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Executives

Elizabeth M. Cook - Director of Investor Relations

Peter T. Socha - Chairman, Chief Executive Officer and President

Coy K. Lane - Chief Operating Officer and Senior Vice President

Joseph Czul - President - Logan & Kanawha

Samuel M. Hopkins - Principal Financial Officer, Chief Accounting Officer and Vice President

Analysts

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

David Feaster

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

Caleb M.J. Dorfman - Simmons & Company International, Research Division

Brett Levy - Jefferies & Company, Inc., Research Division

Justine Fisher - Goldman Sachs Group Inc., Research Division

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

David S. Martin - Deutsche Bank AG, Research Division

James River Coal (JRCC) Q3 2012 Earnings Call November 7, 2012 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the James River Coal Company Third Quarter Earnings Conference. [Operator Instructions] I would now like to turn the conference over to your host, Beth Cook, Director, Investor Relations. Please begin.

Elizabeth M. Cook

Thank you, Sean, and good morning. Welcome to James River Coal Company's Third Quarter Earnings Call. We released our earnings this morning and our release and presentation are posted on our website and were furnished to the SEC on an 8-K.

On the call today are Peter Socha, Chairman and Chief Executive Officer; C.K. Lane, Senior Vice President and Chief Operating Officer; Sam Hopkins, Vice President and Chief Accounting Officer; and Joe Czul, President of Logan & Kanawha.

Before we begin this morning, I need to remind you that this call will contain forward-looking statements. These statements should be considered along with the risk factors that we note at the end of our press release as well as in our annual report on Form 10-K and other SEC filings.

Now, I'll turn the call over to Peter.

Peter T. Socha

Thank you, Beth. I'm sure if most of you are like us, you had a late night last night watching the elections. We haven't really studied it, a whole lot yet. We may talk about it a little bit, but we haven't sort of studied all of the implications of it yet. This is a down ballot races, which surprise me a little bit. I mean, obviously, the top pick is as good as well. But some of the down ballot races, I thought, were very surprising.

So I will go through the slides and then we'll -- like usual, we'll jump into -- right into Q&A and take as many questions as we can. You could see on the summary slide, we are continuing to focus on liquidity, continuing to focus on maintaining a strong balance sheet. This particular quarter, we did dip our toe into the -- into bond repurchases a little bit. We had thought that when the other coal companies had their issues earlier in the summer, we had thought that there might be a vortex that we would get caught in and that our securities might be abnormally priced. And so that's in effect, what happened, and that's why we dipped our toe in the water. At the same time, we did maintain a strong balance sheet and strong liquidity.

Our view is that the thermal market is correcting. As far as the market view, our view is the thermal market is correcting. It's just correcting slowly. We had said just last May that we thought that it would take 2 normal seasons. In this case, it would be a normal summer and a normal winter, both for the natural gas market and for the coal market, and we continue to have that view.

On the met market, it's earlier in the process. The corrective period is earlier in the process. But the innings, I used a baseball metaphor here, but the innings in the met market are shorter, so they may be on the same track or the met market may lag a little bit.

The natural gas market is going exactly as we thought it would when we talked about it back in May. The storage overhang is quickly dissipating, partly that's due to production, partly that's due to coal-to-gas switching at the power generators, probably more so on the power side than on the production side, but it is correcting. And as we head into winter, as you'll see in the graph that we put in here that in fact, storage is normal. Storage is pretty close to normal. C.K. and the guys are continuing to manage production to the markets and doing a great job.

So with that, I'll turn it over to C.K. I will forewarn you though, he does have a cold, so if he sounds a little nasal, that maybe why.

Coy K. Lane

Thanks, Peter. On the safety and environmental fronts, we have received several safety awards through the quarter at Triad, our Freelandville surface and Freelandville underground mine, both received the lowest entry rate in the MSHA District.

In Kentucky, at Bledsoe, our Old House underground mine was the safest mine in the district. Also at McCoy, our Mine 15 mine was the safest mine in the district. And our surface mine grew. Coal services, they had a surface mine, Laurel Fork, that received the Reclamation Award for the district.

We're continuing to focus on safety. A lot of distractions with the election, the coal markets and all the mine closings going on, so a continual effort being made to operate the mine safely.

Going over to Central App, as Peter said, we managed production to control inventories. The focus is reduce production and control costs. For Kentucky, we did idle all the operations the week of 4th of July. We idled the CAPP operations for 1 day in August. We did idle one contract met mine. And in the quarter, we began a 40-hour work week. We chose to go with the 40-hour week versus try to take the idle days periodically throughout the quarter.

We began development of our Stacy's Branch Surface Mine, and that's going well. And we also started a replacement mine in West Virginia. That's 1.5 million tons of met coal that will come online next year.

Over in the Midwest, not a lot of change. We continue to try just matching our production to our shipments. We did complete a major upgrade of our Freelandville preparation plant, and we did start shipments from our new Hurricane East Surface Mine.

So with that, I'll turn it back over to Peter.

Peter T. Socha

Okay. Mr. Czul?

Joseph Czul

Sure. Thanks, Peter. The met market has been under considerable pressure for most of the year, but especially for the past few months. We do think the worst is behind us as we observe a bottoming out of demand in China with perhaps some small improvement in spot coking coal prices.

