Massey Energy Company Q1 2010 Earnings Call Transcript

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Massey Energy Company (MEE) Q1 2010 Earnings Call Transcript April 22, 2010 9:00 AM ET

Executives

Roger Hendriksen – Director, IR

Baxter Phillips – President

Eric Tolbert – VP and CFO

Don Blankenship – Chairman and CEO

Mark Clemens – SVP, Group Operations

Analysts

Kuni Chen – Bank of America/Merrill Lynch

Shneur Gershuni – UBS Securities

Brett Levy – Jefferies & Company

Jim Rollyson – Raymond James & Associates

Curt Woodworth – Macquarie

Paul Forward – Stifel Nicolaus

David Gagliano – Credit Suisse

Meredith Bandy – BMO Capital Markets

Jeff Kramer – UBS

Michael Dudas – Jefferies & Company

Brian Gamble – Simmons & Company

Jen Marcello – Tuohy Brothers Investment Research

Justine Fisher – Goldman Sachs

Brian Singer – Goldman Sachs

Wayne Cooperman – Cobalt Capital

David Khani – FBR Capital Markets

Dave Katz – JPMorgan Chase & Company

Gaurav Bana – AllianceBernstein

Brian Yu – Citigroup Incorporated

George Caffrey – Miller Tabak Roberts Securities

David Lipschitz – CLSA

Operator

Good morning, and welcome to Massey Energy Company's first quarter 2010 earnings conference call. Today’s call contains copyrighted material and may not be recorded or rebroadcast without Massey Energy Company's expressed permission. Your participation in our call implies consent. Please disconnect if you do not agree with these terms.

Roger Hendriksen, Massey Energy's Director of Investor Relations will now provide opening remarks. Please go ahead Mr. Hendriksen.

Roger Hendriksen

Thank you Jackie and good morning everyone. Thank you for taking the time to participate in our call this morning. We appreciate your continuing interest in Massey Energy. As you know, we distributed our first quarter press release after market close last night. If by chance any of you have not seen it, it is posted on our Website and has been furnished to the SEC on Form 8-K.

I need to remind you that the statements made in this presentation which are not historical in nature are forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. And they are based on current factual information and certain assumptions which management currently believes to be reasonable. Financial and operational results for future periods may differ materially from current management projections as a result of factors outside the company's control. Information concerning those factors is available on the company's 2009 annual report on Form 10-K and other periodic filings with the SEC. In providing projections and other forward-looking statements, the company does not make and specifically disclaims any undertaking or obligation to update them.

The members of our management team who will be speaking with you today are our Chairman and Chief Executive Officer, Don Blankenship; our President, Baxter Phillips; and Eric Tolbert who is Vice President and Chief Financial Officer.

Before we begin this morning, we feel it would be appropriate to observe a moment of silence in memory of the fallen miners at the Upper Big Branch mine. Please join us now in that remembrance.

Thank you. I will now turn the call over to Mr. Baxter Phillips.

Baxter Phillips

Good morning and thank you for joining us. As you might imagine, the past two-and-a-half weeks have been an incredibly challenging and emotional time for our Massey members. I would like to start this morning by once again expressing our sincere condolences and sympathy to all those who are impacted by the trouble tragedy at the Upper Big Branch mine. Please note that we are and have been doing everything we can think of to provide for the needs of the families who lost loved ones in this disaster.

I would also like to thank the many shareholders and analysts who have called or written to express their condolences and to offer support. Words cannot express how much your support means to us at this time.

In our call this morning, I will give you an overview of our operations and results for the quarter, and Eric will follow with a discussion of relevant financial details after which Don will conclude our prepared comments with a few words about Upper Big Branch and our outlook for the rest of the year. As we reported a few weeks ago, our operations in the first two months of the year were challenged due to extremely harsh weather and related transportation delays and production issues.

Our shipments in January and February were well below our plans at 2.7 million tons and 2.6 million tons respectively. In March, our operations improved, but not enough to fully offset this slow start. Shipments improved to 3.2 million tons in March for a total of 8.5 million tons shipped in the quarter. The most significant improvement in March was the increase in metallurgical coal shipments. Metallurgical coal shipments exceeded 1 million tons in March compared to 700,000 tons shipped in each of January and February.

For the quarter, we shipped 2.4 million tons of metallurgical coal, and we expect that with our mitigation efforts, this level will be approximately in line with our capabilities in the second half of 2010. Metallurgical coal represented 28% of our total shipments in the quarter compared to 17% in the same period last year. Approximately two-thirds of our metallurgical coal shipments were exported in the first quarter.

We expect to continue expanding our export sales particularly to Asia. I travelled to Asia at the beginning of this quarter to meet with some of our metallurgical coal customers. As a result of this travel and these meetings, I am very optimistic about opportunities for continued growth in the Asian market. I am also very pleased to tell you that we will soon be formally announcing the opening of a European sales office to assist with our global coal sales. We have hired a highly qualified professional to oversee this office, and we expect this extension of our sales force will enable us to better leverage our met coal reserves and production capabilities.

This international office will be particularly important as we integrate the recently acquired Cumberland Resources operation and work to maximize the value of the additional production capabilities this acquisition provides us. We are extremely pleased we have been able to close the Cumberland transaction as planned, and I want to express appreciation for the hard work of all those who made this happen on both sides. We also want to once again welcome our new members from Cumberland who joined Massey this week.

Finally, I want to mention our plans to mitigate loss production from the Upper Big Branch mine. Beginning immediately, we are adding Saturday production at all over the met coal mines we are presently operating, and additionally, we are adding there new continuous miner section at our Elk Run resource group. Combined, we expect these measures will give us an estimated 1.3 million tons of annual met coal production.

Now, I will turn the call over to Eric for a discussion of the financial details of the quarter.

Eric Tolbert

Thank you Baxter. For the first quarter of 2010, we reported net income of $33.6 million or $0.39 per diluted share compared to net income of $43.4 million or $0.51 per diluted share in the first quarter of 2009. As Baxter mentioned, our produced tons sold totaled 8.5 million in the first quarter of this year compared to 10.8 million tons in the first quarter of 2009.

Our average produced coal sales realization of $67.38 per ton in the first quarter was $4.35 per ton higher than in the first quarter of 2009. This improvement was driven largely by price increases for utility and industrial coal, both in the range of 9% year-over-year, and a proportional increase of met coal in the total product mix.

Average cash cost per ton for the first quarter of 2010 was $55.38 per ton compared to $50.53 per ton in the first quarter of 2009. These figures both exclude SG&A costs. The increase was due to weather-related production issues, a higher percentage of underground versus surface mining production, higher labor costs, higher sales-related costs, and higher fixed cost absorption the total volume produced.

At March 31st, 2010, Massey had cash and cash equivalents totaling $1.2 billion. This compared to $665.8 million at December 31st, 2009. During the quarter, the company received $466.9 million in cash proceeds from an equity offering, net of the underwriting fees. In addition, a $72 million appeal bond the company had been required to post related to the Harman litigation was released by the court as the case was resolved in Massey's favor.

Massey also received a disbursement from the Reserve Primary Fund in the amount of $14.6 million, which added to the cash balance, and resulted in a pre-tax gain on short-term investments of $3.8 million. In addition to its cash and cash equivalents, the company had $98.6 million available under its asset-based revolving credit facility for total liquidity of $1.261 billion at March 31st, 2010. Of course this is before we closed on the Cumberland acquisition subsequent to the end of the quarter and the final purchase price for Cumberland included $640 million in cash and 6.5 million shares of Massey common stock.

During the first quarter, Massey also retired the remaining $21.9 million of its 6.625% senior notes due November of 2010. Total debt at March 31st, 2010 was $1.301 billion compared to $1.319 billion at December 31st, 2009. Massey's total debt-to-book capitalization ratio was 42.4% at March 31st, 2010 compared to 51.2% at December 31st, 2009.

