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Executives

Janine Orf – Director of IR

Rick Whiting – CEO

Mark Schroeder – SVP and CFO

Analysts

 

Luther Lu – FBR Capital Markets

Brian Gamble – Simmons & Co.

Jeremy Sussman – Natixis Bleichroeder

Paul Forward – Stifel Nicolaus

Justin Fisher – Goldman Sachs

Michael Lucheks [ph]

Michael Goldenberg – Luminous Management

Fritz Von Carp – Sage Asset Management

Wayne Atwell – Pontis Capital Management

Jacob Miller [ph] – Ann [ph] Capital

Patriot Coal Corporation (PCX) Q2 2008 Earnings Call Transcript July 29, 2008 10:00 AM ET

 

Operator

 

Ladies and gentlemen, thank you for standing by, and welcome to the Patriot Coal second quarter 2008 earnings conference call. For the conference, all the participants’ 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’ll turn the conference now to Ms. Janine Orf. Please go ahead.

Janine Orf

 

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

On this call, we will be discussing our results for the 2008 second quarter, our outlook for coal markets, our updated guidance for 2008, and initial guidance for 2009. 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 on our 2007 Form 10-K, our first quarter 2008 Form 10-Q, the F-4, and Form 8-K. Finally, we’ll be referring to non-GAAP financial measures, which are reconciled in our earnings release, available at our Web site, patriotcoal.com.

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

Mark Schroeder

 

Thanks, Janine. Good morning, everyone. Thank you for joining us this morning. Second quarter was an exciting for Patriot. Still in early in our life as a new public company, we announced the Magnum Coal transaction, completed the (inaudible) and SEC filings related to this transaction, obtaining approvals quickly and successfully, and entered the capital markets with a convertible debt offering to provide permanent financing for this transaction. We also solicited shareholders and obtained the successful vote at the shareholder’s meeting last week, and we have already made substantial progress in the integration of the companies.

And our operations turned in a solid performance, providing EBITDA in excess $41 million, and net income of just under $12 million or $0.44 per share on a pre-split basis, and $0.22 per share on a post-split basis. Please note that street estimates are on a pre-split basis. So use the $0.44 amount for comparison purposes.

Our Q2 operating results did, however, reflect increased cost, more so in Appalachia than in the Illinois Basin. Although I am never pleased with cost per ton increases, I do appreciate the keen focus our team continues to display on this side of the equation in the face of unprecedented escalation of the cost for key inputs to our operations.

2008 second quarter margins at our mining operations improved significantly over the prior year as we are seeing positive results from management’s decisions in our focus on these assets. We are growing our operations through both consolidated and bolt-on transactions that add value, and demand continues to outstrip supply in the coal markets driving sustained higher prices.

In a few minutes, Rick will speak more to the markets and our growth activities. Let me continue with the discussion of the supplemental data portion of our earnings release.

In the second quarter of 2008, Patriot sold 5.9 million tons and posted revenues of $343 million, compared to sales of 5.3 million tons and pro forma revenues of $264 million for the second quarter of 2007. Sales volume increased 0.5 million tons compared to the year ago quarter as we increase production at our mines, particularly, in the Illinois Basin in response to the strong market demand.

Metallurgical coal represented 22% of total tons sold this quarter, similar to the year ago level. Total met shipments increased by 100,000 tons in the current year as we continue to doll-up productions in response to the strong net market. Patriot’s average selling price in Appalachia increased almost $11 to $68 in the second quarter, compared to the 2007’s pro forma average selling price.

Appalachian operating cost increased $4.09 per ton in the second quarter, versus the prior year pro forma figure due to three main factors

first, start up cost, as we ramped up production in response to market opportunities at our Coalburg No. 2 mine at Kanawha Eagle and at the (inaudible) mine at Big Mountain; second, higher material and supply cost in part due to rebuilds of the longwall and continuous miner units at our Federal mine; and third, increased royalties due to higher average selling prices.

Cost this quarter in Appalachia, compared to last quarter, produced mixed results. On the one hand, cost per ton on the second quarter of 2008 were $53.86 or $1.32 lower than the 2008 first quarter. On the other hand, we are disappointed that the costs in the quarter were higher than we had planned. We continue to face pressure from steel, fuel, and loop [ph] increases at both company and contract operated mines, increased insure related costs, and manpower constraints. We also experienced higher costs at the Harris mine this quarter as we mined through the difficult final panel and recovered our longwall equipment. Segment EBITDA for Appalachia was $14.13 per ton for the 2008 second quarter. We are seeing the benefits from higher prices translating into increased margins per ton.

The average selling price in the Illinois Basin was $35.03 in the second quarter, a 221 improvement compared to the price reported for the prior year. As with the Appalachian segment, the Illinois Basin pricing also benefited, during the quarter, from strong coal markets. Operating costs in the Illinois Basin were $33.94 per ton in the second quarter, up 165 from the prior year primarily because of higher diesel fuel and labor cost, and increased royalties related to the higher average selling prices. The higher pricing resulted in Illinois Basin’s segment EBITDA of $1.29 per ton in the 2008 second quarter, compared to $0.73 per ton in the prior year.

Appalachia other revenues increased $10.5 million year-over-year to $11.2 million in the 2008 second quarter primarily as a result of structured settlements on a property transaction and past due royalties.

Turning to the income statement portion of the release, EBITDA for the quarter was $41.1 million. Importantly, after excluding gains on property sales each year, EBITDA improved $35.7 million compared to the prior year pro forma amount. The 2007 second quarter including gains on property sales of more than $45 million, while gains on property sales in the 2008 second quarter were approximately $6 million.

Looking forward, we expect to experience continued inflationary pressures in our cost structure. In addition to steel related materials and supplies and capital equipment, with the acquisition of Magnum, we now have greater exposure to surface equipment operating costs, including diesel fuel and tire replacements. We have experience in dealing with inflationary pressures, and we intend to employ all available means to control these costs.

Our capital expenditures total $21.4 million in the 2008 second quarter, and stand at $33.4 million for the first half of 2008. By depreciation, depletion, and amortization of $20.9 million in the 2008 second quarter, increased $1.9 million, compared to the pro forma figure a year ago. Higher depletion resulted from increased tons mined during the quarter.

Interest expense increased $2 million this quarter, compared to the prior year pro forma amount primarily as a result of financing cost for the bridge loan related to our assumption of Magnum’s debt in connection with the acquisition and cross related to the new convertible data offering.

Our income tax provision in the 2008 second quarter was $3.5 million to the year ago pro forma amount of $10.1 million. The higher income tax provision in 2007 is primarily related to the large gain on property sales.

