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Alpha Natural Resources, Inc. (NYSE:ANR)

Q3 2012 Earnings Conference Call

November 2, 2012 10:00 am ET

Executives

Todd Allen – Vice President-Investor Relations

Kevin S. Crutchfield – Chairman and Chief Executive Officer

Frank J. Wood – Executive Vice President and Chief Financial Officer

Paul H. Vining – President

Analysts

James M. Rollyson – Raymond James & Associates, Inc.

Shneur Z. Gershuni – UBS Investment Bank

Caleb Michael John Dorfman – Simmons & Co. International

David Gagliano – Barclays Capital

Andre Benjamin – Goldman Sachs & Co.

Brett M. Levy – Jefferies & Co., Inc.

Mitesh B. Thakkar – FBR Capital Markets

Michael S. Dudas – Sterne Agee & Leach Inc.

Paul S. Forward – Stifel Nicolaus & Co. Inc.

Lucas N. Pipes – Brean Murray, Carret & Co. LLC

Operator

Greetings, and welcome to the Alpha Natural Resources Third Quarter 2012 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Todd Allen, Vice President of Investor Relations for Alpha Natural Resources. Thank you, Mr. Allen. You may begin.

Todd Allen

Thank you, operator, and thank you everyone for participating in today's Alpha Natural Resources third quarter 2012 earnings conference call. Joining me on the call today are

Kevin Crutchfield, Alpha Natural Resources' Chairman and CEO, who will provide a brief market outlook and summarize our third quarter results; Frank Wood, our CFO, who will comment on Alpha’s financial results and updated guidance; and Paul Vining, Alpha’s President, who will be available to address operational and marketing questions following the prepared remarks.

Before we begin, I wanted to mention that Alpha’s management team will be meeting with investors at several upcoming conferences, including Dahlman Rose Global Metals, Mining & Materials Conference on November 13 and the Goldman Sachs Metals, Mining & Steel Conference on November 27, both in New York, and the UBS Coal Conference in Boston on November 29.

Please let me remind you that various remarks that we make on this call concerning future expectations for the Company constitute forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are made on the basis of management’s views and assumptions regarding future events and business performance as of the time the statements are made.

Actual results may differ materially from those expressed or implied, and information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in our filings with the United States Securities and Exchange Commission, including our annual report on Form 10-K and subsequently filed Form 10-Qs.

This call is being recorded and will be available for replay for a period of two weeks. The call can also be heard live on the Internet, and both a replay and a downloadable podcast of the event will be archived on our website at alphanr.com for a period of three months.

With that, I will turn it over to Kevin.

Kevin S. Crutchfield

Thanks, Todd, and good morning, everyone. Before I get started, I just want to say that I hope all of you on the call, your families and friends stayed safe during the Hurricane this past week, and our thoughts and prayers are with those who didn’t fare so well, and those who are still recovering from the event. This was clearly a challenging quarter; I do want to commend our workforce for their hard work during the period for staying focused under difficult circumstances. and for once again demonstrating their commitment to Running Right.

Our incident rate in the quarter decreased 14% year-over-year and the number of our mine rescue teams recently took a couple of awards from the national competitions. And one of our AMFIRE mines, the Centre County surface mine, was awarded the National Mining Association's Sentinels of Safety Award. These will be commendable achievements in any quarter but in light of the current market environment and changes in the industry and within Alpha the focus and dedication of our people, is especially noteworthy.

As you’ve seen from our release, and as Frank will elaborate on shortly, coal revenues during the third quarter of 2012 were $1.5 billion, versus $2 billion in the third quarter of 2011. We reported a third quarter 2012 net loss of $46 million or $0.21 per diluted share, compared with net income of $63 million or $0.28 per diluted share in the third quarter of 2011. We generated adjusted EBITDA of $179 million and free cash flow of approximately, $66 million. As everyone on this call is aware this continues to be a difficult environment for coal producers with the macro events limiting demand in key end markets for both thermal and met coal.

Against this backdrop, Alpha has demonstrated this quarter that it is taking clear decisive action to remain competitive both now and in Q3. In September, we announced the plan to strategically reposition the company and ensure that our operations and cost based are appropriately aligned with the current market environment and primed for long-term success.

We're already executing well against this plan, which includes three main elements. Moving to a sharpened focus on metallurgical coal, capitalizing on our strengths, secondly, creating a durable, sustainable cost competitive, thermal coal business, supplying the electric utilities, here in the U.S. and growth markets overseas, and lastly streamlining the organization, so that it add enough to scale up or down as markets evolved, while at the same time, reducing annual overhead costs by $150 million. as part of this effort, we also acted this quarter to further strengthen our balance sheet.

in October, we successfully issued $500 million of 9.75% senior notes due in 2018 and repurchased approximately $123 million of our 3.25% convertible senior notes due 2015. This action will immediately provide us with additional financial flexibility and improve our maturity profile.

As Frank will detail later, this leads us with $2 billion of liquidity as of October 26, 2012 including approximately $900 million in cash. We believe that this gives an appropriate capital structure to support us through today’s volatile markets, as well as one that provides us with the flexibility to pivot offensively into the next cyclical upturn.

To put it simply by increasing focus on our met and most profitable thermal coal businesses in creating a leaner, more flexible organization were positioning Alpha to compete successfully as the leader in the global coal markets for years to come.

Now I’d like to provide more color on our view of the markets and additional details on the controllables. I’ll start with the global market for metallurgical coal. the combination of ample supply especially with the recovery of Australian shipments following interruptions in 2011, stagnant to declining demand in developed world and a significant slowdown in Chinese demand, the seaborne metallurgical market was in a state of oversupply as this now reflects $70 quarterly benchmark price.

Representing a $55 per ton decrease in a single quarter, we believe the fourth quarter benchmark is at or under the cash production cost of marginal producers. Furthermore, recent spot transactions have been reported at or even below $150 per metric ton, if all producers had to immediately re-price at least spot prices, we estimate that between one third and one half of all seaborne supply would be under water.

In response to this rapid erosion in pricing, producers around the globe including Alpha had curtailed production. Production cuts have been announced in the United States, in Australia, a region long believed to be the lowest cost production region in the world, and in Western Canada and Russia.

We believe that up to 30 million tons of annual supply have recently come out of the seaborne market. representing more than 10% of the seaborne market, this sort of supply response is widely expected to impact prices, and we hope to bring the market back in the balance.

