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Oxford Resource Partners, LP (NYSE:OXF)

Q3 2012 Earnings Call

November 6, 2012 10:00 am ET

Executives

Karen Van Horn – Investor Relations

Charles C. Ungurean – President, Chief Executive Officer and Director

Gregory J. Honish – Senior Vice President, Operations

Bradley W. Harris – Senior Vice President, Chief Financial Officer and Treasurer

Analysts

James Rollyson – Raymond James & Associates

Mark A. Levin – BB&T Capital Markets

Sam Dubinsky – Wells Fargo Securities, LLC

Operator

A very good day to you ladies and gentlemen, and welcome to the Oxford Resource Partners, LP Third Quarter Earnings Conference Call. My name is Nancy, and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions) As a reminder, this call is being recorded for replay purposes.

And I would now like to turn the call over to Karen Van Horn. Please go ahead.

Karen Van Horn

Thanks, Nancy. Good morning, and welcome everyone to our third quarter 2012 earnings conference call. We appreciate your continued interest in Oxford Resource Partners. I’m Karen Van Horn, Investor Relations Representative with Oxford.

Participating on the call today are Oxford’s President and CEO, Chuck Ungurean; Oxford’s Senior Vice President of Operations, Greg Honish; and Oxford’s New Senior Vice President and CFO, Brad Harris. Oxford released its third quarter results earlier this morning.

On today’s call, we will be discussing our financial results for the quarter. Following our prepared remarks, we will open the call up to questions. Please be aware that some of our remarks may include statements that are not historical in nature and that may involve expectations, plans and objectives regarding future operations.

These remarks are forward-looking statements and are subject to the cautionary language regarding forward-looking statements contained in our press release. Additionally, we’ll be discussing certain non-GAAP financial measures. Definitions and reconciliations of the differences between these measures and the most directly comparable GAAP financial measures are included at the end of our press release. Our press release has been posted on our website oxfordresources.com and furnished to the SEC in our Form 8-K filing.

With that, I would like to turn the call over to Chuck for some opening remarks. Chuck?

Charles C. Ungurean

Thanks, Karen, and thanks everyone for joining us today. Before beginning my remarks, I would like to take this opportunity to introduce our new CFO, Brad Harris. He has extensive coal industry experience, including almost five years as CFO of International Coal Group. Brad is a welcome addition to our management team.

As you saw on our earnings release this morning, we continue to focus on our core Northern operations, while restructuring our Illinois Basin assets. Northern App continues to realize the benefits of the productivity improvements that we put in place earlier in the year.

In the Illinois Basin, we are continuing to manage our mining operations in a way that allows us to reliably serve our Illinois Basin customers, while producing coal at lower costs. These combined efforts enabled us to maintain a consistent year-over-year cash margin per ton in the third quarter in spite of lower sales volumes and higher fuel costs.

It is significant to note that we are fully committed in price for the remainder of 2012 and for 2013 we are presently 97% committed in price. We remain a low-cost producer in our region with strong longstanding relationship with key utilities. We’re committed to maximizing the cash margin on every ton we produced. Although, coal markets remain weak, natural gas prices have been increasing, setting up for what we expect will be an increase in thermal coal demand.

Given our capacity to increase production, Oxford is well-positioned to participate in a market rebound. In the near-term, we continue to work hard to sale our excess Illinois Basin equipment at acceptable values and further reducing CapEx to enhance liquidity.

Now, I’ll turn the call over to Greg to provide an update on our mining operations. Greg?

Gregory J. Honish

Okay. I’m going to report on our progress in three key areas. First, safety; second our operations; and third permitting. On the safety front, seven of our eight mining complexes completed the third quarter with zero reportable accidents. Our MSHA reportable incidents rate for the quarter was less than half the national average. Our employees remained focus on mining safely and employee safety remains our highest priority.