Turning to the balance sheet, at June 30th, 2008, we have revolver borrowings of $20 million under our credit facility. In addition to $21.4 million of capital expenditures during the quarter, we funded $14.7 million of joint venture activities and $5.4 million related to the Magnum transaction. During the quarter, we entered into a $200 million private placement of 3.75 convertible senior notes due in the year 2013. The offering was well received. We were able to price the private placement at the low end of the pricing and high end of the conversion range. The restricted cash balance of $193 million at June 30th represents the net proceeds from the notes, which were subsequently used to reduce the principal balance of debt assumed in our acquisition of Magnum.

So, in summary, (inaudible) margins, EBITDA, and net income increased substantially. We continue our cross focus and we are investing in our facilities in response to the robust coal demand. Further, the Magnum acquisition closed and we expect to benefit from this combination as we look forward to 2009 and beyond.

At this point, let me turn the call over to our CEO, Rick Whiting, to discuss the markets and Patriot’s strategy going forward. Rick.

Rick Whiting

 

Thank you, Mark. I’d like to begin by reviewing Patriot’s key strategies as we set out as a new public company last fall. We established goals to tightly manage our operations, maximize customer satisfaction, and to pursue value enhancing growth opportunities, all utilizing a well qualified, experienced team. I can confirm that Patriot’s actions and performance have been fully aligned with these strategies.

Our operating results have improved significantly, with ton margins up 82% this quarter. We have captured value with new contracts and joint ventures to further our production. We have almost doubled our size with the Magnum acquisition. With the addition of Paul Vining and other key personnel from Magnum, we have also added more talent to our already capable team, and the added then strength means that Patriot will be able to further act on our strategies.

After the Magnum acquisition, Patriot enters a new chapter in our history as a significantly larger company with an enhanced footprint and more opportunities to participate in the future demand for coal both here in the US and overseas.

Speaking of the markets, international coal demand continues to strengthen while supplies struggle to meet the growing demand. China continues to be a major driver in the worldwide coal markets with expected consumption increase in 15% this year, and the import-export balance nearing breakeven after years as the net exporter. Blackouts are predicted in India due to coal shortages where as many as 40 coal-powered plants have co-inventories of less than seven days burn. South Africa’s rebuild of coal stock piles this spring has reduced its exports by 2.3 million tons through June. Russian exports are down 800,000 tons through June, while its domestic coal deliveries are up by 10.5 million tons.

Meanwhile, on the supply side, operating issues at several large mines in Russia have negatively impacted production as new safety measures are implemented. Rail capacity and port capacity in Australia continue to limit exports as witnessed by the approximately 60 vessels currently in queue, which has been a persistent multi-year issue.

In metallurgical coal markets, world production of blast furnaced iron is up almost 6% compared to last year. Chinese blast furnaced iron production is up nearly 9% correlating with the 8% increase in China’s net coal imports.

In the US, coal consumption for electricity is up approximately 10 million tons compared to the first six months in 2007 permitting equipment and labor constraints and safety regulations or reducing coal production, particularly in Central Appalachia where production is down about 900,000 tons year-to-date compared to last year. The combination of greater domestic consumption, higher exports, and reduced production has caused Appalachian and Illinois Basin coal inventory levels to decline by 14 million tons from year ago levels. As a result of strong demand and limited supply, international and domestic prices have risen 50% since April 1.

We see coal as a key global energy source, providing electricity to an energy hungry world and helping supply the growing steel industry. Patriot believes growing demand and tight supply are long term fundamentals of the coal market, and we are preparing for this new reality in the industry.

In the midst of these unprecedented markets, we are especially pleased, last week, to close on our acquisition of Magnum Coal. We were able to quickly obtain the regulatory and stockholder approvals, and we look forward to integrating the operations of our two companies. As we have previously stated, Magnum is an excellent, strategic fit for Patriot, broadening our Central Appalachian presence and combining two companies with continuous and overlying properties. With Magnum, we have also acquired valuable expertise in surface mining and further strengthened our experienced employee base.

As a result of the Magnum acquisition, we have modified our senior management structure. I am pleased to welcome Paul Vining as our new President and Chief Operating Officer. Paul will have responsibility for all of our mining operations as well as our sales marketing and trading functions. Paul has extensive experience with assets in these coal basins and also the markets they serve. I look forward to working, once again, closely with Paul.

One final note on the Magnum acquisition, as we have previously stated, our aim is to maintain a conservative financial stance. With the Magnum acquisition, we have preserved our solid financial position, increasing our debt to about only $200 million while almost doubling our production. Importantly, as previously announced, during the quarter, we entered into a joint venture to develop certain metallurgical coal reserves in Central Appalachia. We hold a 49% interest based on our initial contribution of coal reserves and $10.1 million of cash. We expect the venture to build production to over half a million annual tons by the end of 2008. Production at this operation is expected to begin during the third quarter. We will benefit from the synergy of processing this new production at Patriot’s Rocklick preparation plant, which is served by both the CSSX and Norfolk Southern railroads.

As you can see, we continue to find new opportunities to further grow our business in various ways. We see ample opportunities for similar transactions going forward, and we intend to continue to build our production base.

Organic growth is another key component of Patriot’s growth strategy. Our response to the markets continues to be very disciplined and measured. During the quarter, we ramped up production in our Coalburg No. 2 mine and installed an additional contingence mining unit at the Lower Dorothy mine. We also reopened the Sweet Birch mine, which will be an additional source for either Wells or Rocklick.

Going forward, we continue to review our mining complexes for future expansion opportunities. The Black Oak metallurgical mine, a follow on to the Harris mine, has began production. During the third quarter, we will reopen the Sugar Maple mine as an additional source for Rocklick. We continue to look at other opportunities, including the development of additional production capacity at Kanawha Eagle.

With the addition of Magnum’s assets and reserves, we have even more capacity to grow our production organically. Magnum has several new products in the pipeline, and we will provide more information as the integration progresses.

Turning to new sales contracts signed in the quarter, we are participating in the rising market as Patriot and Magnum, on a combined basis, booked over 9 million tons of new thermal business in the second quarter for deliveries 2009 through 2012. Appalachian thermal coal was booked at triple-digit prices during the quarter. On Illinois Basin business booked during the quarter, term business prices on our high quality products were in excess of $70 per ton with annual price escalations as well. Moreover, since quarter in, certain Illinois Basin spot prices have reached $100 per ton.

We are working closely with our customers to ensure we are in a position to meet their future volume and quality requirements for 2009 and beyond. In the thermal market, certain customers have begun discussing additional term business, while others are less willing to consider term commitments at the moment. On the met side, discussions actively continue and we would expect both domestic and international transactions to take place as we move through the fall months.

As of June 30, 2008 for the combined Patriot and Magnum, up to a half million tons of expected 2008 volumes remained unpriced. Of our combined expected 2009 volumes, six to seven million tons of met and five to six million tons of thermal were unpriced at June 30. Of combined expected 2010 volumes, nine and a half to ten and a half million tons of met and 17 to 18 million tons of thermal remained unpriced at June 30.