Capital expenditures for the first quarter 2010 totaled $56.1 million compared to $103.7 million in the first quarter of 2009. Depreciation, depletion and amortization was $64.5 million in the first quarter of 2010 compared to $72.6 million in the first quarter of 2009. In our press release, we provided updated guidance with and without the integration of Cumberland. I won’t take the time to go through all the details on the call as you can read them in the release, and while we hope it’s helpful for you to have been Massey and Cumberland breakout for this quarter, we usually expect to only see the combined guidance ranges going forward.

Now, let me turn the call over to Don.

Don Blankenship

Thanks Eric. I won’t take a lot of time, because I know you have a lot of questions you would like to ask. I would like to begin by expressing once again my personal condolences to the families who lost loved ones in the explosion of April 5th. We share their pain and their grief and all of us at Massey feel a terrible loss. We remain committed to doing what is right and to helping the families get through this difficult time.

I would also like to thank the shareholders who have stood by us and expressed support during what has clearly been one of the most challenging times in Massey’s history. No one wants to learn what caused the tragic explosion at Upper Big Branch more than we do. We intend to cooperate fully with investigators to identify the cause and then we will put all necessary resources to work in an effort to ensure that nothing like this ever happens again at Massey or anywhere in the industry.

What we do know now is that the explosion was not caused by willful disregard for safety regulations as the media would have you believe. We have one of the most comprehensive safety programs in the industry and we stand by our company policy of S-1 or safety first. We are agile parties to avoid our own judgment. We are committed to reaching as complete and understanding as possible what caused the tragedy and are cooperating fully with agencies as well as conducting our own investigation.

Part of our S-1 program is to carefully evaluate each incident and the in-place programs that were released or eliminate the possibility of reoccurrence. Such will be the case at Upper Big Branch. As we look forward, we are seeing encouraging signs of economic growth that bode well for the global coal markets, in particularly, we are encouraged by the decreases we have seen in utility coal stockpiles over the past couple of months, and we expect this trend to continue as we approach the summer months and peak electricity demand.

We are also encouraged by increasing steel production in the United States and overseas. Our channel is the key driver of metallurgical demand throughout 2009. Steel production has improved in many of our other key markets such as Brazil, Korea, India, and the United States. Domestic steel production capacity utilization is now over 70%. United States crude steel production has increased by more than 50% in just the first two months of this year. We believe we will have significant opportunities to expand our metallurgical coal production sales going forward as the global economy continues its recovery. Much of that opportunity is in overseas markets.

This concludes our prepared remarks. We would now be happy to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator instructions) Thank you. Our first question is coming from Kuni Chen of Bank of America/Merrill Lynch.

Kuni Chen – Bank of America/Merrill Lynch

Hi good morning everybody.

Baxter Phillips

Good morning.

Kuni Chen – Bank of America/Merrill Lynch

I just wanted to start off and express my condolences over the Upper Big Branch tragedy. Obviously tough times, I guess just one of my first question, can you guys comment on what’s changed in your cost outlook here? Obviously, the guidance for the next two years has gone up by a couple of dollars. Is that or is some of this perhaps an effort to be proactive and incorporate more stringent and internal kind of mine safety, improvements, are there specific actions around that, that’s embedded in your new cost outlook, or are there other factors there?

Baxter Phillips

I would say it’s primary other factors. We expect to of course, after a tragedy of this magnitude, that we would have regulations internal focus and so forth for that. I think more of the cost change is just a reflection of we expect the market for underground coal to be strong and that will bring some pressures on labor, and we also think that you will have the rates that you just mentioned, and of course, when you have more metallurgical coal sales, you have inherent costs that go with that. So, the combination of all those things as well as extrapolating in the first quarter numbers routine, I think probably account for the great majority of the increase, probably some conservatism based on the unknowns of exactly what will come out of the tragedy and what the productivity will be going forward.

Kuni Chen – Bank of America/Merrill Lynch

Okay. Great. And then just as a follow-up on Cumberland, now that you have closed the acquisition, have you had a chance to do additional due diligence there and review the contracts, maybe you can talk a bit about any flexibility that you see there to transition more of those thermal tons into met maybe sooner than later?

Don Blankenship

Baxter would speak to that quite a bit, we really haven’t completed the review and of course we had a chance with customers and so forth that would actually allow us to forecast it, but Baxter can speak more to it.

Baxter Phillips

We are actually this week now that we are in Cumberland having sales meetings and reviewing the contractual requirements with customers there. The sales force there has already had some preliminary discussion with customers. We are basically holding off and we are able to meet and align our efforts. But in that regard, we are working towards looking at what the requirement is going to be, what our Cumberland customers are going to want to do going forward. However we do have, we have some met production available from time to time there and we are indeed under the Massey effort moving some metallurgical coal, some of Cumberland’s metallurgical production into the market in May, a small quantity but we are already starting to work in that regard where it’s available.

Kuni Chen – Bank of America/Merrill Lynch

Thank you.

Operator

Thank you. Our next question is coming from Shneur Gershuni of UBS Securities.

Shneur Gershuni – UBS Securities

Good morning.

Baxter Phillips

Good morning Shneur.

Don Blankenship

Good morning.

Shneur Gershuni – UBS Securities

First and foremost, we would also like to express our sympathies to the families of the fallen miners as well as the colleagues in Massey Energy, and we do recognize that it’s difficult for you guys in hosting this conference call, but we do really appreciate it. A couple of questions if you don’t mind, starting with the quarter, I was wondering if you could talk about your realized pricing for metallurgical coal and for cost performance. Is the pricing similar to what occurred in Q3 where we saw some more shipments in the high vol B versus high vol A? And also if you can talk about the fact that you had some of the shipments, is that part of the reason why the cost performance was higher this quarter as well?

Don Blankenship

Let me speak to the cost part first, and I will let Baxter speak a little bit to the sales side. The cost side, it was just primarily brutal weather in the first two months of the quarter, and it was also partially the blend which I think the number was 28% met coal in the first quarter. So, that was a factor and it’s just basically the sales-related and the low volume, you know, just mathematical. So, between the mix, the bad weather, the sales-related, that pretty much accounted for. It’s difficult to project going forward, I mean, this month sales, the surface manager didn’t get better because of the weather but we also have the tragedy and all the things to deal with there, which we have had some days down so forth going forward. So, it’s a combination of things, but we hope the guidance is representative and/or to the conservative side. And as far as the met pricing, I will let Baxter speak to it a little bit temporary I hope, but he can speak to it.

Baxter Phillips

In part, the met pricing for the quarter was a result of the mix of the shipments that took place and as impacted by pricing discussions that took place in the fall, we had some contracts that were actually renegotiated, it is said to be renegotiated based on pricing in the fall, which as you know is at the bottom of the recent market. So, we have that impact on the quarter as well.

Shneur Gershuni – UBS Securities

Okay. And I was wondering if two more questions if you don’t mind, when we look out, your guidance seems to imply in expectation for return of the Upper Big Branch mine, I was wondering if you can walk us through the timeline in terms of when these discussions will be done, when there will be preliminary reports, when will it be shared with the investors and the public and so forth, and if you have any working theories at this point right that you are able to share with us?

Don Blankenship

As to the guidance reflecting the restart of the Upper Big Branch mine, it actually does not. It reflects the mitigation efforts that we are putting in place. In ’11, it would reflect the startup of the new Bandmill plant, which we are still hoping to get, early to mid fourth quarter this year. And the things that we can do over a longer period of time, absent Upper Big Branch. So, we would still hope that Upper Big Branch would be a player, but certainly it’s not in the numbers, because we are not in control of when it might restart. I will let Mark speak to – your other question was related to what?

Shneur Gershuni – UBS Securities

With respect to the timelines of the inspections of the preliminary reports, if you have any working period?

Don Blankenship

Okay. You are talking about inspection to investigation?

Shneur Gershuni – UBS Securities

Correct.

