Cloud Peak Energy's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Cloud Peak Energy, Inc. (CLD) Q2 2013 Earnings Conference Call July 30, 2013 5:00 PM ET

Executives

Colin Marshall - President and CEO

Michael Barrett - EVP and CFO

Karla Kimrey - VP, IR

Analysts

Caleb Dorfman - Simmons & Company

James Rollyson - Raymond James & Associates

Evan Kurtz - Morgan Stanley & Co., Inc.

Brandon Blossman - Tudor, Pickering & Holt

Jeremy Sussman - Clarkson Capital Markets

Mitesh Thakkar - FBR Capital Markets

David Katz - JP Morgan Chase & Co

Lance Ettus - Tuohy Brothers Investment Research

David Beard - Iberia Partners

Christopher Haberlin - Davenport & Company

Lucas Pipes – Brean Capital

John Bridges – JP Morgan

Operator

Good day ladies and gentlemen and welcome to today’s Q2 2013 Cloud Peak Energy Inc. Earnings Conference Call. This call is hosted by Mr. Colin Marshall. My name is Celine and I’ll be your operator for today. During the presentation, your lines remain on listen-only. (Operator Instructions)

And now, I’d like to hand the call over to Karla. Please go ahead.

Karla Kimrey

This is Karla Kimrey. I’m Vice President of Investor Relations with Cloud Peak Energy. Thank you for joining us today. With me on the call is Colin Marshall, Cloud Peak Energy’s President and CEO, and Michael Barrett, Cloud Peak Energy’s Executive Vice President and CFO.

Today’s presentation may contain forward-looking statements regarding our outlook and guidance, economic and industry conditions, volumes, prices and demand, LBAs, business development plans, regulations and energy policies, capital resources, and other statements that are not historical facts. Actual results may differ materially because of various risks and uncertainties including those described in the cautionary statement in today’s earnings release and in our 2012 Form 10-K.

Today’s presentation also includes non-GAAP financial measures. Please refer to today’s earnings release for the required reconciliations and other related disclosures. Our earnings release is available on the Investor Relations section of our website at www.cloudpeakenergy.com.

I’ll now turn the call over to Colin Marshall.

Colin Marshall

Thank you, Karla. Good afternoon and thank you for joining our Q2 results call. I’ll review Q2 before handing over to Michael Barrett, our CFO to cover the financials. As normal I’d like to cover our safety performance first.

I can report that during the quarter, 1,400 mine site employees suffered one mine reportable injury. This has led to a 20% drop in our All Injury Frequency Rate so far this year. During the quarter’s 53 days of MSHA inspections across our three mine sites, we were issued five S&S citations. We were – we also wanted to receive the 2013 State of Wyoming Reclamation Award for work at the Antelope Mine to control of cheatgrass and reclamation land.

Now the second quarter. Well, the second quarter is normally characterized by slow shipments, this quarter was lower than we had expected. As we explained in our pre-release, a small number of major customers had unplanned outages, we had some unplanned equipment downtime of our own, and there were some weather interruptions here in the quarter. While we’ll continue our strong focus on cost control, third time cost increase compared to Q1 due to low shipments during the quarter, when we completed several major maintenance jobs.

As you can also see from the segment analysis, lower Newcastle prices reduced our Logistics adjusted EBITDA to $2.8 million on our 1.2 million tons of exports. Current low international prices leave little export margin, but the sales remain profitable overall. Net result of low shipments and low international prices was a drop in EBITDA compared to Q2 last year.

Moving to our projects, during the quarter, the Bureau of Indian Affairs approved the Exploration and Option Agreements we signed in January with the Crow Tribe. The agreements cover up to 1.4 billion tons of coal adjacent to the Spring Creek Mine. We are now planning our exploration drilling program that will allow us to develop detail of mine plans.

We continue to work to develop ports in Northwest and we’re encouraged that the Army Corp of Engineers declined the political and NGO pressure to conduct an unprecedented problematic environmental impact assessment for all the proposed port. They will now be scoping individual EIS for each project. We know permitting is going to be drawing that process, but are encouraged by the level of underlying support we find in Washington state, the terminal development and the benefits it will bring.

We continue our discussions with Ambre Energy over the potential purchase of our 50% interest in the Decker Mine. The deal is uncertain as it depends on their ability to raise the necessary financing to replace our reclamation bonds.

With that, I’ll hand over to Mike to run through more numbers before I cover the outlook.

Michael Barrett

Thanks, Colin. I’ll go straight into our results by segment. For our Owned and Operated mine segment, our second quarter realized prices fell slightly to $13.05 per ton, compared to $13.11 this time last year. This reflects the week market into which we’ve been contracting and settling index prices since late 2011.

