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Westmoreland Coal hopes to pay down debt with cash from new San Juan mine

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Westmoreland Coal hopes to pay down debt with cash from new San Juan mine

WestmorelandCoal Co. executives hope that the recently acquired San Juan minein New Mexico will bolster the company's earnings after positive initialperformance.

"I can't say enough about the first two months in SanJuan, and that's continued here through April," said Jason Veenstra,Westmoreland's CFO and treasurer on an earnings call May 10.

He said that included in Westmoreland's $63 million ofadjusted EBITDA for the first quarter of 2016 was $7.7 million from the mine injust two months.

Westmoreland completedthe purchase in February and executives say they are off to a great startintegrating San Juan. "We are delivering coal that has a much morepredictable and narrower BTU variance than San Juan has historically produced.The team has done a great job on this, and as a direct result, enabled ourcustomer to run more efficiently and cost-effectively," said company CEOKevin Paprzycki. Westmoreland laidoff an unconfirmed number of workers in March after their purchase.

Veenstra reiterated the company's guidance of generatingbetween $60 million and $80 million in free cash flow in 2016 while Paprzyckisaid Westmoreland would likely use that cash flow for delevering.

"We see this as every dollar of cash flow we generategoes back into paying down the debt. And we'll approach it from purely amathematical standpoint. Whichever piece of debt provides the best opportunityin the maximum deleveraging benefit, that's what we'll tackle," the CEOsaid.

FBR analyst Lucas Pipes said that the results in the company'squarterly earnings were "a beat against buyside expectations," whichwere more conservative due to soft winter weather and low natural gas prices. "Welook forward to the company's expectation over the year against the currentguidance," Pipes wrote in a release.

Veenstra also touted the company's advantage in the way itcovers reclamation at mine sites. "With respect to our bonding, we arefully cash collateralized and do not sell bond. Over time, we have routineincreases or decreases in our level of cash collateral as we move in and out ofdifferent mining areas. Many other coal companies are now facing the pain oftransitioning away from self-bonding, while this is something we do not have toworry about."

Alpha NaturalResources Inc. is facinglitigation about their reclamation obligations while is still ways to satisfy theirbonding requirements.

Westmoreland reported a $47.9 million tax noncash taxbenefit in their first quarter earnings this year, which Veenstra said was aresult of the company evaluating existing tax assets. The tax helped thecompany go from what would have been a net loss of $17.8 million to a netincome rise of $30.1 million. "We still expect not to pay cash taxes forat least five years as we carry forward all of our tax benefits," Veenstrasaid.

Paprzycki said that record warm weather over the firstquarter of 2016 meant low coal deliveries, adding that demand should improve inthe future when the climate reverts to normal. "While we cannot controlthe weather, I can say with some degree of confidence that over time, demandwill respond favorably as the weather reverts to the mean," Paprzyckisaid.

"As we run Westmoreland leaner in response to currentmarket conditions, we better position ourselves to benefit from a recovery indemand."