Ramaco Resources Inc (METC) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ramaco Resources Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to hand the floor over to Michael Windisch, Chief Accounting Officer. Please go ahead, sir.

Thank you, Karen. On behalf of Ramaco Resources, I would like to welcome all of you to our second quarter earnings call. With me this morning is Randy Atkins, our Executive Chairman; Mike Bauersachs, our President and CEO; and Marc Solochek, our Chief Financial Officer.

Before we start, I would like to share our normal cautionary statement regarding forward-looking statements. Certain statements discussed in today's call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent Ramaco's expectations or beliefs concerning future events, and it is possible that the results discussed will not be achieved. These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of Ramaco's control, which could cause actual results to differ materially from the results discussed in the forward-looking statement. Any forward-looking statement speaks only as of the date on which it is made, and except as required by law, Ramaco does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. New factors emerge from time to time, and it is not possible for Ramaco to predict all such factors. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statement found in the company's filings with the Securities and Exchange Commission, including our annual report on Form 10-K and our Form 10-Q. The risk factors and other factors noted in the company's SEC filings could cause actual results to differ materially from those contained in any forward-looking statement. With that said, I would like to introduce Randy Atkins, our Executive Chairman.

Thanks, Mike. Again, on behalf of all of us at Ramaco Resources, I want to thank everyone for joining us here today. We're now basically 6 months beyond our IPO. Every month, we continue to transition from being a development company and into a fully functioning coal production and marketing operation. We've achieved a number of milestones this quarter, which we will talk about today, and we are on the cusp of several more.

First, I'd like to address several marketing highlights and a few metrics. We have approximately 280,000 uncommitted tons placed for the balance of '17. As we stated in our press release, we expect our total production for '17 to be approximately 720,000 tons, but we will also be selling about 120,000 additional tons this year of primarily high-quality, low-vol tons purchased from third parties. These tons are primarily for export. Through June, sales from both our own production as well as purchased tons was approximately 184,000 tons. These were sold at an average sale price of about $111 per ton, which works out to an FOB mine price of $91. Of this $184,000 (sic) [184,000 ton] figure, roughly 75,000 tons was purchased coal. That purchased coal sold at an average of $163 per ton or $145 FOB mine. As I said, we hope to sell at least 50,000 additional purchased tons in the second half. We also have about 338,000 tons of additional committed tons for the balance of the year at a gross average sale price of $90 per ton or slightly less than $70 FOB mine. About half of these tons were sold at an artificially low price in connection with our washing arrangement with competitor, which goes away at year-end, which we have discussed previously.

Domestically, from a marketing perspective, we have been invited to participate in all of the 2018 RFQs. In the past weeks, we've either visited or had serious dialogue with every major North American steel and coke producer. We are similarly active overseas. We believe that looking forward to 2018, although we will be placing substantial tons in North American markets, the majority of our tons will be sold as export. Presently, we are in the middle of sales negotiation, so we're not going to comment on any directional pricing expectations, but we would note somewhat anecdotally that at least internationally, there has been some firming in prices over the past few weeks. The tea leaves from China seem to indicate that their steel business remains very healthy. China also seems to be continuing to close some older induction furnaces. If these were replaced with blast furnaces, this would potentially create some additional met coal demand. Domestically, our steel sector also continues to show strength. So generally, we are very encouraged with the state of the overall market. Also, very importantly, as we ramp up production, we continue to feel that Ramaco will be one of the lowest-cost producers in the United States. Mike will comment in a few moments on some of our operating detail, but I want to note just a few milestones. As we previously announced, we received the final mine permit for our Berwind complex this quarter. We are now in the premining phase with development production slated to commence in November. Our Elk Creek prep plant is now projected to be operational in late September. And as I mentioned, due to the delay in both receipt of the Berwind permit and completion of the Elk Creek plant, our '17 production estimates are now approximately 720,000 tons. But also as stated, we hope to additionally sell a total of 120,000 tons of mostly high-quality, low-vol coal purchased in calendar '17, most of this will, again, go to the export market. We think that this arrangement bodes well for the future growth of our trading business in 2018. Our mining cost estimates at Elk Creek are still expected to be in line with previous guidance of roughly in the low-$50 per ton average, once our mines are fully operational. And as we have stated before, we do not expect Ramaco to report meaningful financial results until we are in both full production as well as full marketing mode in 2018. Marc Solochek, our CFO, will follow Mike with some remarks on our first quarter financial results. But again, I just wanted to give a few highlights. We continue to maintain a very strong liquidity position and had roughly $53 million in cash and short-term securities at the end of June. Our CapEx estimates for the balance of the year show us spending about another $29 million. In sum, we believe you're going to find that in the second half of 2017, you will find Ramaco completing the transition from development to a full operating mode.