You’ve already heard that we were disappointed with shipment levels in the second quarter. As you know with the fixed cost business, lower shipments drive higher costs per ton. On an absolute basis, we were able to slightly reduce costs compared to the first quarter. We continuously focus on all controllable costs, including our use of contractors, completing in-house maintenance and always look for efficiencies across all aspects of the business.

Nevertheless compared to this period last year, we have incurred higher absolute costs. We seen higher than normal inflation on explosives and higher labor costs, partly due to longer hauls at our Cordero Rojo Mine. In addition, maintenance costs were higher this quarter than last year. Due to the timing of repairs, maintenance costs were particularly low this time last year. In contrast, we had several major maintenance jobs come due this year.

As we spread the costs over fewer tons, this meant that costs per ton were $10.81 for the quarter and $10.58 for the first six months compared to $9.93 this time last year. The net results for our Owned and Operated segment for the quarter was adjusted EBITDA of $34.2 million compared to $51.6 million last year.

As we look to the remainder of the year, we have completed the majority of our major plant maintenance and we’re expecting significantly higher shipments in order to meet our customers contracted tonnages. We will continue to focus on controlling absolute costs and we expect costs per ton to decline in the coming quarters.

For our Logistics segment, the key story remains the low international prices. At current levels, our logistic segment reports limited additional margin for the business still remains economic and we continue to seek all available port capacity to supply tons to our customers in South Korea, Taiwan and Japan.

Adjusted EBITDA for our logistics business was $2.8 million in the second quarter and $4.1 million for the six months. These figures include $2.6 million of gains realized in the second quarter from our hedging program. As you’ll see in the notes to the 10-Q which we will file later today, we also have a mark-to-market asset of approximately $11 million, which will settle and benefit the remaining quarters in 2013 assuming that Newcastle prices remain at their current levels.

One final point on our results for the quarter, interest expense was higher this quarter than last year. In the first half of last year we were capitalizing some of our interest expense against projects under development. One of those projects was completed in the second half of last year, so we’ve stopped capitalizing interest. On a cash basis, our interest costs are in line with last year.

Turning to our balance sheet and cash flow, we finished the second quarter with total available liquidity of $767 million, which includes $280 million of cash and short-term investments. In the second quarter, we generated cash flow from operations of $7 million and spent $11 million in capital expenditures.

Year-to-date we’ve generated cash flow from operations of $44 million and spent $24 million on capital. With the prolonged weakness in domestic and international coal pricing, we’re continuing to focus on our balance sheet strength, return on investments and cash flow. In the near-term, we continue to scrutinize this year’s CapEx and we’re reducing the midpoint of our 2013 capital expenditure guidance by $15 million to the new range of $60 million to $70 million.

Compared to our original guidance midpoint, this represents a reduction of $30 million or 32%. The reductions reflect extended equipment lives based on condition monitoring, the availability of good used mining equipment and delaying non-critical projects. Consistent with our strategy of matching production with demand, we’re reviewing the future production and contracting levels. Our 2014 plans include some significant equipment additions and capital expenditures, which would be needed to maintain 2015 production levels as haul distances and strip ratios increased.

Initial results indicate that current weak coal prices leave certain of those investments uneconomic particularly at a lower margin 8,400 Btu Cordero Rojo Mine. As a result, we’re evaluating reducing future production at Cordero Rojo by approximately 10 million tons from 2015. The mine is nearly fully contracted for 2014 and does not require significant capital additions for 2014 production.

As part of this analysis, we’ll look for ways to optimize and potentially redeploy equipment and capital spend to our higher margin opportunities. Please be aware that as we finalize these forecasts during the third quarter, we will provide updates to several of our accounting estimates, including our asset retirement obligations and our estimated liability on the tax receivable agreement. So you should expect to see some accounting adjustments to these estimates in the third quarter results.

To wrap up, a review of the key points of our 2013 full-year guidance. We continue to expect to ship approximately 90 million tons. We’ve increased our expected export shipments through the Westshore terminal to around 5 million tons. We expect full-year adjusted EBITDA of between $210 million and $250 million and we’ve lowered our expected capital expenditures to between $60 million and $70 million.

With that, I’ll hand back to Colin.

Colin Marshall

Thanks, Mike. Currently there is several positive factors impacting the coal markets compared to last year. Well 2013 U.S. electricity generation is flat compared to last year; coal generation is up by 11%. This almost exactly matches the 13% drop in natural gas power generation this year, high gas prices according to utilities switch back to coal. As a result, so far this year coal is generating around 40% of U.S. electricity and burn is up by 32 million tons.

