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Executives

Janine Orf - Director of Investor Relations

Rick Whiting - President and Chief Executive Officer

Mark Schroeder - Senior Vice President and Chief Financial Officer

Analysts

Jeremy Sussman - Natixis Bleichroeder

Luther Lu - FBR Capital Markets

Brian Gamble - Simmons & Company

Patriot Coal Corporation (PCX) Q1 2008 Earnings Call April 29, 2008 11:00 AM ET

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Patriot Coal First Quarter 2008 Earnings Call. For the conference all the participant lines are in a listen-only mode; however, there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions). As a reminder, today's call is being recorded. With that being said I'd like to turn the conference now to Ms. Janine Orf. Please go ahead.

Janine Orf - Director of Investor Relations

Thank you, John. Good morning and thank you for joining Patriot's first quarter 2008 earnings call. I am Janine Orf, Director of Investor Relations for Patriot Coal. With me are Rick Whiting, President and CEO of Patriots, and Mark Schroeder, our Senior Vice President and CFO.

On this call we will be discussing our results from the 2008 first quarter, our outlook for coal markets, and our guidance for 2008. We also will be referring to non-GAAP financial measures which are reconciled in our earnings release available at our website, PatriotCoal.com.

As a reminder, forward-looking statements should be considered along with the risk factors that we note at the end of our press release, as well as in our annual report on Form 10-K for the year ended December 31st 2007. Please also note that we will file proxy statements perspectives with the SEC in connection with the Magnum transaction. We urge investors and stockholders to read it when it becomes available because it will contain important information about the transaction.

Now I'd like to turn the call over to Mark Schroeder, Patriot's Chief Financial Officer.

Mark Schroeder - Senior Vice President and Chief Financial Officer

Thanks, Janine. Good morning everyone. Thank you for joining us this morning. Our 2008 first quarter margins at our mining operations improved significantly over the prior year even with the issues we encountered at the Federal Mine. Our management focus is beginning to pay dividends and our consolidation strategy is underway. In a few minutes Rick will speak more to the markets and our growth activities.

Let me begin with the discussion of fluctuations in the supplemental data portion of our earnings release. In the first quarter 2008 Patriot sold 5.1 million tons and posted revenues at 284.3 million compared to sales of 5.7 million tons and pro forma revenues of 275.8 million for the first quarter of 2007.

Sales volume decreased 0.7 million tons compared to the 2007 first quarter primarily due to the adverse geological conditions at the Federal Mine including two rig falls which reduced sales by an estimated 0.5 million.

In addition, flooding on the Ohio River impaired shipments from our hiring complex and extremely rainfall events at our Patriot surface mine lead to a 2.2 million ton sales shortfall in the Illinois Basin compared to a year ago. Metallurgical coal represented 29% of total tons sold this quarter compared to 20% a year ago. The higher percentage of met sales was in part due to lower sales at Federal, but more importantly reflected an increase of over 300,000 met tons in the current year as we dolled-up production in response to the strong met markets.

Patriot's average selling price in Appalachia increase more than $10 to 66.91 in the first quarter compared to the 2007 period Pro forma amount. Appalachia operating cost increased $6.25 per ton in the first quarter versus a prior year Pro forma figure. Primarily as a result of lower production at Federal Mine. Operating cost in Appalachia would have been about 48.75 per ton or flat relative to the 2007 first quarter here at the Federal Mine produced at a normal operating level.

And keep in mind that our royalties and taxes were up this quarter relative to a year ago as a result of a higher average selling prices. Segment EBITDA for Appalachia was $11.73 per ton for the first quarter, segment EBITDA for Appalachia would have been more than $15 per ton had the Federal Mine produced at a normal operating level.

Importantly, we are seeing the benefits from higher prices and controlled operating cost at most of our operations translating into increase margins per ton. The average selling price in the Illinois Basin was $34.82 in the first quarter, $2.62 improvement compared to the price reported for the prior year.

As with the Appalachian segment Illinois Basin pricing also benefited during the quarter from the strong coal markets. Illinois Basin operating cost were 32.02 per ton in the first quarter, right on track with the 31 to 33 per ton figures we discussed in our February earnings call. Our costs were slightly impacted by lower shipments due to a high water on the Ohio River system and weather related lower production at our surface operations.