Now at this time, I'd like to turn it over to my partner, Mike Bauersachs, to provide some operating detail.

Thank you, Randy. We definitely have some very positive developments, milestones and updates to discuss during this call. The geologic conditions that we are encountering and the productivities we are experiencing are very exciting. Once the Elk Creek preparation plant is online, coupled with unleashing our mines for coal production, we anticipate that we will meet and hopefully exceed our expected results. With the above being said, let me preface everything for the second quarter and for the third quarter, for that matter, by reminding everyone that we are indeed in development mode. In many cases, we have purposefully limited staffing and delayed equipment deployment to align our production with stockpile space, coal sales and the ultimate startup of our Elk Creek preparation plant. Although we are in development mode, that does not mean that we are not experiencing an increasing number of employee hours. Our current number of employees is 113. We anticipate that headcount to rise to 187 employees by the end of the third quarter and 213 by year's end. Our nonfatal days lost rate continues to be 0. We believe that says a lot about our operational execution to date to not have incurred a lost time accident, while initiating production alongside interaction with our sizable infrastructure build-out. One of the key positions that we've hired in the second quarter is a Vice President of Administration, Legal and Environmental. Our addition of Dan Zaluski will allow us to address more administrative and legal tasks internally, rather than through consultants.

Let me provide an update on our operations. One major change that we made during the second quarter was to switch our Alma Mine from a contracting mining operation to a company mine. In some respects, this mine is still in transition for a couple more weeks. There are a number of things that impacted this decision, but perhaps the most critical was the fact that we wanted to address some adverse mining condition related issues more quickly. Once in control of this section, we have gone to great lengths to address areas where problems existed. These efforts and the ongoing transition have negatively impacted our productivity and costs for this mine during the second quarter. Some of these impacts were mitigated by encountering thicker coal seams than initially expected. We believe that the measures we have taken will create a safer work environment and send a strong positive signal to federal and state officials relative to our commitment to safety. This is a mine that, unlike the normal life cycle for mines in Central Appalachia, should operate for 20 years. It is important to establish a firm foundation from which to operate. An additional consideration in converting to a company mine was the fact that we wanted to alter the operation's mining techniques and install a super section, which the contractor was not required to do. This is a necessary and planned enhancement, as the mining section migrates to an area where conditions are anticipated to be a good fit for this technique as well as coinciding with the startup of our preparation plant. Once our transition and capital enhancements are implemented, we believe that this mine will become one of the most productive, low-cost metallurgical mines in Central Appalachia.

Speaking of productivity, we have been pleased by the development mining productivity that we are experiencing at the new Eagle deep mine. The feet of advance have exceeded our plans and expectations, routinely coming in at over 300 feet per shift for the last couple of weeks. This combined with the favorable mining conditions we are currently experiencing point to a mine that will likely match or improve upon the planned Alma Mine cost structure. During the next week or so, we will have a fully staffed Eagle Mine with all of the equipment necessary to operate as a super section. During the third quarter, this mine is expected to intersect the area where the Eagle seam and #2 gas seam will be mined together. We expect the total mineable height to regularly be in the 12-foot range once that occurs.