For the PRB, the combination of recovering burn and steady to lower production has led to a significant reduction in stock pile. The exchange should be down to around 78 million tons or 67 days of burn at the end of June. This is down from 98 million tons this time last year and is approaching the lower end of the five-year range. Well, there has been increased contracting from utilities for (indiscernible) and future coal sales, the pressure on producers to rebuild their forward odd book is currently keeping a lid on prices.

During the second quarter, we fix the price of our remaining export sales and made some small sales of Spring Creek coal to raise our contracted position to 92.5 million tons a year. We are not planning on making any additional sales for this year. For 2014 we contracted 30 million tons during the quarter, bringing us to a total of 75 million tons contracted. 63 million tons of fixed at a weighted average price of $13.40 per ton. The average price for the new contracts during the quarter is around $11 per ton due to around 70% of the new contracts being for lower priced 8,400 Btu coal.

As Mike explained, we’re evaluating reducing production in Cordero Rojo from 2015 to match production to demand and avoid making unprofitable capital investments. Current depressed market prices were restricting our contracting for 8,400 Btu coal in anticipation of reducing production by around 10 million tons for 2015.

Internationally we see a similar situation with strong demand being overcome by ample supply leading to depressed prices. As illustrated, it should come back into balance as high cost producers have to curtail production. Strong demand means we’re having no problem placing all export coal we have terminal capacity for. As you see from our logistics business, our current year cost will – at current year cost prices were low $90 per metric ton, there is very little logistics margin for us. However, overall the sales are still profitable and allow us to maintain our position in current customer supply mix.

It is encouraging that two shipments are being made to new customers in Japan as we look to increase our export customer base. We are now expecting to export around 5 million tons this year as we benefit from the increased capacity of the Westshore terminal. As we go into the second half of the year, we’re now fully contracted for 2013 with only 2 million tons of index contracts left to fix.

In July we’re seeing an increase in shipping rates as the issue is with the second quarter put behind us. As we explained, our mines will have to run at a consistent higher rate for the second half of the year to meet our production guidance. While we prefer to run at much steadier rates, this is similar to the shipment profile that occurred last year.

Increased shipments will also reduce our cost per ton in the second half. As a result, regarding to an EBITDA range of $210 million to $250 million for the full-year as Mike explained. Obviously we’re currently facing tough domestic and international coal market. With steady coal burn and reducing PRB stockpiles, we expect domestic prices to rise to spot ongoing investments in our mine. Internationally strong demand will eventually to increase prices as over supply is reduced. However, until this occurs, we’ll focus on costs and continue to closely manage our cash and capital investments.

With that, we’d be happy to take your questions.

Question-and-Answer Session

Karla Kimrey

Operator? Hello?

Operator

(Operator Instructions) Okay. So the first question comes from Caleb Dorfman. Please go ahead.

Caleb Dorfman - Simmons & Company

Good afternoon Colin, Micheal and Karla. I guess, first off, could you speak a little more about the decision to potentially curtail production at the Cordero Rojo Mine, is that mainly been driven by the capital expenditure considerations or is that only a factor its more driven by the demand of price environment?

Colin Marshall

I will tell you, it’s a combination, obviously if the price is much higher, then significant capital expenditure wouldn’t be a problem, but the combination of the capital we’ve to put in to increase the stripping fleet next year or would have put in next year to be ready for 2015 combined with where the low prices are at the moment for 2015, we think it doesn’t actually make sense. Obviously, we’d be happy to review things if prices change, we can sell some coal at prices which support the capital investments for now. Its combination all the factors as we look forward while its sort of I think we will hold off and rather not make the capital investment assuming things don’t improve. That’s how it’s looking at the moment.

Caleb Dorfman - Simmons & Company

I know it’s a little early probably to know for sure, but how is the cost profile at the Cordero Rojo Mine shipped when it runs its 75% capacity. Would the fixed cost be an issue or would there be a way to eliminate that, so the cost inflation would not be that excessive?

Colin Marshall

Well, obviously we've got to do the work to actually – the detail work to make sure it all make sense. But one of the key factors of that is making sure that we manage the overhead costs through the whole business and that’s something we need to do. Another thing about actually looking at doing this in 2015 as we’re sold – pretty well sold for 2014, it gives us some time to actually plan and do that in an effective manner rather than just sort of doing it in a hasty way that might not – that might cause some longer term damage to the business. So obviously we’ve got to look at all the factors. The other point is that of the different mining areas at Cordero Rojo, one of them was getting higher cost for a variety of reasons, mainly strip ratio and some ground condition. So, it’s not as if every ton is equal at the mines depending on where that we mine, so obviously we look to reduce the production at the high cost areas.