We are bullish on the coal markets as we look forward to 2009. With the addition of Magnum, we are providing new 2008 guidance to include the benefits of this accretive transaction. Additionally, we are introducing 2009 guidance reflecting our view of the markets. For 2008, including Magnum beginning on July 23, we anticipate sales volumes in the range of 30 to 32 million tons, including met shipments of seven to eight million tons.

Patriot’s 2008 EBITDA is targeted in the range of $165 to $185 million. For 2009, including Magnum for the full year, we anticipate sales volumes in the range of 41 to 44 million tons, including met shipments of 9.5 to 10.5 million tons. We expect Patriot’s 2009 EBITDA to be in the $750 to $950 million.

Our updated guidance takes into account that over 25% of our ’09 deliveries remain unpriced, and that we are early in our annual budgeting process. While we will maintain our keen focus on cost control, our ability to accurately project future costs of fuel, materials and supplies, and labor is challenging at this early stage.

Finally, with the closing of the Magnum acquisition, just last week, we continue to spend time and attention on operational and commercial synergies as many of these areas could not be fully explored until the transaction was finalized.

At Patriot, we believe that good corporate governance is one of the keys to success. As you know, Patriot has an excellent Board of Directors. Our Board includes individuals very familiar with the coal space and with the wealth of experience in building and running large corporations. Last week, we announced the expansion of our Board, adding three new members. Two of our new Board members, Rob Turner and Jake Erhard, come to us from Magnum’s larger shareholder ArcLight. ArcLight has a history of investing in the energy sector, and Rob and Jake both have strong backgrounds in energy, finance, and also M&A. The third new member, Michael Johnson, has extensive experience in the human resources arena, which will be extremely valuable as we integrate Magnum and look to future consolidation in the coal space. These new directors will complement Patriot’s very capable Board as we executive our core business strategies.

As you are certainly aware, Patriot’s stock price has more than tripled since initial trading on November 1. At its meeting last week, our Board declared a 2-for-1 stock split payable August 11th, 2008 to stockholders of record on August the 4th.

On behalf of the Patriot management team, we want to express our appreciation for the confidence the investment community has shown in our company and in our recent acquisition of Magnum in particular. We believe that Patriot has a very bright future, and we will work everyday to create additional value for our stockholders.

Before I finish my comments today, I would like to welcome the Magnum employees and their families to our team. At the same time, to acknowledge the contribution and commitment of Patriot’s employees and their families.

That concludes our prepared remarks this morning, and Mark and I will be glad to take questions now, and I’ll turn the call back over to the operator to facilitate that.

Question-and-Answer Session

 

Operator

 

Thank you. (Operator instructions) And first, from the line of Luther Lu with FBR Capital Markets. Please go ahead.

Luther Lu – FBR Capital Markets

 

Good morning, guys.

Mark Schroeder

 

Good morning, Luther.

Luther Lu – FBR Capital Markets

 

Well let’s go right to the guidance number for 2009. Mark, I was wondering if you guys can give us a sense of what Legacy contract was priced for Magnum’s portion of that coal.

Mark Schroeder

 

As far as number of tons, quantity of tons?

Luther Lu – FBR Capital Markets

 

Yes. Quantity of tons and at what price range are we talking about?

Mark Schroeder

 

Yes. As of the beginning of the quarter, Magnum had about 40% of their 2009 tonnage unpriced. They have a price sum of that during the quarter. So that number is down some and we can give you the numbers on a combined basis here on a second. I guess as far as pricing, the average pricing, I’m going to come up with my similar answer from before. I prefer not to give pricing on those contracts that are already recorded either for Magnum or Patriot.

As we lock in more of 2009 business, I think you’ll get that more as we get closer to the end of the year and we provide the guidance for the full year on a more refined basis. But I think at this point, we’re looking to early on giving any kind of realization on those price tons at the Magnum level.

Luther Lu – FBR Capital Markets

 

No. I’m not asking for the contracts recently signed. I’m talking about the Legacy contract that are well below the market.

Mark Schroeder

 

Yes. There’s a couple that they have similar to Patriot having a couple. I think the tonnage is somewhere around 2.5 to 3 million tons.

Luther Lu – FBR Capital Markets

 

Okay.

Mark Schroeder

 

That were those, I’ll say, below the market contracts. And then in addition, Magnum has also sold some 2009 business throughout late 2007 and into 2008.

Luther Lu – FBR Capital Markets

 

Okay. Got you.

Mark Schroeder

 

Did that get you what you want, Luther?

Luther Lu – FBR Capital Markets

 

Yes, yes. That gives a good sense. And for the second half of the year, what do you anticipate the DD&A will be for the second half of the year?

Mark Schroeder

 

It’s a number that’s going to move with purchase accounting, so.

Luther Lu – FBR Capital Markets

 

Okay.

Mark Schroeder

 

Initially, I would say, without purchase accounting, it’d somewhere in the range that you’ve seen on the individual company basis already. Our purchase accounting is going through drastic lead change, those numbers, DD&A, and also change the sales contract amortization. As you probably know, when you do purchase accounting, we will do that for Magnum, you value all the coal contracts at current prices, and record a deferred credit in the case that your coal contracts are lower than current markets. That sales contract amount is amortized for accretive income. At the same time, the flipside of the purchase accounting, says you record additional coal reserve dollar amounts, and therefore, additional DD&A going forward.

Luther Lu – FBR Capital Markets

 

Okay.

Mark Schroeder

 

Sorry, only the (inaudible), but the long-winded (inaudible) tried to make shorts as purchase accounting adjustments, which we’re in the process of determining now will impact the DD&A going forward for the Magnum mines.

Luther Lu – FBR Capital Markets

 

Okay. And can you guys address the cost issues a little bit? How much inflation are you seeing in steel and how much inflation are you seeing in terms of lowering productivity by (inaudible) rulings, stuff like that? And also, from Magnum’s – from a combined view, Magnum brings in a lot of surface mining so it should lower your cost. Do you have a sense where the average cost will be for the Appalachian production in the second half?

Mark Schroeder

 

Sure. There are a couple of different questions there. I guess, first on the steel, I’ll give you a price out there of a roof bolt as an example. Year-over-year it’s increased about 35%. So if we see a large increase just in roof bolts, now that’s not across the board for all steel-related products, but just as an example, roof bolts were up 35% year-over-year.

End shaft, with new safety regulations, and more importantly, inspections occurring on a very, very frequent basis with multiple inspectors are more than new costs are hurting the production level at the mines. So we’re spending more time going through the inspections, spending time with the inspectors. And we’ve estimated that number to be somewhere around $1. It could be $0.25 either way from that. Others may have higher numbers on there, but we’re somewhere in the $1 or so impact.