Moving on to operations, we completed the move into lower ratio reserves at our Illinois Basin mining complex at the end of quarter. This included the downsizing of the workforce and freeing up of some additional equipment that was moved to our Northern App mines. As discussed on previous calls, we continue to right size our Illinois Basin operations to better align production with sales.

Production cost at our Northern App operations decreased from the second quarter, driven primarily by the equipment relocated from the Illinois Basin operations and then increase in high-wall miner production. Both high-wall miners operated the entire quarter without leading to be moved. We do expect to move one miner during the fourth quarter.

And finally regarding permitting, we were issued six permits covering 6.3 million tons during the quarter. Year-to-date, this brings us to 10 permits totaling 8.8 million tons. We also expect to receive additional permits before year-end. So despite the challenging permitting environment, we continue to make progress on this front.

And now I’ll turn the call over to Brad. Brad?

Bradley W. Harris

Thank Greg. Good morning everyone. I welcome this opportunity to talk with you on my first earnings call. As both Chuck and Greg mentioned, our third results demonstrate the benefits being realized from focusing on our core Northern App operations and our Illinois Basin restructuring.

In the third quarter of 2012, we reported total revenues of $97.2 million, including $83.9 million from our 1.9 million tons in coal sales. In the third quarter of 2011, revenues totaled $110 million, including $94.9 million from our $2.3 million tons in coal sales.

The decrease in coal sales revenue was primarily due to the Illinois Basin coal supply contract termination that we discussed in prior quarters. Third quarter adjusted EBITDA was $14.2 million, a decrease from the $17.8 million in the prior-year period, and down slightly from the $14.6 million in the second quarter, lower sales volumes again primarily from the Illinois Basin throughout the year-over-year decline.

We were able to offset the lower adjusted EBITDA with CapEx reductions of $2.4 million helping to stabilize our third quarter distributable cash flow. Maintenance CapEx for the quarter was $4.9 million compared to $7.3 million for the same quarter last year.

DCF for the quarter was $3.1 million compared to $3.9 million for the third quarter last year and $3.2 million for the second quarter of 2012. Total CapEx which also includes expansion CapEx was $18.2 million for the third quarter compared to $31.2 million for the same quarter in 2011.

I want to refer you to the production and sales summary table in our earnings release. This table has been reformatted to provide cash sales, cash cost, and cash margin per ton. We hope that this new format provides improved information for your analysis.

As you will note, we maintained our cash margin from the third quarter of 2011 at $8.07 per ton. Higher cash coal sales revenue per ton offset the increase in cost of purchase coal in higher diesel fuel expense. Depreciation, depletion and amortization expense was consistent at $13.1 million for the third quarter, compared to $13.3 million for the same quarter last year.

Corporate SG&A for the third quarter was $3.9 million compared to $3.1 million for the same period in 2011. The increase primarily resulted from higher compensation and insurance expenses. We did incur a small amount of restructuring charges in the quarter, primarily due to the continued move of excess equipment from the Illinois Basin to our Northern operations as Greg discussed.

As of September 30, 2012, our liquidity was $9.2 million. We had a $150 million in debt outstanding including a $115 million presented is current. The current balance now includes a $104 billion outstanding on our revolver that matures in July 2013. We remain in compliance with over debt conveyance and preparing for discussions with our lender group regarding the refinancing of our credit facility with one option being an extension of the facilities term.

As of announced on October 26, the Board elected to reduce the common units distribution and suspend the subordinated units distribution. The Board’s action was prudent proactive move to preserve liquidity in a challenging coal market. The Board will review distribution levels on a quarterly basis taking into consideration, the facts and circumstances of the time to determine what is in the best interest of the partnership and its unit holders.

Accordingly, we are not providing any forward guidance on our distributions at this time. Going forward, we remain focused on maximizing operating efficiencies and further reducing our capital expenditures to preserve liquidity while positioning ourselves to participate in a market rebound.

With that, I’ll open the call up to questions. Nancy?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Okay. We have a first question in the queue from the line of Jim Rollyson from Raymond James. Please go ahead.

James Rollyson – Raymond James & Associates

Good morning, gentlemen.