That said, our traditional customers in Europe, South America and India continue to face challenging times. Steel prices are low, demand remains low.

On the supply side of coking coal, serious cutbacks are visible. A number of significant production curtailments have occurred here in the U.S, particularly among medium-sized coking coal producers.

Supply is a little sticky, as recently shuttered mines may not return to production any time soon, so there is a reluctance to close mines. That said, we have seen some close.

While it's difficult to handicap the current supply-demand balance, we do think a material price recovery is forthcoming.

As Peter said, it's in the fourth or fifth inning, so we don't exactly know the timing. And the recovery in the U.S. and European economies will continue to dictate when we see that price recovery.

With that, I'll turn it back to Peter.

Peter T. Socha

Okay. Thanks, Joe. I talked a little bit about the thermal coal side on the -- in the summary slide. We are seeing some increase burn, not a great -- not a huge amount, but we are definitely seeing some increased coal burn and seeing capacity factors go up.

There has -- and this is understandable, there's been some hesitancy on the part of customers on buying additional coal until the election was completed. They already have -- their stockpiles are okay. In some cases, they're better than okay. But in many cases, they're okay to flush. And so they were going to wait and see what kind of regulatory environment they'll have for the next several years since they had the coal, and so we'll engage in conversations with them here over the next several weeks.

Given where natural gas is and the impact on coal, we've said for the last year or so that PRB would improve first and that CAPP would probably improve last in the U.S. domestic market, and that continues to be the case. PRB has clearly improved and CAPP will be less [ph], and so that will be it.

In the past, we have seen [ph] this kind of a market situation. We have done our contracting quarter by quarter as best we can, so we're not really focused so much on 2013, we're focused more on Q1 and Q2 of 2013. And we have some annual things in there, but by and large, that's what we do when a market is troughing the way it is.

The natural gas market, I also talked about a little bit. You could see we're -- as of last week, we were just over 7% above normal. To me, that's within the range of normal, and that's pretty much what we had talked about. I can't remember whether it was the May call or the August call where we talked about this particular slide. And then the rig count continues to come down.

So we expect tightening pretty much throughout the year. There may be, and I know Ray Jay and some others have put out some forecasts. There may be some spikes in Q1 because of the winter and heading into winter with normal inventories or normal storage, so there may be some spikes. But we do expect that nat gas market to tighten through the year.

On the -- on slide -- I can't read it here, but anyway, on the debt repurchases slide, as I said, we did see a window of opportunity earlier in the summer after the other bankruptcy or after the bankruptcy that happened in, I guess, in New York with Patriot and our securities got extraordinarily low. So we decided to go ahead and take advantage of that window, and we did. We are in conversations with our bank group.

One thing we did when we set the balance sheet -- we didn't talk about it on the last talk and I was a little bit surprised by that. When we set our balance sheet, we did really 3 things. We put liquidity on the balance sheet. We put runway, so our debts are not due until, I think, fourth quarter of 2015 is our first debt maturity. And then the third thing we did was we allowed ourselves dry powder. So if we wanted to take some debt, some additional debt and boost our liquidity, we could do that.

And that was by design. Those 3 elements were all by design, and they have worked out very well.

I haven't decided yet. I'll be honest with you, I haven't decided yet between a term loan and a flexed revolver. We've had conversations on both, and we'll see where we end up.

And let's see, where are we? Next week, we are with Dan up in New York at Dahlman Rose, and I'll be there. I'll be there at that conference. And the end of the month, we're with Shneur, up at UBS. I think that, that's going to be Sam and C.K. But I'm not certain on that yet.

And Sean, we will be happy to take questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mike Dudas with Sterne Agee.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

So 2 questions, Peter. First on met coal, where do you stand on production relative to the current market. Are we going to see cutbacks from your operations or how do we anticipate that? My second question, before they tell me to cut off here is could you just -- even though it's early with the election just finishing last night, is there 1 or 2 things from a regulatory front that we should look out for in a next Obama term?

Peter T. Socha

I don't think so. I'll take the second one. And on the met side, we have cost reduction and we'll continue the cost reduction depending on what the met market is doing, Mike. On the -- on what the impact is on the regulatory side, I thought for a long time, and I can't remember whether we talked about it before, but the real issue in the election for me was not so much the regulatory side, although that brings a lot of uncertainties both on the environmental, the EPA side, and on all the other pieces of the executive branch. But it's more on the economy. The economy has just kind of stalled out here in the last 6 months or so because of the uncertainty on the elections. So I'm hopeful that we will see some type of an uptick on the economy. And quite frankly, I think how they handle the fiscal cliff negotiations that are coming up will probably tell the tale on that. If they turn very acrimonious, then I think the economy will continue to be stalled. If they take the Simpson-Bowles framework and tweak it -- there already is a bill, by the way. There's a 600-page bill kind of being edited or being reviewed in Congress right now on Simpson-Bowles. And so I'm hopeful that they will use that as a framework, and then go forward from there. So I think the economic impact of the election is probably more important to us or is more important to us than the regulatory.

Operator

Our next question comes from Jim Rollyson with Raymond James.