Don Blankenship

Okay. The investigation of course is just now getting started. The first order of business will be to make the mine safe for the investigative team. There will be three teams, state, federal and company team that will, in some respects, collectively investigate, but also somewhat independently investigate. My guess is it will take a long time because it will be quite technical. I would assume one of the key things is finding the origination of the explosion. That will go a long way toward finding causation. So, in general terms, the objective will be to prepare the mine for the investigative team see by lot of things, more blown, and how the mine reacted for the origination of the explosion, that have been and then find causation and then of course put in place processes that would prevent anything like that from happening again. And the process I believe will be quite lengthy, because of the fairness that all the investigative teams will want to use in making that decision or that judgment as to what happened?

Shneur Gershuni – UBS Securities

Okay. And one last question if you don’t mind, just with respect to your metallurgical coal outlook for 2012. You mentioned 20 million tons. It seems that you are going to hit that run rate a little earlier than at least what we were thinking as to what was implied post the Cumberland acquisition, I was wondering if you can walk us through that, is it more high vol tons coming into the market, and also if you can talk about the Cumberland impact, are the uncontracted tons in ’11 [ph] going to be in that tons or the thermal terms, and kind of pulling back on, on how you are thinking about the 20 million tons for 2012?

Don Blankenship

First of all, I don’t think we are suggesting that we will ship 20 million tons in 2012, but rather, we expect to get to that annualized run rate in late 2012, so that slight difference there, and of course, all of that dependent on the strong enough metallurgical market to absorb the tons. Secondly, it would be primarily high vol tons, although depending on how quickly Roland could be developed, we might get more into mid vols, lower vol, but it would be used as a bland, and we are also looking at other possibilities to produce more low or mid vol coals, because that would be where the premium pricing is. But we got to work through the Cumberland situation in more detail and deal with utility accounts as far as what they want to do with their contracts. We have got to be comfortable with our timing, of course, we will have Bandmill come back online.

There is a lot of moving parts and lot of things to be digested, but certainly if the market stay the strong, which is a combination of switching high quality steam to met, the Bandmill plant, hopefully some tons out of Roland in that timeframe and then the Cumberland situation that, that could be the late 2012 run rate.

Shneur Gershuni – UBS Securities

Great. Thank you very much and thank you for hosting this call.

Don Blankenship

Thank you very much.

Operator

Thank you. Our next question is coming from Brett Levy of Jefferies & Company.

Brett Levy – Jefferies & Company

Hi guys. Pro forma for the Cumberland acquisition, if you had to give a cash and revolver availability number for today, I suspect you still have tons of liquidity, but a specific number would be great, if you care to share it. And then the follow-no to that is, you know, are you feeling additionally acquisitive or you are just going to focus on digesting Cumberland for a while?

Don Blankenship

I think that timeframes probably difficult, I think we will be focusing on Cumberland and the tragedy, and we are probably sort of bifurcating our efforts here. Baxter has been looking very hard at Cumberland issues and where we will take a couple of people down and focus on Cumberland, so that it doesn’t get, the appetite doesn’t get diluted, but we will be very focused on both the UBB investigation getting that completed and finding causations, so we can make sure that, that doesn’t happen, and then we will also be greatly focused on mitigation of the tons with these new startups and so forth. So, that does not mean that we don’t have the talent and the breadth and so forth to deal with another acquisition, but it does mean we are pretty busy and we will continue to pursue any opportunity with our acquisition team, that’s not involved in out of the UBB situation or the mitigation over Cumberland.

Eric Tolbert

And Brett, this is Eric. From a pro forma cash standpoint, I would just take the cash and cash equivalents to be in the March and to track the $640 million of cash disbursement that we made earlier this week. So, you are looking at about $523 million of cash, adding in our ABL to about $622 million of liquidity pro forma as of March 31st.

Brett Levy – Jefferies & Company

Thanks very much guys.

Eric Tolbert

Thank you.

Operator

Thank you. Our next question is coming from Jim Rollyson of Raymond James & Associates.

Jim Rollyson – Raymond James & Associates

Good morning and our condolence as well. Baxter, you have talked about the mitigation plan to come up with about 1.3 million tons of met kind of offset Upper Big Branch while it’s down, can you maybe spend a minute and talk about kind of qualities of replacement relative to what you are producing out of Upper Big Branch, and does that present any kind of contract issues in terms of replacement qualities versus contract specs?

Baxter Phillips

Mark Clemens, our Senior Vice President of Operations is here in the room. He’s spearheaded the coordination of implementing additional mines and the mitigation plan, and I am going to ask him to comment on those qualities and how they can supply what’s been –

Mark Clemens

About 30% of the mitigation tons is made to be the same quality as Upper Big Branch. A remarkable [ph] tonnage, the Elk Run production will be a little bit less quality, but not noticeable, and we talked to many of our customers and they have agreed to change the leadership [ph] of qualities on their order. So, we don’t fit to be in that bigger difference.

Jim Rollyson – Raymond James & Associates

That’s great to hear, and as my follow-up, you also mentioned. Baxter, the 2.4 million ton run rate in 1Q was probably a good number just for the second half of this year until you get into next year.

Baxter Phillips

That’s correct.

Jim Rollyson – Raymond James & Associates

What are you thinking for the second quarter, just given I imagine there is some timeframe involved to start ramping production up at other mines while Upper Big Branch is down, what do you think for 2Q?

Don Blankenship

Actually some of the production, the mitigation plan has actually started this week. One of the other sections will start by the end of the month, then the other two sections at Elk Run should be in mid-May startup.

Baxter Phillips

Probably a good way to look at it, Jim is that between the end of the first quarter and getting the run rate up in the second half, there will just be a fairly level ramp-up.

Jim Rollyson – Raymond James & Associates

Okay. Thank you very much guys.

Don Blankenship

Thank you.

Baxter Phillips

Operator?

Operator

Thank you. Our next question is coming from Curt Woodworth of Macquarie.

Curt Woodworth – Macquarie

Hi good morning.

Baxter Phillips

Good morning Curt.

Curt Woodworth – Macquarie

Don, I was wondering in terms of the potential met production for 2011, if you kind of take UBB out of the equation for a moment and if you look at Bandmill, the potential for Roland maybe some other Brownfield type expansions, what do you think a good range would be for your total coking core sales potential for that year?

Don Blankenship

You know, again it’s tough not knowing what the steam coal customers at Cumberland and so forth would do or will do. We have got very modest numbers in our guidance under 12, but we probably could see close to 15 under a circumstance where steam tons were willing to defer and we got Bandmill back up and running and the market was up for cross-over tons maybe even a little higher. So, it has to take to predict even higher numbers, but it’s going to be greatly dependent on how much tons of deferred, how hot the market is for high vol, and of course, just how well we run post the tragedy.

Curt Woodworth – Macquarie

And then in terms of Cumberland, what percent of the volume is locked out for 2011 at this point?

Don Blankenship

We have those exact numbers there.

Eric Tolbert

For 2011, they have, sorry, I am flipping here, approximately 6.5 million tons that are contracted, and I think we expect the range in 2011 to be – we have been little bit conservative, about 8 million to 9 million tons in our guidance there.

Don Blankenship

That’s about 2 million tons that are – that’s not committed.

Curt Woodworth – Macquarie

Okay. Great. And then just one follow-up on the thermal market, you talked about the inventories coming down quite a bit in the Southeast, what is your sense for the inventories to normalize, or I guess another way, when you think the utilities are going to come back to the market more aggressively for probably ’11?

Don Blankenship

I think you will see in later summer, early fall, begin to focus on ’11 and there will be more tons marketed if you will in ’11. It’s hard to predict unless you can predict the gas price and the strength of the economy. So, it’s just pretty variable right now in my mind as to what exactly the economy is going to do and how big impact gas will have, but it could both provide meaningful offset if they go in the right direction.

Curt Woodworth – Macquarie

Yes, great. Thank you very much.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is coming from Paul Forward of Stifel Nicolaus.

Paul Forward – Stifel Nicolaus

Good morning.

