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Executives

Scott Morris

David G. Zatezalo - Chief Executive Officer of Rhino GP LLC, President of Rhino GP LLC and Director of Rhino GP LLC

Christopher I. Walton - Senior Vice President and Chief Operating Officer

Richard A. Boone - Chief Financial Officer of Rhino GP LLC, Principal Accounting officer of Rhino GP LLC and Senior Vice President of Rhino GP LLC

Analysts

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Paul S. Forward - Stifel, Nicolaus & Co., Inc., Research Division

Mark A. Levin - BB&T Capital Markets, Research Division

Rhino Resource Partners LP (RNO) Q3 2012 Earnings Call November 1, 2012 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter 2012 Rhino Resource Partners Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Scott Morris, Vice President of Investor Relations. Please go ahead.

Scott Morris

Thank you, Erin, and good morning, everyone. And again, my name is Scott Morris, Vice President of Investor Relations with Rhino Resource Partners. The earnings release was issued before the market opened this morning and is posted at the partnership's website at www.rhinolp.com. We also have a presentation posted on our website that provides information on our operations and results for the quarter.

Representing the partnership today are Dave Zatezalo, President and Chief Executive Officer; Chris Walton, Senior Vice President and Chief Operating Officer; and Rick Boone, Senior Vice President and Chief Financial Officer.

Before I turn the call over to Dave, I'll read the following Safe Harbor statement. This conference call contains certain forward-looking statements. Forward-looking statements may be identified by words such as expects, intends, anticipates, plans, believes, seeks, estimates, will or words of similar meaning and include, but are not limited to, statements regarding the outlook for the partnership's future business and financial performance. Forward-looking statements are based on management's current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict.

Actual outcomes and results may differ materially due to various factors that are summarized in today's earnings release and are described more fully from time to time in the partnership's filings with the SEC. We refer you to these sources for additional information.

Rhino expressly disclaims any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in its views or expectations or otherwise. This call is the property of Rhino Resource Partners LP. Any distribution, transmission, broadcast or rebroadcast of this call in any form without the express written consent of the partnership is prohibited.

A replay of this call will be available from today at 1 p.m. until Thursday, November 8, 2012, at 11:59 p.m. Eastern Time. To access the replay, call (888) 286-8010 in the U.S. and Canada or (617) 801-6888 internationally and enter the confirmation code 71642820. The webcast will also be archived on the partnership's website for one year.

With that, I'll turn the call over to Dave Zatezalo, President and Chief Executive Officer. Dave?

David G. Zatezalo

Thank you, Scott. I'd like to thank everyone for participating in Rhino Resource Partners Third Quarter 2012 Earnings Call. I'm pleased to announce first that 2 our operations in our Central Appalachian statement have received awards from the Kentucky office of Mine Safety and Licensing as having the best safety records for surface and underground mines in their respective districts.

In addition, while our operations Eastern Kentucky received a reclamation award sponsored by the Kentucky Department of Natural Resources and the Kentucky Coal Association, in recognition of the best reclamation in their respective region. I congratulate our employees on their efforts that resulted in achieving these awards, and I commend all of our employees throughout the company on their -- for their continued focus on safety.

Despite the continued downturn in both the steam and met coal markets, we continue to deliver positive operating results in the quarter as we had EBITDA of $21.3 million, which represents our fifth consecutive quarter of EBITDA exceeding $20 million.

On October 22, we announced a cash distribution of $0.445 per common unit or $1.78 per unit on an annualized basis, with no distribution being paid to the subordinated units. Our focus on maximizing cash flow and reducing our debt has provided positive results as we have lowered our overall inventory by more than 155,000 tons from peak levels and reduced our long-term debt balance by approximately $7.8 million during the third quarter, and this while we spent approximately $9 million on expansion capital during the quarter, primarily in the Utica Shale area but in other areas as well.

Through this extended downturn in the coal markets, our strategy continues to be to focus on maximizing cash flow and to work to reduce our debt. At the same time, our diversification issues continue, and we are encouraged by the initial test results from wells drilled in our Utica acreage, as well as other opportunities in the Utica area, such as Razorback Services Company that has completed construction of 2 drill pads in the Utica and has now commenced work on its third.