David Feaster

This is David Feaster actually, in for Jim. You guys booked a pretty good amount of coal in the quarter, 2 million tons over $70 a ton in Central App. Could you maybe just give us a little bit more color in regards to the breakdown between met and thermal and where you're seeing prices trending for each quality?

Peter T. Socha

Well at those prices, it's mostly thermal. That's basically all I can say. It includes met, thermal and stoker. And just based on the weighted average, you can look at it and see that it's mostly thermal. There is some met there. On the color on the met, Alpha just reported last week, they usually do probably the best job and then Arch, the week before, so I think I'll defer to them. Joe, you have a thought on that?

Joseph Czul

No. I mean, I think if you have a specific question on that, we can try and answer it.

Peter T. Socha

But you want to know kind of where we're showing, what price [indiscernible] for that?

David Feaster

How contract is going with the U.S. steel market. And I mean, like you said, Alpha gave some color, but I just kind of want to hear your thoughts on it.

Peter T. Socha

Joe, you want to?

Joseph Czul

Yes. I think, I mean, some of the other guys have also -- just, I mean, I haven't really listened in a whole lot. But I saw some of their comments that I guess the way to say would be discussions are ongoing, and that's pretty much where I'd like to leave it. And maybe we can have some more to report a little bit later, but that pretty much where we are.

David Feaster

That's fair, okay. Now with the rebound in gas pricing, could we talk a little bit about what you guys are thinking about the Midwest market heading into the fourth quarter in 2013?

Peter T. Socha

Midwest should be better. But the Midwest, as we've said for the last couple of years, Midwest is so tied to the industrial economy. And that matters, at least as much as gas prices.

David Feaster

Okay, last question. Debt repurchase is clearly a focus. Is there a target amount you guys are looking to repurchase? Or was this...

Peter T. Socha

No, I'm pretty well done now. I may -- depending on where prices are, really it has as much to do with our view of the market. The coal market is going forward as much as anything else. But prices kind of ran away from us. We bought some -- I'll give you an example. We bought some at $0.23 -- it was $0.23 or $0.24 on the dollar. I couldn't buy that today. I don't want to lock myself into a corner and say, "I'm absolutely positively done." But it's not something that I'm spending a lot of time on today.

Operator

Our next question comes from Shneur Gershuni with UBS.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

So I guess, my first question is just kind of as a follow-up on the previous met question. U.S. steel producers typically sign this annual contracts, negotiations come about right now. Is that a business that you participate in? Or do you prefer, really, just to go to the spot market? And then as sort of us some color around that, there's been a big disconnect between what Platts is calling spot next pricing versus where benchmark is. When we're thinking about modeling you guys, would you -- do you think that we should be gravitating more towards the benchmark? Is that more where you settle out? Or is spot probably a good guidance point for us to pay attention to?

Peter T. Socha

Joe? Good questions, Joe?

Joseph Czul

Okay. I guess, first, yes, we do participate in North American met coal market in a pretty meaningful way. Second, frankly, I really don't follow the Platts very much. It's -- and I don't want to necessarily slam them on this call, but there's a pretty serious disconnect from what Platts is calling the market and what coal is actually for in any meaningful volumes. That said, there's not a whole lot of U.S. coal trading at the benchmark either. So I mean, I guess, what we really see is sort of the monthly deals coming out of Australia seem to be improving. We do compete with them, I guess would be the way to say it, in the world, and so that is encouraging. And the benchmark -- what happens in the next quarter, we really don't know. But we do follow the monthly price and that seems to have bottomed out. And that's sort of -- I guess, that's the first green shoot, what I'd call it. But apart from that, that's probably where I'd like to leave it.

Peter T. Socha

I'll bet you, Platts calls us today, Joe. I'm going to have them call you. Go ahead, Shneur.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Peter, I was wondering if you can talk about the stoker market a little bit. Just given the weakness that we've seen over the last year, gas switching and so forth, do you still achieve a premium for stoker and is it consistent with where it has been in the past and so forth?

Peter T. Socha

Yes. We still achieve a premium. And I don't want to give -- hold on. Yes, I'm sitting here looking at my pricing sheet. Yes, we still achieve a premium, and it's an okay premium. The stoker market really kind of hit, and Mark needs to come in here and tell me if I'm wrong on this, but it kind of hit a little air pocket earlier in the year. And it seems like it's come back up from that. So we were getting more -- a little more pushback on shipments, shipments were being delayed by a little bit. But it seems like it's been okay here recently. But yes, we still get a premium.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

And one final question, just with respect to the debt repurchase. Clearly, you're able to pick them off at a pretty good price. And I know you didn't really want to paint yourself into a corner. But I guess, my question is more of let's hypothetically think about the bonds get down to $0.12 or $0.15, something...

Peter T. Socha

If you think I'm going there, Shneur, you're nuts. I'm not even going to accept that premise.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

My question is more about are you comfortable with your current liquidity position, that you could consider something like that? Or is liquidity exactly what you need right now, and you probably wouldn't want [indiscernible]?

Peter T. Socha

It's a balance. Every single thing -- every trade that we did, it was a balance, where I had to look at what is our liquidity today; what does the market look like; what do I think the market is going to look like in April, say, just to pick a month, in March, April, May, something like that; where do I think thermal will be; where do I think the met market will be. And I want to make sure that I have plenty of cash in the bank to make sure that we're strong at that time when the market turns up. So it's, I want to say, a 3-dimensional equation that I look through it every time. When they called me up and said, "Look, we can pick up some of these." I think it was -- Sam, what was the lowest I bought at, was it $0.235 to $0.24?