The combination of cost and price resulted in Illinois Basin segment EBITDA of $2.80 per ton in the 2008 first quarter compared to 3.21 per ton in the prior year. Other revenue increased over 4 million to $5.2 million in the 2008 first quarter. Early in the quarter we purchased coal for future shipment and sold out the disposition after the run up in coal prices recognizing a sizable gain.

Turning to the income statement portion of the release, EBITDA for the quarter was 17.1 million. This is after the impact of lower down from most of March at Federal which lowered EBITDA by an estimated $17 million.

On a Pro forma basis, EBITDA for 2007 first quarter was 40 7 million. I will point out that the 2007 first quarter including gains on property sales up more that 35 million. And there were no similar transactions in 2008. So even with a lower production at Federal, EBITDA associated with operations at the mines showed a market improvement in 2008 over the 2007 level. We are not yet satisfied with the operating performance at all of our operations. However, an increase number of our properties are performing at or near planned levels and the positive impacts of on going decisions and changes elsewhere are expected to further improve our operating results as we move through the year.

As we look forward we expect to experience continued inflationary pressure in our cost structure, especially in steel related materials and supplies and capital equipment, both directly and through our contract mining relationships. We have experience in dealing with inflationary pressure and we intend to control these cost pressures as much as possible through extra efforts on the purchasing side as well as on the commercial side gaining pass-through language for certain inflationary cost in our coal supply agreements.

In short, we recognize the important of maintaining a competitive cost structure to achieve fundamental long term success in this business. Our capital expenditures totaled 12 million in the 2008 first quarter. This is more than our run rate for the full year due to the timing of certain equipment deliveries slipping to the second quarter. Our depreciation, depletion and amortization of 18.6 million in the 2008 first quarter decrease 2.4 million compared to the Pro forma figure a year ago. The 2007 amount included DD&A or mines that are no longer in production. Asset retirement obligation expense of 3.4 million this quarter was 2.2 million lower than a year ago, as a result of accelerator reclamation expenses in '07. Reclamation expense in '07 related primarily to the termination of the County Bay North surface mine.

Now turning to the balance sheet. At March 31 '08, we had net revolver borrowings of 13.1 million under our credit facility. A major driver of this figure was federal production level in the first quarter. So in summary, average selling prices increased year-over0year (audio gap) operating cost per ton action to federal longwall downtime are in the range we expected. Per ton margins are increasing. We generated earnings by capitalizing on some brokerage activities. As we discussed earlier this month, we began to act on our consolidation strategy with the announcement of the Magnum acquisition.

Although the longwall and our federal mine is up in running we expect Q2 performance to be negatively impacted to some degree as we continue this long haul ramp up and transition Harris from a longwall toward continuous miner operation. However, we expect market upside, improving operational performance and the addition of thermal and net operating sections feeding the wells and Rocklick complex to have a positive impact in the second half of the year.

As a result we are pleased to reiterate our 2008 guidance. Excluding the effect of the Magnum acquisition for 2008 we anticipate sales volume in the range of 23 to 25 million tons including net shipments of 6.5 to 7.5 million tons. Patriot's 2008 EBITDA is targeted in the range of 115 to 145 million, and 2008 earnings per share is targeted in the range of $0.95 to $1.30 per share. So at this point, let me turn the call over our CEO, Rick Whiting to discuss the markets and Patriot's strategy going forward. Rick?

Rick Whiting – President and Chief Executive Officer

Thank you, Mark. I will start with an overview of the markets this morning. Global demand for both thermal and metallurgical coal continue to strengthen during the quarter, driving US exports higher with prices setting record highs, unprecedented international demand for coal and supply constraints due to infrastructure and other issues are expected to extend this trend resulting in sustainable longer term growth and pricing strength in coal markets.

As a result of heavy demand anti supply, Australian coal prices for the April 01 fiscal year into Japan have recently settled a $305 per metric ton for hard cooking coal, and $125 per metric ton for thermal coal. These are increases of over 200% for cooking and 100% for thermal coal compared to the prior year. At Patriot our rail import commitments have allowed us to participate in the growing export market in a major way, in fact, we exported almost twice as many tons in the first quarter of 2008 as we did a year ago. And these increased exports were across all of our segments and products including Illinois basin coals ship by boats to the Gulf for ocean transport to Europe. The tight markets are also beginning to grab down inventory levels. Inventories at US electricity generators from the coal supply regions of the Northern Appalachia, Central Appalachia and also the Illinois Basin have all declined substantially since a year ago and currently stand at levels will attain the historical five year range.

