Filed by
Patriot Coal Corporation Pursuant to Rule 425
under the Securities Act of 1933 and deemed filed pursuant to Rule
14a-12 of the Securities Exchange Act of 1934
The following is the transcript of a
conference call held by Patriot Coal Corporation on April 3,2008.
Final
Transcript
Thomson StreetEvents
Conference Call
Transcript
PCX. - Patriot Coal Announces
Agreement to Acquire Magnum Coal Company
Event Date/Time: Apr. 03. 2008 /
11:00AM ET
1
CORPORATE
PARTICIPANTS
Janine
Orf
Patriot
Coal - Director, IR
Rick
Whiting
Patriot
Coal - President and CEO
Mark
Schroeder
Patriot
Coal - SVP and CFO
CONFERENCE CALL
PARTICIPANTS
Jeremy
Sussman
Natexis
Bleichroeder - Analyst
Luther
Lu
Friedman,
Billings, Ramsey Group - Analyst
Paul
Forward
Stifel
Nicolaus & Company - Analyst
Shneur
Gershuni
UBS
- Analyst
David
Khani
Friedman,
Billings, Ramsey Group - Analyst
Wayne
Cooperman
Cobalt
Capital - Analyst
Tariq
Yassussi
Rockbay
Capital - Analyst
Mark
Caruso
Millennium
Partners - Analyst
Michael
Goldenberg
Luminous
Management - Analyst
PRESENTATION
Operator
Ladies
and gentlemen, thank you for standing by and welcome to the Patriot Coal
investor conference call.
(OPERATOR
INSTRUCTIONS)
I'd like
to turn the conference now to Ms. Janine Orf. Please go ahead.
Janine
Orf - Patriot Coal - Director,
IR
Thank
you. Good morning and thank you for joining our conference call. I am Janine
Orf, Director of Investor Relations for Patriot Coal. With me are Rick Whiting,
President and CEO of Patriot, and Mark Schroeder, our Senior Vice President and
CFO.
On this
call, our comments will be limited to discussing our planned acquisition of
Magnum Coal Company. Comments regarding our 2008 first quarter will be addressed
during our first quarter earnings call the last week of April. As a reminder,
forward-looking statements should be considered, along with the risk factors
that we note at the end of our press release, as well as in our annual report on
Form 10-K for the year ended December 31, 2007.
2
Please
also note that we will file a proxy statement prospectus with the SEC in
connection with the transaction. We urge investors and stockholders to read it
when it becomes available, because it will contain important information about
the transaction. Before we begin our remarks, I will point out that we have
provided PowerPoint slides for you at our website, patriotcoal.com.
While we
will not be referring to these slides directly during our prepared remarks, you
may find them helpful in understanding the transaction and the combined
Patriot-Magnum entity. Now I'd like to turn the call over to Rick Whiting,
Patriot's Chief Executive Officer.
Rick Whiting -
Patriot Coal - President and CEO
Thank
you, Janine. Good morning, everyone. I'm glad you could join us for this very
important announcement. Yesterday, we announced that Patriot has signed an
agreement to acquire Magnum Coal, a leading coal producer in the Eastern United
States for approximately 11.9 million shares of our PCX stock.
The
purchase price is approximately $709 million, based on yesterday's closing price
of PCX common stock and including the assumption of approximately $150 million
of Magnum's debt. The acquisition is subject to approval by Patriot's
stockholders and certain regulatory agencies. In a few minutes, Mark will give
you the financial details and then we will take your questions, but first, let
me spend a few minutes here to explain why we are pleased and enthusiastic about
this transaction.
Magnum
represents an excellent strategic fit for Patriot, bringing together two
companies that share a significant business presence in the Eastern U.S., a
similar operating culture and a strong commitment to mine safety. We are very
familiar with Magnum, its operations and its management team. In the past, we
have exchanged coal reserves with Magnum, had contract mining relationships and
completed numerous commercial transactions.
We know
Paul Vining, Magnum's CEO, and several members of his senior management team
very well, all having worked together in the past at Peabody. Magnum is an
experienced, reputable coal producer with 1,700 employees and over 600 million
tons of proven and probable coal reserves, all in West Virginia in the valuable
Central Appalachian region.
In total,
Magnum operates 12 mines and seven preparation plants. In its underground mining
complexes, Magnum operates Panther, a large long-wall mine and several other
underground mines, utilizing continuous miner units.
Magnum
also operates surface mines at Hobet, Samples and Apogee, employing both
dragline and truck shovel technologies. With its West Virginia operations, many
of Magnum's properties are contiguous or near our Patriot
operations.
In fact,
Magnum's Panther mine is a prime example, as it is contiguous to our Kanawha
Eagle complex and related infrastructure on the Kanawha River. This acquisition
will allow us to better use our combined reserves and in some cases extend the
lives of certain existing mines.
In 2007,
Magnum's 16.1 million tons of coal production were sold as thermal coal. Magnum
is in the process, however, of increasing its production of high-volatile
metallurgical coal and Patriot is well positioned to market these products to
our long-established domestic and international customer base.
Given
additional sources and loading points, we will have numerous opportunities to
optimize current and future contracts. As an example, we have the ability to
ship via both the CSX and Norfolk Southern railroads from our Rocklick Complex.
With the addition of Magnum's production on the CSX, Rocklick thermal coal can
now be diverted to currently more attractive markets on the Norfolk
Southern.
As part of
Patriot's strategy, we have targeted a larger presence in surface mining to
further diversify our asset base. Magnum has significant expertise in surface
mining methods, with more than 60% of its current production from surfaced
mines. With this acquisition, this expertise can be applied to both Magnum and
Patriot reserve holdings.
With the
Magnum acquisition, we are not only acquiring physical assets, but also very
valuable talent, including experienced miners, seasoned supervisory personnel
and key management. We will also benefit from Magnum's wealth of engineering and
planning expertise in both surface and underground mining
techniques.