Samuel M. Hopkins

Yes, $0.23.

Peter T. Socha

$0.23. That was a no-brainer. That was a no-brainer. But today, with where today's prices are, I don't know. It's just -- it's not my focus, I guess, would be my point. It's not that it's back burner or front burner or anything like that, it's just not my focus today.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

But generally speaking, you're comfortable with where your liquidity is at this point?

Peter T. Socha

Oh, yes. Oh, yes. I'm comfortable with where my liquidity is. I need to see what I think the market will look like. There was a big election yesterday. That will have an impact. As I said earlier, that will have an impact on this fiscal cliff. I kind of hate the term because they can change it any time they want. They can just extend it into 3 months increments or 6 months increments. So I think it's kind of silly. But to call it a cliff, but if those negotiations are congenial, that will tell me one thing about what I think the economy will do next year. If they're acrimonious and people storm out and they're standing in front of the microphones in the White House and everybody has got grim faces, I'm probably less likely because -- to do anything on additional bond purchases. Because I think the economy will continue to muddle along until that -- until the fiscal situation is taken care of. And I had slides, I had another whole 3 or 4 other slides that I was going to talk about today and decided not to. If you ever want, look at anything interesting, look at the velocity of money. The velocity of money right now, and you go to the St. Louis Fed website and print it out starting from 1959. Today, it's 1.56. Normally, it's 1.85, okay? That's a huge difference in the growth rate. If it goes to 1.6 from 1.56, I think the growth rate is 3%. If it goes to 1.65 or 1.66, the growth rate is almost 6% in the U.S. But the velocity of money is correlated to consumer confidence and business confidence. That's the whole -- the mattress money. Everybody is holding money in their mattress, companies and people. And so the fed has been pushing on a string. They've been pushing all this money into the economy, and it sits like a black hole because nobody is spending it. Nobody is doing anything. I hope that with the uncertainty of election behind us and I hope that they make progress on the fiscal situation, I hope that, that starts to loosen that up. 1.56 becomes 1.58 or 1.60. That would be the best possible scenario. If I'm in that situation, Shneur, and I've got bonds -- I'm not even going to put a number out there, but I've got bonds out there at a very low price and I think that the fiscal situation is being handled positively and will have an impact -- a positive impact on the economy, then I'll balance those things out. The liquidity that I have, our view of what happens in the economy midyear 2013 and what our current liquidity is, I'll look at all 3.

Operator

Our next question comes from Lucas Pipes with Brean Capital.

Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division

Just a few quick questions. You announced these new mine developments. I wondered if you have a sense of where the cost of these new mines are going to shake out relative to your current platform given that one of them at least is a surface mine, could that lower your average cost structure?

Peter T. Socha

Yes, it will be -- well, C.K., why don't you take it?

Coy K. Lane

Well the surface mine replaces some existing surface mines, so they will be in line with what we've been doing. So I think it would just blend in with the rest. Met mine replaces an existing met mine, it's close to the prep plant in West Virginia. And so those costs will be about the same as we're currently doing right now. So considering both are replacement mines, I don't see it moving our overall cost any.

Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division

Okay, that's helpful. And then earlier this week, there were some comments that I think CSX is considering linking their freight rates to API 2, and I wondered if you could comment on that and what you believe is the implication.

Peter T. Socha

Yes, that's been -- I know Andrew Wells from McCloskey who came out with that story, and then they got into an Jim Thompson's [ph] daily periodical here. I think they've been kicking that around for a little. I think it's the smart thing to do. What they have been kicking around is a linkage, some type of a linkage. It appears now that they put more details behind it. And so kind of what was thoughts is now proposals, is now on paper. I think it makes a lot of sense. Obviously for them they want to put a floor under it. But it's a very lucrative -- exports is a very lucrative business for them.

Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division

And do you think that would help to maintain current export levels? Or how do you see...

Peter T. Socha

I would think so. Yes, I mean, anything you can do where you're -- as a CEO or as a sales group, we're sitting here and we kind of know what our costs are going to be. This is where API 2 is. This is what our rail cost is going to be, and this is what our mining cost is going to be. Any time you have that type of clarity or transparency is a good thing.

Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division

That's very helpful. And then lastly, when I look out of the window here, I see the snowflakes falling. And I wondered if you could maybe comment on the parameters around the winter weather, kind of if it's a very cold winter...

Peter T. Socha

Well, not good for people in New Jersey and Staten Island and Long Island for sure. I mean, I know Mike Dudas is heading -- I think he's heading home there today. I don't know -- I meant to ask him, if he was impacted or not? Yes, we're having kind of freezing rain or we had freezing rain here earlier in Richmond. So as we said earlier, if we have a normal winter this year. We'll get -- we'll pick up somewhere between 800 V and 1 T of gas demand, which is exactly what we need. But if you're heading into a period of what we think will be flat production to slightly down, then you have normalized demand. The gas market will correct. And I think that gets to what some other people were writing, some other sell-side analysts were writing about, expecting spikes between the $5 or $6 range for nat gas. I agree with that. I guess, my only view is I don't see them backing off a whole lot later in the year just because the winter is over. I don't see a sort of $3 or $3.50 gas coming back. I could see a spike up to $6, and then I could see it easing back down in the $4 range for what it's worth.