And then the third question, I think you asked, is on Magnum and Magnum coming into the fold with its surface operations. We’re going to have a cross structure lower than Patriot’s operations. Ballpark, it’s somewhere around single-digits lower. I don’t think as much as 10% lower. And Luther, keep in mind, we’re still – as we integrate these and we think of different ideas that we can do, those numbers will change a little. But ballpark, Magnum’s cost structure is single-digits lower than Patriot’s cost structure in Appalachia.

Luther Lu – FBR Capital Markets

 

Okay. Great! And I’ll get back in the queue. Thank you.

Mark Schroeder

 

Thank you.

Operator

 

And the next through the line of Brian Gamble from Simmons & Co. Please go ahead.

Brian Gamble – Simmons & Co.

 

Yes. Good morning, guys.

Rick Whiting

 

Good morning.

Mark Schroeder

 

Good morning.

Brian Gamble – Simmons & Co.

 

Let’s open the target first, the increase in Illinois Basin. You mentioned rising diesel, labor, as well as royalties. It just seemed like the, I guess, decrease in the margin quarter-on-quarter will lead to, I guess, some hedges rolling off on the diesel side or some unanticipated labor contracts. What exactly are kind of – was that decrease in the margin on that region?

Mark Schroeder

 

I guess first, that the Patriot level for diesel – Patriot uses about 5 million gallons on an annual basis, and we have not had – when we came in as a separate company, well we’re not hedged at all, and we have not began our hedging program yet. Now nationally on a combined basis with the Magnum operations, we will be much higher in our fuel usage, and it’s going to be more in the 25 to 30 million gallons on an annual basis. So we will have a hedged program going forward. But I guess, first off, Brian, we did not have anything hedged during the quarter for fuel in the Illinois Basin.

We do have a little bit of higher cost related to some purchased coal that we had out of Illinois Basin. We do that from time to time. We don’t show a separate part of our operations called broker business yet, although we will expect to do that in the future. But we did have some purchased coal that was at a higher cost than our cost structure that did increase our overall average cost in the Illinois Basin.

And then you mentioned the royalty on that as well.

Brian Gamble – Simmons & Co.

 

What I’m looking at the EBITDA range for ’09. You mentioned being a little bit early in the budgeting process to determine cost inflation on a combined basis, but when you do set a range like that, you obviously have a target in mind. What types of cost are you thinking about? And then also, obviously on the realization side, still 25% uncommitted next year with a majority of that being met. How do you look at those potential prices being a sign of the market? Do you look at them sort of accreditation [ph] from current pricing or are you just taking a flat price out there? How should we think about the assumptions going into those numbers?

Mark Schroeder

 

Let me touch on the cost side of it, and then I’ll Rick talk to the met side and the pricing. I guess, on the cost side first, we did go through the different areas and make an initial stab that what we think is going to occur with the diesel, and steel, and loop related, labor as well. I guess if I ball them all up together, I would say our number is in the high single-digits to low double-digits, low teams [ph]. If I had a –

Brian Gamble – Simmons & Co.

 

Was that region by region?

Mark Schroeder

 

That’s company wide.

Brian Gamble – Simmons & Co.

 

Okay.

Mark Schroeder

 

If I had to pick a number, it’s somewhere between 8% and 12%. And again, it varied, Brian, on steel, diesel versus some of the normal MNS.

Rick Whiting

 

On prices, Brian, in general, I would say we’re looking at the markets holding up, and really no give-backs from levels we have planned to – for last year’s business and what’s been going on in spot markets. Naturally, this early in the process, we’re going to be careful to put out the numbers that we can solve [ph] related labor. So I won’t say we’re off the reservation on the high side. We’re being careful, but in our thinking and in our marketing, and in our – all of our activities, we don’t have any reason to think, given the real strong fundamentals, there’s going to be any give-backs on pricing year-on-year.

Brian Gamble – Simmons & Co.

 

Definitely appreciate the real (inaudible) results. One thing you touched on, Rick, was the labor and possible manpower constraints, maybe since Appalachia, could you go through those a little bit and talk about what you’re seeing. Are there shortages in particular? Mining areas, how does the Magnum integration aid or hinder that type of security of labor going forward?

Rick Whiting

 

It’s been a challenge for both of us. I think when this all ends up, we’ll be about half are union free and half are unionized operations, roughly on both employee and on a production basis. Both sides of that equation have different pros and Conservative, different circumstances. Magnum has done a very good job of projecting their manpower needs, playing out programs to recruit those folks. On our side, we talked about it on almost every call, but we have our training facility that we started to load the classes up with – again for new miners and for guys who want to get training to become supervisors, maybe move out of the rank and file over to the supervisory side, and also for maintenance guys.

I think that’s one of the synergies that we’ll probably expand our training facility and run more classes through there, capitalize on that strength of – for both sides, where we can get employees to get both the Magnum and to the Patriot. By the way, in the future, we’ll refer to them all as Patriot, but in this transition. So there’s some juice there.

There have been a lot of changes in the industry regarding benefits and compensation levels, and we have had our eyes open on that. Magnum has been certainly close to the ground for two or three years now where we come in and taken a closer look for only six to nine months. But you’ve probably heard that we’ve made some revisions to our benefits levels to be more competitive with the rest of the industry in terms of healthcare premiums and so forth. So we’re looking at every aspect of the ability to bring people in, and then also retain those people, and to retain our good people we’ve had for decades.

There continues to be a lot more turnover in the industry, and we’re taking steps to deal with that. I think that the best selling point to an employee is longevity, reserves, have to be competitive on a day-to-day basis, but for a company that has plans to grow and provide jobs for the long term that’s one of our best selling points. The more solid our company is, and I think we’re demonstrating that we are, that’ll be a plus for us in recruiting and retaining good people.

Brian Gamble – Simmons & Co.

 

Thank you, Rick.

Operator

 

Our next question is from Jeremy Sussman with Natixis Bleichroeder. Please go ahead.

Jeremy Sussman – Natixis Bleichroeder

 

Hi, good morning.

Mark Schroeder

 

Hi, Jeremy.

Rick Whiting

 

Good morning.

Jeremy Sussman – Natixis Bleichroeder

 

Since your test of 2008, can you give Magnum’s EBITDA because I assume the 155 to 185 guidance this year is just with Magnum’s second half results.

Mark Schroeder

 

It is with Magnum’s results from July 23rd on. So we picked up only that period. So two and a half or two and quarter months in the third quarter, and then the full three months in fourth quarter. They are numbers that were reported in the S-4 that we filed in the first quarter. Their actual results on their basis was about 12 million. In their second quarter, it was down a little bit from that if you put it on the same basis as Patriot. And I say that because there are some accounting dissimilarities between the two. So if we record Magnum on a similar basis, a little bit less than that in the second quarter.