I will turn the call over to Chris Walton, our Senior Vice President and Chief Operating Officer, for his discussion of our operations. Chris?

Christopher I. Walton

Thank you, Dave. In regard to Rhino's coal operations, you may want to reference the map on Page 5 of our earnings presentation posted on our website. Our steam coal at Hopedale in Castle Valley remained fully contracted through 2013 and '14. In addition, we have continued to see reasonable activity from steam customers that have previously delayed shipments in Northern and Central Appalachia, as well as in the Western Bituminous in the operation.

We continue the process of contracting our 2013 met coal, and while prices in the met markets are depressed, we replaced the majority of the 2013 tonnage that's needed to keep these mines open and the work crews in place.

Rhino Eastern's continued normal production and produced a solid quarter as we've continued to experience lower production costs along with satisfactory sales levels. We made substantial progress in securing anchor customers that wanted to underpin the development of our Pennyrile property in western Kentucky, which is referenced on Slide 12 of our earnings call presentation.

The Board of Directors of Rhino's general partner has approved Phase 1 capital for the earthwork development in Pennyrile. We expect this operation will become a significant source of long-term positive cash flow going forward. Once in full operation, we believe Pennyrile will add another significant pillar to our base steam coal operations that allow long-term contracts that generate long-term stable cash flows.

In Central App, our operations resumed on July 9. The majority of the locations after a 5-week furlough. Our efforts to reduce inventories continued as we lowered inventory levels by over 150,000 tons in the quarter compared to earlier peak levels. We are seeing some increase in met coal inquiries and continue to see some limited spot met sales. However, we only participate in these sales when the prices are acceptable to us.

Our new Tub River prep plant continues to operate on a limited schedule, and once market conditions improve and the plan operates at full capacity, we expect significant cost savings and increased production flexibility from this operation.

Our highwall miner continues to operate on a limited schedule. It's capable of producing 240,000 tons of met coal per year from this mine, even though it's producing just a fraction of that amount now. The re-mining at 3 surface mine commenced limited production in April, and this mine is capable of producing 375,000 tons per year when it's operating full capacity.

Results from our Elk Horn coal lesion operations continue to reflect positive results in the challenging Central Appalachian coal basin. In Northern App, our Hopedale location remains fully contracted through 2014 for its steam coal. Our Hopedale operation also remains a steady cash flow for Rhino and performed well during the quarter. We continue to focus on operating our Sands Hill surface mines at an efficient level to lower costs and improve profitability.

Limestone sales continue to be strong as the demand for stone has remained high in the area. We also continue to process the permitting the 7 seam reserve. It'll be accessed from the existing portal and infrastructure at Hopedale.

In our Western region, the Castle Valley mine has performed very well in the quarter as we sold over 300,000 tons, in large part due to a pickup from a customer who curtailed shipments early in the year due to a generator fire. Our cost at Castle Valley has improved as our cost per ton was below $22.50 for the quarter, which we view as an outstanding achievement.

We've also begun production at our Eagle #3 mine at our Rhino Eastern joint venture during the third quarter, and Rhino Eastern's continued to show positive results as our ongoing efforts to improve safety, productivity and cost structure to this operation resulted in positive returns even with the difficult market conditions. Despite the Patriot Coal Corporation's bankruptcy, operations at Rhino Eastern joint venture have been proceeding normally.

Finally, our well site preparation business in the Utica Shale has performed well. We've completed the construction of 2 drill pads and we expect this area to continue to grow as drilling is expected to increase in the area. With that, I'll turn the call back to Dave.

David G. Zatezalo

All right. Thanks, Chris. In relation to our non-coal activities, we are extremely encouraged by the initial results of our diversification efforts. For those of you following on the website presentation, this is detailed on Page 9.

Gulfport, the manager of the joint operating agreement, currently has 12 wells in various stages of development in the Utica Shale area, with 5 sets of test results that have been publicly announced. The initial test results announced by Gulfport have been very positive and shown a relatively high concentration of hydrocarbon liquids. Our review of the test results from wells drilled in Utica region show that the wells drilled on our acreage have some of the highest BOE test results of all the Utica wells drilled to date, which demonstrates the substantial potential value these wells could generate. We believe our oil and gas investments, along with other opportunities in the Utica area, will provide a partnership with substantial long-term value.