Don Blankenship

Hi Paul.

Baxter Phillips

Hi Paul.

Paul Forward – Stifel Nicolaus

I know you have had your priorities right fully focused on the rescue and recovery efforts and safety issues across your minds, but we have seen a strengthening metallurgical coal market and I just did want to ask about, as you look to your obligations to your existing customers, that you have the 1.6 million tons of forced [ph] shipments this year, as you look to your own recovery and production of metallurgical coal, at what point does Massey have tons available to ship into the met coal market that aren’t currently committed? Is that really at the beginning of 2011 in your forecast? And as a follow-up, if you could talk about in your guided average price for next year, what sort of metallurgical coal average price assumptions are you baking into that guidance? Thanks.

Don Blankenship

I will let Eric in a moment to respond to the price that’s in the out years, but we will probably, clearly we will have a lot of tons available in 2011, because we are going to serve this number, probably 8.5 million or 9 million ton price. So, tons in ’11 will likely to be 12 million. 11 million or 12 million depending on where we push the volumes to when we deal with some of the issues we were talking about on customer deferrals on the steam side and so forth.

As far as we assume, that it is complex and that we have two major railroads involved as well as river business and in some cases, this is a CSX issue. We still have Norfolk Southern Coal and perhaps more out of Cumberland that can be shipped metallurgical. So, we will have some metallurgical tons and then you also get into significant quality differences even on the CSX where we have the middle and low vols and all of that. So, it’s not as simple to take out 1.6 UBB and put in 1.3 mitigation and so forth. It’s pretty complex as between the railroads and the qualities as to how much coal is still marketable, but we will still be processing quite a bit of coal in the second half of ’10 that’s sold to customer, but just not priced. So, there will be some advantage to us of the increase in the market and the pricing. And I believe Eric can give you some guidance on what we have put in our numbers.

Eric Tolbert

Yes, just from a very general standpoint, we said in our guidance that about 2.2 million tons that were essentially sold and priced, on the unpriced, if you look at it, maybe 9 million tons or so unpriced, the range is about $100 to $130 on the met pricing in our model. It’s very general, but I think that gives us pretty close in terms of what the guidance range that we provided.

Paul Forward – Stifel Nicolaus

Okay. Thank you for that. And just wanted to ask as a follow-up, on the tons that are committed to customers that are I guess committed but not yet priced, some of that for this year, a lot of that for 2011 and on the met side of things, how after, in a very strong period for recent pricing, how do you go about resolving the actual price with customers?

Don Blankenship

Well, I think that what we will do with the regulation, well, each one of them will be an individual negotiation and the pricing obviously is very strong, and we will see a significant improvement in the metallurgical pricing and of course the average pricing going forward. In fact, I think we have been very conservative in our guidance in that regard, because the current day pricing is far higher than the guidance pricing that we are giving. We saw the yo-yo effect in 2008-2009, and you know, we are probably still conservative, we struck less than a midpoint between a down market and the market we are seeing. So, if we get into current market or higher market, certainly we would see much better average pricing, not only on the met coal but across the board. So, it will be as far as how it’s resolved, it’s customer time-to-time and as far as what we would expect, today’s market is much stronger than we are guiding to, because we want to make sure that we don’t get overly optimistic and be to the high side on our guidance.

Paul Forward – Stifel Nicolaus

Okay. Thanks pretty much.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is coming from David Gagliano of Credit Suisse.

David Gagliano – Credit Suisse

Hi everybody. Most of my questions have actually been covered, but I do have one, regarding the EPA’s recent ruling about reinterpreting water quality standards, if that interpretation stands as it is written now, how much preliminary estimate I realize, but how much of your total volumes are at risk of being impacted and what would be the timing of that impact?

Don Blankenship

Again assuming that the jobs you are running will finish out which I think is a safe assumption, we won’t have much impact in 2010. We probably will be able to mitigate the 10% to 15% impact it would have in ’11 with alternative permitted operations or relocation equipment. I don’t know that we have studied the number and nothing 12 to no, but if the EPA circumstances get to the point that it’s continuing to prevent permitting and maintenance or sustaining the current surface mine production, we certainly have the capability to go underground particularly in light of the Cumberland acquisition, which has some very thick and very amountable underground thermal coal.

David Gagliano – Credit Suisse

And do those impacts include expectations for, say the processing facilities as well?

Don Blankenship

Again these things are always tricky because you have to renew these empowerment permits on an annual basis, about like renewing a driver’s license historically every five years or so. So, it’s normal routine, but exactly how the agencies will treat empowerments and so forth that are being continued as opposed to started, I am not clear on right now, but for certain, we have more empowerment capacity and more flat capacity by a wide, wide margin than anyone else in Central Appalachia and we have probably three or four empowerments at locations that are inactive right now that could be reactivated and what would no doubt be a hot market in the event that EPA prevented others from starting operations.

David Gagliano – Credit Suisse

Okay. Just to be clear on my side, I apologize this is already covered, but that preliminary announcement, 10% to 15% impact in 2011, is that included in your base case targets for 2011?

Don Blankenship

The only thing that might be a little different than what’s in the guidance is we now have to be mobilized and mobilize equipment from one site to another. So, it wouldn’t register on the calculator as being very meaningful.

David Gagliano – Credit Suisse

Okay. All right. Perfect. Thanks very much.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is coming from Meredith Bandy of BMO Capital Markets.

Meredith Bandy – BMO Capital Markets

Good morning and gentlemen and thank you again for your time. I just had a question on the guidance for 2010, and given the sort of 9ish met production that we have been talking about, if we hold industrial production just sort of flat, that seems to imply much stronger thermal shipments than you saw in the first quarter, is that right first of all? I think it would be about 7 million tons or so per quarter. What do you have in terms of thermal coal that is committed and priced? And are you sticking at just sort of ramp-up over the year or how should we think about thermal shipments?

Don Blankenship

Okay, I don’t know if all the presumptions that are accurate. I will let Eric speak to that.

Eric Tolbert

Yes, just looking at our outlook model here, we are showing just to correct one thing being said there on the met side, we are showing about 10 million tons on the met side, not 9. I think we were saying it would be kind of ramp-up a little bit over the course of the year. On the steam side, we are projecting higher steam shipments in the other three quarters than what we saw in the first quarter, again the first quarter was fairly light in terms of steam coal sales, and we do expect to see higher levels throughout the rest of the year.

Meredith Bandy – BMO Capital Markets

And can you say what you have committed in price for thermal for 2010?

Eric Tolbert

I think we are fully committed on what we expect to sell for the year, and our pricing and our model on average for the year shows about $56.50 or so.

Meredith Bandy – BMO Capital Markets

Okay. And then as a follow-up, I guess some people are reporting that last night, MSHA announced what they are calling an inspection blitz of 57 mines including some of Massey, but I am assuming that, in light of reason to that, you have been talking to MSHA quite a bit, and I wondered if you could give us any clarity on what exactly an inspection puts us and I know MSHA is at these mines frequently already, so do you have any sense of how this might differ from their typical inspections?

Don Blankenship

Yes, I don’t know how MSHA would define it, so I don’t want to say anything incorrect here, but typically what happens in, you know, what we would consider it is when they show up rather than the two or so inspectors that would normally show up, the team of inspectors might be 10 or 12, and they might spread out on shifts and those inspectors might be from other districts in order to get a fresh look. So, they are basically, you could say that they are putting high level of attention and inspection level on the company, but they are also sort of getting the chance to see what one inspector thinks about another inspector’s reviews and focuses, and they might also bring in someone that’s more of a ventilation expert or more of an electrical expert, or more of someone else expert. So, they bring in a team to try to do a more complete evaluation and to cover more of the mine and perhaps cover a larger part.

Meredith Bandy – BMO Capital Markets

Okay. Thank you. That was really helpful. So, when they – you are talking about, the blitz that you are talking about as a larger team, are those very frequent, do you have those happen a lot or –?