Caleb Dorfman - Simmons & Company

That’s very helpful Colin. I guess looking forward to what type of factors do you think we need to actually see the pricing for 2014 appreciate, I know that previously you’ve talked about we need PRB stock piles to get down to 80 million tons we’re below that now is it just the people are out in the market bidding too lowly.

Colin Marshall

Yeah. So I said in my comments, I think the fact at the moment is that, producers are still selling it at the current OTC prices, demand is there, people are – utilities are rebuilding there stockpiles, but as long as there is someone willing to sell at current prices and until that stops then the prices cant move up. But I believe the demand is there and we’re in the (indiscernible) stick of having a high fixed costs business and weighing up potential of having sort of unsold tons as selling them at low prices. And obviously I think the equation will change at some stage, but it hasn’t yet.

Caleb Dorfman - Simmons & Company

Thank you, Colin.

Karla Kimrey

Thank you. Next question?

Operator

Thank you. The next question comes from Jim Rollyson. Please go ahead.

James Rollyson - Raymond James & Associates

Good afternoon, everyone.

Karla Kimrey

Hi Jim.

James Rollyson - Raymond James & Associates

Colin, maybe going back to Cordero if – I know you’re just now kind of contemplating this and you’ve got a lot of work, it sounds like to due to figure out whether it makes sense and when, but where does this put you on the thoughts of the LBA and Maysdorf II?

Colin Marshall

Well Jim, obviously there is no way I can comment on anything to do with LBA etcetera about the coming up the bid. So I just can’t comment on that.

James Rollyson - Raymond James & Associates

Okay. And then maybe just a follow-up on cost, Michael you kind of walk through the nuts and bolts of it, but obviously this is a fixed cost business as you mentioned and your volumes in the second half, even if you go into the low end of your range of 88 million tons, you’re talking north of 23 million tons a quarter of production. And if you kind of divide that into the cost you recognize in the first half get you well into the nine’s on cost. Is that my math correct and you think that’s a feasible target for second half?

Michael Barrett

Jim yes, that you’re looking that in the right kind of way. We’re obviously very focused on controlling those absolute costs. If you look back at the second half of last year, you can see that we brought our costs down into the low nines. I’m not sure we’ll get as far as the low nine’s this time, but we’ll certainly be into the nine’s and bringing down the average for the year, hopefully to just north of 10.

James Rollyson - Raymond James & Associates

Okay.

Michael Barrett

We are certainly looking for some good cost declines in the second half. But as you pointed out, very much volume dependent.

James Rollyson - Raymond James & Associates

Yes, absolutely. And lastly, just with where Newcastle prices are today and kind of the price recognition you’re getting? Do you still think it will be in the – it looks like volume in the second half or exports will be similar to first half, do you think it still be kind of small positive EBITDA in the logistics business?

Colin Marshall

Yeah, it will be based upon the price, because that’s pretty well all fixed now as part of the index tons that we’re fixing. The other point is we’ve got – we’ll get the benefit of the 11 million of the hedging position, which is significantly larger than, I think really got 2.80 n the first half. So that will be obviously help a chunk.

James Rollyson - Raymond James & Associates

Excellent. Thank you, guys.

Colin Marshall

Thanks.

Karla Kimrey

Thank you. Next question please.

Operator

Thank you. The next question is coming from Evan Kurtz. Please go ahead.

Evan Kurtz - Morgan Stanley & Co., Incorporated

Hi. Good afternoon, guys. Just a follow-up question on exports, sounds like you have a nice tailwind here in the second half with the hedge benefit. As there is roll off for the end of 2013, and you going into 2014, if we’re in a situation where Newcastle is still kind of sub 90, how would – how do you think about selling into that market at that point?

Colin Marshall

I think that’s a – its still in sort of where it is at the moment. As we said, overall its profitable for our business without the hedges. So we’d carry on the selling because a very important factor in the international market is actually staying in them and maintaining a position in the customer’s burn and boil mix into their boilers. So, until you – prices went down substantially more, I won’t give you a precise number, because I don’t know what it is. But until price went down a lot more, we’d not be interested in sort of cutting sales and going to taking a – take or pay option, which will frankly we’re well clear off. So we’re looking at current prices, marginal profitability without the hedges.

Evan Kurtz - Morgan Stanley & Co., Incorporated

Great. Thanks. And then just – I don’t know how much you can comment on this, but if the financing for the Ambre transaction doesn’t come through, is there a Plan B for Decker?

Colin Marshall

You’re right, I can’t comment on that. We will carry on working with Ambre and we’ll see how we go, but we will work through that.