I'll now turn the call over to our Chief Financial Officer and Senior Vice President, Rick Boone, for a review of the financials. Rick?

Richard A. Boone

Thank you, Dave. Good morning, everyone, and thanks for joining in the call today. My comments will be based on Rhino's consolidated results for the quarter. However, our press release and posted website presentation provide detail by our business segments, which have been defined on previous calls and in our SEC filings.

During Q3 2012, Rhino continued its strong financial performance while operating in extremely weak market conditions. Q3 2012 marked the fifth straight quarter with EBITDA exceeding $20 million.

Looking at our results of operations, total revenue for the quarter was $93.6 million and was in line with the 2011 comparable quarter. Coal revenues totaled $83.9 million, up slightly from $82 million in the third quarter of 2011. Other revenues for the quarter were $9.7 million compared to $11.6 million for the period as coal lease revenue from our Elk Horn operation was lower due to lessees being challenged in the current market.

Net income for the quarter totaled $8.9 million, which was slightly lower versus net income of $9.8 million over the third quarter of 2011. Adjusted EBITDA was $21.3 million in the third quarter, which was relatively in line compared to the same period of 2011. Overall, coal revenues per ton decreased quarter-over-quarter as we experienced a higher mix of lower priced steam coal sales from our Western Bituminous coal operations. On a per ton basis, coal revenues in the third quarter 2012 were $64.33 compared to $65.61 in the same period of 2011, a decrease of $1.28 per ton.

Cost of operations per ton was $53.19 per ton in the third quarter of 2012 compared to $55.22 in the third quarter of 2011. The decrease in cost of operations per ton can also be attributed to the higher mix of lower-cost tons from our Western Bituminous operations.

Rhino had actual maintenance capital expenditures of $2 million for the quarter, while expansion capital expenditures were approximately $9 million, consisting primarily of our continuing investment in the Utica Shale.

Rhino has sufficient liquidity through its revolving credit facility to amply operate the business, fund its capital requirements and pay distributions. At September 30, 2012, Rhino had total availability of $78.5 million, which includes cash of $0.5 million and available credit under our facility of $78 million. As Dave mentioned earlier, we were able to lower our long-term debt by $7.8 million during the third quarter.

Although overall market conditions remain challenging, we are reaffirming our guidance for 2012. We are still in the process of contracting our 2013 met coal sales so we're not providing guidance for 2013 at this time. When we have clarity on met sales and other transactions that are in process, we will provide 2013 guidance.

With that, I would like to turn the call back over to Dave for his closing remarks.

David G. Zatezalo

Thank you, Rick. To summarize, we continue to focus on our goals of maximizing our cash flow and reducing our debt during the ongoing market downturn. We believe that focusing on these areas will position Rhino to be an even stronger participant in the market once the downturn reverses.

We're excited about the Pennyrile project in Western Kentucky and the diversity that the Utica operations are bringing to Rhino. On behalf of the board and employees of Rhino Resource Partners, I thank you for your participation today. Operator, please open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jim Rollyson from Raymond James.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Dave, it sounds like pretty good results coming so far out of the Gulfport Utica wells. Couple questions around that. You said of the $9 million you spent, the majority of it or a large part of it was going to fund your interest there. Can you -- when you think about this over the next few quarters, kind of how do you see your total capital commitments going into this, number 1; and number 2, when do you think that cash inflow starts up to overcome the cash outflow? When is it a positive cash flow event for you, would you guess?