Don Blankenship

I am told that there might be just, say, eight inspectors instead of 11 or 12 from someone here, but it happens. I mean, I don’t know exactly what procedure they use to make that determination, whether they are looking at violation count, size of mine, it could happen, an 800 number [ph], call, there’s line that members at the mine can call and report incidents that might lead to one. So, there is a number of ways it can come about, it can be a routine one, it can be one caused by something that’s being reported by their inspectors that needs to be checked on, it can be caused by someone calling in for the purpose of reporting what they might have observed. 8 of the 57 mines that you mentioned, I believe are Massey mines which is probably about our fair share if you will.

Meredith Bandy – BMO Capital Markets

Okay. Thank you very much.

Don Blankenship

Thank you.

Operator

Thank you. Your next question is coming from Jeff Kramer of UBS.

Jeff Kramer – UBS

Hi good morning, and our thoughts are with you on the families of the fallen miners as you go through this.

Don Blankenship

Thank you.

Jeff Kramer – UBS

The $850 million impact estimated from Upper Big Branch, you have an estimate for much of that is expected to be realized in cash over that two months, and maybe how much of that will be in reserves?

Don Blankenship

I will let Eric speak to that. Obviously we may pay out money and have to get it back on coverage and some of it is – I am sorry, did you say Cumberland?

Jeff Kramer – UBS

About Upper Big Branch.

Eric Tolbert

No, he did say the Upper Big Branch reserve.

Don Blankenship

Okay. Yes, there was a confusion here to table as to whether you were talking something about Cumberland or UBB, but when I start to say about UBB is that some of that is fixed assets and some of that will be cash outlay that will have to later come back from the insurance companies and so forth as you are probably suspecting. So, I will let Eric to see if we can put that in a frame for you.

Eric Tolbert

Yes, I would say it’s extremely uncertain about how much will be related to cash in the short term. For the most part, what we are indicating there is a book reserve for potential for future claims and again what we have already identified as we put in the press release related to workers’ compensation and such and how that works out on cash payments is yet to be seen.

Jeff Kramer – UBS

Okay. And I was just wondering if you could go into more depth or if you could kind of quantify some of the synergies you expect from the Cumberland acquisition and maybe talk about some of the bigger buckets, some of the work in progress, but I guess any early reads?

Don Blankenship

As Baxter noted before, and I will let him add to this, we did model a lot of synergies in the acquisition because as far as put the two companies together and safe overhead and so forth, but I think there will be, the bigger synergies are the ones that you might consider intangible, but I think there will be tangible and that is learning from them than learning from us, because they are at 8 million or 9 million tons, a substantial producer that’s being run by private entity that we see some creative things there. So, there will be some of that, but I don’t know how you evaluate it. But Baxter would you like to add to that?

Baxter Phillips

Only to say that the largest synergy there clearly is going to be the commercial synergy of moving 5 million tons of coal out of the thermal coal market with an opportunity to move 5 million tons of coal out of the thermal market into the metallurgical market. There obviously will be some synergies from purchasing and overlap of insurances and so forth that will reduce costs. But effectively where you get synergies and most transactions of this type is the elimination of significant overhead as you consolidate the upper management levels, and in this case, our model and the model for doing this has already took that into account, because the owners were indeed the upper level of management and the upper executive management and overhead. That was removed for modeling purposes from the beginning. So, it’s pretty straight up.

Jeff Kramer – UBS

Okay. Thank you.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is coming from Michael Dudas of Jefferies & Company.

Michael Dudas – Jefferies & Company

Good morning everybody.

Don Blankenship

Good morning Mike.

Michael Dudas – Jefferies & Company

Don, looking at Central App, maybe you could provide a little bit of observation relative to, you know, the arguments for continued secular decline in Central App production given permitting, labor, capital, and geology issues, with regard to the – it seems like a more sustainable need for US met coal primarily underground-driven met coal production here and abroad, how do you see that playing out over the next 12 to 18 months? Certainly, Massey is quite strong to mitigate issues and handle lot of the challenges ahead, how do you see that playing out over the next 12 to 18 months, and are you of belief that you are going to continue to see significant declines of Central App production from either just total or non-met coal thermal Central App production?

Don Blankenship

I think on the thermal side first, obviously EPA and pressures of gas may have a combination of reducing supply and reducing demand as well as the (inaudible) on the utilities whether it be voluntary or regulatory as to utility burn and electric generation choices. So, that side, you may see some balance on pricing but you certainly will see downward pressure. On the metallurgical side, I would assume that everybody is hopeful that the economy will be strong, therefore domestic steel will be strong, but the international market is incredible, it’s large, in other words, the volumes around the world are big and even 4% and 5% increases in the demand for met coal are hard to keep up in either Australia or out of the US and it sets a limit on how much metallurgical coal can be produced.

It’s much more difficult to produce when it is there and there is much less of it to develop. So, I look for the metallurgical markets for the next three to five years to be extremely strong, but you know, tremendously strong in Asia and that draw of the Australian and Chinese production will cause the steel prices and/or metallurgical coal prices in Brazil, Europe, and US to be very strong as well. I don’t think that Central App would be able to fully hold up its end of that situation and the prices should be strong, at least until a period of time that major, major developments could occur in Australia and that’s going to be a long time.

Michael Dudas – Jefferies & Company

Thank you Don. A follow-up is, maybe for you or for Baxter, I assume of the potential met coal shipments you are expecting 20 million ton run rate 2012 and beyond, most of it is going to be sent internationally given your prior comment, how is Massey looking relative towards contracting given the new trend and the pressures of quarterly pricing versus annual or maybe multi-year pricing? What’s Massey’s views on that, is that something that’s going to cause more volatility in price realizations that we will be seeing going forward from your met coal shipments?

Don Blankenship

I mean, clearly to the extent, there is more quarterly pricing, it will be more volatile. It’s odd we saw a lot of customers because the first quarter prices were high, who wanted to do quarterly pricing, and then when they went higher, they began to think about annual pricing and you know. It was like the customers are pretty well – we are the tail on that dog sometimes because the customers write a lot of times.

Baxter Phillips

An example is we got a demand letter from a customer saying that we believe they were going to quarterly pricing and basically that was that. It was an export customer and I visited with the customer to tell them we were willing to go forward with that. And when I went to that meeting, they opened the meeting by telling me they were going to stay with annual pricing.

Michael Dudas – Jefferies & Company

Terrific.

Baxter Phillips

So, I guess the bottom line is the customers are still back and forth on that themselves. Some are little more constrained where they have dialogs and procedures or government intervention that requires them to stick with the benchmark pricing, and in that case, they are forced to do whatever the benchmark is until their regulatory requirements are revised.

Michael Dudas – Jefferies & Company

Thanks guys. Thank you.

Baxter Phillips

Thank you.

Don Blankenship

Thank you.

Operator

Thank you. Your next question is coming from Brian Gamble of Simmons & Company.

Brian Gamble – Simmons & Company

Good morning guys. Just a couple of quick ones. Don, you mentioned that the modeling assumptions were baked into the guidance range for ’11 at this point in comparison with the market was conservative, I was wondering if you could kind of just reflect on what the current market for met is either just a generic high vol price or what you guys are seeing on the ground right now, and just how conservative $100 to $130 per ton on the met side is at this point?

Don Blankenship

You actually put in a new quality A code, probably $180, $190 at the mine, without touching the last couple of weeks as to where it has gone, but the numbers are far more than the $130 or so that we might forecast. We just – we don’t know whether that market will stay that high or come off some, but if you look at our, I don’t know, what we got $82 (inaudible), it could probably, the met side alone could probably push at a number toward $90 if you assumed anything like the current market as these orders were closed for ’11 during the next say, 6 to 7 months.

Brian Gamble – Simmons & Company

Great, I appreciate that, and just one small modeling question. Best tax rate assumptions for the remainder of the year?

Eric Tolbert

It’s a little uncertain with the events in the past couple of weeks, Brian, probably use about 25% for the full year.