Looking prospectively, I thought that it would be a good idea to highlight the startup of our surface mine at Elk Creek. First of all, I'd like to welcome Toby Edwards, our new Vice President of Surface Mining, to our team. Toby brings decades of experience in the type of mining that we will be conducting. We completed the access road to our surface mine in mid-July. Our first hourly surface position was filled on July 19. We expect sporadic production to begin from the surface mine during the week of August 28. We project about 17,000 clean tons to be produced in September, and our Highwall Miner is scheduled to begin production in October. We remain confident that everything will be in place for our surface mine to run as projected in 2018 as well as contribute just shy of 150,000 tons during 2017. While we still plan to start up our Elk Creek plant in the third quarter, it now looks like the startup will be towards the end of September. The primary delay relates to the completion of the thickener, which is, in essence, a pool formed out of concrete. The time that it has taken to stabilize the foundation for the thickener is the key cause for delay. Let me emphasize that there are no issues with components or time-sensitive steel fabrication. I will also note that we have mitigated the impact by permitting a series of on-site raw coal stockpiles to help us manage inventories, especially during the next few months. Fortunately, stockpile permit work was completed long ago, in case we experience some sort of delay. It is likely that we will have more than 150,000 raw tons in a series of stockpiles when the plant is commissioned. We project being enabled to decrease our stockpiles to a more normalized level by the end of the fourth quarter. On a related topic, all of our rail work that will serve the plant has been completed, and our general contractor has demobilized all of its equipment. CSX has approved the work, and we look forward to shipping our first train from the 150-car unit train loadout early in the fourth quarter.

Moving to our Berwind development, as we recently announced, we received our mining permit at the end of June. We broke ground on the new phase up immediately after the 4th of July holiday. All of the major capital equipment for this mine has been procured, and we anticipate being development production mode in November. This mine will have an extended development time frame as we migrate from the seam where our phase-up is located up to the more prolific Pocahontas #4 seam. As we have done with our Elk Creek build-out, we have placed picture updates on our website, so you can view our progress during the next few months.

Our active deep mine sections company-wide produced approximately 74,000 clean tons during the second quarter. Our temporary second section in the Alma Mine became active in May. We currently have 3 active sections, although none were fully staffed or fully capitalized from an equipment standpoint during the second quarter. We now anticipate production of 195,000 tons in the third quarter and 395,000 tons in the fourth quarter. This points to anticipated total 2017 production of 720,000 tons, down from our prior guidance.

We have not entered into new coal sales arrangements for our Elk Creek coal. We have approximately 338,000 remaining committed tons for 2017 at an average FOB mine price of slightly less than $70 per ton. We expect to produce and sell an additional 280,000 tons prior to the end of the year. We shipped our first train in June under a contract entered into earlier in the year. Due to rail and vessel issues, we did not ship an additional train until August 1. We anticipate an additional shipment before month's end. We continue to sell tons to a nearby producer who also washes and ships tons for us to our customers. Obviously, we look forward to eliminating the added cost of trucking raw coal long distances as well as third-party washing costs.

As we think about the current marketplace, we believe that our uncommitted tons available in the fourth quarter could be well timed to be placed into an improved marketplace. We remain optimistic that the remaining uncommitted tons can be placed into the market at a margin that is significantly greater than our base load tons.

At this point, our outlook for third-party purchased coal for all of 2017 is 120,000 tons. We shipped 39,637 purchased tons in the second quarter. Currently, most of this revenue is generated from high-quality, low-volatile coal that we are purchasing for resale to third parties. These tons are all being washed and shipped out of our Knox Creek wash plant. All of the coal generated from our near-term Berwind development production estimated at 14,000 tons during 2017 is expected to be washed and shipped out of Knox Creek. Let me also note that we terminated our coal washing arrangement early in the third quarter. And alongside washing lower volumes of purchased coal, we are also able to make improvements to the plant.

Like other metallurgical coal producers, we have and will be focusing on 2018 solicitations. We find that we are encountering a receptive audience among our potential customers. We are in the midst of bidding for 2018 business. In support of our efforts, it has been helpful to provide property visits to numerous customers, so they can become more comfortable with our ability to perform. As those investors and analysts who visited Elk Creek during the second quarter can attest, visually seeing deployment of capital and the developments in process as well as exposure to our operational advantages is a powerful tool. Let me also add that our domestic customers appear to be gaining strength from better pricing and demand. The latest earnings releases from both domestic and international steel producers have been very positive. Our guidance relative to capital expenditures is expected to be between $65 million and $70 million in 2017. The significant spending range relates to whether we were able to move some development work forward from 2018 into 2017. The slight increase in capital also relates to the purchase of equipment and other assets from our contract miner as well as some timely equipment purchases at a substantial discount to market.