3
As I said
previously, Magnum is absolutely committed to the safety of its miners. Like
Patriot, Magnum's safety incidents rate is substantially better than industry
averages. As we looked at a possible combination with Magnum, this was very
important to us, to find a partner with the same core safety values and
principles. As we move forward with the new requirements under the Miner Act and
various other safety regulations, we will have the opportunity to identify and
implement the best practices across both of our companies.
As we
discussed on our earnings call in mid February, the fundamentals driving the
coal markets are the best we have seen in the past 30 years. The larger
production base of the combined company will give Patriot more opportunity to
participate in these robust markets. As of March 1, Magnum had a significant
portfolio of unpriced coal, with over 40% of expected 2009 and over 70% of
expected 2010 production unpriced. In today's strong pricing environment, these
unpriced positions provide meaningful upside.
Additionally,
since the beginning of the year, Magnum has secured significant quantities of
multi-year business in this very strong market. We believe Central App coal will
be increasingly valuable as the robust demand is expected to continue, while
supplies in this basin have declined in recent years. As a combined company, we
will be positioned as the second-largest coal producer in the CAPP region and at
least the seventh-largest producer in the nation.
We believe
this acquisition fits squarely with our strategy of growing through synergistic,
accretive acquisitions and is an important step in executing our strategy and
creating shareholder value. In fact, we expect this transaction to be accretive
in year one. We look forward to continuing constructive relationships with all
of our constituencies as we draw on the broader talent of our combined
companies.
As a
larger company with a strong sense of corporate responsibility, we intend to be
a good steward of the environment and a good neighbor in the communities where
we operate and we will work very hard to develop innovative solutions to
industry issues. As this merger unfolds in the coming months, we expect Patriot
to strengthen in virtually every respect, continuing to build a versatile
platform for long-term value creation.
Now I will
turn the call over to our Chief Financial Officer, Mark Schroeder, to discuss
the financial structure of the transaction and what we see as some of the
specific synergies and benefits of this acquisition. Mark?
Mark
Schroeder - Patriot Coal - SVP
and CFO
Thanks,
Rick. Like Rick, I am very pleased to be speaking with you today about this
acquisition. We believe it clearly enhances Patriot's footprint. Let me briefly
address the financial structure of the transaction.
Magnum
stockholders will receive approximately 11.9 million newly issued shares of PCX
common stock and Patriot will assume approximately $150 million of Magnum's debt
expected at closing. So at yesterday's closing price of $46.95 per share, the
acquisition price totals approximately $709 million.
We plan to
refinance the assumed debt as part of the transaction. We have arranged bridge
financing. However, we expect to have permanent financing in place by the
closing of the transaction. We will be working through the details of the
permanent financing between now and the closing.
Following
the closing of the transaction, ArcLight Capital will own approximately 16% of
Patriot's shares and Magnum's other stockholders will own a combined 15%
interest. Magnum's stockholders will be subject to certain lockup provisions
and, as a result of their ownership, Magnum's current owners will have the
ability to nominate an additional two members to Patriot's Board of
Directors.
We expect
the combined company will generate annual revenues well in excess of $2 billion,
with annual sales of 40 million tons to 45 million tons. Met coal, on a combined
basis, is expected to total between 20% and 25% of our production, or 8 million
to 11 million tons, with thermal coal at 75% to 80%.
The
combined production will provide Patriot a more balanced asset mix, with 70%
underground and 30% surface mining. As Rick previously mentioned, we expect this
transaction to be accretive to our EPS. We have computed an initial assessment
of the Magnum opening balance sheet for purchase price allocation purposes. The
increase in the coal markets over the last several months results in an opening
purchase accounting credit related to sales contract valuation.
4
This
balance sheet credit will be amortized into the income statement over the
remaining terms of the sales contracts. This amount, coupled with the estimated
synergies and the overall combination of Patriot and Magnum operations results
in a transaction we believe will be accretive to EPS in year one.
Synergies
were an important part in our valuation of Magnum. We see synergies in a number
of areas, including operating cost savings, enhanced brokerage and trading
operations, the ability to increase met coal production and sales and in the
administrative functions. But until our integration plans are more formalized
and communicated internally, it's not appropriate to disclose those
estimates.
I realize
that synergy numbers are interesting and important, but we will defer that
discussion to a future point in time. We believe that combining our engineering,
mining and commercial expertise will create an even stronger
company.
As Rick
mentioned, we see real benefits from combining our reserve bases, especially
where we have contiguous properties. We also believe we can achieve benefits as
we source the larger base of coal production against our respective coal supply
agreements, including the ability to sell a greater amount of Magnum's coal as a
metallurgical product.
As a
reminder, the transaction must be approved by Patriot's shareholders. SEC and
FTC approval will also be needed and the customary closing conditions will also
need to be satisfied. With all of that, we expect the transaction to close
around midyear.
So to wrap
up, we are very excited about the prospect of a combined Patriot-Magnum. This
acquisition demonstrates our execution on our growth strategy and we look
forward to closing the transaction and reaping the many benefits we believe a
combined company will bring.
So before
opening the call up for questions, I would request that questions pertain only
to the Magnum acquisition. We do not plan to discuss our 2008 first quarter at
this time. So at this time, I'd like to turn the call over to our operator,
John.
QUESTION AND
ANSWER
Operator
(OPERATOR
INSTRUCTIONS)
And first
on the line is Jeremy Sussman with Natexis Bleichroeder. Please go
ahead.
Jeremy
Sussman - Natexis Bleichroeder
- Analyst
Hi,
good morning and congratulations to all.
Rick
Whiting - Patriot Coal -
President and CEO
Thank
you.
Mark
Schroeder - Patriot Coal - SVP
and CFO
Thank
you.
Jeremy Sussman - Natexis
Bleichroeder - Analyst
Certainly
the market seems quite happy with this. I guess the first question I'll get into
pertains to margins. And I don't know if you can go here yet or not, but the
broad assumption, obviously Magnum's got mostly surface production and your
existing production is basically underground. So from a cost standpoint,
potential cost improvements could seem to exist, at least relating to Central
App, is that certainly a consideration going forward?