Charles C. Ungurean

Good morning, Jim.

Bradley W. Harris

Good morning, Jim.

James Rollyson – Raymond James & Associates

Chuck, you mentioned, I can refers this morning or just in the press release, but having the ability to increase production if the market gets better, which were obviously I hoping for. Can you maybe talk about what your annual capacity looks like? What could you ramp up to and maybe what the breakdown is between the Illinois Basin versus Northern App?

Charles C. Ungurean

Okay, here in the Northern App, we feel we could had another 5% to 10% really without any capital. And then in the Illinois Basin, they’re again largely driven by market pricing. We’re currently today mining their rate of about 600,000 tons a year after our reductions. We could easily take the up that much more market condition winded.

James Rollyson – Raymond James & Associates

Would that require much capital?

Charles C. Ungurean

No. But I think earning above that would.

James Rollyson – Raymond James & Associates

Okay, that’s helpful. On the 97% of your coal, it’s committed in price for next year. What volume assumption does that imply?

Charles C. Ungurean

That’s about 6.5 million tons.

James Rollyson – Raymond James & Associates

Okay. And when you look at average pricing that’s in your contract portfolio for next year, maybe some color on how that compares versus what’s your average looks like for this year?

Charles C. Ungurean

We’re up about $1.20 I think.

James Rollyson – Raymond James & Associates

Okay, helpful. And on the cost side given the volume that you are looking at the 6.5 million tons, obviously you guys have been focused on trying to bring cost down anyway you can. What are you thinking on a kind of unit cost basis next year given the volume that you are starting, out looking for?

Charles C. Ungurean

Right now I think that, the biggest driver of that would be fuel. But I would hope we could remain flat-to-up slightly there again fuel in just general inflationary pressures.

James Rollyson – Raymond James & Associates

Okay, perfect. That helps a lot, nice, guys.

Operator

Thank you for your questions, Jim (Operator Instructions) We have the next question from the line of Mark Levin from BB&T Capital Markets. Please go ahead.

Mark A. Levin – BB&T Capital Markets

Hey, guys, just a couple of quick questions. I know Jim just asked on 2013, any color on what percentage of 2014 has been contracting at this point and how to think about pricing on those tons?

Charles C. Ungurean

We’ll price somewhere in the neighborhood of 70%, 75% price being committed.

Mark A. Levin – BB&T Capital Markets

Okay, got it. With prices that would be comparable to 2013, or around?

Charles C. Ungurean

Yeah, similar to 2013.

Mark A. Levin – BB&T Capital Markets

Similar to 2013, okay, great. And then on the comment regarding CapEx in the press release this morning, I think you mentioned the reduction in, looking at a reduction in 2013, would you anticipate, I guess a is, would you go straight back to maintenance levels and b, what would you look at, what would be the annualized maintenance CapEx level as you see things today for next year?

Charles C. Ungurean

Our annualized maintenance CapEx is going to be similar to down slightly from this year and that’s largely, because we’re taking advantage of the Illinois Basin assets, so if we can put them to work here that’s what we’re going to do rather than the market for this equipment is not the best. So in some cases we’re better to use it, part of that use of this for maintenance CapEx. So it will be down somewhat from this year’s levels.

Mark A. Levin – BB&T Capital Markets

Okay. And then the final question when you think about the distribution and what might look like in appropriate coverage ratio going forward? It looks like you guys will be in a much healthier position after the recent distribution cut getting were the subordinated having to worry about that at least from the near-term. What looks like in appropriate coverage ratio for you guys long-term or where would you be comfortable?

Bradley W. Harris

Well, at this point, I don’t think we’re prepared to give obviously a coverage ratio. I think what we said in the press release and the direction that discussions we have had with our Board is we’re certainly going to evaluate the distribution level on a quarterly basis and make decision later to what the facts and to say circumstances are at that time. We certainly did that this quarter and that’s reflective in the reduction to preserve liquidity. We’re certainly hopeful that we will be able to sell the excess assets from the Illinois Basin that would improve our liquidity.