To put it a little differently, it seems to us that the global met market is at or near trough, simply because vast amounts of production are uneconomic in today’s prices. We’ve seen this movie before. when the benchmark hit $129 in 2009, which was around the marginal cost production at that time, supplier scaleback supply and the market rebounded rapidly. we’re not quite bold enough to speculate about timing, but it feels like we’re positioned for a similar rebound this time although the recovery may be dictated by the relative strength of Asian demand.

On the thermal side of the business, the drivers and timing are different. Thermal coal demand in the United States plummeted in early 2012 due to lack of burn, less winter, and the availability of low price natural gas, (inaudible), which in hindsight appears to have been spring, early summer of 2012, inventory peaked at 213 million tons and coal share of electricity generation dropped to a low 32%, tied with natural gas for the first time in 40 years, that represented more than a 10% decrease in market share in the year.

This is basically unprecedented in the market as historically stable as the U.S. electricity generation market. Adding fuel to this fire, the hospital U.S. regulatory climate has been driving more announcements of coal-fired plant retirements and encouraging switching to natural gas for electricity generation. we’ve clearly passed the bottom today, with inventories in the 190 million ton range, normal shipment levels out of the PRB and higher prices in all regions compared with the low point earlier this year, but that’s coal comfort when you consider that between two thirds and three quarters of all U.S. thermal coal production is probably underwater in today’s spot pricing levels.

If there’s some good news in all of that, certain domestic thermal coal market is largely a cyclical phenomenon in most production regions, and the PRB competes well when natural gas prices are at or above the $2.75 to $3 range and we saw shipments out of the PRB, pick up swiftly when gas prices rose above that level. While shipments are strong, the overhanging of unpriced tons in the PRB will take time to work through and it will likely take time for the business to recover. So, we’ve elected to ship only what we have committed and priced at levels that allow a reasonable profit margins until the market comes back into balance.

In the east, our Pittsburgh 8 long-hauls are the lowest cost thermal coal production in our portfolio, and these mines can complete profitably when gas prices are above the mid $3 level. Based on the forward strip on our long-term view of the gas market, we believe that this production will be in the money and should continue to dispatch going forward. also with high E content and excellent transportation outlooks, this coal makes an outstanding export product assuming that seaborne markets support economic prices.

So both PRB and Northern NAPP have experienced cyclical challenges this year. Central Appalachia is different in that demand has been, and will continue to be structurally diminished. coal to gas switching capacity is greatest in the Southeastern United States and Central App steam coal requires sustained gas prices above $4 to remain competitive.

In addition, the territory served by Central App coal is replete with small older profile facilities that historically can continue operating because of the readily available low sulfur Central App coals. In many cases, economic and new regulations are driving utilities to retire these units and favor new gas plants, rather than invest the capital required to retrofit. All in all, we estimate the Central App could strength some 50 million tons to 70 million tons in the next few years, from a basin that produced approximately 120 million tons of steam coal, in 2011 to that basin producing 50 million tons to 70 million tons going forward.

As I mentioned earlier, we have taken and continue to take decisive action to align our operations and cost structure with today’s markets. So far in 2012, as you are aware we’ve announced three rounds of production CapEx, starting with four million tons on February 3, reducing expected 2012 shipments by 2.5 million tons of Eastern steam and 1.5 million tons of lower quality mix. Yet on June 8, we began the implementation of a further 7.5 million ton reduction to our expected 2012 shipments that was initially announced on our first quarter earnings call in May. Including a further 7 million tons of steam coal and another half million tons of lower quality mix.

We took further action on September 18, when we announced the rollout of our major restructuring plan. I painted this in broad strokes at the top of my remarks, but this plan specifically involves reduction in CapEx of 16 million tons of annual production to be phased in from September through early 2013. These setbacks include temporarily crawling back Powder River Basin shipments by 8 million tons in 2013, further reducing Eastern steam production by another 6.1 million tons and further reducing lower quality met output by approximately 1.6 million tons. We will ramp back up PRB and met coal volume for the market conditions were, it’s difficult to see right now conditions in which much of Central App steam could come back into production any time soon.

In addition to the production CapEx, we implemented a number of internal cost-reduction and restructuring actions in June and September, which are expected to permanently reduce overhead expenses by approximately $150 million annually when fully implemented. And these savings will be reflected in both our cost to coal sales and our SG&A expense lines in our income segment. These overhead cost reductions are, in addition to other cost of coal sales reductions due to the mine idling and production curtailments.

Looking ahead, we expect that the global market from met coal will come back into the balance in the relatively near term through the combination of supply cuts around the world. Our resumption of steel production and growth in China, which has risen back to above 700 million metric ton annualized, based in October and expected seaborne met coal demand growth of 10 million tons to 15 million tons, or about 5% in 2013.

Thermal coal recovery will vary by region with PRB likely to be the first to return to a balance supply demand picture, while Northern App will gradually improve with rising gas prices and improvement in the export market. Central App as I have noted will likely face a protracted period of compressed margins and additional rationalization.

Before I turn it over to Frank, I want to emphasize that we are positioning Alpha for success over the long term. Given the state of the markets today, re-pricing of shipment volumes, as we entered 2013, will no doubt mean that 2013 is going to be a challenging year. All of our efforts as the management team have been geared towards preparing our sales to capture the opportunities that lie beyond what confronts us in the immediate horizon. Our restructuring efforts, our capital structure, our strong liquidity position, our diverse suite of assets, our leading position in metallurgical coal and our unrivalled access to the export markets among our U.S. peers position us very well to capitalize on these future opportunities.

With that, I’ll now turn the call over to Frank.

Frank J. Wood

Thank you, Kevin, and good morning everyone. As Kevin noted in his remarks, coal revenues during the third quarter of 2012 are $1.5 billion versus $2 billion in the third quarter of 2011. The year-over-year decrease was primarily due to lower shipment volumes, on both metallurgical and eastern steam coal, which declined by 18% and 23% respectively, as well as the 23% decrease in average per ton realization for metallurgical coal, partially offset by higher shipment volumes and average realizations from the Powder River Basin.