Brian Gamble – Simmons & Company

Appreciate you guys. Still thoughts and prayers definitely with you and all the members of the Massey family.

Eric Tolbert

Thank you very much.

Baxter Phillips

Thank you.

Operator

Thank you. Your next question is coming from Jen Marcello of Tuohy Brothers Investment Research.

Jen Marcello – Tuohy Brothers Investment Research

Good morning guys.

Baxter Phillips

Good morning.

Eric Tolbert

Good morning.

Jen Marcello – Tuohy Brothers Investment Research

First, I would like to express condolences on behalf of the firm, and secondly with regard to your announcement of the European office, could you comment on those markets, maybe as far as demand recovery in the Atlantic Basin and what you are seeing there?

Don Blankenship

Yes, I think we can do that. I will let Baxter comment some on it, but what we are certain of is when US coal begins to move into China and Japan, there is not enough coal in Australia to be going to Europe at or Brazil. And we felt like that, we need to put a better foot forward in some of the eastern European countries as well and the essence of what we are trying to do is to not just be visiting European and other countries customers when there is a price settlement or there is an issue or whatever to develop closer relationships, because our relationships in the US are much more personal than they are in Europe. So, we are trying to improve that. But Baxter, would you like to add to that.

Baxter Phillips

Well, it started out with a focus on eastern European mills and the individual that we brought in, while he has broad experience throughout the world, he is currently – previously until he came on Board with us was selling into those mills that we had actually targeted. So, while he brings broad-based experienced, he actually brings a focus to the area that we were looking to bring attention to and of course he has thermal coal experience too, and if that market opens up in Europe, we are looking to him to be our point person in that regard.

Jen Marcello – Tuohy Brothers Investment Research

Thanks guys.

Don Blankenship

Thank you.

Operator

Thank you. Your next question is coming from Justine Fisher of Goldman Sachs.

Justine Fisher – Goldman Sachs

Good morning.

Don Blankenship

Good morning.

Baxter Phillips

Good morning Justine.

Justine Fisher – Goldman Sachs

I am wondering if you guys could comment on whether you are seeing utilities change or perhaps I guess downgrade their preference for types of steam coal that they put in their burners, and I think one reason we may do this is if they are concerned about environmental legislation etcetera, reducing the average life of those. And the reason I ask is that first of all, would that reduce their preference for using higher quality cap, steam coal, maybe let them burn from Illinois basin etcetera and then second of all, that may increase your ability to divert some of the higher quality steam from Cumberland into the met market because if they are not, do you think they would be willing to give up the contracts for their high quality steam?

Don Blankenship

I don’t know, I mean, they are all different, but I will say this that a lot of these environmental things like carbon sequestration would be a good example. It takes away a lot of the capacity of the plants. So, a lot of the electric generation capacity can get lost to dealing with CCS or whatever and then they might need to move up the quality to try to improve the efficiency, but I am not technically qualified to say that. I will say that environmental issues and/or even political issues and the ability to move off to gas without it being too much of an increase is all in their minds, because the being green thing is something that a lot of them have at the front of their thoughts. But each of them will have their own views and their own options to move one way or the other. So, I don’t know that you can make a generic statement there.

Justine Fisher – Goldman Sachs

So, usually do you think that they would be willing to say, if you guys want to renegotiate some of Cumberland’s steam contract, that they would be willing to potentially take a lower quality steam coal at a lower price and let you guys take that coal and sell it off into the met market?

Don Blankenship

I think that’s possible although a drop in quality wouldn’t help us as quickly as a deferral would, and there may be some of them that high inventories or would prefer to use a different coal or more gas that have a commitment to tell you wouldn’t want to say they have million ton commitment for rest of ’10, ’11, they might turn into 0.5 [ph] million ton commitment for four years. So, again, I don’t want to prejudge what might best fit their situation.

Justine Fisher – Goldman Sachs

Okay. And then just a clarification on the met front, back to this quarter’s price versus the pricing going forward, do you guys have any more of these contracts that you had signed at lower levels, last year that we need to be baking into our forecast, because I think if you look at most of the Street’s estimates, does met coal average price jumps up and obviously that’s based on stronger pricing environment that everybody knows about, but are there any other contracts that we should be baking in that might lead pricing to be below what we might think it would be based on current market pricing?

Don Blankenship

I think when we provide the guidance, we have considered fulfilling the commitments that we have and whatever you see there is unpriced or unsold is totally open to the market. So, I don’t think so. I don’t think if there’s any constrained terms.

Justine Fisher – Goldman Sachs

Okay. Thank you.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is coming from Brian Singer of Goldman Sachs.

Brian Singer – Goldman Sachs

Thank you. Good morning and condolences to the families and those impacted at Upper Big Branch.

Don Blankenship

Thank you.

Brian Singer – Goldman Sachs

Wanted to go back to some of your comments on costs, can you speak more specifically to the type and magnitude of labor pressures and other cost pressures that’s impacting higher operating costs unrelated to UBB mitigation, and then separately, when you think about your capacity expansion, can you speak to any updates on how much that would cost and whether cost increases are occurring on a capital front as well?

Don Blankenship

On the capital front, I mean, we are not seeing increases in the capital that would impact our guidance. Our equipment today is far more expensive than it was several years ago. It comes with lot more bells and whistles as part of it, of course steel prices and other things have factored on it, but as far as the guidance and what are experiencing going forward, expecting it go up higher would only be so for uncommitted capital that may be hit. So, huge inflation run-up or something, but I don’t expect that at least in the timeframe that we forecasted. As far as the cost, again the labor rates are strong. We gave a labor rate increase that affected, I believe January 1, that affected the first quarter. We know that underground production will be stressed by the strong met market. So, we are trying to get out in front of that curve. As far as material costs of diesel and so forth, it’s not been much different than it was last year for us.

We had quite a bit of first and some second quarter diesel hedge, so we are not impacted there. We basically have been impacted as we said earlier about productivity. I don’t have the number right in front of me, but for example, if were as close to produce 4 million tons of surface mining coal in the first quarter and we were off 15% because of horrible weather, lost 600,000 tons that would have gone into inventory of $24 million, and on 8 million to 8.5 million tons basis, nearly $3 by itself. And so, we took a real beating on the surface mines. Roger and I were talking about protocol we should have put out on the Web the white out days that we had where we couldn’t see in front of us before the snowstorms. So, that part will stabilize at least in the second half of the year.

And on the underground, we continue to struggle with productivity given all the regulations and so forth, but we expect and we forecasted the same productivity going forward as we had experienced in the first quarter. So, I think that we will be okay there even with the additional scrutiny or pressures brought on by the tragedy. So, it’s basically surface mine and mix and the surface mines will correct, I doubt the mix will correct, because we all believe as we have discussed so much here this morning that the steam markets will be weaker than the met markets. So, we will be continuing to drive both to higher cost met coal production as well as underground mining. So, I wouldn’t – I would expect the mix to continue to frustrate the ton level, but provide wider and wider margins, and I would expect the surface mines on the other hand to sort of self-correct.

Brian Singer – Goldman Sachs

Thanks. And as a follow-up, when the UBB mine does come back on, how does your mitigation measures or are there any changes to your mitigation measures, in other words, do you reduce the additional shift and bring production down from some of the other mines that you are increasing now, or do you keep that and those increases become sustainable?

Don Blankenship

We got of course a lot of detail goes into how that question ends up being answered, but I would say that among the synergies that Cumberland gives us, we run some underground thermal coal mines in order to fill our own orders in the Central West Virginia where the market is hot. So, we might for example take underground guys that are maybe there is a 100 or 200 of those and move them from steam coal mines to met coal mines i.e., back into UBB if and when, when we get it back up.

And so, you would see UBB would be incremental, metallurgical coal production with thermal orders being moved back off and the mitigated tons, I think they wouldn’t be – the tons that we add for the mitigation wouldn’t necessarily be produced from where they are, but that workforce and that equipment would continue and be part of the higher numbers that we have forecasted. For example, once we have that workforces and that equipment in place, it might become part of the Roland workforce or part of increased workforce, what we call it our inland operation.