Operator

Our next question comes from Chris Haberlin with Davenport & Company.

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

You all had a very good quarter on the met shipment side this quarter. And I guess, just kind of thinking about met going forward into the fourth quarter. You all guided to -- previously guided to 2.8 million tons, and you're already pretty close to that today just given what you've done Q1 through Q3. Should we be anticipating that you all should be able to beat that guidance? Or would you all have a pretty noticeable step-down?

Peter T. Socha

What do you think, Joe?

Joseph Czul

I think we'll beat the guidance, yes, in terms of volume. Not in a big way, but I think we'll beat the guidance a little bit.

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

And then on met realizations in the quarter, just kind of surprised...

Peter T. Socha

Chris, let me give you a tip. Joe, doesn't give long answers. You got to jump right back in there. He's not quite like me, he doesn't give these 5-minute answers.

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

All right. On the met realizations, just kind of surprised to see those realizations come down about $15 a ton quarter-over-quarter. With the benchmark moving higher, can you just talk about what was going on there? Was that just a shift in mix from what you did in Q2? Or was it more pricing on the spot market?

Peter T. Socha

So those would have been priced. When were shipments -- when were those Q3 shipments?

Joseph Czul

Well, so it's -- I mean, first of all, the benchmark went up for [indiscernible] coal. A lot of U.S. coal didn't enjoy that increase, and we were among those that we didn't get the full benefit of the increase in benchmark. That's point one. Point two is as you just sort of surmised, in terms of volume, we are going to beat guidance. And part of that is because we did get some shipments that weren't expected, basically spot shipments this -- in the third quarter. At -- basically spot prices, so it pulled the average down. Although they were beneficial to the company, it did pull the average down, and a lot of that was coal from some of our independent suppliers. So it makes the overall average look a little bit worse, but it wasn't that we lost or didn't -- that we lost any business that we were earlier expecting. We're not losing that, we're performing on that, and our customers are performing. It was just that if you add in an increment of volume, at a good bit lower than expected -- than the mean price, then it does pull the whole weighted average down.

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

Okay. And then on the contracting, you had mentioned that you're continuing to focus on contracting one quarter at a time. Is it safe to assume then that at least in CAPP, the 3.4 million tons that you do have booked, that, that's heavily weighted towards the front half of next year?

Peter T. Socha

No, I wouldn't use the term heavily weighted. It's probably weighted. I would say it's weighted. But I wouldn't use the term heavily weighted. It's just when I sit down with the sales guys and I -- we look at, "Okay, what do we have to sell for next year." I'm not really focused on sort of Q4. I don't care so much about Q4. When you're going into a rising market, I mean, this is not -- it's not rocket science. I'm not that smart. But when you're going into a rising market, I'm going to avoid pricing in the out years or in the out quarters as much as I can. Some customers just insist. They said, "I need to have a 2-year contract." And we try to get them to back off to a 1-year contract. And with the ones with the 1-year contract, we try to do it at 6 months and we try to front-end load the shipment, if we can. It's just -- it's something we've always done. We've always talked about, we've always done. It just has to do with the rising market. In a rising market, we want to stay short term.

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

Okay, and then just last one for Sam. I guess, just given the debt repurchases, how should we think about interest expense going forward? Is that $13 million quarterly run rate still good to use? Or should we [indiscernible]?

Peter T. Socha

Well, you would adjust it. I mean, we've laid out there what we bought sort of in detail on the slides. So just adjust your estimates from that, okay?

Samuel M. Hopkins

If you look at that slide, we gave what the interest...

Peter T. Socha

And if you have a question, just call us later, okay?

Operator

Our next question comes Caleb Dorfman with Simmons and Co.

Caleb M.J. Dorfman - Simmons & Company International, Research Division

I guess, first question probably would be for C.K. The costs were relatively flat quarter-on-quarter. Met realizations were down, which probably helped restrain the cost there. Was there any inflationary pressures that you are seeing or onetime costs or places that you've been able to get cost savings from your suppliers? Or how do you think we should think about the durability of cost savings going forward with the continuing decline in the met prices?

Coy K. Lane

Well, on cost, I think we're able to keep them relatively flat due to a lot of hard work at the mine. We've adjusted the schedule back to 40-hour work week from some time in the 45- to 50-hour average that we were doing. So we just really started doing that to get a handle on that. I think you see basically the inflation that you see up or down in the economy with the basic products of steel and diesel fuels. So there's not really been any big cost savings. We're always trying to negotiate package deals, and we've been able to do that, especially in the last year since we added the operation at IRP to give us a little more volume. But in general, it's just trying to cut costs and the guys are doing a good job at the mines right now.

Caleb M.J. Dorfman - Simmons & Company International, Research Division

Do you think cost next quarter could be down because of the lower met realization?

Peter T. Socha

We don't go to quarterly guidance, at least we try to avoid it as much as we can. I mean, fourth quarter, you have fewer workdays anyway, just historically. Go ahead, C.K.