Other revenues for the third quarter of 2012 included a $16.5 million from cash buyout of the coal supply agreements. During the quarter, Alpha shipped 27.9 million tons of coal, including 4.9 million tons of metallurgical coal, 9.8 million tons of eastern steam coal and 13.2 million tons of Powder River Basin coal. This compares to 31.2 million shipped in the year-ago period, including 5.9 million tons of met, 12.7 million tons of eastern steam and 12.6 million tons of PRB.

Average realizations for metallurgical coal were $129.96 per ton in the third quarter, compared with $168.49 in the third quarter of 2011 and $127.83 in the second quarter of 2012; eastern steam coal realizations were $66.40, compared to $67.07 last year and $65.05 in the prior quarter. Realizations in the Powder River Basin were $0.12 out of $0.87 compared with the $11.98 in the year-ago period and $12.96 in the second quarter of 2012. Total cost expenses were approximately $1.7 billion in the third quarter, down from $2.2 billion last year and $2 billion in the second quarter of 2012, after excluding impairment and restructuring charges.

Third quarter cost of coal sales were $1.3 billion compared to $1.7 billion in the third quarter last year and $1.4 billion in the previous quarter. Excluding approximately $6 million of pre-tax UBB expense credit and a fairly negligible amount of merger related expense included in our third quarter cost of coal sales, Alpha’s adjusted cost of coal sales in the East was $75.93 per ton, compared with $76.38 in the year-ago quarter and $74.21 in the second quarter.

The year-over-year decrease in adjusted cost of coal sales per ton in the East is the result of host of variables, including the elimination of a significant amount of relatively high cost, Central App thermal coal production, a mix shift with a greater proportional contribution from the lower cost Pittsburgh 8 Seam longwalls, lower variable cost met coal realizations have decreased.

Fewer and lower cost purchase coal volumes somewhat offset by a greater proportional contribution of high-cost metallurgical coal, and increased fixed-cost absorption as costs spread over fewer tons. The cost of coal sales in the PRB during the third quarter was $9.40 per ton, compared to $10.34 in the year-ago period and $11.01 in the second quarter of 2012.

The significant increase in production costs in the PRB is primarily attributable to the variable cost nature of mining in that region and reduced overburden movement as we adjust our mine plant, in anticipation of lower production volumes in 2013.

As you’ve seen in our release, and as Kevin noted, Alpha reported the third quarter 2012 net loss of $46 million or $0.21 per diluted share, compared with net income of $53 million or $0.28 per diluted share in the third quarter of 2011.

Our third quarter net income reflects various pre-tax items, including changes in the fair value and settlement of derivative instruments from approximately $29 million, restructuring charges of $14 million, UBB expense credits of $2 million, a benefit of $12 million from the amortization of acquired intangibles and a benefit of $6 million from the reversal of merger-related accruals, as well as the income tax impacts the above items, which was a benefit of $10 million during the quarter.

Excluding these items, Alpha’s third quarter 2012, adjusted net loss was $36 million or $0.16 per diluted share. Adjusted EBITDA, which excludes the restructuring charges, merger-related expenses, UBB expense credits and the change in fair value and settlement of derivative instruments with $179 million, compared to $377 million in the third quarter of last year.

Capital expenditures during the third quarter were approximately $87 million down significantly from $142 million in the year-ago period. Our 2012 full-year guidance is unchanged with respect to most items, including shipment volumes, our cost of sales, our cost of coal sales per ton in the East and the West, SG&A expense, DD&A and CapEx.

Based on the midpoint of shipment guidance, we currently have all of our eastern steam coal and all of our western steam coal committed price for the year 2012 at average per ton realizations of $66.02 and $12.89 respectively. We have 91% of metallurgical coal committed and priced at average per ton realizations of $133.20 and 5% of our metallurgical coal is committed and unpriced. This leads 4% or approximately 800,000 to 900,000 tons of lower quality metallurgical coal that was uncommitted as of October 25. In light of current demand and pricing the ability to profitably place these tons into market remains in open question. If they are not sold our met shipments for the year could transfer to lower end of the shipment guidance range. Importantly these are lowest quality and therefore lower margin tons and would have little impact on our financial performance whether they are ultimately placed in the market or not.

Finally we have updated our interest expense guidance to a new range of $190 million to $195 million in order to reflect the impact of our recent $500 million issuance of 9.75% senior notes and the repurchase of approximately $123 million of our 3.25% convertible senior notes.

Looking at Alpha’s traffic position for the year 2013, as of October 25 Alpha has 2.9 million tons of metallurgical coal committed and priced at average per ton realizations of $129.78 and another 11.2 million tons committed and unpriced. We have 16.7 million tons of Eastern steam coal committed and priced at average per ton realizations of $66.30 and 3.2 million tons committed and unpriced. And in the West we have 37.9 million tons of Powder River Basin coal committed and priced at average realizations of $12.87 per ton. Alpha’s total liquidity at the end of the third quarter totaled approximately $1.6 billion including cash, cash equivalents and marketable securities approximately $550 million, in addition to approximately $1.1 billion available under the company’s various security facilities.

However as Kevin mentioned earlier the combined effect of our senior notes offering and the repurchase of a portion of 3.25% convertible senior notes resulted in increased cash and liquidity. As of October 26 when the convertible tender was closed cash to marketable securities totaled approximately $900 million and total liquidity was approximately $2 billion.

As Kevin discussed we’ve taken decisive actions to right size our mine portfolio, we’ve restructured our organization with plans to eliminate a 150 million in annual overhead costs in the process. Now we have adjusted our capital structure and increased our liquidity and financial flexibility. We have the plan in place that will allow us to emerge from the current challenging market environment as the stronger competitor and we’re well in the execution of this plan. Ultimately our goal is unchanged to maximize Alpha’s free cash flow generation, so that Alpha continues to improve with leadership position in the industry to that the benefit of all of our stakeholders.

Operator, we’ll now open the call for questions?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Jim Rollyson with Raymond James. Please proceed with your questions.

James M. Rollyson – Raymond James & Associates, Inc.

Good morning everyone.

Kevin S. Crutchfield

Hi, Jim.

Frank J. Wood

Good morning.

James M. Rollyson – Raymond James & Associates, Inc.