Jeremy Sussman – Natixis Bleichroeder

 

Okay. Great! And then, I guess secondly, just given the recent volatility in (inaudible) pricing that we’ve seen over the past months, have you really seen much of a change in the way utility buyers are looking at either the short or long term purchases?

Mark Schroeder

 

I think they’re just – they’re taking their time. There hasn’t been a lot of business booked in just the recent days and weeks in the face of that. But once again, we don’t see the fundamentals changing our mind about firm pricing. So for me there’s a disconnect right now between that volatility and what’s going on, on physical, meaningful business for next year or multi-year ’09 and beyond.

Jeremy Sussman – Natixis Bleichroeder

 

Okay. And then lastly, just to catch on 2009 again. I guess, can you give us maybe a little broad – a broad sense of where you see pricing going directionally from here compared to where we are? I guess what I’m trying to get at is in light of – in light of say the recent $200 per short ton FOB settlements that we’ve seen elsewhere for high volume met coal, the numbers look a little bit conservative given that you’ve got 6 to 7 million tons of unpriced met coal, and would I be wrong in looking at it in that way.

Mark Schroeder

 

Well that’s still – a few minutes ago, I think that on the met side, the numbers are going to hold up where they have been on at least that because there’s been no letting up of the supply and demand balance. I think it’s solidly in our court. So I don’t see much change on that.

On the steam coal side, I think the physical numbers will be more in the high end of the range of what we’ve seen on these traded markets. I know they’ve been very volatile and they’ve spike up in these bag, but I think they’re more likely to be – the physical business done in the high end of that range where they have traveled over the – where they’ve been over the recent weeks before they started to move around more rapidly and actually ease off a bit.

Jeremy Sussman – Natixis Bleichroeder

 

Okay. Can you say that’s what’s embedded in the guidance or is that too granular?

Mark Schroeder

 

Well, I think you know us, maybe not real well yet, but I think you know we come from a heritage of not disappointing. So we’re – there’s – I would say this is an optimistic marketing kind of guy. Certainly there is – there’s upside in the prices, upside potential in the pricing we’ve assumed in that guidance.

Jeremy Sussman – Natixis Bleichroeder

 

That makes sense. Thanks very much for the caller, as always.

Rick Whiting

 

Our pleasure.

Operator

 

Our next question is from Paul Forward with Stifel Nicolaus. Please go ahead.

Paul Forward – Stifel Nicolaus

 

Yes. Good morning. Thanks.

Mark Schroeder

 

Hi, Paul.

Paul Forward – Stifel Nicolaus

 

A couple of things, when would you expect to have the met coal essentially wrapped up for next year? I guess, how active are the negotiations?

Rick Whiting

 

I’d say they’re pretty – they’re slow riding now. First of all, as everybody knows, all the European buyers go on vacation either entire August or for several weeks. So I think they’re kind of in shell shock having coming through a period to try to get all their business in order and get the shipments to move, and they’re just kind of taking aside and letting things happen for the next month or two. I think when they come back from vacation in September they will readily fire back up and be more engaged in looking at the situations. They’ll be starting to look at their budgets and plans for production next year just like we are, and it will heighten the need to bring security to their supply of raw materials and the cost thereof.

So I think it will – I think it’ll heat up in September or October timeframe, Paul, but it’s a little quiet right now. We have how many? We have actually dialogue. We have regular interaction with the buyers. They aren’t radio silenced, but they don’t seem ready to really lock in a meaningful way right at the moment.

Paul Forward – Stifel Nicolaus

 

Okay. And then – excuse me. Shifting over to the Illinois Basin, you talked $70-plus for the high quality coal that you’d signed up. I guess thinking about that, is there a high quality label? What percentage of Patriot’s production would you say fits into that category where it would’ve been getting $70-plus. It hadn’t been available to be signed over the past quarter.

Mark Schroeder

 

Well that’s probably more – that’d be referring to the Dodge Hill, which is the higher BTU step when I refer to that. Annual production there is about 1.2 million, 1.3 million. So the rest of our production (inaudible) into that 4 million. That’s coming on down to quality change, like an 11-4 by-product, and most of that’s booked on the contract through Peabody. And then you move over to the Blue Grass complex, and a lot of that’s even lower BTU, higher ash. A lot of that coal is that raw so it moves into yet another price plateau that’s 2.5 or 3 million tons. At the Blue Grass operation is about 2.8 to 3.

So it’s about 1 million, 2 million that I’ve talked about what I consider our high quality, mainly the BTU content. It’s still a 4.5 or 5 pound SO2 polo with that eContent [ph]. So we think that’s a pretty, pretty strong result.

Paul Forward – Stifel Nicolaus

 

Okay. What would you say on the – I know you’re still working on ’09, of course, but capital spending, what would you say ’08 versus ’09, at least at this early stage, what the growth and CapEx might be for next year to set and evaluated the projects and the cost inflation that you’re thinking about?

Mark Schroeder

 

Paul, it’s a little early, but I guess just to give you something to go on, I think the range is probably between $4.50 and $5.50 per ton. So if we’re doing 40, a couple of million tons, you’re talking somewhere (inaudible) $200 million of CapEx.

Paul Forward – Stifel Nicolaus

 

Okay. That’s helpful. And then you’ve mentioned also the 25 to 30 million gallons of diesel that you now have. So there’s no hedging at this point on maybe – no hedges that you inherited from Magnum or anything on the ’09.

Mark Schroeder

 

That’s correct, Paul.

Paul Forward – Stifel Nicolaus

 

Okay. Great! Thanks very much.

Mark Schroeder

 

Thank you.

Operator

 

Our next question is from the line of Justin Fisher with Goldman Sachs. Please go ahead.

Justin Fisher – Goldman Sachs

 

Good morning.

Mark Schroeder

 

Good morning, Justin.

Rick Whiting

 

Hello.

Justin Fisher – Goldman Sachs

 

I have a question about how your relationship may or may not have changed with coal buyers. I guess primarily domestic, but also maybe foreign now that you are the combined Magnum and Patriot as opposed to the foreign – I think you probably have the same marketing people working, but I’m wondering if they’re approach to you has changed because of your size and scope now that you’re the larger company?

Rick Whiting

 

I don’t think so. I don’t have the evidence of that. We all come from a background, both our Patriot team and folks at Magnum joining us now, all come from a background of long term relationships. I mean, Paul Vining and I and the guys in the workforce on both sides have been at this for two or three decades, and have pretty deep relationships with all the buyers. I think, if anything, the buyers are pleased to see a stability and depth, and breadth and ability to mine the product that they need, particularly on the met side. Those relationships are ongoing and long standing, and they like stability. They need to know they’re going to get their product.