Our response of these strong markets continues to be very discipline in measures. We are opening a previously plan new thermal mine at our Kanawha Eagle complex as we speak. We also are in the process of adding thermal and net operating sections and into unused prep plant capacity were prudent, especially at our Rocklick preparation plant. And we are also carefully evaluating even further capacity additions as opportunities warrant.

In summary, supply demand dynamics in all of our markets continue to be very favorable. We are participating in these strong markets through prudent contracting and production decisions. With these weak coal markets as a back drop, it was especially exciting to announce our proposed acquisition of Magnum Coal earlier this month. We believe Mangum is an excellent strategic fit for Patriot broadening our Central Appalachian footprint and combining two companies with continuous and overlying properties. Magnum produced 16.1 million tons in 2007 and has proven and probable reserves totalling 600 million tons. With this acquisition we will acquire valuable expertise in surface mining and further strengthen our experienced employee base. We expect significant operating and commercial synergies and expect the acquisition to be accretive to earnings per share in year one.

As a reminder, Patriot stockholders must approve the issuance of common stock associated with this transaction which we expect around mid-year. Both SEC and FTC approvals will also be needed. We look forward to completing this acquisition as soon as practical and realizing the many benefits we see from the combination.

Please note that we will not be discussing Magnums results on the call today. These will be forthcoming as we advanced a proxy filing and permanent financing activities.

Further extending our strategy to maximize the use of our resources last week we entered into a joint venture to develop some of our Central Appalachian reserves very near the Kanawha River. We will lease up to 25 million tons of undeveloped coal reserves into the venture, and we hold a 49% interest in the venture. We expect the project to reach an initial production level of at least 1 million tons per year. This is a great example of a transaction that will further grow our business without significant upfront cash outlays. As we look forward we believe we will see opportunities for similar both on transactions allowing us to further build our production base of high value, high margin products.

Turning to new sales contracts signed in the quarter. During the first quarter we priced over 1 million tons for 2008 delivery and over 1.5 million tons for 2009 delivery in these favorable coal markets. As of March 31 2008 after 0.5 million tons of expected '08 net volumes and 0.5 million tons of expected thermal volumes remained unpriced. Of our expected 2009 volumes 5.5 to 6.5 million of met and 3.5 to 4.5 million of thermal were unpriced at March 31. Of expected 2010 volumes, 7.5 to 8.5 tons of met and 9 to 10 million of thermal remained unpriced again at March 31. None of these figures include Magnum. As a management team we remain very comfortable with our relative committed versus uncommitted position.

It is interesting to note that in the amidst of extremely favorable coal markets we are already speaking with international and domestic customers about new and multiyear business in 2009 and beyond. In our experience this early timing is unprecedented and we believe this bodes well for ability to secure future business, in some cases multi-year at excellent prices and margins.

To wrap up, we believe our operations are on the right track for continued sustainable improvement. As demand outpaces supply in the coal industry we expect pricing to rebase at significantly higher levels. By combining the stronger pricing environment with all our -- what I call double barrel mission to mine it right and also sell it right, we continue to be excited about the opportunities we see for Patriot to continue to create shareholder value.

This concludes our prepared remarks for this morning but Mark and I will be happy to take your questions. I will go ahead and turn the call over to the operator to do so.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions)

And first with the line of Jeremy Sussman with Natixis Bleichroeder. Please go ahead.

Jeremy Sussman

Hi good morning.

Rick Whiting

Good Morning Jeremy.

Jeremy Sussman

As mentioned you signed about 1 million tons in 2008 and 1.5 in 2009. Can you talk about where that came from in and maybe just I know, you can’t get too granular, but what are you seeing for prices kind of in general out there?

