Walter Energy Management Discusses Q2 2012 Results - Earnings Call Transcript

Walter Energy (WLT)

Q2 2012 Earnings Call

August 02, 2012 9:00 am ET

Executives

Paul Blalock - Vice President of Investor Relations

Walter J. Scheller - Chief Executive Officer, Member of The Board of Directors, Member of Executive Committee, President of Jim Walter Resources and Chief Operating Officer of Jim Walter Resources

William G. Harvey - Chief Financial Officer and Senior Vice President

Daniel Paul Cartwright - President of Canadian Operations

Michael T. Madden - Chief Commercial Officer and Senior Vice President

Richard Allen Donnelly - President of Jim Walter Resources

Analysts

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Brian D. Gamble - Simmons & Company International, Research Division

Garrett S. Nelson - BB&T Capital Markets, Research Division

Ralph Wayne Atwell - Global Hunter Securities, LLC, Research Division

Curtis Woodworth - Nomura Securities Co. Ltd., Research Division

Andre Benjamin - Goldman Sachs Group Inc., Research Division

Timna Tanners - BofA Merrill Lynch, Research Division

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

Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division

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

Sam Dubinsky - Wells Fargo Securities, LLC, Research Division

David E. Beard - Iberia Capital Partners, Research Division

Presentation

Operator

Good morning, and welcome to Walter Energy's Second Quarter 2012 Earnings Call. [Operator Instructions] I would now like to turn the meeting over to Mr. Paul Blalock, Vice President of Investor Relations. Sir, please begin.

Paul Blalock

Thank you, Merilee. Good morning, all, and thank you for joining us today. This call is being webcast live over the Internet and a recording will be available and archived on our website for at least 30 days. On this call, we may refer to forward-looking statements made in yesterday's press release, and we may make those and other forward-looking statements during this call. For more information regarding the risks associated with forward-looking statements, please refer to the company's SEC filings. Joining me today, on today's call are Walter Energy's CEO, Walt Scheller; and CFO Bill Harvey, as well as other members of the management team, who will be available for Q&A. Now I'd like to had it over to Walt.

Walter J. Scheller

Thanks, Paul. Good morning, everyone, and thank you for joining us. I'd like to begin today with a brief report on safety which always comes first at Walter Energy. U.S. operations reduced the total recordable injury rate by 34% in the second quarter, and our Canadian operation's recordable injury rate was reduced by 26% compared with the year ago. Across the entire Walter community, we strive to ensure a safety culture for our employees and the communities in which we operate.

Turning now to our results. Second quarter met production of 2.91 million metric tons was within 50,000 tons of first quarter's 2.96 million metric tons record production. This represents a 17% increase from the 2.49 million tons produced in the second quarter of 2011. This strong production puts Walter on solid footing to accomplish our 2012 met coal production target of 11.5 million to 13 million metric tons.

Second quarter met coal sales of 2.84 million metric tons increased 20% over first quarter 2012. Mike Madden and his team has been globally marketing our suite of met coal products creating new opportunities and meeting our customers' needs even in a difficult macro environment.

It is also noteworthy to recognize that the strong production was accomplished for 2 mines having less than normal production during the quarter. First, Mine No. 4, was off-line for the majority of the second quarter. The extended longwall move was successfully accomplished just as the scheduled miner's vacation began. For the year, Mine No. 4 is on plan to meet its production target of about 2 million metric tons. Second, the Brule Mine in Northeast British Columbia currently operated by an on-site contractor had higher mining waste removal in the second quarter which negatively impacted its productivity and cost. As you know, Walter is focused on reducing cost. In the second quarter, the consolidated cash cost of hard coking coal decreased slightly to $115 per metric ton. In the U.S., Underground cash cost totaled $107 per metric ton from $110 in the first quarter. For perspective, cost were $119 per metric ton in the fourth quarter last year. Clearly, our Underground operations are making progress for reaching our cost coal of $100 per ton by the year end. And I should remind everyone, that Walter's Underground operations represent the majority of our production and cash flow.

Switching to Canada, met production increased to 1.19 million metric tons from 994,000 last year. Hard coking coal cash cost decreased very slightly in the second quarter to $144 per ton versus $145 per ton in the first quarter. However, PCI cost were impacted by the higher mining waste removal at Brule due to the mining cycle and cash cost for PCI increased to $218 per metric ton from $208 in the first quarter. At the Willow Creek project, you may recall that our first quarter production was limited due to the wash plant outage and cash cost were $449 per metric ton on 120,000 tons. I'm pleased to report that in the second quarter, Willow Creek's production increased to 154,000 tons and cash cost declined to $259 per metric ton.

We also expect further increases in Willow Creek productivity to continue to reduce cost. More importantly, Willow Creek started mining hard coking coal and we now have an inventory approximately 65,000 tons that are low-vol Mine No. 7 type quality, which makes this coal one of the best in the world. I should also mention that we have recently contracted to sell some of the low-vol coal from Willow Creek at benchmark pricing. The biggest issue in Canada, however, is a contractor-operated cost structure of the Brule Mine. So we have accelerated our plans to move Brule to an owner-operated mine. We believe the combination of making Brule on owner-operated mine plus increasing productivity will over time significantly decrease cost. I would caution that while we've made the decision to move to an owner-operated mine, we have a great deal of work to accomplish over the coming months, including the retention of people who are critical to our success.

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