It sounds like you guys have a fun job to do right now to try and manage this current market, but circling back to one of the comments you made Frank just on the fourth quarter met volumes, it seems like the 5%, 4% whatever that’s open, it doesn’t sound very likely necessarily, I’m curious about the 5% that’s committed, but not priced and the reason I’m curious is because I guess, if you get to that number, to back into what you implied for fourth quarter volumes would be up over 5 million tons almost 5.25 million tons, just in line of the market being weaker in the fourth quarter, in the third quarter, do you feel comfortable that the customers have signed up to take those tons or are going to take them or just kind of maybe characterize how you see the market playing out for the fourth quarter?

Paul H. Vining

Yeah, this is Paul Vining. On the committed and unpriced I can pretty much say we’ll get to a price agreement with those folks were sort of the finish line with them is some kind of painful processes, as you know the markets been bouncing around even since the bench markers are established, but those we feel fairly complement around, I think the uncommitted and unpriced tons are I think pretty well characterized price comments, but what I would put in a risk category, that’s fully subject to sound business decisions around what makes sense for us and what doesn’t, and it may make sense for us to sell little, if any of it is the prices are in a range that make us negative cash flow and doesn’t make any sense.

James M. Rollyson – Raymond James & Associates, Inc.

That makes perfect sense and as you guys start to talk with customers about your 2012 calendar domestic business, any indication how that’s going just in relation to obviously the timing of those conversations are particularly great, just given where the pricing benchmarks are right now, I’m just curious if, there are willing to meet you somewhere in the middle on pricing given that there are going to stuck with it for a year?

Kevin S. Crutchfield

I think they are going to do what they always do, they are going to their jobs and they are going to try to get what they perceived to be as prevailing market prices that people will sustain and ship 12 months. I think last year we happened to catch the market at a good time for the domestic side and the year before it was, this year was on the other foot and this year it happens to be in where it was two years ago in terms of timing and the benchmark certainly doesn’t draw the domestic piece, but it gives some visibility here on the market conditions on the supply and demand dynamics and we only deepen it for obvious reasons don’t want to comment a lot, but we’re confident we’ll get to settlement that hopefully make sense for both of us.

James M. Rollyson – Raymond James & Associates, Inc.

Okay, and last one Kevin you mentioned PRB obviously picking back up, first on the scale with as gas prices recover, when we look at your implied full year volumes and obviously you’ve kind of taken down the outlook for next year, just to what’s committed in price, curious just how that fits within your thinking in the gas market, because you would think that you might actually see some improvement coming, as if gas prices actually hold up next year relative to this year. Is it because you think customers are going to draw from their still relatively high inventory and does not need a lot of production or you just more be in conservative.

Kevin S. Crutchfield

Well I think Jim, I think you hit it right on the head, I think if you look at the difference between second quarter and third quarter, it was vastly difference then what we saw was in a immediate volume response when gas prices started moving back up, but there still some overhanging to work through and I think as customers work through that overhang, you’ll see a price response at sometime. We’re just taking the view that while we get move those tons and we had opportunities to move the terms that we don’t match our production profile out there, we’re just choosing not to do it because we don’t still think it makes good financial sales that we’re just going to hold back for now.

James M. Rollyson – Raymond James & Associates, Inc.

Wait for the right price.

Kevin S. Crutchfield

Yeah, wait for the right price.

James M. Rollyson – Raymond James & Associates, Inc.

Okay, thanks guys.

Kevin S. Crutchfield

Thank you.

Operator

Our next question comes from Shneur Gershuni with UBS. Please proceed with your question.

Shneur Z. Gershuni – UBS Investment Bank

Hi, good morning guys.

Kevin S. Crutchfield

Hi, Shneur.

Shneur Z. Gershuni – UBS Investment Bank

It kind of a follow-up to Jim’s question, with respect to pricing, it seems that pricing is actually started to bounce up as of late, you’ve talked about kind of in the press release today about supply (inaudible) around the globe helping stabilized market, reaching contracting seems to be a little bit better, I was wondering if you can elaborate a little bit on your discussions with, I guess with the U.S. domestic settlement, is there an after tight potentially not go annually, go quarterly or trying to extract premium to be able to lock in prices for year. How much of that is part of the discussion point of the quarter right now.

Paul H. Vining

Yeah this is Paul. I don't think it’s realistic to expect the domestic folks to shift in this shorter-term obligation is in weather, it’s in the period like now whether its certainly have a little bit of leverage or even want to flip the other way. We’ve had discussions with the few customers about it, and without sale basically each one of at least true for the time being is – elected to move of anything other than 12 month obligation.

Shneur Z. Gershuni – UBS Investment Bank

Okay. Second question I was wondering if we can talk about or expand a little bit on the mine closures and margin impact. Cost were better than what we’re looking for you, you’ve had some cash generation and so forth, it seems that you’ve targeted kind of the lower margin mines, without explicitly asking for 2013 guidance, can you sort of give us what you would characterizes the annualized closure rate for steam and met and whether the cost that we’re seeing now can be continued into 2013 or if there is opportunities for further improvement.

Kevin S. Crutchfield

Let me hit a couple of things, Allen, (inaudible) Paul kind of follow-up with your volume question and when we think about cost structure, had think about it in-terms of the ledger, they are things going on that will positively impact cost and consider going on that will negatively impact cost if we don’t mind, I’m just kind of walk you through some of the those items and then kind of give you the net some of at the end.

On the positive side we are idling or closing higher cost mines and assess the process that we go through, we are going to structurally remove the $150 million of cost out of the system, and we will hit that number, we have maintenance and productivity scorching initiatives that are on going internally, that will either impact productivity or reduce cost of goods sold. In an environment like we are experiencing right now, we are experiencing less inflationary pressures on our inputs. So that’s the positive and then Frank mentioned in his section comparable costs tied to sales revenue, give where prices are there obviously down, so I kind of summarizes the positive side.

The negative side is made as a percentage of the total is increasing loan balance that’s not a bad thing, but it’s just may have to, we’ll get some influence there, I think Frank alluded to this one as well fixed absorption I know is an issue when you are shrinking your footprints, we got continue to take those fixed cost out of the system as well and of course idling closed which filters into that as well. And then depending on loan loss produced they can move a needle one way or the other.

I think our view on balance is that we’re thinking about it in terms of worst case flattish, best case single digit decreases as we move ahead and continue to work through this re-structuring, and that’s the goal, and then in terms of some of the volumes, I think we’ll approach it a little different way than the way you ask the question, but Paul has got some thoughts there around the volumes prospectively.

