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James River Coal (JRCC)

Q1 2011 Earnings Call

May 10, 2011 11:00 am ET

Executives

Joseph Czul - President - Logan & Kanawha

Peter Socha - Chairman, Chief Executive Officer and President

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

Elizabeth Cook - Director of Investor Relations

Coy Lane - Chief Operating Officer and Senior Vice President

Analysts

Paul Cheng - Lehman Brothers

Lance Ettus - Mortar Rock Capital Management

Justine Fisher - Goldman Sachs Group Inc.

James Rollyson - Raymond James & Associates, Inc.

Justine Fisher - Goldman Sachs

Shneur Gershuni - UBS Investment Bank

Michael Dudas - Jefferies & Company, Inc.

Brian Gamble - Simmons & Company International

J. Haberlin - Davenport & Company, LLC

Jeremy Sussman - Brean Murray, Carret & Co., LLC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the James River Coal First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Beth Cook, Director of Investor Relations. Ma'am, you may begin.

Elizabeth Cook

Thank you, Gavin, and good morning. Welcome to James River Coal Co.'s First Quarter Earnings Call. We released our earnings this morning, and our current release and investor presentation are posted on our website and were furnished to the SEC on an 8-K. With me on the call today are Peter Socha, Chairman and Chief Executive Officer; C.K. Lane, Senior Vice President and Chief Operating Officer; Sam Hopkins, Vice President and Chief Accounting Officer; Jim Ketron, Vice President and General Counsel; and Joe Czul, President of Logan & Kanawha.

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

Peter Socha

Good morning, everyone. Thank you, Beth. We have a fairly short slide deck today, so we'll get to the Q&A, and hopefully, Q&A will be a little bit longer.

Just turning on Slide -- what is my -- Slide 4, we did complete the acquisition just a couple of weeks ago of IRP and L&K. We're very, very happy with the transaction. We're happy with how everything has gone and the integration so far. I think the integration has gone smoother than we would have expected, and I would expect it to continue to go very smoothly. We've been pleased with all sides on how things have gone on that transaction. The capital markets transactions also went smoothly, as those of you who we saw on the road show are aware, that all 3 transactions were very well oversubscribed, and we are pleased with the results and pleased with the quality of the investors and with the geographic dispersion of the investors. We did have some short-term impact in the first quarter. We knew it going in. Anytime you do a transformative transaction like this, you're going to have costs, both direct and indirect. And that was one of the things that we weighed in late January, early February. C.K., Sam and I went away for a couple of days, and that was one of the things I thought about very hard, which was, could we divert ourselves away, because we are a small company and we are thinly staffed. Could we divert ourselves away? In fact, we decided the risk was worth it, and it's turned out to be worth it. We had some direct costs in the quarter of about $5 million, but there were also indirect costs. But over the long term, we think that those will be minimal.

The synergies, when we're on the road show, we talked about $20 million to $30 million of annual synergies. Right now, we're saying $25 million, but we do believe it will have upside bias. The ones that we're looking at today are all product-related. They're all product mix in that we are trucking our metallurgical coal from McCoy Elkhorn over to Gilbert and that is being shipped under L&K orders to the international seaborne coal markets. We are in the process of doing engineering work on the upgrade to the Sunny-Knott loadout facility that IRP has, and we'll be able to stoker coal there. And then we're also, the one that I think has surprised me a little bit more, maybe it shouldn't have, and that is PCI coal. Crossover in PCI. Joe and his team have really been diving in on that. And so we've been very pleased with what we've seen. So today, we're looking at $25 million with upside bias to that.

We did sell, since we last spoke to you a couple of weeks ago, we did sell about 800,000 tons of 2011 coal, about 1.3 million of 2011 and 2012, of the 800,000. And I know this will be one of the early questions from either Riley or Jeremy, depending on who's in the queue. Of the 800,000, about 500,000 of that was thermal and the remaining 300,000 was metallurgical coal. So we've been pleased with the pricing. We've been pleased with the transaction, and we believe it sets us up well going forward. And with that, I will turn it over to C.K. to go through operation.

Coy Lane

Thanks, Peter. First, I just wanted to go over the first quarter NFDL rate for the existing James River mines. It was 1.45, which is tracking lower than our last year's number, and also, well below the national average. We are still continuing to work on our tracking and communication systems. We're down to having all but about 3 of those installed. They will be installed by June 15, complying with that. We're continuing to work through the issues with the EPA on permits. The permit that we are focused most on now is our Stacy Branch Surface Mine permit in the hazard area. We have been working on that permit since 2006 and that's very active. We had a meeting in Atlanta with the EPA as late as yesterday. We're continuing to make adjustments to the mine operations to comply with the new and the modified MSHA regulations. The new dust standards are on the horizon for respirable dust. The new rock dust standards, mine evaluation standards and many more to come. And those are having an impact on underground mining costs pretty dramatically across the cap region.

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