5
Mark
Schroeder - Patriot Coal - SVP
and CFO
Jeremy,
this is Mark. Magnum has very good cost structures. Both their surface and
underground mine. Rick mentioned the Panther mine. The combination of their
surface and underground with our largely underground does create some real
potential in an overall cost standpoint.
Jeremy Sussman -
Natexis Bleichroeder - Analyst
Okay.
And I guess as a little bit related, as I look at your mix going forward, will
you look to idle any high-cost production, either from your existing mines or
Magnum's for some margin improvement. Or am I reading into it correctly, that
based on the 40 million ton to 45 million ton a year estimate that you just
gave, probably it doesn't look like that's the case?
Rick Whiting -
Patriot Coal - President and CEO
We're
not going into it in this market environment with that expectation. Naturally,
if there are market downturns, just as if we were still standalone, we would
have to look at what makes sense, what cash flows and what makes reasonable
profits and margins. But certainly in this market environment we'd be thinking
the other direction to see where we have opportunities to gain synergies between
operating properties first hand. And then, after that, looking for opportunities
to grow strategically, preferably if we can get some multi-year business to
justify additional investment.
I don't
think you'll see us bringing much more on just to chase a spot market. I think
we have an opportunity now to lay in long-term value in terms of multi-year
contracts with high margin.
Jeremy Sussman - Natexis
Bleichroeder - Analyst
That
certainly makes sense. And did you say what the lockup period is going to be for
Magnum shareholders?
Mark Schroeder - Patriot
Coal - SVP and CFO
For
Magnum shareholders, no sales for six months and then it filters in over the
following six months. So by the end of a 12-month period they are free to
sell.
Jeremy Sussman -
Natexis Bleichroeder - Analyst
Okay,
great. And then, lastly, last question would be I think on slide five it says
that Magnum sold 16 million tons, but I thought I saw in the press release that
it said they sold 18 million tons. Am I missing something?
Rick Whiting - Patriot
Coal - President and CEO
This
is production. On page five is production. They had a very successful year in
'07 in trading and brokerage, which made up the difference. So I think that's
the difference between the two numbers. The sales was 18 million tons-plus. That
shows the benefit of that organization. They're well embedded in that traded
arena out there, particularly the Kanawha River market, and that's just one more
value we saw in their organization.
Jeremy Sussman -
Natexis Bleichroeder - Analyst
Fantastic.
Congratulations again. Thank you.
Mark Schroeder -
Patriot Coal - SVP and CFO
6
Thanks,
Jeremy.
Rick
Whiting - Patriot Coal -
President and CEO
Okay.
Operator
And
next to the line of Luther Lu with Friedman, Billings, Ramsey. Please go
ahead.
Luther Lu -
Friedman, Billings, Ramsey Group - Analyst
Hi,
Rick and Mark. Congrats on the transaction.
Rick Whiting -
Patriot Coal - President and CEO
Thank
you, sir.
Mark Schroeder - Patriot
Coal - SVP and CFO
Thank
you.
Luther Lu - Friedman,
Billings, Ramsey Group - Analyst
A
question related. We understand that Magnum has union operations and will
therefore come with legacy liability. Can you guys speak a little bit about on
that front?
Mark Schroeder - Patriot
Coal - SVP and CFO
Luther,
I will. This is Mark. They do have legacy liabilities, like Patriot has legacy
liabilities. We're very familiar with how to work with those, how to control
those costs. We are not afraid of legacy liabilities and yes, they do. I think
their number is in the $500 million range.
Luther Lu - Friedman,
Billings, Ramsey Group - Analyst
Okay.
All right. And next question is on page four, you guys gave the unpriced
production volumes in percentage terms. Is there any way that you can break it
down in tonnage?
Mark Schroeder -
Patriot Coal - SVP and CFO
Yes,
they have 40%. What we had indicated on page four is 40% of 2009 production
unpriced, ballpark number, use 18 million tons to 20 million tons as their
production in 2009.
Luther Lu -
Friedman, Billings, Ramsey Group - Analyst
Okay,
and what about 2010.
Mark
Schroeder - Patriot Coal - SVP
and CFO
7
Same
number. Maybe increase it slightly on the overall production but same
ballpark.
Luther Lu - Friedman,
Billings, Ramsey Group - Analyst
Okay,
and in terms of met coal, how much met coal is in that 18 million tons to 20
million tons.
Rick Whiting - Patriot
Coal - President and CEO
Well,
let's put it this way. They have not sold much met coal up until this year
because Panther was pretty well tied up on steam coal contracts. But as this met
market has unfolded and they've had the ability to shift some business around,
there's been an increasing amount of met business in this year and there's an
anticipation and a great ability to shift more in the future.
They have
Panther production, which is all met coal. It's Eagle seam coal, similar to our
Kanawha Eagle product. And they have a couple of other projects, one that's
already coming online and another one in the pipeline. So you put that all
together and they're going to have the ability to produce at least 2 million
tons to 3 million tons of high-grade, high-vol met coal, and that will be coming
into the mix, but that would be in the total in the 20 million ton-plus
range.
Luther Lu -
Friedman, Billings, Ramsey Group - Analyst
Right,
okay, so roughly --
Rick Whiting - Patriot
Coal - President and CEO
Excuse
me, Luther. That would largely be unsold, given the nature of the met business,
more on one and two-year contracts to this point. So with them coming in new
into that market, we'll have a lot of opportunity to lay those tons into new
business with existing and probably some new customers, both here in the U.S.
and overseas, because we have all those relationships that you're fully aware
of.
Luther Lu - Friedman,
Billings, Ramsey Group - Analyst
Yes.
And in terms of the -- Rick, you mentioned in terms of capacity expansion, you'd
like to see multi-year contracts, and how long will those multi-years
be?