Rick Whiting

Let me go first kind of a source end of it. Substantial amounts of it came out of the federal complex, also some Rocklick cooking which effectively at this point of time is basically the Harris met product was booked during that period. Them you move on down to Kanawha Eagle, both are some thermal coal and some cooking coal from Kanawha Eagle was part of those volumes. And interestingly, we’ve had some very good activity, level of activity to the relatively small but important customer base in the Illinois Basin in the Midwest Region looking for term business for the Midwestern Coals. So it’s been kind of an interesting mix across the whole spectrum both Northern App, Central App and Illinois Basin within those numbers. And in terms of price without getting specific I guess, I would say, we would like to thank we’ve been in the higher end of the range of what’s been available to the physical market, there is obviously some correlation with what you see out there on the publicly published price curves. There is always some correlation of that, but not necessarily an exact correlation, and in fact, often on the price curves, the traded curves you may see backwardation, and indeed we are not engaging a much of that on our multiyear business. We’re being able to avoid that backwardation in fact looking at strong pricing on a going forward basis beyond away.

Jeremy Sussman

Great, it’s very helpful. And also I think in your prepared remarks you also talked about exporting prices much this quarter if you had first quarter, I guess of 2007, kind of going forward maybe more for 2009 from few more on price there, I guess, what percent of met coal do you think -- can you get to the export market and how would that stack up with what you’ve done historically on a stand alone basis?

Mark Schroeder

Jeremy this is Mark, historically I think 2007, about 30% of our met business went to the export market, we see that increasing in 2008, and I suspect going forward as well, 2008 will probably be closer to 40% in that range. So I see those same sorted numbers increasing over the historical 30 or closer to a 40 range as we look forward.

Jeremy Sussman

Okay, and potentially higher then that in 2009?

Mark Schroeder

Yeah we see as get into 2009 as Rick mentioned we’re pricing some business. Now, we now we still have a substantial amount of our met business unpriced, it would stay unpriced until later in the year, but we continue to talk to both domestic and international customers.

Jeremy Sussman

Great. Thank you very much for the color.

Mark Schroeder

Thank you.

Operator

Thank you. And our next question then comes from the line of Luther Lu with FBR Capital Markets. Please go ahead.

Luther Lu

Good morning Rick and Mark.

Mark Schroeder

Good morning Luther.

Luther Lu

Hey Mark, I have question for you. I just want to verify the number for if you were to -- if federal number to were to run throughout the quarter the cost would have been flat?

Mark Schroeder

Yeah I just made a 4875Luther, if federal would have operated at a normal range and that’s pretty well flat as to where we were in the first quarter of last year very close to where we would have been in the fourth quarter of '04 again we not had a federal issue.

Luther Lu

Okay.

Mark Schroeder

Really within our range I thought previously about our range being 46 to 49. So we’re seeing that number very well within that range. And as I mentioned in my remarks, the upside on the pricing also hurts us to the 10 to 15% on the cost side as it relates to royalties and taxes.

Luther Lu

Right I understand. And Illinois Basin without the flooding and the rain issue the cost would have been slightly lower as well?

Mark Schroeder

Slightly lower, not a huge number. We're still in the $32 range, it would have dropped under 32. So slight improvement there had we not had the flooding,

Luther Lu

Okay.

Rick Whiting

That was more about shipments and moving the coal through in a case of Highland, but it did affect our cost at the Patriot Surface Mine; that's where we got the rainfall events that hampered those operations.

Luther Lu

Okay. And for the -- number two, is there going to be any rollover tons for the second quarter or fourth quarter or perhaps into the next year?

Rick Whiting

Obviously it was severe enough issue. We had to claim a force majeure and there are a variety of types of contracts some made up by mutual agreements, some as the non-defaulting party. So, there will be a mix, but clearly there will be some of the tonnage that will be required to be made up as we move forward. It's probably not possible to have all made up in '08 and some of that could go over into '09.

Luther Lu

Okay. And for the rest of the year, can we expect a similar realization price for the Illinois Basin Coal?

Mark Schroeder

Our realization in the first quarter was just under $35. We have priced some '08 business earlier this year, not a whole lot, but we will have some uptick as we go through the rest of our way. That number is in the ballpark Luther. It’s probably a little bit of upside potential there. But it is in the ballpark…

Luther Lu

Okay.

Rick Whiting

We've engaged some international business which obviously would bear out some very strong prices and also some domestic business that will start kicking in, but still it is against the pretty large base of commitment at the Highland Complex. So, it won't move a lot, but it should trend generally upward as the year moves along, by the influence of higher prices.

Luther Lu

Okay. And of the 1.5 million tons we signed for 2009, any of those are Illinois Basin Coal?

Rick Whiting

Yes; it is kind of a similar mix. The good news is that across all markets buyers are entertaining multiyear business particularly on the thermal coal side.