Evan Kurtz - Morgan Stanley & Co., Incorporated

Understood. Okay, thanks guys.

Operator

Thank you for your question. The next question comes from Brandon Blossman. Please go ahead. Your line is now open.

Brandon Blossman - Tudor, Pickering & Holt

Good afternoon guys.

Colin Marshall

Good afternoon.

Brandon Blossman - Tudor, Pickering & Holt

I guess a couple of things. One on EBITDA, the top end of the range is down 250 from 270, that makes sense. What would have to happen to get to the bottom end of that range? The 210 seems pretty low considering an improving cost profile in the second half of the year and everything is pretty much fixed as far as pricing.

Colin Marshall

The big driver is the tonnage range. So, it really is very volume dependent. So we’ve – as long as the – we get to the sort of the range it really driven by what the sort of expected production range of 88 to 92, and that drives most of the way down then maybe cost of the – some other cost would be a touch higher, but it's really driven by volume the EBITDA range.

Brandon Blossman – Tudor Pickering Holt

That’s fair enough. And again you're contracted -- you’re committed at the top-end of that range for ’13 correct?

Colin Marshall

Yeah, but a lot of things can happen as we said in the first half of the year -- well the second quarter, one of the issues that hit us was one of our customers had a reasonably significant outage that meant that tons of a contract that they couldn’t take during the quarter. Thankfully we expect them to perform much more strongly in the second half now that their units are back on line.

Brandon Blossman – Tudor Pickering Holt

Fair enough. And then on the CapEx decrease, what's the sustainability at that, I guess it's now around $0.70 a ton.

Michael Barrett

Brandon it’s Mike here. We’re obviously evaluating the sustainability and the CapEx that’s needed to run the business, but we’re also evaluating that in the light of reducing some of the production as we said particularly at Cordero. So at this stage I don’t really have a view on specific sustainable CapEx. We have made an absolute point of making sure that our equipment integrity is maintained and we will always make sure that we are investing enough to maintain that equipments integrity, because it is one of the things that drive’s us as the low cost producer. So we’ll make sure that we’re investing the right amount, but we’ve got a bunch of very good people who are looking at the condition monitoring, who are looking at the ability to buy secondhand equipment, and really keep a very tight focus on CapEx for us across the business?

Brandon Blossman – Tudor Pickering Holt

Thank you, Michael. Thank you, Colin.

Operator

Karla Kimrey

Next question please.

Operator

Thank you. The next question is coming from Jeremy Sussman.

Jeremy Sussman - Clarkson Capital Markets

Hi, good afternoon.

Colin Marshall

Good afternoon, Jeremy.

Jeremy Sussman - Clarkson Capital Markets

Colin, when – how long is the review process for Cordero Rojo?

Colin Marshall

Well it's the ongoing and just as, obviously as we go through our planning cycle, obviously we’ll give you an update next quarter. But I think the important point at the moment is we’re actually going through that. Obviously we’ve had -- the important thing is that we’re selling to a sort of 26 to 28 million ton level for next year which means that the 2015 which certainly takes the pressure off the marketing department in terms of chasing every 8400 opportunity. So they can actually sit back and choose the ones who want and not give pressure to sort of get every opportunity to come. So we’re doing that, we’ll see how things develop and how the plans come and we’ll update you next quarter.

Jeremy Sussman - Clarkson Capital Markets

Thanks, that makes a lot of sense. And just as a follow-up, the export business, I know the Eastern Rails have talked on their calls about where rates are much lower now compared to a few years ago when coal prices were a lot higher. Can you give us a sense of how we should look at that on for your West Coast business?

Colin Marshall

No, I am sorry, it's unclear, so the rail rates have come down you’re saying?

Jeremy Sussman - Clarkson Capital Markets

Well certainly for East Coast Exports, CSX and NSC have talked about that on their conference calls, but I know since it's such a -- much smaller business for the Western Rails and only one of them is public. We haven't got a sense of -- or I don’t have a good sense of where rail rates are now for your exports through Westshore et cetera.

Colin Marshall

Okay, well that is pretty much the level they’ve been for a while and we obviously we talk to railways and look for opportunities to make sensible business decisions together but they’re -- I certainly wouldn’t say that they’re dropping significantly. But the business does remain profitable for us at the moment, at the sort of current best prices, so I think that shows some resilience and obviously we’ll talk to the railways should that change, but that’s not actually necessary.

Jeremy Sussman - Clarkson Capital Markets

Okay, great. I appreciate it.

Karla Kimrey

Thanks, Jeremy. The next question please.

Operator

Thank you. The next question is coming from Mitesh Thakkar. Please go ahead.

Mitesh Thakkar - FBR Capital Markets

Good afternoon, everybody.