Coy K. Lane

Well, the royalties that we pay on -- as prices go down, we do pay less royalties, but that's a small part of our costs compared to labor and supplies to operate the mines, so it has a real small impact on cost.

Caleb M.J. Dorfman - Simmons & Company International, Research Division

Okay. That's pretty helpful. I guess, the next question would be just on the Illinois Basin. It looks like you basically sold around 1.8 million tons year-to-date. I know that when you gave guidance on your committed position, the last time you basically had 2.8 million tons for 2012 price coal. I guess, 200,000 tons of that rolled into 2014 now. So I guess, that's implying like 800,000 tons for Q4. Is that the right way to think about it? Or has some of this fallen out of the market due to deferrals or other issues?

Peter T. Socha

We really haven't had much in the way of deferrals. C.K., have we?

Coy K. Lane

We got a little bit of carryover tons with one of our customers into next year, but really the reduction in the sales volume out there is just focused on the economy and the industrial customers that Peter alluded to earlier.

Caleb M.J. Dorfman - Simmons & Company International, Research Division

So I guess, my thinking is that sort of implies that you all have pretty good Q4 in the Illinois Basin from a shipment level, and then that probably could help your costs [indiscernible]?

Peter T. Socha

Yes, I don't want to get in too much into modeling Q4, to be honest with you. We try to avoid that. Brett is probably out there somewhere, and Brett will be -- Brett Levy, he does the same thing. He always tries to get us to -- within the current quarter to give guidance within the current quarter, and I always try to punt on it, if I can.

Caleb M.J. Dorfman - Simmons & Company International, Research Division

Okay, that's fair. So I -- just one real quick thing. When you talked about you try to layer in Q1, so is Q1 basically fully sold out now and is it now [ph] then a little bit of Q2?

Peter T. Socha

No, I don't think it's fully sold out yet. I'm just saying what our focus is. When we're in a market like this, which is trough and it's kind of bouncing along the bottom and up a little, we just try to stay shorter term. That's our focus. But sometimes we're successful, and sometimes we're not. But I don't think -- Q1 is not fully sold out yet.

Operator

Our next question comes from Brett Levy with Jefferies and Company.

Brett Levy - Jefferies & Company, Inc., Research Division

Have you guys established a budget for CapEx for 2013 yet? And can you talk about sort of some of the major items?

Peter T. Socha

The answer is -- the short answer is no. Like most people, we were waiting on the results of the election to see what happen. And so we'll have more in-depth budget discussions, particularly with C.K. and Sam and I soon.

Brett Levy - Jefferies & Company, Inc., Research Division

Okay. So it's not a quarterly guidance thing, but you've got the full month of October done and the first full week, so I figured I'd asked for monthly and weekly...

Peter T. Socha

Are you asking for next year or are you asking for the remainder of this year? I'm sorry.

Brett Levy - Jefferies & Company, Inc., Research Division

No, I'm asking you to tell me how sort of business conditions have been relative to the third quarter in the month of October and the first full week of November?

Peter T. Socha

So you are asking me for Q4 guidance. I thought -- I'm sorry, I thought you were asking about 2013 budget.

Brett Levy - Jefferies & Company, Inc., Research Division

Yes. No, the CapEx budget question was 2013. I'm just asking whether or not things have started to improve because it looks like some of the key metrics look like they're moving in the right direction for the month of October.

Peter T. Socha

Yes. I mean, there is some more coal burn going on out there, it's not widely written about or anything. But there's a little bit more coal burn. And certainly you saw that with Arch on the PRB stuff. You saw it with Alpha. So there's not as much train pressure. I'll probably get kicked after the call on this. But we don't see quite as much on the train pressure and the slowdowns as we saw maybe earlier in the year. But on the other hand, as I said earlier, we are in Q4 and Q4 has always got quirks in it because of the holidays and because of deer season and everything else.

Brett Levy - Jefferies & Company, Inc., Research Division

All right. And then on the term loan or flexed revolver, by your calculations, how much room do you have? What size could you potentially pursue as you read the...

Peter T. Socha

We purposely didn't put it in there -- didn't put that in there.

Brett Levy - Jefferies & Company, Inc., Research Division

Is it near $40 million? That's kind of...

Peter T. Socha

I'm not going there. My intent -- obviously, my intent was if I use up some liquidity on the bond repurchases at extremely low prices, I wanted to replace or want to replace that liquidity plus a little, plus some. Just replacing that liquidity by itself was never the thought. I mean, my original thought when I started thinking about this back in March or April was depending on where the price of securities goes, I could in effect deleverage the balance sheet, have no negative impact on our liquidity and if anything, maybe even have a positive impact on liquidity. And at the same time, deleverage the balance sheet.

Brett Levy - Jefferies & Company, Inc., Research Division

So Pioneer [ph]...

Peter T. Socha

So that was the thought process.

Operator

Our next question comes from Justine Fisher of Goldman Sachs.

Justine Fisher - Goldman Sachs Group Inc., Research Division

So my question is just to dig in a little bit deeper on the cost because they were higher than what we had expected for this quarter, even though they were flat quarter-over-quarter. And I think the most recent cost guidance you guys had given for well, I guess, it was a couple of quarters ago for CAPP thermal was $74 to $76 a ton, so I'm just wondering how you guys are viewing the trajectory of cost? I mean, what are the moving parts that could keep them stable or pick [ph] them up?