Luther Lu

Alright. One last question, can we expect anymore trading related revenues for the balance of the year?

Rick Whiting

I think it would be likely. When we set out, we had talked about we would have some meaningful amount, far less than perhaps been in the past, but some meaningful amount of commercial-type activity whether it would be land and property transactions or trading activity. And I think we probably would at least keep pace with what happened in the first quarter and continue to do more on both sides of the equation, both on the property side and on the brokerage side.

Luther Lu

Okay great, thank you.

Mark Schroeder

Thanks Luther.

Operator

(Operator Instructions). And we'll go to the line of Brian Gamble with Simmons & Company. Please go ahead.

Brian Gamble

Yes good morning guys.

Mark Schroeder

Good morning Brian.

Brian Gamble

I have just a couple of questions, first I wanted to talk a little regional theory for the rest of the year. When we talk about the Northern App market with Federal coming back on line, what do you see as far as supply demand from that region? We've heard a couple of your competitors talk about some potential river issues with (inaudible) prepares being done over the course of the next couple of quarters and the real issue is continuing to be tight as we continue to ship more exports out of the east, how do you view your position there and do you think some of those issues are valid or maybe a little bit overblown?

Mark Schroeder

I would say that they are probably not overblown. In aggregate, every supplier has a really different situation naturally with the adages we had in makeup tons and so forthm we’re not going to be able to do much more if any, for`08 all of our additional sales would be going on into next year. But as far as one thing, I think you have to look at for the situation in that region is that stockpile levels are getting down now in the low 30s in terms of number of days. The last time the stockpiles have been that low for the Northern Appalachian coal was back in mid '04 previous to one of the other run ups which we were able to lay in some multiyear business in '05 and '06 coming off of that. So completely different levels we thought we were doing good in those days and I guess the 40s and 50s and now the prices are double that as far as the traded prices you see out there. So, I think a combination of exports, straining the system, knocking the call out of some of the systems that haven’t been used as much for somebody's movements, just overall activity is putting a lot of pressure on role and its being reflected in what we’re seeing in these trial prizes, and at some point its not even prize, its just the ability of even get the product, I think it is more challenge the buyers finding product then we’re seeing for a long, long time regardless of what the price might be.

Brian Gamble

And then, when you talk about that situation and being able to take advantage of those prices, you got some pretty decent volume just over for '09 and then if you – you’re not talking random yet but, when you layer that in you have some additional lines there, what is your strategy going forward, are you looking to price coal for '09 at these levels. I know some people have talked about committing turns to people but not necessarily layering the price yet and kind of waiting and seeing what contrast out of the next six months, what is your overall strategy for that, and how do you view levels of comfort with your current open positions as you look forward into '09?

Rick Whiting

The prices we’re seeing for Northern App and I think also Central App is well. We would be pleased to go ahead and start layering in some meaningful volumes that these levels. And moreover we would be seeking to do it on a multiyear basis as opposed to just taking ’09 business. As you see this is an opportunity to maybe, I guess, I would call lay in some annuity with some certainty and that’s never a bad thing, certainly we wont grow and sell our last tons and we will be very careful and pace ourselves , but we will look to take on business, preferably multiyear business, it would probably a premium above the current market if we want to get multiyear business frankly, and that would be our philosophy, Another thing we’re going to be looking at even at these levels, I am not sure what’s out there in the future in terms of inflationary and we will also be seeking to get some protection in our coal supply agreements for unexpected or very high inflation levels, maybe not from the first few percentage points but certainly some protection for high inflation or certainly we’ve always gotten lowest cost payers through. So we will be very sensitive to future cost movement and try to reflect protection our agreements around that as well.

Brian Gamble

And then as you look at the cost structure Mark, which went over – that is in process to be able to reflect quarter-over-quarter taking out the federal operations. But when you look at your ’08 level 46 to 49 and your increasing realizations or the royalties kick in, can you talk a little bit about how you are able to maintain that sort of cost number, and then in addition of that as you look at into `09 obviously realization kick up again. Should we expect another flat construction next year or as realization and any cost savings from this year had a go away in '09 which is start to think about more like a 3 to 5% cost increase year-on-year in that ’09 timeframe?