We also have a reputation for not only getting the product to them on the plan, but also for quality, attention to the quality, having eyes on over 9,000 on our prep plants that ship met coal. And I think they feel good about the combination and the ability to make sure that they’re going to get what they signed for. I haven’t any one sign that there’s any concern or reason to have problems over this.

Justin Fisher – Goldman Sachs

 

Okay. And then, both for the tons that you committed during the second quarter then also going forward, did you commit more of those to domestic or foreign buyers? And then would you look more to start committing more tonnage under a long term domestic relationship versus exporting it?

Rick Whiting

 

On our side, on the Patriot side, looking back historically, the bigger numbers where we have committed tons have been in the Midwest, and that we didn’t have as much steam coal to sell in the east. On the Magnum side, of course, most of their sales have been central lapped where they operate of the thermal coal, and very little done on the met side other than spot business for this year. So on met, there hasn’t been much done other than a few top off orders for this year to fill in business both internationally and domestically. I think we’ve been in both of those markets.

We will always keep our business involvement in both domestic and international business. I think I’ve said on previous calls, we’ll move to where the action is. We may migrate if the international business is stronger, migrate our tonnage in prices. Migrate it there for a period, and then migrate back to the US if it’s stronger there. But we’re not the kind of supplier who will jump from one market to the other rapidly. We’ll give the people who supported us over the years the opportunity to engage with us at what we think are fair prices.

So I don’t have any particular preference, other than I do have strong orientation towards having diversity. Diversity is good. Different markets we – another example of that diversity, for many years now, we’ve always kept business through good times and bad in Brazil. And that’s paid off for us because now they’re some of the low cost producers of steel, and we have good relationships. And if their business has gotten better, we participated in that with them in terms of tons and price. That’s one of the best examples I could think of, of staying in various markets for at times different reasons, but always having the option to be a player, of being inside the insider’s market.

Justin Fisher – Goldman Sachs

 

And then lastly, I guess, now in light of previous comment that the US utility buyers are kind of holding off. In other words, they appear to be less active than they may have been maybe a couple of months ago. Are you seeing any migration now towards that export business because maybe you’re getting more coals from some of the foreign buyers for US coal still or not?

Rick Whiting

 

Well certainly there have been probably more activity in the prices have been with those – as far as the net backs, those prices are definitely, for the most part, have been in the money against the European prices. So we are very interested in that. The domestic buyers are holding off, but the stock piles are not moving in their favor. Look at the productions flatter down, actually down as we stated, and when I looked at the cooling degree days, it looks like June was very strong relative to averages year-over-year. Basically, we’re having a hot summer, and I don’t think there’s much ending side on that.

So I think it’s just a matter of time until reality sets in, and we’ll be sitting down and talking in earnest about ’09, and maybe business beyond that with the domestic buyers that they continue to be a big, important part of our business. All the major utilities we have done business with for years, and just as with the met buyers, we will be there for them and asking for fair prices given all of our costs and market conditions that we’re aware of. And it always works out because these utilities and coal companies and railroads are all part of the game, and we all have to play our role to make it work.

Justin Fisher – Goldman Sachs

 

Great. Thank you.

Rick Whiting

 

You’re welcome.

Operator

 

Our next question is going with Michael Lucheks [ph] with (inaudible). Sir, please go ahead.

Michael Lucheks [ph]

 

Yes. How are you doing?

Rick Whiting

 

Good morning.

Michael Lucheks [ph]

 

Good morning. I’m curious, I went through these numbers and I think I was just kind of dancing around the question, but – and I appreciate conservatism, but if I just 67 million tons of met coal at $200 a ton, which is very conservative, and cost is $75, I’d get 900 of EBITDA just from met coal. So I’m curious, are we overly conservative here or – again, I mean that’s zero for the rest of your tons. $900 million EBITDA just for met.

Rick Whiting

 

Well you have things going on like you have some business that’s done from prior year, that’s fiscal year, that’s April through the end of March. So you got three months’ impact of that kind of business. You have Brazilian business that’s basically is midyear-to-midyear. So you may have six months of some of that kind of business with older Legacy pricing.

You have an element of multi-year tonnage contracts on met with some customers that were done last year or maybe the year before that have priced increases in them, but they maybe collared so that we can’t immediately go from the previous levels in the 70s and 80s, all the way up to 200. These all have dampening effects. You may have carry over shipments for whatever reason, force majeure make ups or inability for a customer to take coal or for us to ship it at a certain quality at a certain point. And we usually agree to move it into a different period or to swap out tons and price running on something now to make it up later. There are numerous situations where you just don’t immediately move every ton from point A to point B on price.

Michael Lucheks [ph]

 

I understand that, but I’m just trying to read the press release and what you said on the call again. I though it was very explicit, 6 to 7 million tons are on priced at metallurgical coal on 2009.

Mark Schroeder

 

Michael, that is correct. I guess the other thing I’d add to Rick’s comments is keep in mind there are some add on taxes or royalty head on taxes that are somewhere in the 10% to 15% range that you have to back off of the selling prices as well. And certainly, whatever cost, average cost, you are using at the operation is going to vary from year-to-year, and we did build in some estimates for what that price inflation is going to be.

Michael Lucheks [ph]

 

I understand. Like I said, I’m using $80-plus and still coming up with those numbers. Okay. Let me just answer that at a different question then. Is the metallurgical coal you sell – what out of the percentage of say 10 million tons is low ball and what is high and mid?

Rick Whiting

 

It is all high ball, and there are varying grades of high ball. Our Rocklick met, which has historically been the Harris and the future will be Black Oak that is the strongest and highest priced product. There is certainly good coke [ph] in coals, but the less of our portfolio, you move on down through Wells, is a very solid have-all. And then you move into Kanawha Eagle and Panther, which are essentially look-a-likes because they are right beside each other physically and geologically, and they’re a little lower grade in terms of the high ball ranking. So we’re all in that range. We have kind of some price range across that product line.

One thing that we do have is unique ability to ship off at both railroads at Rocklick. And also, we’re going to have a lot of ability to blend coals. We have ground storage, blending capability down at DTA, which gives us flexibility to do a lot of optimization across our coking [ph] coal portfolio, which is now stronger with what Magnum has.

Michael Lucheks [ph]

 

So is it – that sounds like it’s selling $250 in the market right now, the high ball stuff that has settled to $250?

Rick Whiting

 

I think that the price, if you equate things for quality and freight, and bring it back to the miners, probably in the $220 to $250 range.

Michael Lucheks [ph]

 

Okay. And what do you –?

Rick Whiting

 

Now which quality, from the low end to the high end of the quality range.

Michael Lucheks [ph]

 

Just so I understand, what would your cost be on that?