Karla Kimrey

Hi, Mitesh.

Mitesh Thakkar - FBR Capital Markets

Just a question on Cordero Rojo; one is, you mentioned that you are reviewing whether to cut the capacity and because you need to do pre-stripping in 2014, assuming that the same coal market trends continue as they are, if at all you plan to idle it, how fast can you bring the 10 million tons back assuming there is a market recovery or something like that?

Colin Marshall

It would depend on a few factors, I’m sure some of it could come (indiscernible) dragline assuming then we could bring that back into production, but if we put off ordering what we’re looking putting off ordering truck shovel fleet, then the lead time on that is a lot longer. So, you can bring some of it back pretty quick I would say, but all of it might take -- would take longer because we’re trying to -- the reason to look at going down 2015 is to avoid a significant capital expenditure in 2014 to maintain production levels. So there would be some time lag for some of the production.

Mitesh Thakkar - FBR Capital Markets

Yeah, and just to follow up on that; how much capital expenditures are we talking about and how much of that is just a function of buying additional equipment versus just labor hours for pre-stripping.

Colin Marshall

I think what we’ll do is, I’d rather -- I’ll differ that one until next quarter when we’ve actually done some more work on this, but it's certainly, several tens and millions of dollars, so it's significant.

Mitesh Thakkar - FBR Capital Markets

Okay. Just one last question on maintenance CapEx; how should we think about normalized and sustainable maintenance CapEx, because I know things move you can differ maintenance for a while, but in general how should we think about maintenance CapEx for your mines?

Colin Marshall

I think as Mike was saying, and obviously the earlier question was really to Brandon’s question that, overall we are scrubbing what we are looking out for this year obviously in the low market it's essential to do that, but without compromising our equipment. So we maybe closer to -- we’re closer to $0.70 or $0.80 a ton than maybe the dollar that we talk about long-term, so it's a few cents down, you can’t do that forever, but at different times there are factors in the CapEx such as land purchase and things that come and go and maybe major things like shovel fleets or dragline tubs, so it's can be a bit lumpy. Obviously we’re doing everything we can to manage it, but we are very focused on making sure we don’t let the equipment deteriorate.

Mitesh Thakkar - FBR Capital Markets

Okay, perfect. Thank you, guys.

Operator

Thank you. The next question is coming from David Katz. Please go ahead. Your line is now open.

David Katz - JP Morgan Chase & Co

Hi. I was a bit surprised by the decline in liquidity and was curious of that reflected and your restriction in the accounts receivable securitization facility?

Michael Barrett

Hi, Dave, it's Mike here. No, it doest reflect to any restriction on the accounts receivables, security -- securitization. We’ve got the capacity of around about $50 million under that program which is very similar to the second quarter. Obviously we’ve got the various leverage covenants and leverage ratio tests, and we do the calculations under those at the end of each quarter. But with $280 million worth of cash on the balance sheet as we sit at the moment we’re very comfortable with that liquidity.

David Katz - JP Morgan Chase & Co

Okay, and then looking at the costs, as you indicated prior on this call, you expected them to move down throughout the year. Last year you had a significant decline partly because production was up in the back half of the year and it seems like your numbers at this point for production are indicating that it's somewhere sort of a rise first half compared to second half. Should we see a similar move in costs?

Colin Marshall

Absolutely, yeah; that’s certainly one of the things we’re trying to signal that it's the cost, the gross cost stay relatively flat quarter-by-quarter then with the increased production in the second half we’re expecting to see a significant drop in the cost room from where we are so far.

David Katz - JP Morgan Chase & Co

Okay. Thank you.

Operator

Thank you. The next question is coming from Lance Ettus. Please go ahead.

Lance Ettus - Tuohy Brothers Investment Research

I just wanted to know, a little more on the ports. I know you guys are almost directly running the projects or I know you guys just have kind of widely what capacity or what contract or what capacity, but just anything as far as what we should be looking for as far as major catalysts or I guess major implications in the permitting process I guess as far as the next steps as far as the survivability of the ports go?

Michael Barrett

I think the, Lance the first thing what will happen is obviously these process is sort of ebb and flow. After the press around the public hearings for the Gateway Pacific terminal, the next thing we’re expecting is for the scope of the IS to come up, that will be important obviously it's project-specific EIS of the Corp of Engineers decision. It will then take about two years to do the work on that. So it will sort of -- that in terms of things actually especially moving forward will go very quite and we’ll be waiting for the outcome of that. But during that period obviously we’d expect NGOs and people to carry on explaining their issues about ports and we’ve carried on working to try and make sure that the people who support the economic benefits and the exports for America actually get a voice. So, I am afraid it will sort of -- it will come in ebbs and flows as it were; but we’ll keep going on the project is progressing. They did flag though unfortunately because of opponent’s abilities to protest everything then the things don’t go any faster, they tend to go slower. But it is important that they are actually -- the ports are actually moving forward and we’ll continue along so. We’re thinking like 2018 for Gateway Pacific, I think is what we got at the moment, but it will be what it’ll be, but I think the next thing to wait for is the scope of the IS and then we’ll need that work to be done which takes a couple of years.