Mark Schroeder

A couple of things Brian I guess first as we look into '09 inflationary pressures continue to be a factor as prices go up and you have the additional 10 to 15% price related royalty taxes that’s going to be pressure. So I don’t see prices flat in 2009 relative to 2008.

What we are doing looking back to first part of your question, what we are doing – part of our reason or everybody reason for splitting up these set of operations is put our management team together focusing on this set of operations, and that’s what we think we’re doing, that’s we’re attempting to do, part of that focus is to look at all the cost that we’re incurring and try to do what we can to control those cost, look at the operations that are out there, run the best operations that we can, dolled back the operations that are performing as well. So part of our overall focus as a management team is to control cost, and it is difficult to do as we’re fighting some very high price increases on steel related products like roof falls and petroleum based product be it comparison and some few lucrative that we use, its difficult to do but that’s part of what we are trying do as management team and stay on those cost as much as we can and try to understand where we’re spending the dollars and what we can do to increase capacity at some of our prep facilities at those mines that are producing better than others and dwell back the production at those mines that are not producing as well.

Brian Gamble

Do you think those factors will mostly be taken care of as you look at to the remainder of '08 and do you think that will continue to be a benefit to Patriot in '09?

Mark Schroeder

Well I think it is certainly going to be as we work through '08, I am not saying we're doing as well as we can do in '08, I think there is still room for improvement and then as we look forward, I think we'll continue to focus on the cost. I don't think that's an issue that we're going to address now and we'll put away until later. think it is an area we're going to continue to address throughout '08 and in to '09. That's, I guess back to my first comment, I don't think our cost structure would be flat in '09 compared to '08 for this set of operations only. But that's part of the beauty of this Magnum transaction. We see in the Magnum cost structure being a very good cost structure and the blending of Magnum and Patriot can help us on a combined basis going forward to try to maintain a flat cost structure.

Brian Gamble

Thank you, that's great. I'll get back in the queue.

Mark Schroeder

Thank you.

Operator

(Operator Instructions). And we'll go back to Brian Gamble. Please go ahead.

Brian Gamble

Okay I guess it’s a lucky go.

Rick Whiting

It is like two-three pointers back to back there, take another shot.

Brian Gamble

That’s right, how you guys keep on shooting, that's right. What was I going to ask, that was a good question, when you look at the recent delay of the 404 rulings, I was hoping to get a little bit of color from you Rick as to how you see that affecting the Central App market? I know that a lot of people said – give varying opinions either they have enough permanent employees and so, they are okay for '08 or maybe it'll start affect the market in 2009. I know that the primary process has been extremely delayed due to the ruling being outstanding; I'm assuming that only gets accentuated as we go through the summer. How do you view that in light of production issues coming either back half of this year, does is affect '09 production, just the overall viewpoint there?

Rick Whiting

I think for most producers its going to be more likely to affect maybe at the earliest '09 production and perhaps not till 10 or 11 but ultimately there is a price to pay here in terms of time. I just can't imagine that once the core and the other regulators get the green light or whatever direction they are going to get, that there isn't some log jam or backlog of time lost about these months that are going by with no or slowed activity. So, to me it is inevitable that ultimately it probably will work out, surface mining will move forward, perhaps change a bit in terms of technique and cost. But I believe its likely there will be some impact at least on an interim basis while there is some catching up on the permits and getting back into the flow, and it could very likely result in a dip of the surface mine production for some period of time. Its very hard to predict precisely where it is because of all the different tails on existing permits and once that are already in the pipeline in the queue if you will. It is hard to say, I am still flying at probably 25,000 or 30,000 feet on this issue having just coming out with a largely underground company and being exposed through the eyes of evaluating Magnum that are certainly going to be the experts on that and are much more scored and number one in dealing with it. But as I get on down to 10,000 feet and 5000 feet, I think I will see for the industry that it’s likely to have some impact on surface mine production, and I can't imagine anything coming out of that. Whole process is going to be a pat on the back and ability to increase surface production in Appalachia. So, you just take your imagination from there as to what impact that’s going to have on supply demand and markets.

Brian Gamble

And then maybe just touch a little bit on the labor situation in the east. We have heard continue talk that the Central App is extremely tight and we have heard talk of the increased production out of certain companies in the region and they are definitely needing to expand there employee base. How do you view your Central App positioning when it comes to labor and then as you take on Magnum and work on integrating those operations, how does that all hatch up?