Paul H. Vining

Yeah, rather than try to recreate the various announcements we had during the year, and then try to figure out what the met is, why don't we talk about, give some general ideas of what 2013 is shaping up to look like, and it's based on some preliminary budget information, our view of the markets and how we’re really starting to situate the mines to operate next year. Total volume next year that we expect to actually produce and ship is in the range of 80 million tones to 95 million tones. And anticipating some other questions, I will just try to hit some highlights, 38 million tons of that is going to come out of the Powder River Basin, and that’s fully sold, or basically sold, and we are right sizing things. Given the current market, we can obviously we can dial it up as needed as necessary with some pre-stripping notice, but we’re not interested in basically mining coal and selling it at or near without some decent margins. The balance of it is going to come out of the East. Just to give you a zip code for met, if you take the third quarter that we just finished an annualized and assumed the volume in that Zip Code, plus or minus some figure it probably wouldn't be a bad guess for on estimate for 2013. And you back that off the rest of it basically is thermal with long hauls doing 9 million to 10 million tons and the balance of it basically, some thermal coal coming out of Central App.

Shneur Z. Gershuni – UBS Investment Bank

Very good, that’s great color. Just to sort of summing up, Kevin from your high-level comments, we really shouldn't be focused so much on the cost as much as we should be thinking about it from a margin perspective and margin expansion. Is that the kind of that point that you wanted to get across about met being a larger part of the mix?

Frank J. Wood

Well, yeah, I mean look from the strategic standpoint in a minute, I mean it’s the third-largest metallurgical coal franchise in the world and we think long term even though it’s 20% of overall volumes, it has the potential to be significantly more of that on the revenue side, as well as profitability side. So that's going to continue to be the focus, and then, as we work through our portfolio of assets, what we want to do is create a long-term sustainable thermal platform where we participate both here in the United States, as well as global markets, when we start to see some signs of improvement there. So, yeah look at the end of day we have always been above the margin. And we still got work to do, but I think we’ve got a good plan and we’re heading in the right direction, and look forward to keeping everybody posted as we continue to work through the process.

Shneur Z. Gershuni – UBS Investment Bank

Great, thank you very much guys.

Frank J. Wood

Thank you.

Operator

Our next question comes from Caleb Dorfman with Simmons & Company. Please proceed with your question.

Caleb Michael John Dorfman – Simmons & Co. International

Thanks for taking my question. Obviously in the production rationalization see you’ve announced to halt down to market. If you look at the U.S. market as a total, how much more production, do you think will happen, cost based and supply base?

Frank J. Wood

Yeah, look at me, it is a good question, and it is deep question. And we’re in one of those situations, I would characterize as still a work in process or still evolving. I mean, we saw, I guess it was April; we saw coal at a low of 32% of net generation capacity and tied effectively with gas. Since then we have seen it bounce back to 39% or something in that area code anywhere. And clearly, I think going forward, we’re talking about a smaller marketplace in the United States, the question is how much smaller, and who can be competitive and who can't. I mean, I think Powder River Basin and Northern App, and the Illinois Basin are going to continue to have their opportunities. I mean clearly Central App is the one that’s the most challenging from its cost structure standpoint. And where gas has to be for it to dispatch, so we’re not hiding from that fact, I think we’ve been pretty open about it and continue to, as most of the focus of our rationalization efforts is in Central Appalachia.

So I think it is a function too of, I mean, we have seen what the regulatory environment has hailed so far, and it kind of delve that into what we think the coal dispatch is going to be. The question will be, is there more to come. And we’re doing everything we can to set legislation and regulations that make good sense as opposed to things that are just aimed at coal, in particular. So I think to kind of sum it up, it is going to be a smaller footprint, but, it’s still some degree of work in process.

Caleb Michael John Dorfman – Simmons & Co. International

Do you think too much PRB production is coming back online over the last couple of months?

Frank J. Wood

Well I can speak from our perspective we saw material increase second quarter and the third quarter. But that's all under contractual arrangements we haven’t been trying to focus, unwanted coal into a marketplace and will plan to maintain that level of discipline, as we move into 13. I am not able to speak for the other producers out there.

Kevin S. Crutchfield

Anything to add, Paul?

Paul H. Vining

Yeah, I think, I mean, if you look at the near term 2012, shipments have picked up. And I would guess the other suppliers like ourselves are just shipping on contracts for this productivity I think that buyers have been fairly active on RFPs and for good reason. To looking at the forward strip on gas, it’s start to move, we’re trying to lock things in for two or three years. At least, fairly depressed prices, and gain some benefit out of the forward curves long gas is low. And certainly, that’s created a lot of contracting activity.

Caleb Michael John Dorfman – Simmons & Co. International

So it looks like for 2013, you contracted a little bit at PRB, somewhere around $9, is that new business and what are you seeing more in the out years, 2014 or 2015? Is there anything out there or what are you thinking about contracting going forward? What is it going to take further strip slight to depreciate significantly?

Frank J. Wood

That’s a good question. I think from the standpoint of what we’ve sold some of that was small tons or test burns at new plants. Some of it was going into current customers for you testing the market sort of get a mark on where things really are for the certain products that we have, which are on the lower end of the Btu stream. It’s been unattractive typically and/or in the contracts for ‘14 and ‘15, in part, because the price of ‘13 was so unattractive. we’ve opted to sort of lay back and wait for things to recover a bit more and some of that is going to require the other producers to perhaps add more volume to their book and take out some of the capacity that is out there.

Caleb Michael John Dorfman – Simmons & Co. International

Thank you, that’s all, very helpful.

Kevin S. Crutchfield

Thank you.

Operator

Our next question comes from David Gagliano with Barclays Capital. Please proceed with your question.

David Gagliano – Barclays Capital

Hi, thanks for taking my question. Congrats on a very resilient quarter. I have a question on the unit costs side for next year. Thank you very much for the insight on the volumes, I was wondering, if you can get a little more detail on the regional breakdown on unit costs, I know it’s not easy. But my question specifically is the PRB unit costs came in the $9.40. Is sub-$10 PRB unit cost sustainable as you move into the next year given the Hurricane volumes and if not, what is the reasonable PRB unit cost assumption for 2013?