One of the most common questions that I receive from investors and analysts relates to whether the Trump administration is making a difference. The Trump administration's Section 232 action assumed that some sort of action that's ultimately taken will likely strengthen the domestic marketplace for steel producers. We are of the mind, taking into account what could be some adverse international reactions, that almost all of the possible actions being reviewed will have an overall positive impact on U.S. metallurgical coal demand. Additionally, I believe that most of you have seen the recent press release from the Department of the Interior relative to the crayfish issue that caused a significant delay in the issuance of our Berwind permit as well as some important permits at Elk Creek. Indeed, I can confirm that the Department of Interior officials worked with us to reach a mutually acceptable resolution of the issue with the U.S. Fish and Wildlife. The new EPA Director's decision to repeal the Waters of the United States initiative, which we believe was regulatory overreach, is also likely to have a substantial positive impact on mining in Central Appalachia. From a forward-looking standpoint, we are hopeful that the new head of MSHA will have the same pragmatic approach that we have witnessed from the new administration's environmental regulatory approach for reaching an appropriate balance, allowing mining activities to proceed, while maintaining strong legal and regulatory standards. Hopefully, this will also result in MSHA taking a fresh look at their efficiency and rule-making. Most importantly, this new official will inherit a slow-moving bureaucracy that needs to act more quickly. We believe that mining operations can be conducted safely and efficiently, while loosening some regulatory constraints that hamper productivity and that inordinately increase costs. In summary, it does appear that the Trump administration is beginning to make a positive difference for the coal sector.

I would also like to mention that we are diligently working to provide a more timely quarterly release and corresponding conference call. We are implementing a new accounting system in the third quarter that should be fully operational in the fourth quarter. This will speed up our financial close and allow for more efficient communication with our shareholders. Ideally, we want to be one of the first to report earnings.

In summary, Ramaco is close to unleashing the full impact of its capital deployment and hiring efforts. To date, we have not been in a position to allow our minds to run at the planned potential. The majority of these barriers will be removed prior to the fourth quarter. More importantly, our vision for 2018 becomes clearer by the day, and we anticipate having all the key building blocks in place by year's end. Thank you for your interest in Ramaco Resources, and I will now ask Marc Solochek to provide some comments relative to our second quarter financial results.

Thank you, Mike. In as much as we had no active operations in the first half of 2016, I will not bore you with quarter-to-quarter comparisons. Rather, I will hit some of the financial highlights of the second quarter of 2017. But before I do, I encourage you to read our 10-Q and our 2016 10-K to get more detail about and insights into Ramaco Resources.

Now to the highlights. And most of these, as would be expected, relate to the highlights that Mike has just talked about in operations. As noted, we completed some unanticipated developments in the Alma Mine that enabled the startup of the second section in that mine. We did this to increase Alma production and to avoid some geological issues. We capitalized 370,000 -- $378,000 of costs of this extension as development expense. It's already starting to pay dividends as Alma production increased significantly in June over prior months. Also, we extended our development through thinner seams at the Eagle Mine towards the point where the Eagle and the #2 gas seams merge. This area forms the economically advantage reserve that we are focusing on exploiting. We spent over $1 million in the second quarter developing the inner workings of the Eagle Mine. After accounting for Eagle inventory buildup and some sales revenue, we capitalized about $600,000 of additional development expense for the Eagle Mine. In the second quarter, we had total capital expenditures of $26 million. We invested a little over $7 million in a preparation plant, leaving about $5 million to complete it. We also spent $4.6 million to purchase the Alma mining equipment and infrastructure equipment from our contractor. And we spent $900,000, not a whole lot of money, to finish the Elk Creek rail line, which is now ready to operate.