But as we move into the latter part of the year, as indicated we’ll also be engaging in discussions with our lenders group related to refinancing and the distribution decisions, what we’re able to do will all become a part of that larger discussion. So in that way, I’m little reluctant to put shadow, what maybe to come and so figure out what all the facts and circumstances are that we’re dealing with.

Mark A. Levin – BB&T Capital Markets

Yeah, Brad, that makes perfect sense. And then just finally on the equipment, how far along are you in that, can just maybe give some color into the process as to when you might expect to sale a sort of, or you [edge square one] or you in the seventh inning, where you guys on that process?

Bradley W. Harris

I guess I would say that we’re probably in fourth inning on that. Again we’re evaluating the best use of that equipment in relations to sales price. We do have you a large electric shovel that we think is probably a little easier to sell on this market and we’ve been marking that currently, and we hope to see something come of that. The smaller equipment that we can as I said earlier, either use in after the Northern App or retire over Northern App equipment and bring more bit up here. That’s what we’re going to do. If we can get a fair price we’ll sell it. But we were between the cash we’ve received from it or avoiding either maintenance or equipment CapEx. We will make the best use of those assets.

Mark A. Levin – BB&T Capital Markets

Great, thanks very much guys.

Operator

Thank you. We have a next question in the queue from the line of Sam Dubinsky from Wells Fargo. Please go ahead.

Sam Dubinsky – Wells Fargo Securities, LLC

Can you guys give an update on your litigation regarding the contract cancellation? And do you have a timeline, when you think will get some maculation there? And I have a couple of follow-up question.

Charles C. Ungurean

I tell you, it is continuing. We’re currently in discovery now, and as far as the timeline that’s really up to the lowers. But we are in discovery mode right now.

Sam Dubinsky – Wells Fargo Securities, LLC

Okay. And then in terms of your liquidity, I know additional selling assets in kind of distribution. Can you discuss maybe just suggestively how flexible your financing partners are with extending credit that need to be? Do you feel comfortable? You can get a quite increase in one interest rate. Do you think are the range of interest rates we should expect? Then I have one last question.

Charles C. Ungurean

We’ve had some, I’m going to say a very preliminary discussions with the lender group at this time and then obviously everybody is well aware of the maturity in July of 2013. So that’s clearly something we need to address in the fourth quarter. Certainly the size of the facility is something we would discuss to the extent that there might be we could increase the bit to provide a little bit more additional liquidity would be helpful, but we have not quantified specifically that number with the lenders yet nor have we gone into the discussion about terms or conveyance at this point.

So we’re a little ahead of where we can talk about the specifics at this point. But I would say, the initial discussions with the lenders, we think they will be receptive to working with us as we go forward. So we’re encouraged by the very preliminary calls, but again none of the facts have been addressed as of yet.

Sam Dubinsky – Wells Fargo Securities, LLC

Okay. And then one last inventories question, can you just comment on how much channel inventory you think there is out there for thermal coal? It seems like things are restabilizing near-term. But is there a lot of inventory at utility still?

Bradley W. Harris

That the inventories are certainly still healthy, but they have also I think through the summer months, they come down I think somewhere in a neighborhood of 30 million to 40 million tons, I think for last thing average. So they are down as you aware. Gas prices have ticked up to the 350 or maybe a little over, which has also has and we’ll continue to help the coal burn. So they are down some from their highs, in the spring of the year.

Sam Dubinsky - Wells Fargo Securities, LLC

Okay, great. Thank you very much. Good luck for everybody.

Charles C. Ungurean

Thank you.

Bradley W. Harris

Thanks.

Operator

Thank you for your questions ladies and gentlemen. I would now like to hand it back to the management for any closing remarks. Thank you.

Charles C. Ungurean

Thanks again everyone for your ongoing support of Oxford. We look forward to sharing our continuing progress with you on our next earnings call. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Have a good day.

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