Brian Singer – Goldman Sachs

Great. Thank you.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is coming from Wayne Cooperman of Cobalt Capital.

Wayne Cooperman – Cobalt Capital

Hi Don.

Don Blankenship

Hi Wayne.

Wayne Cooperman – Cobalt Capital

Condolences as well, just on the Upper Big Branch, how do you – you guys think that something actually caused, like something happened to cause it, or is it just sort of a natural occurring phenomenon, and if that’s the case, what are the implications for underground mining going forward?

Don Blankenship

Obviously, I don’t want to speculate, but either something went wrong from a natural manner that was not foreseeable thus and/or human beings or somebody made a mistake or something, we don’t know. But to answer your question if it was something unpreventable by a process and technology and ventilation and so forth, I think there would be high scrutiny on the longwalls. These operations are inseams that are beneath and sometimes above other mine seams. There is the changing terrain in Central App where you have high mountains and then you have valleys and there is a lot of gas wells in the area and lot of natural gas contained in this strata.

So, there are so many things that it could be and whether it was natural or manmade or whatever, until we know what it was, I don’t know that we could say whether it will have an impact going forward. I think the speculation would be that if there is an impact, it would be more likely to be a review of the longwalls rather than a review of (inaudible) miners.

Wayne Cooperman – Cobalt Capital

Okay. Thanks.

Don Blankenship

Thank you.

Operator

Thank you. Your next question is coming from David Khani of FBR Capital Markets.

David Khani – FBR Capital Markets

Hi guys, condolences as well.

Don Blankenship

Thank you.

Baxter Phillips

Thank you David.

David Khani – FBR Capital Markets

First of all, Baxter, congratulations on finally getting your European salesperson, I know you were looking for a while and I know it’s important to help market your coal.

Baxter Phillips

Thank you.

David Khani – FBR Capital Markets

If you could, Don, you said something was kind of interesting, and I know you flushed out a little bit just with Wayne’s question, but you have mentioned that you didn’t think the explosion was due to safety issues. Could you – and why do you think that is?

Don Blankenship

Well, I think we said is this is not due to us not being focused on safety, not having a strong safety culture, not putting safety first, not having the best processes as we know to have in place in regard to safety, it could be a safety process failure, we don’t know that yet, but it doesn’t – some of the implications have been that we don’t focus on safety or we put dollars in front of safety and nothing could be farther from the truth. We have equipment enhancements for the purpose of safety. We have hazard reduction committees that focus every day on violations and hazards and we have people at these mines that are highly trained and highly professional. So, it’s not a lack of focus or a lack of effort or a lack of professionalism. What it is, we don’t know again.

David Khani – FBR Capital Markets

Thank you for the clarification, okay. And you guys are going to generate a good amount of free cash flow over the next several years and I know one of the areas you talk about is potentially making more acquisitions down the road. I know you have to sort of assimilate Cumberland and obviously you have to get past to solve UBB issue, but have you thought about given the fact that your stock has come down so hard to maybe even buyback stock, and if you did, where would you consider doing it or when?

Don Blankenship

We obviously thought about it. We think the stock is clearly impacted by the tragedy and you know that we will move through this time as hard as it is to see the other side sometimes, move forward, and we thought about it, but we haven’t really focused on a timing or whatever and whether we will do that or not do that is – there are so many things to consider that we really don’t want to suggest either way.

David Khani – FBR Capital Markets

Okay. And then last question, if you look at your cash costs per ton, if you think about what is your percentages fixed versus variable, could you just give us a rough ballpark either percentage or dollar ton or something, so that we get a sense of that?

Don Blankenship

The problem with that question from my accounting background is, is a tremendous amount of semi-variable with a tremendous amount of variation in how semi it is. So, it’s a tough question. I don’t know that I would want to take a stab at it, I probably would prefer to have someone evaluate some, because you can get some of the fixed costs off of yourself over a year or so if you chose to do that, but you can’t just turn it on and off very quick. And if I could, I don’t know if Eric wants to take some stab at it or not, but the semi-variable part takes a lot of talk.

Eric Tolbert

We have answered the question in the past, really depends on the timing over which you are looking at variable, as Don said, bringing on new mines and such takes some time, and once you put them in place, they would become fixed for a portion of time. I think we have answered the question in the past perhaps that our variable cost would be as high as 60 or two-thirds of the cost, but there again, as Don said, we will have to do a lot more analysis per se and figure out what time period we are looking at.

David Khani – FBR Capital Markets

Okay. Maybe I will follow up with you Eric offline and we can sort of work this.

Eric Tolbert

Yes, that’s fine. Thanks.

David Khani – FBR Capital Markets

All right. Thank you guys.

Eric Tolbert

Thanks David.

Operator

Thank you. Your next question is coming from Dave Katz of JPMorgan Chase & Company.

Dave Katz – JPMorgan Chase & Company

Hi, our condolences as well.

Don Blankenship

Thank you.

Dave Katz – JPMorgan Chase & Company

With regard to the equipment in the mine and longwall development, the 62 million that you guys have identified, in the worst-case scenario, none of that is recoverable. What do you think the expenditure to replace the equipment would be and how much do you think it is necessary to replace?

Don Blankenship

Again tough questions, but we have a – the great majority of the longwall that is used to rotate for example and cute move times. So, we probably would not replace the longwall, even if it were totally lost, we would have to buy portions of the longwall, but I don’t know that if we totally lost it, we would do more than enhance our spare wall, and so it might throw out a number, it might be $15 million to $20 million. As far as the miner sections, it’s highly, highly unlikely that equipment will be lost, some of it was in a part of the mine that was not at all damaged by the explosion, and of course the investigative team will have, it appears at least full access to all locations and equipments, so we would expect it would come out, but if you took a literal sections of equipments in that coal mine, and you would go after and buy it, it would probably cost you $60 million or more. And of course, there is a lot of built mine and structure and so forth in the mine that might add another $30 million to $40 million. So, those would be all the numbers, and I think some of the money that is on these books is development capital. It wouldn’t be replaced at all. So, directionally, that’s way it would look. I don’t know that it’s very – that we are very able to give a good answer to that, but that’s directional.

Dave Katz – JPMorgan Chase & Company

Okay. And then with regard to while waiting for access to the equipment, the mitigation plans that you have set out, will there be any equipment purchases that are acquired?

Don Blankenship

We had, if you recall, some spare equipment, but the answer to your question would be that there will be some – so I will throw that question to Mark because it’s part and parcel to what Baxter said earlier that Mark is trying to hit up the mitigation effort here.

Mark Clemens

Yes, there is very little that would be required to be purchased. A lot of the equipment is coming from idle sections that we have already had idled, particularly a couple of the sections that are Bandmill operations.

Dave Katz – JPMorgan Chase & Company

Okay. Thank you very much.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is coming from Gaurav Bana of AllianceBernstein.

Gaurav Bana – AllianceBernstein

Thank you very much for taking my question and my condolences as well. Thank you very much also for having such a long Q&A at what is a very difficult time for the firm. My question is on the guidance and if we look at the unfortunate experience in 2006 where before Aracoma and then subsequently at the end of ’06, your actual production came something like more than 20% below the pre-Aracoma guidance and your costs came like 20% above the pre-Aracoma guidance, you know, 12 months down the line. I am just wondering what possibly besides Cumberland could be different this time to have such a small level of, relatively speaking, level of guidance revision? Thank you.

Don Blankenship

I mean, the guidance first of all, that we gave before I think was 49 to 52 on costs and it’s 54 to 57, is that right. So, I mean, if we have a significant amount of cost increase in our guidance which has been one of the focal points, I think it certainly partially represents what you are alluding to there. And hopefully we have learned the ’06 experience and so forth, and Eric’s looking to see what those numbers were in ’06.