Our balance sheet remains strong with excellent liquidity. We had approximately $53 million in cash and investments at June 30, which we believe will be more than enough to complete our planned production ramp-up and capital buildup, while meeting operating cash needs this year. Ramaco Resources did report a loss of $3.5 million or $0.09 per share for the quarter ended June 30. This compares with a net loss of $600,000 or $0.03 per share last year. During the second quarter, we sold 91,050 tons at an average realization of $109 per ton. Our cost of mine coal was approximately $74 per ton in the second quarter. That's $9 or 11% improvement over the first quarter. We believe this cost improvement will continue with the addition of fully staffed super sections at both the Eagle and Alma Mines. With the Eagle Mine rapidly moving to the dual seams that Mike spoke about earlier, we remain confident that our mines will have one of the lowest-cost structures in the metallurgical coal industry with our projection of costs in the $50 plus range. It's important to note that although the cost was $74 a ton, almost $18 of that is transportation cost, which will be avoided when the prep -- when -- which -- most of which will be avoided when the Elk Creek prep plant is up and operational. Our SG&A in the quarter was $2.2 million, which was up from $1.7 million in the first quarter on a normalized basis. This reflects the continuing growth of our organization as our business grows. We still expect that our normalized annual SG&A will run at about $12 million per year when we are fully staffed.

Other operating costs, which represent non-mine-specific engineering and other general development type operating expenses, ran $1.4 million in the second quarter. We would expect these costs to drop as our mine development on all our properties proceeds to operational mines. Those are the financial highlights for the quarter. And with that, I'll turn the call back over to Randy.

Thank you, Marc. So this completes our formal remarks for the quarter. And at this time, I would like to open the field to questions from the analyst or investor community that are out there.

(Operator Instructions) Our first question comes from the line of Jeremy Sussman with Clarksons.

Congratulations on getting the Berwind permit. I wanted to focus on that for a second. Sounds like that mine is going to begin producing in Q4, which obviously brings some high-quality tonnage to the market. How should we think about the, kind of, ramp profile, both volume and costs of Berwind?

Yes, sure. So volume, as I, kind of, referenced, will start out, kind of, slowly in the Pocahontas #3 seam actually versus Pocahontas #4 seam. And we'll be in a development mode in that mine where we'll actually be driving what is more like a tunnel mine, Jeremy, to the point where we ramp up to the more prolific #4 seam. So during that period of time, we will probably see slightly elevated costs coming from that mine because some of the work will be rehabilitation work. That being said, we'll generate a substantial -- well, a reasonable number of tons during that time period to offset our cost structure, which will be very high-quality, low-sulfur, low-volatile coal. We like the thought of blending that coal with some of our purchased coal, creating, kind of, similar revenues to some of the things that we've experienced on the purchased coal side. So what you will see is, instead of a coal mine that will run at -- or a section, for example, that would run at 200,000 or 300,000 tons a year, we'll be mining more at 125,000 ton a year rate as we begin to ramp up to what will ultimately be a coal mine that will mine more like 800,000 or 900,000 tons a year after we reached the Pocahontas #4 seam. So still we believe healthy margins. We will indeed have trucking costs that will impact those margins, but we expect the -- ultimately the recoveries in this coal mine to be superior to any that we have which will help lower the trucking costs. So...

That's very helpful. And maybe, if I could follow up, more conceptually, I noted that you've been invited to the table for all of the domestic steel mill negotiations and understanding that you have to be sensitive on pricing, I guess, can you just give us a sense of maybe how those discussions are going, particularly given that, obviously, Ramaco is a new entrant to the market?

Yes, I think it is important to qualify everything, in that we are a new entrant. We have -- we've done as many things as we possibly can to get -- to make sure our potential customers are comfortable with our ability to perform, both quality wise and production wise. That entails sending barrel samples and all of those sort of things to these customers and making sure that they know that we can perform. I think we've done a very good job with that. We are -- we're just pleased to have Joe Czul representing our coal into that marketplace, and each of these requests for proposal that we've been reviewing, have bid on and will bid on, and I think the reception has been very good.