Rick Whiting - Patriot
Coal - President and CEO
Well,
I think it's reasonable to at least have an amount of tonnage, a percentage of
the tonnage, and an amount that would get the payback of the project to ensure
that you get your initial payback on the project. So often that would be
somewhere probably between two and four years.
Luther Lu -
Friedman, Billings, Ramsey Group - Analyst
Okay.
And have the utilities been willing to commit this kind of length in the last
few months? Have you seen that?
Rick Whiting - Patriot
Coal - President and CEO
Yes,
we have seen it through the Patriot lenses, and I can also say probably in a
stronger way because they've had more uncommitted tons and are a stronger steam
coal player, thermal coal player, the Magnum team has definitely seen that,
particularly in the last two months to three months.
Luther Lu - Friedman,
Billings, Ramsey Group - Analyst
8
Okay,
great. Thank you very much.
Rick Whiting - Patriot
Coal - President and CEO
Okay,
take care.
Operator
And
next to the line of Paul Forward with Stifel Nicolaus. Please go
ahead.
Paul Forward - Stifel
Nicolaus & Company - Analyst
Good
morning and congratulations.
Rick Whiting - Patriot
Coal - President and CEO
Thank
you, greetings.
Mark Schroeder - Patriot
Coal - SVP and CFO
Thank
you, Paul. Good morning.
Paul Forward -
Stifel Nicolaus & Company - Analyst
A
few questions here. I guess, well, first of all, maybe on the surface mine
permitting issue, how much of Magnum's production do you think might be at risk
from -- just if Chambers is upheld?
Rick Whiting - Patriot
Coal - President and CEO
Well,
we've taken a very careful look at that and we believe that we're good for at
least the next two years to three years. Beyond that, it gets a little more
challenging, perhaps. We have factored any potential delays we think might be
part of the picture into our economics, so we've fully vetted that, thought
through it and made calculated estimates based on that.
Frankly, I
do not believe ultimately -- there probably will be some changes, but I think
I've said it before, ultimately I believe coal will be mined by similar methods.
There will probably be some changes to the techniques to get more aligned with
what the litigation is calling for, but that can be factored in, in fact, it has
been factored in.
I think a
worst-case scenario is an increasing cost structure, could be several dollars
per ton, still probably lower-cost production than underground mining, given the
seams that are being mined these days. And still in the context of it being a
level playing field for the whole industry. So if we have to do it differently
to mine these seams, then the costs will possibly go up, but it will go up for
all producers, perhaps at different phasing in, depending on when their permits
roll off and new ones come on.
But we've
thought a lot about that. Magnum has done an excellent job in their engineering
and permitting area to move forward, have long, advanced lead times, have
permits in the pipeline and we're as confident as we can be and what is one area
that brings some uncertainty to the industry in that market, in that region. But
we have always taken the high road. I think you can check our reputation back at
our predecessor company and a reputation for being environmental sensitive and
being straight up with the regulators and the environmentalists, for that
matter.
We intend
to have an open dialogue. We're going to come in and try to seek solutions on
these issues. And that's not to say anything that I think Magnum's done a
marvelous job of doing the same thing, but we're going to come in and top right
off on that, come in unbiased with a fresh look, a clean piece of paper, follow
the advice of the Magnum experts and just build on that with our reputation and
the depth and breadth of a larger company with more resources.
9
Paul Forward - Stifel
Nicolaus & Company - Analyst
Okay,
excellent, and just if I remember correctly, when Arch had sold the surface
mines to Magnum, there was some -- I think they had expressed some concern in
the long run that there would be some pretty decent-sized capital requirements
to extend the lives of those mines and essentially move surface production
underground.
Is that in
the -- when you look at the two year to five-year outlook for those big surface
mines, do you have a need to move production underground, and if so, what do you
think the capital requirements to do that might be?
Rick Whiting - Patriot
Coal - President and CEO
I
think it's going to be a combination. Certainly there are still a lot of
long-term solid surface reserves in the same areas as where the existing
operations are, in the same vicinity, that could feed through some of the same
infrastructure. And the longer-term plans are indeed as the current operations
roll off to bring new production on.
Often,
it'll be less capital than normal because some of the same equipment can be
utilized. It will just be moved across to a different area under a different
permit, perhaps a different legal structure. So we have that ability and that's
definitely in the plans.
One thing
I will say about the previous owners and even the current owners, they have been
more surface mine oriented. They're excellent at it and that's one of the
attractions here. However, they probably didn't spend as much time as we will
and as Magnum has already in looking at underground reserves. They have some
very good, thick seams in underground mining.
So we're
pretty excited about dialing up and doing more engineering and planning in that
area. So we'll be hedged to some degree. If we have difficulty on the surface
side, then we have the reserve base here, a much larger reserve base of
compliance coal and ultra-low-sulfur coal and met coal to go
underground.
We feel
like this package is the best of both worlds. The ability to mine for a long
time on the surface through existing, established infrastructure and also go
underground. And there will be capital associated with growth, but the good news
is we can hold the current levels of 20 million tons, 22 million tons without a
whole lot of capital beyond the next couple of years.
There's
some buildup in the next couple of years. As you know, Blue Creek, as probably
heard, Blue Creek is going to be coming on north of the Kanawha River. That's a
meaningful project and so there'll be some capital, but it's all within the
scope of our financial plan that we've laid out to consider this
acquisition.
Paul Forward - Stifel
Nicolaus & Company - Analyst
Okay,
great, and maybe just two more questions, if I could. One is Panther. Its
production's dropped, if I'm remembering, or I'm getting this information right,
about 4 million tons a year in 2004 or so, down to about 1.8 million tons,
according to your numbers here, for 2007. What can you do to turn that
around?
Rick Whiting -
Patriot Coal - President and CEO
Well,
I don't think we're going to have to do much, because I think Paul and his team
have already gotten it turned around. They changed out, went to more robust
equipment. They had gone to the wider faces and hadn't necessarily had the
engineering and the equipment aligned with the wider faces. They've now gone in
and beefed that up. They have done some extensive drilling and planning around
some thinner areas where there are some sandstone intrusions and they have laid
all that out in their plan.