Frank J. Wood

Yeah, David. It’s Frank Wood. We’re still in the process of our detailed planning process for next year. and as you can appreciate, we’re solving back volumes in the PRB, so that planning process is pretty critical to actually having expectations we would share with the investor base. but just in a general sense, I mean the third quarter was an exceptionally good quarter for the PRB with high-volume, we were essentially shipping coal out of inventories that we created by moving overburden in the preceding quarters. so that makes it particularly cost effective.

So I think you have to look at the third quarter in that context, and then in the usually high-volume, and it follows low quarters that hit effectively where we invested in overburden removal that we essentially converted to cash in that quarter. If you go back and look at the second quarter, we were 10 million tons of volume, which isn’t too different than we would theoretically be for next year. You saw our costs that were certainly north of $10. I don’t want to try to predict or guide you to any sort of a specific range. but I would think that our expectations have consistently been that the numbers would be in the low double digits.

David Gagliano – Barclays Capital

Okay. Just on one thing that you mentioned, it will be really helpful. Can you quantify the dollar per ton positive impact from the shipments out of inventories out of the PRB for the quarter to that $9.40 number?

Frank J. Wood

I don’t have the specific figure on that. but one of the things I can tell you, David, you look across all of our different costs in the PRB from labor to supply to services et cetera. Most of those costs were basically on a total dollar basis, flat from the second to third quarter, did not move appreciably. And so basically, the per ton effect would basically driven off a volume.

David Gagliano – Barclays Capital

Okay, thanks very much.

Kevin S. Crutchfield

Thank you, David.

Operator

Our next question comes from Brett Levy with Jefferies & Company. Please proceed with your question. (Operator Instructions) And we’ll go to the next question, Andre Benjamin with Goldman Sachs.

Kevin S. Crutchfield

Good morning, Andre.

Andre Benjamin – Goldman Sachs & Co.

I was hoping if you could maybe give a little bit of color on how you’re thinking about the demand for some of your lower quality versus high quality met coal in 2013, and longer-term, given what we saw happened this year as Australia starts to bring back some of their volumes, and a little bit of color on what price factored better than that was clearly higher prices, reflects a number higher. And then I guess the last piece would be, given sign is that met demand is actually improving from the third quarter levels, it’s a little surprise, your initial use on next year volumes would be to annualized a lower number, which is part of lowest since the Massey deal?

Kevin S. Crutchfield

Yeah. I guess I’ll address the question of volumes rebounding and I guess, I don’t have the same view in terms of the met volumes rebounding. The Australians are coming back, which clearly signals that they’re seeing what we’ve been seeing for six to nine months and they’re just starting to deal with it, I think it will be first to second quarter, probably before we get things totally imbalance and hopefully see some appreciable price movement, which will create some opportunities for additional volumes at least as it relates to shipments out of the U.S. If I talk about differentiation of quality higher and low quality, I guess, I’d focus on two things, one is from a cost perspective, our lower quality products with typically our low costs. We’ve got more or less facility there in terms of being able to be competitive and certainly are not going to bow those products out and they’re rather nice declines, the package up was some of our high quality products where we expect and often get the premium prices. So I don’t see any tactical or strategic moves in terms of curtailing or materially shutting down some of the lower quality materials going forward and the higher quality materials. We haven’t really seen any curtailment in terms of demand has been more just about pricing that’s been driven by the prices coming off the benchmark.

Kevin S. Crutchfield

And to your point earlier on volumes, sort of zip code that Paul gave here, as we’re thinking about there is 2013 is obviously influenced by what we’re seeing out there today. But what I would remind that group is, we continue to have 25 million tons plus of capacity is just really from our perspective, it’s an issue of discipline in dispatching those tons into the marketplace where it makes sense as opposed to just volume for the sake of volume. So that capacity is still there, we’re ready to unleash it whenever market conditions are, but not until the market conditions are.

Andre Benjamin – Goldman Sachs & Co.

That’s definitely helpful. And just on the formal side, clearly inventories remain elevated, but I was just wondering what you told these are currently saying about their interest and how we started talk about contracting in more for 2013, are they indicating that kind of meaningful conversations once when their burn begins and have a little bit more visibility, for us looking like it can maybe even be a little bit longer than that?

Kevin S. Crutchfield

Yeah. Absolutely, you’ve got to look at the basins, I mean in the Powder River, obviously they’ve been out there, they’re been contracting particularly as the gas price has moved up in the Northern Appalachian area contracting discussions are really just getting underway. And mainly because I think the gas price and dispatch of the plans out there is sort of in what I would call the grey zone flip-flop in back and forth between gas and coal, some of them got caught pretty far upside down this year with obligations and prices that put them in a position where they didn’t have a choice, but stack coal up and they want to avoid it in the future.

so you’ve got pricing for the Northern App area that’s probably going to be limited to one or two years max and volumes are going to be continuing discussion. Central App is a totally different discussion, there’s no real material solicitations going on with inventories where they’re at and some of the field switching to gas or the switching to other basins that’s taken place in some of the traditional cap markets.

Andre Benjamin – Goldman Sachs & Co.

Thank you.

Operator

Our next question comes from Brett Levy. Please proceed with your question.

Brett M. Levy – Jefferies & Co., Inc.

Hey, in the context of everything that’s going on, can you guys talk a little bit about what’s going on in Mongolia, how soon do you think that starts to become an issue and why the economics would even make sense?

Kevin S. Crutchfield

The economics of Mongolia?

Brett M. Levy – Jefferies & Co., Inc.

Yeah.

Kevin S. Crutchfield

I mean, look , Mongolia has kind of come out of nowhere, I mean this few years ago, it was de minimis in terms of production and it’s ramped up to I don’t know something north of 20, pretty quickly. And I think that the China continues to look at as their coal options, we just based on average [conscience] believe that structural growth beyond that level is going to get pretty challenging, just given in the infrastructure. The way they move coal over there. but it’s sort of come out of nowhere, but it feels like, it’s not going to grow materially as we go forward absent certainly marks with capital investments, and probably some very large players in there.

So that’s our general view on Mongolia, quality-wise it’s on the margin. I think it’s okay. I mean it won’t compete with the Australian sources of higher coking coal as well as the U.S. or Western Canadian sources of higher coking coal, but it does make a nice mix into the brand and longer haul average cost. and I think it’s also challenged in terms of meeting or reaching some of these demographic centers on the seaboard of China, because it’s going to come all the way in intercountry, which is a bit challenging. So I guess so to say, not optimistic that Monongahela is going to continue to move to ramp, to rate it has over the last several years. but then again, it makes surprise to the upside so far. So, that’s a helpful color?