Jeremy, this is Randy. I'll add one other remark, which is how quickly we forget but less than 1 year or 1.5 years ago, a lot of these suppliers were in some level of distress. And I think our customers remember that and have basically accepted us perhaps a little more willingly than they might in a stronger market. So we're very encouraged on that.

And our next question comes from the line of David Gagliano with BMO Capital Markets.

One thing I just would like to suggest before I clarify some of this is, if possible, as you go through the review on the earnings release process, if you could include tables and information like this in the earnings release, it would be extremely helpful on our side. I just want to make sure I got my numbers right. So it sounds like full year 720,000 of production plus 120,000 of purchased. I believe that's what was said, so 840,000 in total. And then, in the first half, it was 184,000, which implies 656,000 in the second half of total production plus purchased. Is that correct?

It is. And I think one thing to remember, David, of course, is that we weren't really going to ramp production until we had Elk Creek -- the Elk Creek prep plant online. So that's going to be a September occurrence for us. So that's when we really start to push tons out.

There's lots of things contributing to that, David. And some of it even relates to better recoveries from the Elk Creek plant kicking in versus as you can imagine, sometimes, these recoveries that you have from third-party washing agreements don't necessarily meet with what you think the recoveries should be in. And the surface mine will make a big impact too in the third and fourth quarters, primarily in the fourth quarter as the Highwall Miner comes online.

Okay. That's helpful. Okay. So then 656,000, of which, I believe 50,000 is purchased. Is that right? I'm backing into that numbers.

For the second half.

50,000, second half, okay. So run rate, exit rate for second half is 1.2 million tons annualized. Obviously, that -- it seems like heavily loaded to the fourth quarter. So it's probably a higher exit rate in the fourth quarter versus that 1.2 million. So one of my questions is, does Ramaco feel like they're still on pace for roughly 2.8 million tons of production in 2018, given we've got the Alma ramp, the first surface line starting in the fourth quarter, I believe, when we are down there, there's a second service mine that's likely to be developed in 2018? What -- I guess, the short question is, what's the outlook for 2018 production at this point?

Yes, I think the range that we would give you would be between 2.2 million and 2.8 million tons at this point. The real question becomes will we go ahead and put a second surface mine in? We haven't answered that question yet. Some of that relates to being able to effectively segregate and market those coals in the way that we think they should be marketed. In particular, there'll be some very low-ash, high-quality coals there. We'll hit a tipping point here in the next quarter or so when we'll make that decision. We feel very confident about the 2.2 million tons or so for sure. That will include also bringing on a #2 gas seam deep mine that will add to the production profile at Elk Creek, which we expect to be a very good coal mine. That face-up, by the way, is actually in process. We've gone ahead and moved up that face-up to make sure that we can react to market changes, if indeed they come quicker. That was originally a 2018 budgeted item. So I would give you that wide range there, Dave. I wish I could tell you exactly what we were going to do with the surface mine, but it is -- we are still a bit up in the air on that.

Okay. Now that's helpful. And then the 2.2 to 2.8, I believe is that 400,000 tons, is that surface mine -- second surface mine? So 2.2 would be 2.6, if the second surface mine came on. Is that correct?

Yes, roughly. I mean, it could have a slightly bigger impact, but roughly 400,000 or 500,000 tons.

Okay. That's helpful. And then just last question for me. The commentary said production cost at the mine $74 a ton in the second quarter. And then I believe what was said was $18 per ton of that is -- are costs that effectively go away when the prep plant is operational. Are there any offsetting increases? Or is it simply $74 minus $18 moving forward?

Yes. I mean, we will have a small amount of trucking on-site that will be fairly minor as compared with the on-road trucking, lot of bigger trucks with better cycle times, will have better recoveries. All of those things, I think, contribute to providing a guide from where we are today to where we will be. The other thing, of course, that I alluded to that's contributed to the cost really has been some bad costs that we've experienced, really dealing with some over and under mining issues in the Alma Mine. We, by the way, expect those to totally go away in the next couple of weeks as we migrate to another -- to an area in the mine that will actually be in for 6, 7, 8 years that has no over or under mining issues. So that will also provide better productivities. We also believe that fully staffing and fully capitalizing these coal mines will lead to much greater productivities, which, of course, will help our cost structure. I'll also, of course, reference that we will have preparation plant costs, our own costs that will, of course, go the other way on cost, but we obviously have to wash the coal. So...