I'm
pleased to report on their behalf that they've had an excellent first quarter.
They've been back to the more normal-type run rates that you've seen in --
before they experienced these difficulties over the last 18 months or so. So I
think Panther's more likely to be a 3 million ton mine than it is a 2 million
ton mine, like it was last year. And with some good results, they could be well
above 3 million tons.
10
Paul Forward - Stifel
Nicolaus & Company - Analyst
Okay,
great, and just lastly, has Magnum seen workforce turnover in response to these
really strong markets and maybe some poaching by competitors?
Rick Whiting - Patriot
Coal - President and CEO
I
think we all have. I think they've kept it at a very low level. I think there
have been a lot of people, because of the quality of their people and experience
of their people, they are targets. Even at the supervisory level, there has been
some. But I think net-net they've probably brought more in from the other side,
from other companies, than they've lost. I'm sure of that, in fact, and they
continue to upgrade their operating team.
In fact,
that's one more attraction we had to this deal. They have solid people coming
from similar backgrounds, going back to the Arch days, coming from the
entrepreneurial side with the client operations. They all are good coal-mining
people with a lot of depth and breadth in that, and that's very attractive to us
and I think we'll get some crossover synergy as a result of that. But to answer
your question directly, I would have to say they've probably lost a few, but
they've gained a lot more very good people.
Paul Forward - Stifel
Nicolaus & Company - Analyst
Okay,
sounds good. Thanks.
Rick Whiting - Patriot
Coal - President and CEO
Okay,
take care. Have a good weekend.
Operator
Our
next question is from the line of Shneur Gershuni with UBS Securities. Please go
ahead.
Shneur Gershuni -
UBS - Analyst
Hi,
good morning, guys.
Rick Whiting - Patriot
Coal - President and CEO
Good
morning.
Shneur Gershuni -
UBS - Analyst
I
just wanted to follow-up on the legacy liability question. I think you'd noticed
you expected it to be about $500 million or so. Do you happen to know offhand
what the annual service was for that, for the legacy liabilities, how much cash
you used to service that in the last year or so?
Mark Schroeder - Patriot
Coal - SVP and CFO
The
ballpark number is $50 million to $55 million in 2007. That's both the cash and
an expense basis.
Shneur Gershuni - UBS -
Analyst
Okay,
and one other question I had is just if you can sort of comment on what you
thought Magnum's EBITDA was for 2007?
11
Mark Schroeder -
Patriot Coal - SVP and CFO
I
guess I'll talk some about it. This transaction won't close until mid part of
'08, so we'll be well into '08 before we'll actually do the combination. And as
we've looked at EBITDA numbers and looked at the contracts that are out there
today versus the contracts that were there in 2007 and the cost structure, and
Rick mentioned Panther here just a few minutes ago.
If you
look at 2008 EBITDA and compare that to the comps that are out there for coal
producers trading publicly, we feel we have a very attractive acquisition here.
We feel the comps that are out there are in excess of what we are paying for
this acquisition. We like where the multiples come out in 2008 and we like even
more where the multiples come out in 2009.
Shneur Gershuni - UBS -
Analyst
Okay,
when you say that you're looking at it on an attractive basis, so you're saying
like an EBITDA per ton basis, if you look at some of the close comps in Central
Appalachia, you're saying that you believe that, on an '08 basis, margins are
probably in line or higher than their Central Appalachian.
Mark Schroeder - Patriot
Coal - SVP and CFO
I
guess just what I was referring to is just EBITDA in total just on the pricing
of shares that are out there on the public companies, the coal comps that are
out there. And I guess what I was trying to get across is if you look at those
comps and compare those to the acquisition price, I feel very good about where
Magnum's EBITDA looks for 2008, relative to those comps. In other words, we
certainly see an attractive acquisition here, lower than what the comps are
trading today, both on 2008 and '09, even more so on 2009.
Rick Whiting -
Patriot Coal - President and CEO
We're
probably saying somewhere in the neighborhood of at least a couple of terms less
than the industry comps on this acquisition.
Shneur Gershuni - UBS -
Analyst
Okay,
great. Thank you very much.
Rick Whiting - Patriot
Coal - President and CEO
Thank
you.
Operator
And
next to the line of David Khani with Friedman, Billings, Ramsey. Please go
ahead.
David Khani - Friedman,
Billings, Ramsey Group - Analyst
Yes,
hi. We're kind of double-teaming you here. Could you give us a sense of what
kind of return metrics you're looking at to make your judgment here when you
make these acquisitions? And what do you think the returns are going to be or
you're expecting to be on this transaction?
Mark Schroeder - Patriot
Coal - SVP and CFO
David,
this is Mark. When we do acquisitions, and although this is the first one we've
done within Patriot, as you know, we've had several members of our team, myself
included, who have done a lot of these acquisitions in the past. We certainly
look at EBITDA multiples as one of the factors and we look at the comps that are
out there.
12
But we
spend a heck of a lot more time on just the discounted cash flow calculation,
and that's where we have spent the bulk of our time here. We certainly like the
EBITDA multiples, but we like the DCF and it's a very attractive acquisition
price on a DCF basis, as well as a comps basis.
David Khani - Friedman,
Billings, Ramsey Group - Analyst
And
any venture to give us on the return you think you're going to generate off
this?
Mark Schroeder - Patriot
Coal - SVP and CFO
I
guess it's a little premature to come out with that, just in I think we'll talk
more about the guidance, talk more about where we think this is going as we get
closer to the closing. But you should feel very comfortable that this is an
attractive acquisition. We feel it's a highly accretive transaction in year
one.
David Khani - Friedman,
Billings, Ramsey Group - Analyst
The
last thing I noticed on Magnum was they did get a couple of permits recently for
surface operations. Is that right, or how many permits? Can you quantify a
little bit how many permits they have already in hand to allow the production to
continue on the surface operations?