David G. Zatezalo

Okay, Jim. Well, firstly, the issue with the Utica is that there's an infrastructure shortage. That infrastructure shortage is being addressed by many crews in the region. We're currently forecasting or I should say more accurately, the Gulfport is expecting several of our wells to be hooked up and online before the end of this year, and then several more in the first quarter of next year. I think by the end of first quarter of next year, we should be generating revenue fairly regularly and fairly well up there. Ongoing capital requirements will depend entirely on how many wells that we choose to drill there next year. My own expectation, Jim, is just that in 2013 that the revenues we receive will be largely offset by the capital required to further develop the field. And I expect it's going to be late in the first quarter before we see substantial volume of gas and oil actually moving out of there.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Okay, that's helpful. You mentioned in the press release your efforts on focusing on reducing cost, which is something we've kind of heard as a theme in the industry, since that seems to be one thing everybody can try and focus on. Question is when things get better, we get a recovery in this market, how do you think about maintaining that? Because it seems like as an industry, not picking on you specifically, everybody focused on cost for the downturn and then when things get better again, that a lot of time seems to go out the window. I'm just -- as you think about all the moves you've made on cost, and you think about the hopefully the market recovering as we get into next year and beyond, just how do you think about trying to maintain that focus on cost?

David G. Zatezalo

Yes. We have so far been able to maintain our focus on cost, Jim, largely by streamlining our operations. And I'm not really talking about doing that so much on the balance of the backs of our labor force. We're actually working very hard to keep our labor force intact. We've been able to minimize so far reduction so that when the inevitable market does pick back up, we're able to keep our group intact and grow with it again. Our efforts have been really on streamlining operations, eliminating, for one, truck haul wherever we can; making sure we're doing things with conveyors that are correct; eliminating some of the smaller operations that actually have a lot of overhead and infrastructure associated with them. We're always trying to get a better deal on our materials and supplies as everybody is. But so far, we have not tried to do, this in a manner that has left us with a hollow organization. I think a lot of the cost growth that we've seen in the past is really related to the price of labor where people are having to jack up their labor very rapidly to track participants back into the industry. So far, we've been able to avoid a lot of that. So I guess my strategy would just be to make sure that we are minimizing our extra costs wherever we can through the use of lower variable facilities that generally run on conveyor belts and minimizing trucking.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Okay. Good job also, I guess, on reducing debt this quarter, and then maybe this is for you or Rick. When you kind of look at the way things are shaping up right now and having pulled back on the subordinated distribution, how much do you think you can bring your debt down between say now and the end of next year? Maybe a range?

David G. Zatezalo

And let me try to address this, Rick. Our debt next year will likely, with the proceeding of the Pennyrile development, we will do that largely on debt and we're exploring alternatives to that at this time so I'm not so certain that our debt will go down substantially next year.

Operator

And your next question comes from the line of Paul Forward from Stifel, Nicolaus.

Paul S. Forward - Stifel, Nicolaus & Co., Inc., Research Division

Yes. Following up on that Pennryile question, I was just going to say that was a good little breakdown you gave in the slides about Pennyrile. I was just wondering if you can talk a little bit about what you think the capital needs might be for Pennyrile? And then how do you see that mine stacking up against other mines in the Illinois Basin as far as what kind of advantages do you have in terms of likely cost or coal quality or transportation that makes it, I guess, that makes it a viable project in what is still a pretty tough market for all types of thermal coal?

David G. Zatezalo

Yes. It is still a pretty tough market and Pennyrile has a quality profile that is typical of that basin, of that Southern Illinois basin with the exception that the chlorine is somewhat lower, okay, so it's advantaged in terms of that on coal quality. It is also advantaged in terms of transportation in that we can access the river directly. We would consider it to be or I consider it to be advantaged in terms of export capability because we don't have any railroad interface with it at the present now. The overall capital requirements, I think, would be south of $50 million. We have drilled the coal seam extensively and will continue to do so. We view it to be a very uniform seam, it's slightly thicker than what we're used to operating in, in Central App certainly, and we feel it's a very good for us, Paul. The first phase of it has been approved. We've been – we've had a very good reception in the market domestically, and we have not tried the market this any internationally yet.