Lance Ettus - Tuohy Brothers Investment Research

Okay. Thank you.

Karla Kimrey

Thanks, Lance. The next question please.

Operator

Thank you. The next question is coming from David Beard. Please go ahead, you line is now open.

David Beard - Iberia Partners

Good afternoon.

Michael Barrett

Good afternoon, David.

David Beard - Iberia Partners

Would you guys maybe talk a little bit qualitatively about the order book for next year, how it's shaping up, tons committed or price versus the curve; just to give us a sense of where you’re tracking now versus previous cycle?

Michael Barrett

Yeah, sure. I think we’re in pretty good shape for next year, because we said we got about 75 million tons contracted and if we’re saying, I mean if we got 90 million tons that puts us in a pretty good position. Of that 63s, 6 the weighted average price and $13.40. think the things that did happen in the quarter is we’re actually managed to get Cordero Rojo to a position where we’re comfortable that we’re sold to a sensible position at this stage going into next year. We have traditionally, tons at Spring Creek, fix later in the year or actually in year with exports won, so that’s okay. And Antelope we’re in a good position. So I think of the 75 million tons yet to be contracted a good lump of it is just Spring Creek, but that’s quite normal. So I think we’re in -- we’re in decent shape where we are now. The thing that’s been disappointing is the prices we’ve had to contract out, but as I explained for a less the dilemma between taking the prices now or potentially having a mine without any sale. So that’s obviously what we’ve been juggling. But I think we’re in a position now where we can see a way to getting to be fully sold for the end of the year.

David Beard - Iberia Partners

Okay, good. I appreciate it. Thank you.

Michael Barrett

Thanks.

Karla Kimrey

Thanks David.

Operator

Thank you. The next question is coming from Chris Haberlin. Please go ahead. Your line is now open.

Christopher Haberlin - Davenport & Company

Hi, my questions have all been answered. Thank you very much.

Karla Kimrey

Thank you. The next question.

Operator

Thank you. The next question is coming from Lucas Pipes. Please go ahead. Your line is now open.

Lucas Pipes – Brean Capital

Hey, good afternoon everyone.

Michael Barrett

Hi, Lucas.

Lucas Pipes – Brean Capital

My first question was going back to Cordero Rojo; in terms of the CapEx required to keep the mine as it is right now. How much would that be and would that be incremental to this years CapEx guidance of $60 million to $70 million?

Michael Barrett

Okay. As I said I think in the last two earlier question its substantial but it was an extra fleet all of truck shovel fleet to do overburden stripping. But in terms of the actual detail then lets leave that till next quarter when we will have a better picture of what we’re doing and where the markets are. So, it's significant and it would be a sort of additional to the $60 million, $70 million level I guess we’re at, but this is one of the reasons why we’re considering not spending it.

Lucas Pipes – Brean Capital

Okay, that’s very helpful. Thank you for that clarification and then maybe broader, maybe a bigger picture; you’re discussing these extra steps so far this earning season two of your piers have reported they have not deployed similar considerations. When you look across the basin, how much -- what percentage of supply do you think could face similar if you will expiration?

Michael Barrett

I can’t speak for the people, and I think it would be wrong for me to try and do that, so I don’t know. I mean we’re looking at the market, we’re looking at how we think it will develop and looking at current forward contracting and we’re sort of running our business accordingly to make sure we manage our CapEx and our profitability going forward but that’s what we’re doing but I think I shouldn’t try and speak for anyone else.

Lucas Pipes – Brean Capital

Okay, thank you. And then maybe lastly in terms of your 2014 sales book and what you priced most recently during the quarter. You indicated that the majority of that was 8400 coal; could you maybe give us a break out of the exact volumes and prices for 8800 and 8400 coal?

Michael Barrett

No, I won't go into that level of detail. I think I have given you certainly a very good stare on where it was, but as I said we did 13 million tons and most of it averaged around $11 per ton for – and 70 ton to that was the 8400 coal which the OTC was 10 bucks or below for the quarter.

Lucas Pipes – Brean Capital

Okay, I appreciate your color. Thank you very much.

Michael Barrett

Thank you.