Rick Whiting - Patriot
Coal - President and CEO
We've
been way down in that detail over the last couple of months and been there. I
don't have all that here today, David, in front of me. As far as I know, there's
nothing that has anything out in front of them that's a problem here in the next
couple of years.
David Khani - Friedman,
Billings, Ramsey Group - Analyst
Okay.
ick Whiting - Patriot
Coal - President and CEO
They
have a couple of things in the pipeline that are related to underground face-ups
and that, and they have multiple contingency plans for that, mitigation plans if
one particular permit of Blue Creek doesn't come through. They have a backup
plan that won't even hold them up, may cost a few more dollars to put the mine
in. But there are a couple of things like that, but they're very minor in the
greater scheme of things.
And they
also have -- in one particular case, at Hobet, they have an area that's standby
under permit, not the preferred place to go, but if for any reason they're
delayed any meaningful time on some of the next permits that come up, they have
a place to go to. So they've done a good job of backing themselves up, but I'm
not going to speak to the exact timing, because frankly, I don't have it here
with me right now, all those individual permits.
David Khani - Friedman,
Billings, Ramsey Group - Analyst
Okay,
well, great transaction.
Rick Whiting - Patriot
Coal - President and CEO
I
can tell you, we've thoroughly vetted all of that with the right people, the
experts that understand it and done as throughout a diligence I think on all
these points as any company has done in a while. We've had time to properly go
about it and intentionally taken our time to make sure everything's in order
because of all the sensitivity around these issues.
13
David Khani -
Friedman, Billings, Ramsey Group - Analyst
Yes,
thanks.
Rick Whiting -
Patriot Coal - President and CEO
Yes,
take care.
Operator
Our
next question is from Wayne Cooperman with Cobalt Capital. Please go
ahead.
Wayne Cooperman - Cobalt
Capital - Analyst
Hey,
guys, I think my questions are all about just trying to get some more details on
the Magnum positions as far as what they've sold at what price, and if you could
give us a little more insight onto their cost structure so we can try to cobble
together a good model going forward?
Mark Schroeder - Patriot
Coal - SVP and CFO
Yes,
I think -- Wayne, I think the best thing to do, we have to another call, another
reason to get back together later on down the road, so maybe we'll save that for
the next conversation.
I think
it's a little premature to give out too much of that info. As you know, we'll
file a proxy here probably in the next month or so and that will give some of
the historic information. And then, as we get closer to the closing of this
transaction, we'll give a little more information on how we see these two coming
together and a little more insight into the cost structure. But I guess I'd like
to defer on that one right now --
Wayne Cooperman - Cobalt
Capital - Analyst
How
about can you tell us what Magnum's contracted position is, and at what price,
and so forth?
Rick Whiting - Patriot
Coal - President and CEO
Not
at prices right now. I'll jump in on that one. I'd love to tell you, but
--
Wayne Cooperman - Cobalt
Capital - Analyst
I'd
love for you to tell me, so we'll be even.
Rick Whiting - Patriot
Coal - President and CEO
I'd
love to tell you, but I'll tell you what, price is a pretty sensitive area.
We're still competitors and I don't think it would be right for me to be talking
about that company's prices in a public space quite yet. We're going to have to
get a little closer until we know and actually have probably completed the
transaction. In fact, we've kept almost everyone away from that information
because we're out there every day.
What I can
tell you, I've seen enough and heard enough to know that, if you get out the
price curves and look at how the market has transpired, I can assure you that
those guys have caught the top of the market. They are very good at
this.
14
Paul and
Bob Bennett and the rest of the team are very good at timing the market and they
are out there picking their places and making their multi-year commitments in
this robust market. As far as specific numbers, I have intentionally not drilled
down on those very much, because technically we're still competitors. On the
--
Wayne Cooperman - Cobalt
Capital - Analyst
I'm
glad we don't have Don Blankenship selling coal for us.
Rick Whiting - Patriot
Coal - President and CEO
No
comment. On the cost side, all their cost profile, they've never had a problem
with costs on their surface mines. They've all been in a lower percentile.
They've done a very good job on that. They have been strapped, up until now with
some legacy contracts, large utility contracts.
When you
have a 3 million ton or 4 million ton-a-year contract, well below the market at
basically at cost levels or slightly above it, it's tough to look good. But when
we look at their operating profile and their costs and their productivities and
their yardages on their drag lines and their truck shovel, they're excellent.
They're as good as it gets on that.
Now on the
underground, they got banged around pretty bad with Panther for about a year,
year and a half. They've sorted all that out and now they're back year-to-date,
they're running almost 60 feet a day with a long wall. You back into that, it's
some of the most competitive cost structure underground mining in the country.
So they've got a lot going for them, but specifics, we just think it's a little
premature to be able to get into that while they're still operating as a
separate, independent company.
Wayne Cooperman -
Cobalt Capital - Analyst
Yes,
thanks a lot.
Rick Whiting - Patriot
Coal - President and CEO
When
the time comes, we'll be totally transparent. That's the way we operate. As the
NASCAR guys say, that's the way we roll.
Operator
Our
next question is from the line of [Tariq Yassussi] with Rockbay Capital. Please
go ahead.
Tariq Yassussi - Rockbay
Capital - Analyst
Hi,
guys.
Rick Whiting - Patriot
Coal - President and CEO
Hi,
Tariq.
Tariq Yassussi - Rockbay
Capital - Analyst
Congratulations
on a nice deal.
Rick Whiting - Patriot
Coal - President and CEO
Thank
you.
15
Tariq Yassussi -
Rockbay Capital - Analyst
When
I look at your internal growth targets for met coal and then I look at the
Panther mine, the 2 million tons to 3 million tons, so when we look out to 2010,
should we assume about 10 million tons to 11 million tons of met coal output on
the combined company?
Rick Whiting - Patriot
Coal - President and CEO
I
think that's a comfortable number, yes. We may have said a little bit different
than that in our news release, but that's the right range.