Peter T. Socha

Any time we add in, I mean, that's kind of -- it's one we talked about before, I guess would be the way I put it, is that any time you add in days off in a high fixed cost industry like ours, your fixed cost absorption is going to go down and your unit cost will go up. And so that what we've seen. I mean C.K. talked about the times off, as well as the 40-hour work week. All of those things, the days off, the weeks off and the 40-hour work week, all of those things combined to have -- you have less fixed cost utilization.

Justine Fisher - Goldman Sachs Group Inc., Research Division

So basically -- so until you bring those mines back up, there's -- there doesn't seem to be many moving factors that could put downward pressure on cost?

Peter T. Socha

Yes, I mean -- no. No, I don't see a whole lot of downward pressure on cost at all. I mean as we -- you'll remember back '07, '08, '09, I guess, where we were in a similar situation where we were running the mine at a reduced utilization, reduced capacity utilization. And then as you dial them up, hopefully your unit costs will go down, your production costs, excluding royalties, okay? Because in that particular case, we had really high prices, so the royalty cost was way up. But other than that, your unit cost should go down. Now again, going back to that time you had a lot of competition for labor and you had steel prices that were going up by quite a bit, so we have a lot of moving pieces. But, yes, as long as you're in a high fixed cost industry, and you're producing less units because of market condition, your unit costs are just going to be higher than they would be otherwise.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Okay. And then so this might be a tough question that you may not answer because I'm not asking for guidance, but if we're just looking at how much it costs to maintain Central Apps thermal production per ton, numbers I've heard are $4 or $5 a ton for maintenance CapEx in Central App versus the margin that you are selling some of this thermal coal for. And I know that it's hard to back out exactly what the margin is because you guys don't give us exact thermal cost that includes PCI and stoker. And so I know there's some moving parts there, but does the maintenance CapEx per ton that your spending now exceed the margins that you're generating on your thermal coal?

Peter T. Socha

I'll tell you it's something we look at a lot. I don't want to -- because we've never gone out with that level of detail before, so I don't -- I'm not sure I want to tread new ground on it today, but it's something that C.K. and his team look at all of the time, and Sam and I look at all the time.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Would you consider cutting production, if the maintenance CapEx exceeded them? But further, if it was still money losing production?

Peter T. Socha

We've already cut production. Yes, we've already [indiscernible] production. We are continuing to cut production. We've done that. We just not -- because we're a smaller company, because we're doing it in different ways, we're not going out with press releases when we do it. I mean, when Consall [ph] closes a really big mine, or when one of the other companies closes a really big mine or idles it, I should say, not close it. Idles it, that rises to the level of a press release coming from that particular company. What we're doing doesn't rise to that level. It's just little pieces here and there that the guys have done a very good job of -- a great job of, as a matter of fact so far, and I expect that will continue. But that's something that we do every day. That's part of running the mine. C.K., you agree?

Coy K. Lane

I don't disagree at all. We got to, I mean, just keep the focus at the mine level, working to reduce hours causes your cost to go up because you're just not producing as much on it. And then we'll see what new regulatory impact is going forward, if and -- with the new President or being reelected.

Peter T. Socha

Justine, we're not looking to produce coal to lose money either on the operating level or on the operating level less CapEx level. That's not what we do.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Okay. And then just one last question, if I could on the liquidity. Sorry, it's not going to be about CapEx anymore. On the liquidity front, so I know you're not talking about the exact amounts. But is it fair to say that you're not looking to raise additional liquidity above the dollar amount you spent to buy back bonds in the third quarter, i.e., this is not like $100 million or $150 million liquidity raise?

Peter T. Socha

Yes, what I did say was plus a little, what I was looking to replace. In a perfect world, okay, I would have done more than I did, and I would have done it sooner. But I got caught off guard a little bit on the timing of the other situation, and I needed to get my board brought on board. I needed to get a lot of people, a lot of things needed to happen, and I was a little slower than I needed to be on that. But in a perfect world, I would have done more and my average price would have been less. And my goal was to replace the liquidity. Goal it was and is, I should say, to replace the liquidity that I spent doing that plus a little, plus some. So I end up with a net positive to liquidity and a net positive to less leverage on the balance sheet. That's probably still where we will end up.

It's just not -- we won't end up -- the quantity, the numbers won't be as big as I originally envisioned them to be.

Operator

Our next question comes from Brandon Blossman with Tudor, Pickering and Holt.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Peter, just to finish that last sentence. So less leverage, maybe a tiny bit incremental on the liquidity side and net flat on the interest expense or down?