Karla Kimrey

Thank you, Lucas.

Operator

Thank you. The next question comes from [Matt Farewell].

Unidentified Analyst

Hi, good afternoon. Just a quick question on the debt maturities; you have some bonds that become callable within a year, how are you thinking about your capital structure, cost of capital given that those notes appear to be refinanceable?

Michael Barrett

Yes, Matt you’re exactly right. We have got our December 2017 bonds becoming callable in December of this year. We are obviously continuously evaluating the capital structure looking at the overall interest cost and looking at whether there is any sense in potentially refinancing those buying them back or restructuring them in any particular way. We’ll continue to work through those evaluations and see where that takes us to.

Unidentified Analyst

So, no -- that would be independent of any of the considerations on the operating issues of the company?

Michael Barrett

No, I think everything is connected in terms of our overall CapEx spend, looking at maintaining balance sheet strength, looking at maintaining a very good liquidity position. So, I think the capital structure is absolutely integral to all of that. So, it's possibly overall considerations through the business.

Unidentified Analyst

Thank you very much.

Michael Barrett

Thanks.

Operator

Thank you. And our last question is from the line of John Bridges. Please go ahead.

John Bridges – JP Morgan

I get the honor, as your day is almost done. I just wondered you spoke in the past about some cute to maintenance that you do in the past and it was a painful exercise, and you don’t want to do that again. I just wonder if you could give us a bit of -- your thoughts on the apparent saving that was there and how long you’re able to do that for and then the penalties to recover from that?

Michael Barrett

Well, John one of the things we’ve always flagged is that we, since we run flat I think we don’t skip on the maintenance because it is so painful. So, I am a bit – I am sure about exactly what example you’re talking about, unless you’re talking about my (indiscernible).

John Bridges – JP Morgan

Maybe I am asking about your (indiscernible) it’s just an industry question because it appears to become very topical.

Michael Barrett

Okay. Well in my experience, (indiscernible) 90s when I’ve been in the mining industry is you can cut maintenance in the short-term, and you can look good for a year or two, but then when you try and fix those up it's very expensive, and the analogy with your house you’re saving one piece for a long time, but if you cut the maintenance and then try and get it back into good condition that gets expensive and that’s the sort analogy we’re talking about. That will run for a long time but the – eventually when it start falling over if you haven't done the ongoing maintenance it gets very expensive to get it back into an operating level and that’s a place we just don’t want to go. So, the $60 million, $70 million we’re comfortable it covers what we need to do. I think for instance the moment we’re just completing a new dragline tub at the Spring Creek mine on one of our draglines there. That tub is 30 years old. Our guys said it was due. You could always try and put it off for another year, but we decided it wasn’t the right thing to do and even in this environment we actually want to carry on doing that maintenance and we have -- in the quarter we actually completed several major maintenance jobs on the carriages on big shovels and other jobs and because they needed doing, but that bakes into both some of the costs you saw in the quarter as well as whether it's operating or capital and into the overall capital estimate for the year. So, we’re comfortable we’re in the right place and we are very keep to avoid putting off our maintenance that actually needs doing.

John Bridges – JP Morgan

Right, right. So roughly how much of your capital this year would have been that part of maintenance?

Michael Barrett

Oh, gosh. I think I’d just say overall it's all mixed in there whether it's buying new pickup – replacing pickups or getting a whole truck which we need on whole rebuilding a dragline tub it's all in there, it's a mixture. So, to maintain our capacity at the level it's at this year we need to spend that sort of $60 million to $70 million number and to keep everything in decent shape which is what we’re endeavoring to do. But it's a whole mixture of things.

John Bridges – JP Morgan

Okay, thanks. I apologize forever inferring that you made that sort of …

Michael Barrett

That would be very ugly, yeah. Thanks John.

John Bridges – JP Morgan

Thanks a lot, Cheers.

Karla Kimrey

I think that’s the end of our questions. Colin.

Colin Marshall

Okay. Thank you very much for taking the time to listen to our earnings call. As I said previously we expect Q2 to be -- expected Q2 to be a slow shipment quarter. It turned out to be a bit lower than we had forecasted. We are now fully contracted to the end of the year and we’re looking to [deliver] those tons with the improved EBITDA and lower cost of the ton in the second half of the year. Hopefully by then the full prices would have improved, and we look forward to speaking to you in a few months when we’ll announce our Q3 results and obviously be able to give you an update of our planning with regards to Cordero Rojo and overall tonnages. So, thank you very much for your interest.

Operator

Thank you very much. Thank you very much for joining. Ladies and gentlemen this concludes your conference call for today. You may now disconnect your lines and thank you once again for joining.