Brett M. Levy – Jefferies & Co., Inc.

No, that’s very helpful. In the context then, can you talk a little bit more, because you’ve given great color on lot of difference? Can you talk about the ramping up of your own port infrastructure and exporting infrastructure, which is obviously significant asset of the company?

Kevin S. Crutchfield

I would say that I mean we’ve got about 25 million to 30 million tons of export capacities available to us and continue to have it available to us through Baltimore, DTA and Pier IX and the Norfolk Southern Lamberts Point as well as the couple of terminals in New Orleans and we have been slow dependent on the economics and arbitrage between the river and the rail and different markets. Something in terms of ramping up, we’re pretty much there and contracted and positioned to push 30 million tons out of the country if the opportunity presents itself.

Brett M. Levy – Jefferies & Co., Inc.

Thanks very much guys.

Kevin S. Crutchfield

Thank you.

Operator

Our next question comes from Mitesh Thakkar with FBR. Please proceed with your question.

Mitesh B. Thakkar – FBR Capital Markets

Good morning, gentlemen.

Kevin S. Crutchfield

Hi, Mitesh.

Frank J. Wood

Hi, Mitesh.

Mitesh B. Thakkar – FBR Capital Markets

My first question is just on the export market. can you provide us some color with respect to how much terminal coal did you export or plan to export for this sphere, and how should we think about 2013 given your previous comments about, given where the export market right now, it doesn’t make a whole lot of sense?

Frank J. Wood

We did on a direct basis this year we probably shipped about 4 million to 5 million tons of thermal including some cargos in the China and India. And the balance of it basically into the Atlantic market. Bur one thing about the thermal market, I think if you go back over the last 12 to 18 months, like everything, it is subject to a lot of volatility, influenced from freight rates and certainly supply situations in other countries. So a snapshot in time, if you are looking out of today, and doing the economics, it doesn't look very attractive. Windows open and close and it is highly subjective to that volatility. So I'm optimistic we can repeat that volume next year, but it may be lumpy in terms of when we ship it, and where we ship it from. Because it is going to be very dependent on the volatility on the marketplace and decisions that are made in places like Australia. Quite, frankly, now it is not doing particularly well relative to pricing and the cost structure. South Africa, is obviously dealing with some internal social issues, and the visibility and predictability around that situation is really difficult and could have some power reaching effects, in 2013.

Mitesh B. Thakkar – FBR Capital Markets

But you don't have any thermal coal for export markets sold forward yet, right?

Kevin S. Crutchfield

We do, we do have some minimal terms that we’ve contacted forward into the API to market, but not significant quantities. I'm going to guess it’s kind of less than a million tons in that range.

Mitesh B. Thakkar – FBR Capital Markets

Okay.

Kevin S. Crutchfield

And part of it was going on too is the function of, I think there was a lot of coal West Coast here earlier in the year and headed to into the Atlantic markets and they are kind of working that off. It has been interesting just to watch the demand picture in Europe, taking England, for example, or UK, for example, their nickel burns up something north of 40% and same thing for France. And I think part of that is a function of the green experiment gone bad potentially, and math and physics beginning to really matter again in terms of the economic side of the equation. So I think and also a function of what they got to pay for natural gas for vis-à-vis what is actually trading for here. So, I think the fundamental is actually, while they are weak right now, just given the oversupply situation of coal that left the U.S. coast, I think longer term has the real potential to be a nice outward force.

Mitesh B. Thakkar – FBR Capital Markets

Great. And just a follow-up. Along with the recent refinancing, you almost have $900 million in cash right now, how should we think about it going forward? Do you think it is a little bit an excess liquidity, can we think of potential buybacks either on the debt side or on the share side?

Frank J. Wood

Mitesh this is Frank. In this current environment, I’m not sure there is such a thing, of excess liquidity. So I wouldn’t characterize our liquidity position as excess, I would characterize it as something that we feel, gives us a lot of flexibility and de-risk the company going forward. In terms of use of cash, probably our primary users as we go forward other than maintaining the flexibility would be to, as we started to do with the tender on the converts would be to look at some de-leveraging as the opportunities present themselves. I don't want to get into any specifics there, but I think we would look at that. I think it can be anything on the shareholder side, while I wouldn't necessarily rule it out, I would say it’s longer duration, our immediate focus would be on maintaining flexibility, and then on, selectively de-leveraging.

Mitesh B. Thakkar – FBR Capital Markets

Okay great. Thank you very much guys. And that's all.

Frank J. Wood

Thank you.

Operator

Our next question comes from Michael Dudas with Sterne Agee. Please proceed with your question.

Michael S. Dudas – Sterne Agee & Leach Inc.

Hi, gentlemen. Kevin, given the leverage and production exchanges, you’ve seen in the Central Appalachia, how do you feel about where are your productivity levels are or it can be in the future. But more experience better quality workforce possibly you’ve kept, is that helping it all? And are you about finished with regard to rationalizing relative to the experience in Liverpool access throughout the Alpha (inaudible)?

Kevin S. Crutchfield

I think the plan we announced Mike, we believe persists on the firm, putting, going forward we may certainly hope so. As I have said earlier, it is an evolving marketplace, and what we are trying to do is not only trying to get caught up with it, we get out of here over this well. Because I do think you will see additional cuts in some of the other firms as contracts roll off this year and people make a difficult decision, re-price or just draw some production back. But thinking from our perspective, every time you go through one of these rationalizations it’s difficult, because you are dealing with the lives of good people. But what it has allowed us to do, to shore up openings that we've had across the work place, and so as the consequence, what will happen is, better mines will be running at a fully staffed level as opposed to trying to do it through overtime or just missing folks along the way. So we will see, and we always do through these down cycle since some productivity improvements. And I think those will be complemented to by some of the efforts that we have under way through our productivity initiatives, as well as our maintenance initiatives. So yeah I will expect them on balance, to begin to rise, a little bit starting next year in fact we are seeing some of it already.

Michael S. Dudas – Sterne Agee & Leach Inc.

That is encouraging. The second question is, in your prepared remarks you talked about the long-term gas market may be favorable. Relative to what you thought may be Kevin, six to nine months ago where we’re today, and how about the next year too – are you feeling a little bit more hope filled up the market relative to natural gas or is it just like a cyclical weather driven balance.