Tariq Yassussi - Rockbay
Capital - Analyst
Got
it. And this is -- what quality met coal is this again? I'm sorry.
Rick Whiting -
Patriot Coal - President and CEO
This
is all high vol, basically something between [32 and 35] vol, for the most part,
maybe as high as [36], generally high fluidity, 20,000 DDPM-type low ash, seven,
eight ash, world-class, typical blend going to almost every European
mill.
This is
the kind of stuff that the Brazilian mills love, good domestic base. They've
done a lot of business with the domestic steel companies, or we have. And this
is just the same product as we have at Kanawha Eagle, where we've done that same
kind of business. So Panther and Kanawha Eagle are look-alike on
quality.
Tariq Yassussi - Rockbay
Capital - Analyst
All
right, got it. And then the second question I had was, previously you guys had
articulated a strategy to consolidate and the idea was effectively spreading
fixed costs over more tons. So when I look at the combined company doing over 40
million tons, and I assume that you bring those costs down potentially a dollar
or two, we're talking about $40 million, $80 million of potential in cost
savings. Is that a fair way of looking at it?
Mark Schroeder - Patriot
Coal - SVP and CFO
Tariq,
this is Mark. We've looked at synergy from a number of different areas, and
certainly the cost side is one of them and the sourcing of contracts is another
and there are a number of different areas.
We're not
ready yet to talk about what our estimates are for synergies, so I guess I'll
beg off of talking about a $40 million or an $80 million number that you threw
out, but I will say that we think there's a lot of different areas where there's
synergy dollars that could come to this transaction. That the Magnum operations
being very close to ours give us a lot of operational synergies and then, as
you've mentioned, the larger you are as a company, the more your fixed costs can
be spread over those bigger quantities.
So you're
exactly right, there are some real dollars out there. I'll beg off of commenting
specifically on the $40 million to $80 million, but I will say that when it's
appropriate for us to talk about the synergies, we will, and we think you'll
feel pretty good about them.
Rick Whiting -
Patriot Coal - President and CEO
I'll
just come back and say your concepts are not that far fetched or
unreasonable.
Tariq Yassussi - Rockbay
Capital - Analyst
Excellent.
Thank you very much, guys.
16
Mark Schroeder -
Patriot Coal - SVP and CFO
Thank
you.
Operator
And
we'll go to the line of Mark Caruso with Millennium Partners. Please go
ahead.
Mark Caruso -
Millennium Partners - Analyst
Good
morning, guys. Just a few clarification questions. One was did I hear right, the
lockup is about six months?
Mark Schroeder - Patriot
Coal - SVP and CFO
The
lockup will be 100% lockup for the first six months, so no selling there, and
then it filters in -- a certain percentage can be filtered in over the next six
months, so that the lockup is gone after 12 months.
Mark Caruso -
Millennium Partners - Analyst
Got
you, okay. And then as far as circling back on the contracting comments that you
guys made, so some of the existing legacy contracts were underwater, is that
what you're saying? So they have a --
Rick Whiting - Patriot
Coal - President and CEO
Some
of those have already rolled off. That's the good news. A lot of them are kind
of rolling off here as we go through this.
Mark Caruso - Millennium
Partners - Analyst
Okay.
Rick Whiting - Patriot
Coal - President and CEO
They
probably have a couple more, but it becomes -- it gets more diluted. Every six
months it goes by, it gets diluted. So they're in pretty good shape if more and
more tons open up. We said, with 70% uncommitted by '10, it really opens
up.
Mark Caruso - Millennium
Partners - Analyst
So
as we look out to '08 and '09, or I should say probably more like '09, '10, a
lot of this stuff there is probably similar to what other producers did in the
['40s], is that a safe assumption?
Rick Whiting - Patriot
Coal - President and CEO
They
probably still have some stuff in there that they caught away more in more of
the five handle, I would think, on some of it. There are probably some '40s. Of
the old stuff you're talking about?
Mark Caruso - Millennium
Partners - Analyst
17
Yes,
of the old legacy stuff.
Rick
Whiting That old legacy stuff is probably ['40s and '50s].
Mark Caruso - Millennium
Partners - Analyst
Okay,
got you. And then as far as costs go, as of the last time they went out to the
market, costs were in the -- I'd say low to mid $40 million. Can you kind of
give us a sense on how much that changed? It sounds like they had some issues at
Panther. I'm just trying to gauge how much that would have changed year over
year.
And then
if we should think about what you guys talked about in terms of inflation on a
go-forward basis, the point earlier about trying to make an accurate model on
the cost side. And then it said they were like, I want to say $42 million, $43
million as of last March. And we, obviously being a private company, haven't
heard much since then. I'm just trying to get a sense of how much that's changed
and how much issues at Panther would have affected that.
ick Whiting - Patriot
Coal - President and CEO
Well
if you normalize Panther and take it out and put it in a normal fashion, they're
probably in line with inflation. They haven't had any bad things happen across
the board. It's been pretty well just normal -- I guess you'd have to throw in
some of the Miner Act costs, throw that in on the underground side, which is a
lesser part of their equation.
But
naturally, they saw some pain last year with Panther that would have altered
their averages. But if you pull that out, they still are going to be -- have a
very good profile relative to the industry and something derived from those
numbers that they were showing when they were out in the public space, plus
inflation, probably is reasonable range.
Mark Caruso - Millennium
Partners - Analyst
Okay,
perfect. And then the other question I had was as far as on a go-forward basis
for contracting, it's still too early as far as -- you guys aren't -- obviously,
you're still a separate company. You're not jointly marketing or having, I
guess, broader power --
Rick Whiting -
Patriot Coal - President and CEO
Absolutely.
We won't even let our sales guys talk to each other. Anything that's been looked
at has been at the senior level or specialist level. We just can't do that. And
we won't until we're actually fully married.
Mark Caruso - Millennium
Partners - Analyst
Got
you. Great. Thanks so much.