Paul S. Forward - Stifel, Nicolaus & Co., Inc., Research Division

All right, that sounds good. And was looking at your contracted position in Northern Appalachia, you'd said -- I think you said that Hopedale was basically contracted through 2014. I was just wondering about that. I think you show in 2014 a little over $60 a ton for 1.18 million tons. Does that represent -- I guess in the past, we've seen Hopedale producing on the order of 1.4 million, 1.5 million tons but lower in the last few quarters. I was just wondering if you'd look at that, at the 1.18 million number, and is that something is that we would say, is that all Hopedale, is there a little bit of Sands Hill in there? And what would you say is the kind of productive capacity of Hopedale going forward looking over the next few years?

David G. Zatezalo

Hopedale, that 2014 does represent Hopedale only. Hopedale does fine at that level of sales. What you don't have in that level of sales is development of the 7 seam. That is being permitted. That should start to be ongoing early next year. And as we develop into the 7 seam and understand our cost structure and capabilities there, we will then try to market that.

Paul S. Forward - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. And the – and so Sands Hill, is that pretty much -- there's not a whole lot of current contracting for 2014 delivery, that's really just Hopedale that you're including in that 1.18 million number?

David G. Zatezalo

That's correct. That's exactly correct, Paul.

Paul S. Forward - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And I think you'd also said Castle Valley was pretty much contracted through 2014 as well. I was just wondering, you had pricing come down and cost came down this quarter at Rhino Western. I was just wondering, you've got a $35 pricing in the third quarter but the contracting through 2013 and '14 is up around $41 and $42 a ton. I was just wondering if you could talk about what's different in the third quarter versus what you have contracted going forward?

David G. Zatezalo

Rick?

Richard A. Boone

Yes, Paul, this is Rick, I'll take that question. We had an ash penalty on shipments with one of our major customers there that was absorbed in the third quarter. That was a one-time event that we will not have going forward. So you did see the gross revenues dip some there on the coal side.

Operator

[Operator Instructions] Your next question comes from the line of Mark Levin from BB&T Capital Markets.

Mark A. Levin - BB&T Capital Markets, Research Division

Dave, just a couple just general more market-related questions. As you kind of look at just the met market today and you look at the various qualities of prices and look at inquiries that you guys are receiving, how do -- where do you guys peg the various qualities of met right now?

David G. Zatezalo

Gee, Mark, that's a pretty tough one. I would -- the qualities that we produce, I would say that the higher-vol As are probably close to 100, the higher-vol Bs are probably about 85. The mid-vols are probably about 125, and the low-vol, we don't sell that currently so I really -- I should really only speculate on what I've read, mostly in your writings.

Mark A. Levin - BB&T Capital Markets, Research Division

Well, so related to that point on some of the high-vols or high-vol B prices. I mean when you kind of look at the end ship production numbers, at least and you look at the met mines specifically, there hasn't been a massive falloff in production. I mean, how do you sort of look at the next several months from a met coal production perspective in Central App?

David G. Zatezalo

Well, we've had a pretty substantial reduction in our production and there has been a falloff. I mean, we're probably producing about 50% of what we're capable of producing. Rest of it, we choose not to sell at lower prices because we don't think it's smart. We are taking enough orders at not prices I would like to see to keep the operations open and viable. Generally, our workforce at those operations is working 3 or 4 days a week rather than a full production schedule as we've historically had them on. So I mean, rather than completely shutting down the operations, I think if you look tons, the tons are substantially down. We're absorbing that by shortening work weeks and doing the little things we can do. But we're trying very hard to keep the integrity of our organization together so that we're ready to ramp back up in the event of an upbeat market.

Mark A. Levin - BB&T Capital Markets, Research Division

And when you think about putting together a capital program or a capital budget for 2013, obviously, met is such a wildcard. It is where it is today and who knows how long this type of market can last. I mean, how do you approach that just given the massive volatility that we've seen in met prices as you try to put together a capital program for next year?

David G. Zatezalo

Well, I mean, we approach it very conservatively, and you would find nothing in our capital as proposed now, anything other the maintenance of existing operations on the met side. We did do some growing last year on our met capabilities. We have established new operations in our met capabilities. But from this point forward until such time as the market demands it, we obviously aren't going to put in anything other than maintenance capital.

Operator

I would now like to turn the call over to Scott Morris for closing remarks.

Scott Morris

We'd like to thank everyone for their participation today, and we will speak with you again next quarter. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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