Kevin S. Crutchfield

Well I think it’s a reference around timeframe, so I mean it’s – I guess it’s effectively doubled over the past several months and I think we always as we shared before we’ve always anticipated this sort of cage match between natural gas and coal we just figured it might take a little longer to play out, we didn’t expect we have to deal with it at all over the course of a couple of quarters.

But I think long term as you think about the globe and the dislocated markets that are in place globally, it’s just a matter of time before they began to harmonize with, I don’t know Europe in ’12 put dollar frames to pans in the $16, $17 range and here we are we recovered up with $3.60 gas here in the united states, and I think its just a matter of time before you began to see those markets harmonize on a global base. It’s going to take some times – it will take a lot of capital expenditure from a LNG prospective.

And that’s where I think you could began to see coal start to eat back some market share and take up a little bit more meaning role than it has over the last several months, so it continues to be in evolving marketplace now and somebody pointed out not a whole lot of firm will contribute, but I think we do have a good plan and we continued to be focused on the right things in our hand on all deliveries that do matter, so just continue to work our way through it.

Michael S. Dudas – Sterne Agee & Leach Inc.

And final question maybe for you Frank , when you think about other asset potential asset sales or even as the (inaudible) and things will be a little bit later in year, other opportunities were significant you don’t have to swap sales maybe you can purchase around the hedges and (inaudible) color or your energy infrastructure assets in 2013.

Kevin S. Crutchfield

Like we said, that’s how we continue to evaluate and locate, I mean obviously we don't want to sell assets into a very weak market, we want to get value for them. It's a long-term intrinsic value. But yes, something we continue to look for opportunities in regards to Italy.

Michael S. Dudas – Sterne Agee & Leach Inc.

You don't expect major issues in the next 12 months given your liquidities and your brokerage shift, right now?

Kevin S. Crutchfield

No. I would say we are glad we have our liquidity, where we are and we are not going to rely on asset sales as a way to provide liquidity.

Michael S. Dudas – Sterne Agee & Leach Inc.

That's helpful. Thanks gentlemen.

Frank J. Wood

Thank you, Mike.

Operator

Our next question comes from Paul Forward with Stifel Nicolaus. Please proceed with your questions.

Paul S. Forward – Stifel Nicolaus & Co. Inc.

Thanks, good morning.

Kevin S. Crutchfield

Hello.

Paul S. Forward – Stifel Nicolaus & Co. Inc.

Kevin, I think you spoke earlier about 120 million tons of Central App steam coal in 2011. That’s you thought you could settle out in the territory of 50 million tons to 70 million tons a year. And that's really, essentially you are talking about a collapse of production in Central App steam coals what you are describing. I’m just wondering two points, one is, are your utility customers really concerned about the loss of that capacity, or are they just simply looking at their own inventories being elevated, not thinking too far beyond just working them down. And then secondly, I think we've got an election coming up next week. I read about that, that there might be one coming up. Is there anything specific that you could talk about? If there is a leadership change next week, what can the federal government do to help stand that decline to avoid the worst-case scenario for Central Appalachia?

Kevin S. Crutchfield

Not a great question, Paul. I think in terms of Central App volumes, I think it’s a peak in 97 Central App was right around $300 million tons and it’s been hovering in that 180 million to 200 million ton range for the last few years. And just based on the regulatory environment it’s already transpired plus that which is being contemplated, but it is not difficult to come up with the scenario, where you’re looking at Central App being 120 million, 140 million ton base in total including demand.

And I don’t think that’s overly pessimistic, I think it’s going to take several years for that to just to play out, but just based on what we see today, it is a possibility, I think in terms of, I heard the rumor too that there is no election next week and I think if there were to be an administration change, you got to be honest with yourself in terms of what can be done and more thing that I think difficult is to reverse decisions that have been made over the course of last several years.

I don’t think that’s challenging and likes to talk about it, but I think we are pretty realistic in terms of how difficult that can be, but I think the big thing that can be done is it’s a couple of things, one is clarity regulatory clarity. The show us what the run way looks like and we can deal with it, and then the second thing is regulations that are effectively balanced in terms of the cost and the benefit, and that’s the thing that we’ve seen about some of these things could have come out of Washington over the last several years or just been there lack of balance which is what cash poll of uncertainty over the marketplace and frankly because of the utilities into a difficult position, I can’t make any great decisions today, but the one decision that I can make was some degree of certainty is natural gas, just give the run way, though I mean that would be recommendation to the administration to the extent that they – hear what our opinion was, was give us regulatory certainty and at reasonable cost benefit type of approach.

Paul S. Forward – Stifel Nicolaus & Co. Inc.

Alright thanks Kevin.

Kevin S. Crutchfield

Thank you Paul.

Operator

Our next question comes from Lucas Pipes with Brean Capital. Please proceed with your question.

Lucas N. Pipes – Brean Murray, Carret & Co. LLC

Good morning gentlemen.

Kevin S. Crutchfield

Hi.

Lucas N. Pipes – Brean Murray, Carret & Co. LLC

The first question is on the Medco side, you mentioned earlier that very big part of the global supply is currently uneconomical, do you have a sense of what percentage of production is uneconomical in Central Appalachia on the Medco side specifically.

Paul H. Vining

This is Paul. It would purely I guess but probably a good 50% or more a bit right now on a fully cost basis, if you are going to talk about return of capital much less and return on capital is below order gas spot prices.

Lucas N. Pipes – Brean Murray, Carret & Co. LLC

I appreciate that and then you mentioned earlier that you had other revenues including 16.5 million to (inaudible), could you maybe clarify what type of bio that was? What’s that thermal coal, met coal, what’s that for the current period or for other periods.

Frank J. Wood

It was equal in thermal and related to at least one year out in the future.

Lucas N. Pipes – Brean Murray, Carret & Co. LLC

That’s helpful thank you very much.

Operator

As we have come to the end of the allotted time for the Q&A session today, I will like to turn the call back over to management for closing comments.

Kevin S. Crutchfield

Thank you to everyone for joining the call today and again our best wishes and thoughts and prayers with those who are impacted in the Northeast, who are in the hurricane, with a floor to continue keeping you posted as we go forward. Everybody have a great day. Thank you.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.

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