James River Coal Company Earnings Call Nuggets: Customer Base and Guidance

James River Coal Company (NASDAQ:JRCC) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Customer Base

Michael Dudas – Sterne, Agee & Leach, Inc.: Peter, your closeness with the customers has been a trademark with you and the Company. Maybe a little more light on how the customer base on the domestic thermal side has been reacting to the pretty wild swings in the market and for generation, and is there a sense that this is just a cyclical economic impact, or is there more structural issues that are starting to creep into the thought process from coal (indiscernible)?

Peter T. Socha – Chairman, President and CEO: Well on the thermal side, on domestic thermal at least our customers in the Southeast – and I know this has gotten a lot of play on the various conference calls on how much switching is there going to be and things like that. But in talking to our customers in the Southeast, their coal burn is not really going down a whole lot between ’11 and ’12 or really between ’10, ’11 and ’12. It was already at a low level, gas prices were already in the money in the Southeast for the last several years and so whatever could switch had switched. There may be some switching going on in Mid-Atlantic. I have read about in the eastern side of the Midwest, of the industrial Midwest. There may be some – their stockpiles are big. By and large, they are on the healthy side. Some of them will be coming out for coal solicitations we believe, either late this year early next year. But by and large, they are doing okay on their coal burn. I read a comment from – this was a sell side conference, where one of our CFOs attended, he said his coal burn is going to be flat, pretty much flat year-over-year. They’re not going to be switching; and based on what we’re hearing, that seems to be the case anecdotally. What happens going forward? I don’t know. What happens in ’13 and ’14, I don’t know. Right now we are trying to work with them on ’12 and make sure that what we have under contract and what they need, match up, that’s the biggest – that’s our focus right now, and finding out what they’re doing. Joe, you want to comment on the met side domestically first?

Joe Czul – CEO, Logan & Kanawha Coal Company, LLC: Domestically, it’s sort of like we said in our prepared remarks. The North American steel companies are doing pretty well, automotive is very strong. The coal plants are all more or less running full tilt. So, that’s all really going pretty well.

Michael Dudas – Sterne, Agee & Leach, Inc.: Joe, maybe a follow-up a little bit on your comments about India. I have seen some estimates where I have seen 10% to 15% increase in met coal imports into the country in 2012. That’s like a reasonable number. Is quality an issue given where benchmark pricing seems to be settling here for Q2 and expectations for second half?

Joe Czul – CEO, Logan & Kanawha Coal Company, LLC: Yeah, I mean I don’t know whether imports will be up 10%. We expect them to be up. I don’t know that we have – really slide real on exactly how much, but we do see year-over-year growth, and I guess – so, maybe you can restate your question on the quality. I’m not quite understanding what you’re asking.

Michael Dudas – Sterne, Agee & Leach, Inc.: Is the demand or the interest that you’re seeing for your coals different because of where pricing is? Is that your coal is relative to better quality, larger discounts, narrow discount, or is there any pushback from international steel companies from that front?

Joe Czul – CEO, Logan & Kanawha Coal Company, LLC: I mean generally speaking, the blends haven’t really changed. They still want good quality coal. We sell them very good quality coal. So, we don’t see a whole lot of change in the kind of quality that you’re asking for.

Peter T. Socha – Chairman, President and CEO: Mike, I think that higher number might be on back half of ’11. Though it would be on the full year of ’11, but the back half – if you ever really want to look at an interesting chart, view a foreign exchange chart on the Indian rupee versus the U.S. dollar and go back one year. Starting in August of last year, the Indian currency just collapsed really through about the first part of January, and then I guess started to sit back up since then. It’s actually improved quite a bit since then, but I think it was one of the two or three worst performing currencies in the world. So, if you were to look at imports of met coal or thermal coal for that matter into India in the back half of ’11, I think you’ll probably see material growth as well over that run rate.

Michael Dudas – Sterne, Agee & Leach, Inc.: One final quick question, Peter, any opportunity to ship James River thermal coal to Europe, maybe mid to second half of this year?