Eric Tolbert

Yes, it looks like – I don’t know going back to 2006, I don’t know how much of the decline was market-driven versus the impact or what you are referring to in terms of guidance versus what actual were. But going back to 2006, we would up with 39.1 million tons sold for the year.

Don Blankenship

Yes, I think you are more alluding to the cost levels of like 34 to 40 or 41 and we were probably forecasting something considerably less than that. So, I guess the two main points are that some impacts like we had in ’06, and we also think that, that we have learned from the experience and that our guidance is appropriate all things considered, but it’s certainly something for us to remain aware of.

Gaurav Bana – AllianceBernstein

Thank you.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is coming from Brian Yu of Citigroup Incorporated.

Brian Yu – Citigroup Incorporated

Great. Thanks for the lengthy call and my thoughts that go out to management, employees at Massey as well.

Don Blankenship

Thank you.

Brian Yu – Citigroup Incorporated

Just on the metallurgical coal, can you provide your average committed ton price where that point is for ’10, ’11, and ’12?

Don Blankenship

We only have like 2.5 million tons in 2011 that are committed and price. I think they are looking to see if they don’t write it down to at least see it here. And so in ’12, it would be nearly nothing. So, whatever we sell will be open to the market in ’11 and ’12 except for a small quantity in ’11 I think. Eric, can you clarify that?

Eric Tolbert

We can try.

Don Blankenship

I would refer to how many times they are sold, priced in ’11 (inaudible)

Eric Tolbert

Yes, as we put in terms of sold end price, as we put in the press release, I believe it’s 2.2 million tons of net looking at the average price.

Don Blankenship

2012.

Eric Tolbert

In 2012, it is –

Brian Yu – Citigroup Incorporated

I think it says 900,000 tons.

Don Blankenship

Okay.

Eric Tolbert

Yes, there is not much.

Brian Yu – Citigroup Incorporated

You know, the price point?

Don Blankenship

It can probably give you an average price, but you are talking about 3 million tons in ’11 and ’12 rather. So, it’s pretty miniscule relatively.

Eric Tolbert

Yes, the price range in 2011, part of that is on a collar, so we are looking at about $110 per ton range in terms of in our guidance range. So, it fits within, even within the range that we gave you previously on the unpriced side.

Brian Yu – Citigroup Incorporated

Okay. And then for 2010, what’s the price tons?

Eric Tolbert

Let’s see, on 2010, price tons, approximately, I think we have got in our numbers, I think we are saying that we have got about 3 million tons that are unpriced.

Don Blankenship

So, it’s about 7 million or 8 million tons. They struggle when that question as you have got collared tons and sometimes you have got options on either side. So, it makes a little bit tough, but there about 3 million tons unsold or unpriced to say.

Eric Tolbert

Unpriced, that’s correct.

Don Blankenship

We are forecasting that average price.

Eric Tolbert

The average price for the year, I think –

Don Blankenship

3 million tons.

Eric Tolbert

For 3 million tons, about we would say mark about $120.

Don Blankenship

Yes, so we got to 3 million that’s unsold at $120 and it could be –

Brian Yu – Citigroup Incorporated

Having it sold?

Don Blankenship

I am sorry?

Brian Yu – Citigroup Incorporated

And for the 7 that’s sold, what’s that, how we price that?

Eric Tolbert

It’s approximately $96 or so.

Brian Yu – Citigroup Incorporated

Okay.

Eric Tolbert

So, you are looking at the – in our midpoint model, just to kind of give you a little bit of guidance range here. As we mentioned, we have about 10 million tons in met and all of these numbers at this point what we are discussing exclude Cumberland of course. And we look at about an average price of about $107 all in, both what we have priced and what we have unpriced on the midpoint of our range.

Brian Yu – Citigroup Incorporated

Okay. That’s helpful. And then, Don, for the $20 million tons of potential met coal, if we were going to break that out in two ways, how many tons could be sold under almost like any circumstance or more normal circumstances, and then how many tons would require us to have a tight met coal market like what we are seeing right now?

Don Blankenship

Those are almost pure guesswork, but I would say 14 million tons of it by then will be usage quality and cost structure that we would be able to maintain ourselves in that market. When you get into a weak metallurgical market, you get into much more difficulty in selling marginal met coal and so forth. So, plus 14 million probably in a down market would be a safe assumption.

Brian Yu – Citigroup Incorporated

Great, thank you.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is coming from George Caffrey of Miller Tabak Roberts Securities.

George Caffrey – Miller Tabak Roberts Securities

Thank you and my condolences as well.

Don Blankenship

Thank you.

George Caffrey – Miller Tabak Roberts Securities

Most of my questions have been answered, but with respect to the European sales office, does that have the potential to have any impact whatsoever this year or you are really looking for 2011 and beyond for that to have an impact? And along those lines, could you give a little guidance as to what percentage of your shipments are exports?

Don Blankenship

I will let somebody get you a pretty good number on that, while I am answering the first question. We have got 3 million tons that are unsold unpriced that we will market in the best location although we have a lot of incumbent customers of course that we will discuss those tons with. So, it could have, the European office could have some impact on ’10 if we have relationships with customers through that office that we have not previously had and/or knowledge if you will. So, it could impact it, but we don’t know to what extent we are in, what manner yet.

Baxter Phillips

The export was 69% in the first quarter was of met coal.

Eric Tolbert

Yes, in total for our total tons, the export was 20%, but as Baxter noted, it is 69% of the met.

George Caffrey – Miller Tabak Roberts Securities

I appreciate that. Thank you very much.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is coming from David Lipschitz of CLSA.

David Lipschitz – CLSA

Good morning everyone.

Don Blankenship

Good morning David.

David Lipschitz – CLSA

In terms of the Roland property, you talked about $100 to $130 in your numbers, that’s a low vol type quality coal, so that potentially give up for a lot higher price in the $130, correct?

Don Blankenship

Yes, it would be among the highest quality coal and I suspect some coke users.

David Lipschitz – CLSA

And my second question is, you have always said you have pretty much wanted to stick to the region you know, which is Central Appalachia. With all the regulatory environment, would you be willing to look at other areas that potentially have less stringent regulations so to speak than what’s going on in West Virginia right now?

Don Blankenship

Well, we do and we do. I mean, even though this is tough duty here in Central Appalachia so to speak, it also means that as we have shown I think over the years, there’s 20 perhaps $30 to $35 margins to those that can find their way through the issues. So, we believe we are best positioned in terms of reserves and talent and experience and so forth to do that and there is great opportunity here even given the noise around the regulations and so forth. So, we will continue to do that, but certainly as noted earlier, we show a lot of cash generation and we felt the Cumberland acquisition which was both Central App, but not in the heart of our operations and in the heart of our labor pool and gave us freight rate advantages out of more southern ship point was as I said in that call, sort of a perfect opportunity for us.

We are well aware of the world’s demand for coal and we believe that on the thermal side, the time will come when we will see as big a shortage on the worldwide thermal markets as you do today on worldwide metallurgical coal markets and the Illinois basin coals have a fairly high level of BTUs, which makes the transportation on a per ton basis more reasonable on a BTU basis than the Powder River Basin. That is transferable skill, underground mining, and we would certainly keep our eye on that. I would remind everyone that have a West Kentucky permitted reserve that could be developed in what is called the Illinois basin Mid West. So, that’s always a possibility. So, we are very well aware of the opportunities did not exist outside of Central App in US and elsewhere. In fact, we have been very active in India as you know with JVs and so forth. So, it’s not out realm of possibility and more and more aware of that those opportunities are getting closer and closer from a time frame viewpoint.

David Lipschitz – CLSA

Thank you.

Don Blankenship

Thank you.

Operator

There are no more questions. Now, I will turn the program back over to Mr. Hendriksen.

Roger Hendriksen

Okay. Thank you everybody for your time and your attention this morning. We appreciate your interest in Massey Energy and look forward to future calls and communications down the road. Again, thanks for joining our call.

Operator

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

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