Rick Whiting

 

Well that cost is probably anywhere between $60 and $100 in any particular month.

Michael Lucheks [ph]

 

I mean I don’t mean no (inaudible), but even if it was at the high side, again, it’s $100-somewhat million on 6, 7 million tons. I’m just confused by the guidance set. I’m just curious. I know it’s your guy’s first time reporting. So I don’t know if you’re being overly conservative or I’m just missing something huge and you have huge negative contracts in other places.

Rick Whiting

 

No. I don’t think you’re really missing anything. I think we are comfortable that that’s an appropriate range based on everything we know about our business at this point, and there are numerous moving parts and variables. It’s a pretty complex business and that is our best judgment as to the appropriate range at this time.

Operator

 

Our next question is from the line of Michael Goldenberg with Luminous Management. Please go ahead.

Michael Goldenberg – Luminous Management

 

Good morning, gentlemen.

Mark Schroeder

 

Good morning.

Michael Goldenberg – Luminous Management

Congratulations on a good quarter. I wanted to ask you about amortization of coal supply agreements. Now clearly, with purchase accounting that’s going to move, but can you give us some rough guidance what the expected ’09 amortization of coal supply agreements is going to be or how to at least calculate it?

Mark Schroeder

 

The how to – this is Mark. The how to calculate it is, effectively, you take the prices as of the closing date, July 23rd, and compare that to the prices in all the coal supply agreements, and that difference in tons – in number of tons gets you to a number. And that number, in our estimation, is going to be somewhere between, I’m going to give you a really big range here, but somewhere between $1.2 and $1.7 billion. And what you then do is take that number and accrete it into income statement as those tons roll off.

Michael Goldenberg – Luminous Management

 

Okay. And what’s the average term length of those remaining contracts?

Mark Schroeder

 

Most of it will be amortized over three years or so. There is some that goes longer, but the bulk of the dollar amount will come in over three years. So we’re talking a number that’s in excess of a couple of $100 million.

Michael Goldenberg – Luminous Management

 

So $400, $500 million per year.

Mark Schroeder

 

Yes. Again, the number is – that’s a ballpark number. I probably would use a lighter range than that, but it’s a ballpark number until we go through and do all the calculations.

Michael Goldenberg – Luminous Management

 

And just so I’m clear, the ’09 EBITDA guidance, is that net of that number or is that before that number?

Mark Schroeder

 

That is before that number. So the amortization amount would be added to that to give to the net income number.

Michael Goldenberg – Luminous Management

 

Hold on, additive or subtractive.

Mark Schroeder

 

We gave guidance to $750 to $950 million. We will add to that the amortization of these contract amounts, what was into the income statement as a credit or as an increase.

Michael Goldenberg – Luminous Management

 

Okay. So if there were no taxes, no interest expense, your net income would be $1.1 billion or $1.3 billion?

Mark Schroeder

 

Yes. Pretax numbers, before it’s 750 to 950, add to that some number for amortization, then that’s several hundred millions. So you will be at a number greater than a billion, and then back taxes off of that number to get to net income. And naturally, I’m skipping some of the other lines like interest expense, but ballpark there, it is additive to the $750 to $950 million.

Michael Goldenberg – Luminous Management

 

Understandable. And my other question, just following off on some of the confusion as to how you arrived at those guidance. Maybe another thing is, are you planning to release revenue guidance for ’09 at some point?

Mark Schroeder

 

I would say that, yes, we will, but we will wait until we’re further along in the budget process and further along – well further along in the year, let’s say it that way. As we get closer to the end of this year to the beginning of next year, we’ll provide more guidance than just the EBITDA number and tons sold number.

Michael Goldenberg – Luminous Management

 

Got it. Okay. Thank you very much.

Mark Schroeder

 

Thank you.

Operator

 

And this with the line of Fritz Von Carp with Sage Asset Management. Please go ahead.

Fritz Von Carp – Sage Asset Management

 

Yes. I guess my questions have been asked. It was also related to the guidance. It’s just a little bit perplexing. I get the impression that observers are thinking you should be getting more out of these assets than you’re guiding us to think. And then we do the math and your guidance doesn’t really seem that plausible. I mean it seems too low. I guess, I don’t know. Maybe there’s no way you’re going to square the circle for me today, but that’s what I’d like to hear.

Rick Whiting

 

It’s early in the process. We’ve owned these assets for about four days. So we’re going through the budget process bottoms up, and I can assure you we will wring every possible dollar out of these assets and we have the people capable of doing that. But we’re going to work through it and we’re going to do it right, and if we have anything different to say, we’ll do that as we go forward in future calls.

Fritz Von Carp – Sage Asset Management

 

Okay. Great! Thank you very much on that.

Rick Whiting

 

Okay. You’re welcome.

Operator

 

And with the line of Wayne Atwell with Pontis Capital Management. Please go ahead.

Wayne Atwell – Pontis Capital Management

 

Thank you. Can you give us a thought about your possible exploits for ’08 and ’09?

Mark Schroeder

 

Yes. Our exports are up about double year-to-date in ’08 from ’09. It’s not an extremely large number. I think it’s less than 2 million total tons year-to-date through 2008, but that is about double where we were at this point in 2007.

Rick Whiting

 

It’s about 15% of our overall business, Wayne. And I guess, if anything, with the way the markets are working, there will be some tendency for that to creep up. It’s probably more likely to go up than go down.

Wayne Atwell – Pontis Capital Management

 

And how about ’09? Is 15% still a good number?

Rick Whiting

 

I guess what I’m saying go up, I’m referring more to ’09. It should, as we move through the second half, probably creep up. And then I would think ’09 would more likely be higher, maybe not the huge way, but if anything, the price moves on up in the teens from the mid teens.

Wayne Atwell – Pontis Capital Management

 

Okay. And I apologize if you’ve already answered this, but what kind of synergy numbers should we be looking for in the merger?

Mark Schroeder

 

Still in the process of accumulating that. We have built in a minimal amount into the 2009 projection that we have out there. We expect to have a number that is – actually, I think the range that we discussed at the time we filed the S-4, and that was preliminary, was somewhere in the 35 to 75 million on an annual basis. I think a lot of that, now that we are one company and we can talk through some of these areas that we were precluded from talking through prior to July 23rd, we’ll refine those numbers. So as we get further into the end of this year, we’ll have a better estimate. We’ll give you some more information on that.

Wayne Atwell – Pontis Capital Management

 

And what’s the proximity of the assets? Is there a case where you could put some coal from one company through the washing plant of another or vice versa?

Rick Whiting

 

Definitely. First of all, we’re putting some of the coal, I think I mentioned it, from the new joint venture coming through Rocklick, but we have situations where coal can be trucked, in most cases, be trucked or taken and put on a belt line from one operation to the other.