Rick Whiting - Patriot
Coal - President and CEO
Okay,
thank you.
Operator
(OPERATOR
INSTRUCTIONS)
And we'll
go to the line of Michael Goldenberg with Luminous Management. Please go
ahead.
Michael Goldenberg -
Luminous Management - Analyst
18
Good
morning.
Rick Whiting - Patriot
Coal - President and CEO
Good
morning, Michael.
Michael Goldenberg -
Luminous Management - Analyst
Congratulations
on a great deal.
Rick Whiting - Patriot
Coal - President and CEO
Thank
you.
Michael Goldenberg -
Luminous Management - Analyst
So I
had a couple of questions. Of the contracts that are still in place, the 40% in
'09 and -- I'm sorry, the reverse, 60% on 30%, are any of them still with Arch,
the old contracts, and how long are they in place for?
Rick Whiting -
Patriot Coal - President and CEO
Technically,
I think they have at least one situation where the contract -- naturally, Arch
doesn't burn coal. It goes ultimately to a utility --
Michael Goldenberg -
Luminous Management - Analyst
Right.
Rick Whiting -
Patriot Coal - President and CEO
--
but it was -- still goes through Arch or it has some relationship, much in the
same fashion as Patriot has a couple contracts that for the next few years will
still go through Peabody.
There were
a couple of arrangements like that where assignment was not chosen to be the
path or feasible, and they are in probably just basically in a pass-through
mode. I don't know the exact particulars of it. But there is still some presence
of Arch, I believe, in at least one significant coal supply agreement, perhaps
two.
Michael Goldenberg - Luminous Management -
Analyst
How
many tons is that?
Rick Whiting - Patriot
Coal - President and CEO
I
don't have that detail. I'd say it's probably 2 million tons or
less.
Michael Goldenberg - Luminous Management -
Analyst
Okay.
19
Rick Whiting - Patriot
Coal - President and CEO
Maybe
3 million tons, on the high side, but I'll say it's 2 million tons, give or
take, just from memory a few weeks back.
Michael Goldenberg -
Luminous Management - Analyst
Got
you, and another thing, I heard you mention proxy and closing, what are the
approvals that you need to get for this deal to close from which regulatory
bodies and shareholders or anything?
Mark Schroeder - Patriot
Coal - SVP and CFO
The
two major ones are the FTC, and we plan on filing with the FTC in the next two
weeks to three weeks. Secondly, with the SEC, just going through and talking
about this transaction, filing a proxy, having our shareholders vote on the
transaction. So those are the two major regulatory.
That does
mean that our shareholders vote on the issuance of these additional shares and
then we would have just the normal customary things that you do at the end prior
to closing. So the two main bodies are FTC and SEC and then, naturally, our
shareholders.
Michael Goldenberg -
Luminous Management - Analyst
But
not Magnum's because there's one dominant shareholder of Magnum?
Mark Schroeder -
Patriot Coal - SVP and CFO
Magnum
shareholder approval has already occurred.
Michael Goldenberg -
Luminous Management - Analyst
Okay,
and finally, one more question just on your balance sheet and overall corporate
-- capital structure. You still remain one of the least levered companies in the
space. First, I'm a little surprised that you're not using this time to, I
guess, issue more debt. What are your overall thoughts on your capital structure
and level of debt in terms of EBITDA, debt to equity, anything.
Mark Schroeder - Patriot
Coal - SVP and CFO
Yes,
we have a debt covenant out there of 2.75X. We certainly plan on living within
that. At the Patriot level, on a standalone company, we have very minimal debt
today, less than $10 million, or in the $10 million range at the end of 2007.
The addition of the Magnum $150 million of debt will add to that capital
structure, but not in a real meaningful way. We're still well under a
2.75X.
We've used
this transaction to increase the debt level some, but we'll look at it as we
continue to go forward and look at other acquisition opportunities that are out
there and continue to evaluate whether it makes sense to use our stock as
currency or the debt market as currency.
Michael Goldenberg - Luminous Management -
Analyst
And
I guess, since you brought it up, other acquisition opportunities, do you see
anything in the space of similar size that could be open to discussions or are
all other opportunities significantly smaller?
Rick Whiting -
Patriot Coal - President and CEO
I
think the first order of business will be to get this one tucked in and get our
feet on the ground and properly integrated and make that a priority for the
coming months and through the second half and catch our breath a bit. I think
you'll probably see us do some smaller bolt-on things,
20
maybe
some JVs or other things along the trail of a coalmine or a project here and
there as the year goes along and we have some of those in the
pipeline.
But after
we catch our breath and make sure everything's running well, there will be other
possibilities out there. There are perhaps not -- this reserve base, this over
$600 million ton reserve base, is pretty exceptional and also they have the
operations already up and running, as opposed to a work in progress that's going
to come on later. It's pretty unique and this is a good one. I don't know if
we'll find another one like that, but there are other -- there will be other
candidates and there will be other opportunities and I'd say, probably within a
year or so, we'll be back on the trail for a significant one.
Michael Goldenberg -
Luminous Management - Analyst
Got
it. Thank you. Congrats.
Rick Whiting - Patriot
Coal - President and CEO
Thank
you. Appreciate your support.
Operator
And
to the presenters, no further questions in queue.
Janine Orf - Patriot
Coal - Director, IR
All
right, we're glad you could join us today for your exciting announcement. We
look forward to closing the transaction and reporting on our progress and growth
in future calls. Thanks for joining us.
ick Whiting -
Patriot Coal - President and CEO
Thanks,
everyone.
Operator
Ladies
and gentlemen, this conference is available for replay. It'll be starting either
later this afternoon or tomorrow morning. It will be following the filing of the
transcript with the FTC.
(OPERATOR
INSTRUCTIONS)
That does
conclude your conference for today. Thank you for your participation. You may
now disconnect.
21
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solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of such jurisdiction.
The Company, Magnum and certain of
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from the stockholders of the Company in connection with the proposed
issuance. Information about the Company’s directors and executive
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