Peter T. Socha – Chairman, President and CEO: I think so. I think so, but I haven’t – Joe is going there next week and unfortunately I’ve got a conflict with Jim’s conference otherwise I’d be going with them. So, I’ll know much more – I’ll probably go over there in April or May, and I’ll have a better handle at that time. I think the softness in the European market, as I talked about a little bit earlier and just a minute ago, I think part of the softness in the API2 and the API4 can be traced back to what happened with India in the back half of ’11. I think that pushed some coal on to the available charge that maybe wouldn’t have otherwise been available. So, hopefully, India – there’s a thing going on in India right now where Coal India and the generating companies in India, they are supposed to (indiscernible) a fuel supply agreement, and Coal India has resisted signing the fuel supply agreement. It basically amounts to about 60 million tons that Coal India may have to import and the government has told them to sign the contract by March 31 of this year. So, there are some things going on that should be bullish or should be supportive of the European market. Coal burning in Europe and Germany is not down that much. Renewables have been out there pretty much but they are finding out that renewables are incredibly expensive. So, when you look at the clean dark spreads versus the clean spark spreads; coal versus gas. Coal has been pretty much in the money for the past – quite a while. But we may sell some. I don’t know much more by the time we get to the Q1 call.

Guidance

Shneur Gershuni – UBS: Just a housekeeping question first. I just wanted to clarify the contract book that you have presented in the guidance, that a combination of both your OpCo tonnage sold as well as the trading company or the trading –

Peter T. Socha – Chairman, President and CEO: The guidance on tons shipped includes everything.

Shneur Gershuni – UBS: Includes everything? Okay. But the costs are specific to the –

Peter T. Socha – Chairman, President and CEO: Costs are specific to operating costs.

Shneur Gershuni – UBS: I was wondering if you can go through your cost guidance a little bit. You had mentioned on the last quarter’s conference call that your operational costs were kind of in line, pre the L&K purchase and so forth, early last year. The change, a couple of dollars higher, is it related to specifically fixed cost absorption?

Peter T. Socha – Chairman, President and CEO: Oh yeah. Without a doubt.

Shneur Gershuni – UBS: Any other items out there at all or?

Peter T. Socha – Chairman, President and CEO: I think when you pick a high fixed cost operation like coal mining is, and you run at less than optimal capacity, you are just going to have higher fixed cost absorption. C.K., do you have any thoughts?

Coy K. Lane – SVP and COO: I agree with that, plus we are still seeing some regulatory issues coming down the path from it, Shneur. I think they will probably affect costs a little bit, and we are just scaling back on the amount of days worked and overtime I think probably has the biggest effect on it.

Shneur Gershuni – UBS: I have got a kind of a strategic big picture question. I assumed that there are a lot of operators in Central App right now with costs in excess of $75 a ton looking at a thermal market that’s looking like it may be challenged for the next several years. Are there any strategic opportunities where you could merge with a similar sized company or pickup some smaller companies where you could actually some real strategic benefits on the cost side, where you can help absorb fixed cost better and so forth, is that something that you’re thinking about?

Peter T. Socha – Chairman, President and CEO: I think the answer to the question is yes. There are opportunities like that. To be honest with you, right now we’ve got our heads down. We are focused on James River operations, James River people, James River customers. We get a lot of calls from a lot of areas, different bankers and principals, and we take all the calls and we listen. But right now I’m trying to run what we have and run it as well as we can. I think we’re doing okay. But until we get a little bit more visibility on what the market is going to be back half of ’12 and into ’13, I think that we’re doing the prudent thing by just focusing on the stuff that’s within our (bounds) right now.

Shneur Gershuni – UBS: Okay. A final question, if I may. Last year we saw – I guess we’ll call it a modern day record in terms of exports leaving the country. I know that last decade we saw higher, but basically we pretty much came close to using maximum capacity of the available ports that we’ve got out there or we’re going to find out what it is, but we’re pretty close. I know of have to assume that it’s starting to get competitive for space and so forth. Have you been having any issues securing the export market? You’ve talked about India and the API-2 as being a driver of something that you’re paying attention to which would signal that you want to export more. If you can sort of talk about the access that you have and where you can pick some to move more tons into the market?

Joe Czul – CEO, Logan & Kanawha Coal Company, LLC: Yeah, sure. I mean, the short answer is with exports falling off than capacity has opened up and we’re in some dialogue with that right now. We have some options available to us right now and we are working through what makes most sense for us.

Shneur Gershuni – UBS: So essentially, you feel that this space will be there to achieve what you’d like to achieve?

Peter T. Socha – Chairman, President and CEO: Yeah, we haven’t – I don’t think we’ve run into any capacity constraints on terminal or rail in anything we’ve been involved in. Obviously, we’re a small player. So, it’s not like Alpha or some of the other larger players. We are just a small player. We just pick and choose our other opportunities. On the met side, I don’t think it – has it ever been an issue Joe?

Joe Czul – CEO, Logan & Kanawha Coal Company, LLC: Well, the queues got pretty long at the peak last year on the met side, and those are backed way off. Vessel queues, waiting to load, and so that’s a form of capacity issue.

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