Until we sort through all that, I don’t know any particular one in the field that’s what we’re going to do, but there are ways to optimize. But really, there’s not anything that ends up shutting anything down. It’s just more getting a closer move or have you making a different product at a plant, which has more capability to do that. But we’re going to keep our plants all loaded up.

Wayne Atwell – Pontis Capital Management

 

And I assume you’ve gone through the exercise of what you can blend up. You take maybe high quality steam and then you blend it up to a low quality met?

Rick Whiting

 

Given that the proper coating properties are there and we can commit that we’ll make (inaudible) for our customers, we are – we’ll do that, yes.

Wayne Atwell – Pontis Capital Management

 

So you’ve already assumed that in your guidance.

Rick Whiting

 

Yes. I’d say as we get into it, we will find things and learn things that we don’t have in our guidance, but we have some preliminary look at least in our guidance.

Wayne Atwell – Pontis Capital Management

 

Great. Thank you.

Rick Whiting

 

You’re welcome. Thank you.

Operator

 

And in the line with Jacob Miller [ph] with Ann [ph] Capital. Please go ahead.

Jacob Miller – Ann Capital

 

Hi. Congratulations on finally closing the deal.

Mark Schroeder

 

Thanks.

Rick Whiting

 

Thanks. Appreciate it.

Jacob Miller – Ann Capital

 

Could you please run through your fixed prices that you’ve already fixed on average by basin for ’09 and 2010 please?

Mark Schroeder

 

Jacob, I guess I will say we prefer not to do that at this point. As we did further down the year and we get more of the 2009 business locked up, we’ll get a closer read on that number. But until we get to that point, we prefer not to give that information now. We know the other side of the equation, the customer side of the equation, is familiar with these calls and we just assume to keep that information out until we finalize those negotiations.

Rick Whiting

 

And I would add that there’s basically been a Chinese law, a very tall one and big one, between us and the marketing department over at Magnum throughout this whole process. So there hasn’t been much exchange. Mainly through the accounting folks to do what they need to do on the financials, but we haven’t really had access to each other’s numbers, and we want to make sure we sort through all that appropriately.

Jacob Miller – Ann Capital

 

Or perhaps we can tackle this a different way. When you’re – given your guidance next year, the 750 to a 950, how much of that, would you say, has already been booked?

Rick Whiting

 

Well I can tell you here.

Janine Orf

 

I think we’ve said about 25, but that was unpriced.

Jacob Miller – Ann Capital

 

I understand that part. How much of the EBITDA is attributed to the unpriced part and how much of it with the 75 that has been priced?

Mark Schroeder

 

I don’t have that number. I guess I haven’t looked at it at that view. We have estimated what the numbers are for the unpriced business and rolled it all in. But I guess I can’t tell you how much of that. I cannot answer your question. I don’t have that information in front of me.

Jacob Miller – Ann Capital

 

Ballpark?

Mark Schroeder

 

I’d hesitate to do that. I’m not trying to avoid. I just don’t have the information in front of me.

Rick Whiting

 

Certainly, the related average will be higher on the uncommitted than the committed because of the embedded long term contracts. In our case, we had two major contracts, five-year type or based on old market circumstances. And so there will be naturally a much stronger waiting of higher average pricing on the uncommitted. And also, Magnum has some of that as well. But then you have a blend of other business coming in over the last year or so on spot and on a one or two and three-year type commitments. So it’s really a blend, a lot of moving numbers. We really just don’t have that number calculated that way.

Jacob Miller – Ann Capital

 

I understand, but just to reiterate the sentiments of some of the previous callers. It seems that you guys can do a $150 for the met ton. The $950 million is just on the unpriced met tons alone. So it’s kind of hard to understand why these numbers are as low as they are. So I mean I guess I’m kind of scratching my head like everyone else’s. Let me just state, a couple of other questions. Is there an opportunity right now for a multi-year met deals in the market? And if there are, what kind of discount would you be looking at?

Rick Whiting

 

I can’t say with certainty there are multi-year deals on the international. I think it’s more likely to be on the domestic side, and I don’t see any reason to discount to make that happen. I think it can happen one year at a time or it can happen on a multi-year upfront, maybe with some flexibility on future pricing. But I don’t feel any urgency based on what I see on supply-demand to move quickly and to do any discounting to make sure that we – say we have tons sold. I’ve been in this situation where we’ve gotten all the way to May or June of the following year before we set prices for annual business. As opposed to doing it in June or July before the year comes around. So this is the way this business works. It’s a game of patience and we have plenty of that.

Jacob Miller – Ann Capital

 

I have one more question on the 2010, you haven’t – I was going to have you do a production guidance. Are you looking for 2010 to be a growth year on production and what are we looking at there?

Rick Whiting

 

Yes. We continue to, based on the numbers we have now, the numbers continue to grow in total production as we move beyond ’09. And some of these projects we have in the pipeline, both from the Magnum side and on our side, and we’re in a transition year in ’09 on the Rocklick met because of the Harris mine going down and Black Oak taking its place, is one example. But we showed the tonnage growing as we go in into ’10 by another, I’ll say, several million tons.

Jacob Miller – Ann Capital

 

And how much of that would be met, your estimation?

Rick Whiting

 

Most of the growth will be on the steam coal side, on the thermal coal side, maybe a couple million tons of met.

Jacob Miller – Ann Capital

 

You have any industrial cost mix in your steam side or it will be over to the thermal?

Rick Whiting

 

Yes. On the steam side, we do quite a bit of stoker industrial grade coal, particularly out of Kanawha Eagle. And I think Japan probably has that kind of business as well. There’s some – we have a capability for that and that bears out some very strong prices, (inaudible) on our River business, again Kanawha Eagle and Panther.

Jacob Miller – Ann Capital

 

And pricing of that is round way right now in the market.

Rick Whiting

 

It’s a kind of like – probably more like somewhere in between, but closer to the met coal prices, if anything. It’s like $150 to $200, I would say, is the range.

Jacob Miller – Ann Capital

 

All right. Thank you very much.

Rick Whiting

 

Well, thank you.

Operator

 

And with no further questions in queue, I’ll turn it back to the presenters for any closing comments.

Janine Orf

 

All right. We really appreciate it everybody’s participating this morning. We know you’ve had a really business morning with competitors putting out earnings as well. So thanks for spending some time with you – with us, and we look forward to speaking with you next quarter.

Rick Whiting

 

Thank you.

Operator

 

Ladies and gentlemen, this conference is available for replay. It starts today at 11 am Central time, and will last until August 29th at midnight. (Operator instructions) That does conclude your conference for today. Thank you for your participation. You may now disconnect.

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Source: Patriot Coal Corporation Q2 2008 Earnings Call Transcript
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