Peter T. Socha

Actually, it would be down. Actually, net interest would -- on a GAAP basis, on a cash basis, it may be a little bit higher, just a nudge higher, but not a whole lot. Again just from a framework standpoint, I viewed it as a window. When we set the balance sheet last year in March and April, to me, that was a window. We hit it, we hit it and we hit it right in that we put liquidity on the balance sheet. We got runway in that. We extended the maturity of debt, and we have dry powder -- in the structure of the debt instruments, we have dry power. So we hit the window that we needed to hit. This year, we had a window, and we hit it. We didn't hit it quite as well as I wanted to, but that's my fault, not anybody else's, and that was to deleverage the balance sheet and to improve the liquidity.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

That all make sense, and it looks -- I mean, that's a good deal altogether with a bow tied on it. So I'd approach the CapEx question again. But looking back, so year-to-date, it's about $67 million. It looks like $21 million of CapEx in the third quarter. How much does that -- how much of that includes development work on the new mines, and what's just kind of basic maintenance there?

Peter T. Socha

C.K., you want to take that at all?

Coy K. Lane

No, we haven't spent a lot on the development of the new mines, probably less than $1 million there, and we had a couple throughout the year. But most of that is just infrastructure and equipment repairs and maintenance.

Peter T. Socha

I'd say we're pretty much in rock-bottom on CapEx right now. C.K. would probably say we're rock-bottom -- below rock-bottom a little bit.

Operator

Our next question comes from Dave Martin of Deutsche Bank.

David S. Martin - Deutsche Bank AG, Research Division

Had a couple of follow-ups, if I may. Just coming back first to the met mine development for next year, I think on your last call, you talked about a much larger replacement mine and I'm just curious whether that's the same project. And secondly, I'm wondering about the capital cost for this development, which you mentioned earlier. I know you mentioned cost, but would quality be similar also?

Coy K. Lane

The mine that we were talking about last quarter was a replacement of a thermal mine at our Blue Diamond operation in Kentucky, and that is a little bit bigger reserve block. The met mine is -- could be a little bit bigger than what we're showing there on a clean basis, and that is a different mine than what we talked about the quarter before. The quality will be the same as what we're mining right now. It's the same seam in the same area.

David S. Martin - Deutsche Bank AG, Research Division

And the capital cost?

Coy K. Lane

We haven't really went out with -- on the capital, that will be similar to the mines we've been putting in. We're working on it right now, working through that in the budget process.

David S. Martin - Deutsche Bank AG, Research Division

Okay. And then secondly, I just wanted to come back to the balance sheet and working capital, if I may. Working capital was definitely a pretty meaningful source of cash in the third quarter, which I think you can contribute partially to lower inventories. I understand this is maybe a little bit of a fourth quarter outlook question, but I'm curious as to whether working capital would be more neutral in the fourth quarter as production and sales more closely match?

Peter T. Socha

I would say it would be neutral to maybe down a little, depending on -- working capital with us, so much of it depends on particularly receivable and the timing of receivable payments. We can have a big ship joke and have a fairly sizable shipment overseas, and we've seen that earlier this year. I think it was in the -- Joe, was it in the March quarter, where we got the cash payment, like April 4 or 5, something like that?

Joseph Czul

Right, yes...

Peter T. Socha

Those receivables were particularly high cash, was down a little and everybody kind of freaked -- had a little bit of a concern on that. But receivables were way up and all that cash came in 3 or 4 days later. So I would say, you will not see a repeat on the inventory drawdown in the fourth quarter. That would be correct. And what the other pieces are, it's just too early to say. Mainly because of receivables, Dave, because the timing on receivable payments. That's why I just -- it's not that I won't answer you, it's that I really can't.

David S. Martin - Deutsche Bank AG, Research Division

Yes. No, that's fair. And then my last question, if I may, Joe talked earlier about the strong met shipments in the third quarter being partially attributable to brokered and/or spot tons in the quarter. I'm just kind of curious what your view is on an acceptable broker margin today, is it a couple of dollars? Is it $20 to $30?

Peter T. Socha

We've never said that publicly. I mean, it is -- it does vary. I mean, it's a pretty wide dispersion, and -- but that's something we've been asked before, and we've never said so what the median is or what is acceptable. Because in some cases, we need to buy it at a lower margin because it's critical to the composition, to what Joe was doing on his blend. In other cases, we get a pretty good margin. But it's a -- in this case, averages truly are misleading, and so I would be reluctant to say that. Joe, do you have any thoughts? .

Joseph Czul

No. I mean, that's well said, I think.

Peter T. Socha

I will tell you this, I mean, we have a positive spread on everything Joe does. On the purchase goal, we have a positive spread on it.

Joseph Czul

What we've said before is really sort of reinforced, and that is that we're not speculators, we're arbitrage players. We use our relationships overseas and our relationships here in the U.S. and we leverage that to earn a return, so we're not speculating.

Peter T. Socha

Yes, we don't keep that open. And David, as we've talked about before, we don't keep an open trading book or anything like that. We use back to back, and it's mainly on the blending side. So where we have to buy -- Joe will confirm a sale, and then we have to put a blend together. He and the guys at Charleston have to blend together, so then they'll go out, they'll confirm. Whatever they need to buy to supplement what we're producing, they will buy and that has a pretty wide dispersion around it, on what the margins are.

Operator

Yes, that concludes today's call. I'd like to turn it back over to Peter Socha for closing comments.

Peter T. Socha

Right. Thank you, Sean, and thank you, everyone else. As I said, we will be in Boston in early December, late November and we'll be in New York next week. So we're happy to answer any questions. And hopefully, we'll have something taken care of out of Washington that we'll -- everyone will feel positively about. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.

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