Rick Whiting

I think going forward skilled labor and supervision is the biggest challenge for the central Appalachian coal producers. Across the board, different companies who have different outcomes and different needs based on their age of their work force and their status, the relationship with their employees, again we have less turnover at Patriot as it stands today, because of the immunization of about 40% to 50%of our production. We don’t have the turnover and that’s good. We also have our training facility where we have once again spooled up and are commencing to run a new classes through that course, which is I think a second nine-week course, and we have serious of those. We really have a new one underway to just start it to turnout our skilled initially hourly employees. We will also have classes for supervisors and so forth, but I think it is probably a larger challenge on its skilled supervision in terms of face bosses, in terms of maintenance chiefs and folks like that. We will need to be focused on probably training and building our own and I don’t think there is any future in trading places and looking to other companies time after time and having punched out or musical chairs going on, all that will ultimately do for the industry is just to run up the cost to levels that if and when there is ever a change in these markets everybody will say why did I do that, it’s a slippery slope. So I think we are more of a mind to make sure we carefully evaluate our pay structure, our compensation structure in total, and that we move carefully on that and deal our own where possible and train our own so that we have the demand set and the safety culture and the productivity culture that will ultimately make us successful to good time than bad.

Brian Gamble

And then, I know there is still a couple hurdles as far as the integration of magnum goal. Could you possibly give us a best case, worse case scenario or when that is completed?

Mark Schroeder

I guess timing I mean the steps we need to do is a followup proxy, when I get FTC approval and FCC approval and then go to our shareholders for a vote on the increased number of authorized shares. If in fact the FTC and FCC would have what say no comments or minimal comments and that process would end lets say 30 days after we would file the documents, that could get us to the middle of June lets say the end of May, middle of June and we could turn around and have a shareholders vouch probably at the earliest than they would close sometime into the first half of July. A more likely scenario was probably more like the last half of July or the first half of into the month of August assuming that the SEC spent some time and has couple iterations on that document.

Brian Gamble

You are expecting it to be done before the end of Q3?

Mark Schroeder

That is our expectation, yes.

Brian Gamble

I think that is all, I appreciate you guys.

Rick Whiting

Thanks for your interest.

Operator

And we do have a followup from Jeremy Sussman. Please go ahead.

Jeremy Sussman

Hi, I guess, I wanted to more hear. Just regarding your Black Oak mine expansions, and I think in Rocklick complex, just what’s the status here on, I think your annual production targets of 1.5 million tone of met coal out of this mine?

Mark Schroeder

Right, It is till in the development stage, still just one unit driving wont be too long to be able to add a second unit, I think it’s a couple of three months out at least, but it’s basically one schedule. I mean, sometimes we feel like you’re week ahead or couple of weeks behind, but based on the advance, but generally it’s on schedule it will be up and running, as we move into ‘09.

Jeremy Sussman

Okay, and then, I guess, as you mentioned on the Magnum call, you are certainly still looking at other acquisition targets down the road. Do you have more of a preference for staying in the Appalachian region or Magnum or would you be looking really anywhere even potentially moving out west a bit.

Mark Schroeder

I would say the latter, we are willing to consider looking else where, but I am not saying we will not continue to look I think we continue to do what we prefer to as both to honor maybe smaller adequate pieces like this joint venture we announced particularly when we can do things without much capital put our reserve position and as our pieces of deal as startup and let some entrepreneurs get things up and running as an adjunct to our own operations. I think that's a better model than the contract manner model these days. So, we'll do some growth that way which I consider to be more organic or maybe its Brownfield as opposed to Greenfield growth.

Beyond that, I think we need to fully absorb and get our arms around the merger and get things running well with the new package basically doubling the size of the company and then on the heels of that I think we should probably look to broader horizons perhaps outside of Central App, look to the north and the west.

Jeremy Sussman

Great, well very helpful and thanks again for the color.

Unidentified Company Representative

Thank you, Jeremy.

Operator

And there are no further questions in queue. I'll turn it back to the presenters for any closing comments.

Janine Orf

Thank you all for joining us today. We appreciate your interest in Patriot Coal and we look forward to speaking with you again next quarter.

Mark Schroeder

Thank you.

Rick Whiting

Thanks.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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Source: Patriot Coal Corporation. Q1 2008 Earnings Call Transcript
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