Okay. That's helpful.

We still believe in the 50s, Dave, all in when everything is fully operational. The only other negative will be is that, that we will be trucking refuse to the impoundment during the fourth quarter until our beltline is fully in place, which will mean really, as I, kind of, referenced, everything in place in 2018, just some slight additional costs until we get that beltline in place.

And our next question comes from the line of Curt Woodworth with Crédit Suisse.

Mike, could you comment on the sort of the production ramps at Berwind? Do you have an estimate for how much volume you think you'll do in 2018?

Yes. And again, this development in that coal mine will be extended. I mean, it's -- it is a plus/minus 16-month, kind of, development, more or less, than a shorter-term development. We still anticipate plus/minus 125,000, 150,000 tons next year coming out of that coal mine. Some of the production time that will be in there will be in rehabilitation efforts to some works as we continue to migrate towards that point where we ramp up. What will happen though almost immediately as we hit that Pocahontas #4 seam is the thickness will double, the productivities will get much better. And as we hit 2019, you'll begin to see the full effect of all that, adding an additional section in there and being, in essence, coals twice as big. So we do think it's very high-quality coal. We got about 0.65 sulfur and stuff. So we hope to offset a lot of the development costs by being able to sell that coal at a very good number. So...

Okay. And then, just given the strength of the market and the fact that your Highwall surface mining operations are extremely cost competitive, I guess, what -- why would you not look to sort of accelerate development of the second Highwall and surface mine in this type of market?

Yes, there are a number of things we think about. I alluded to some of it earlier. Some of it is, do we feel like we can do that job justice from being able to segregate some of the very high quality coals? Do we feel like we can properly blend some of those coals on the clean and raw side of the plant? I'll also say that those tons are precious, being permitted and having basically a 20-year mine plan for 1 mine. And it's just, kind of, a difficult decision. We will also have capital that we'll have to deploy. And we're just not quite at the point where we're ready to do that. The marketplace will have something to do with it. How things go with the first surface mine will have things that will impact our decision. And there are just so many different things right now, I just -- I can just tell you we've not made that final decision.

Okay. Understood. And then, just with respect to the domestic met coal contracting cycle, the steel companies seem be out early to try to put to bed 2018. Can you just comment on where you stand in the qualification process with the mills? Do you feel like you're fully qualified with most of them? Are they still doing testing? And what's your sense of timing on when you think the domestic steel contracts will be completed? And do you feel like you're still in a pretty good position with respect to the qualification process?

Yes. Good -- excellent question. You're absolutely right. We've been surprised by how early everyone has come out. We believe that we are qualified with the number of the guys that have come out early. We actually have a couple of people visiting the property here in the next couple of weeks, which will be important for us. Obviously, having a good flavor for the development work and the fact that it'll absolutely be done on time for 2018 business is powerful when we are dealing with our customers, but to see it firsthand is important. That being said, we are in the process of continuing to send out samples to customers as we work our way through the process. We feel like we'll have everything in place by the time they make decisions. The way things have been going, I think you will see decisions made in the third quarter for virtually everyone domestically. They've all, kind of, jumped out there early. But we've had a very good reception. A lot of the coals that we're shipping are similar to the guys around us. So they're familiar with the coals too, and they've been very receptive to adding us through the whole process. That being said, I think, our expectation is that while we'll have a substantial amount of domestic business, that majority will still be export business.

And Curt, I think this year probably based on the experience a lot of the domestic steel companies had, who waited until the latter part of the year and probably wish they bought a little bit earlier in '16. So we see a little bit of that going on.

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to management for any closing remarks.

We appreciate everybody being online today, and we look forward to chat with you again in 3 months.

Thank you. Ladies and gentleman, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.