Final Transcript	

	

Conference Call Transcript

KFX - KFX Investor Update

Event Date/Time: Jan. 12. 2006 / 4:15PM ET

CORPORATE PARTICIPANTS
 Andy Vietor
 KFx - Director of IR
 Mark Sexton
 KFx - CEO
 Ted Venners
 KFx - Chairman and CTO

CONFERENCE CALL PARTICIPANTS
 Frank Bracken
 Jefferies & Co. - Analyst
 Bill Burns
 Johnson Rice & Company - Analyst
 Michael Horwitz
 Pacific Growth Equities - Analyst
 Bill Miller
 Hartwell Advisors - Analyst
 Philip Dodge
 Stanford Financial Group - Analyst

 PRESENTATION

Operator 

 Good afternoon, ladies and gentlemen. My name is Jeannie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the KFx investor update conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

It is now with great pleasure to turn the floor over to your host, Mr. Andy Vietor, Director of Investor Relations. Sir, you may begin your conference.

 Andy Vietor  - KFx - Director of IR 

 Good afternoon, everyone. This is Andy Vietor. Thank you for joining us today on another of our series of conference calls designed to provide our shareholders and analysts with an update as to the Company's progress in achieving full-scale commercial operations in our Gillette, Wyoming facility. A copy of our press release, which was issued on December 30, is available at the investor info section on our website at www.kfx.com.

With me on the call today is Mark Sexton, Chief Executive Officer. Also on the call are Ted Venners, Chairman and Chief Technology Officer, and Kevin Collins, Executive Vice President-Finance and Strategy. Mark and Ted have some brief comments they will make, after which we will take your questions.

Before getting underway, I would like to remind everyone that statements made on this call that relate to future plans or projected result of KFx or the Company are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended by the Private Securities Litigation Reform Act of 1995, and Section 21E of the Securities Exchange Act of 1934, as amended, and all such statements fall under the Safe Harbor provisions of the Private Securities Litigation Reform Act.

The Company's actual results may vary materially from those described in any forward-looking statement due to, among other possible reasons, the realization of any one or more of the risk factors described in the Company's Annual Report on Form 10-K or in any of its other filings with the Securities and Exchange Commission, all of which filings listeners are encouraged to study. KFx cautions all of you not to put undue reliance on forward-looking statements.

Also, two other reminders. First, due to management schedules, we will cap this call at approximately a half-hour. Second, I want to remind everyone that the conference call today is open to the investment community and media, with the media invited to participate in a listen-only mode. We also remind them members of the media that they are not authorized to quote, either directly or in substance, any participant in the call who is not a representative of KFx.

With that, I would like to turn the call over to KFx's CEO, Mark Sexton.

 Mark Sexton  - KFx - CEO 

 Thank you, Andy. Wow, that is a lot of stuff. I hope everybody got all that due diligence. Thanks.

By the way, everyone, Andy is advancing in an expanded role to our business development group. We are very excited to have him and his analytical skills available for us in that role and that capacity. And Andy is going to be working closely with Kevin Collins and the finance and strategy teams as we scale up operations. We will be putting a new IR contact in place shortly. Until then, please feel free to call Andy with your questions.

Today's call is to report the results of the initial tests at the KFx plant in Gillette, also to update you on our corporate developments and our future direction.

The Wyoming 750,000 ton per year plant produced product just about one year to the date from when the foundations were poured, and the initial results were in line with, if not slightly better than, our expectations. The initial operations were to determine how the hardware worked and get initial feedback on how the product handled and transported.

Ted Venners, our CTO, will talk in more detail about the operations, the test results, how well the hardware and process worked and our schedule going forward.

The Company is moving forward on acquiring an inventory of future sites, looking beyond the PRB into lignite and other subbituminous reserves around the country. Working on major strategic partnerships to meet our vertical integration goals is also a priority.

With that, I turn the call over to Ted Venners to discuss the Gillette plant, technical information and the positive results of our initial K-Fuel production. Go ahead, Ted.

 Ted Venners  - KFx - Chairman and CTO 

 Thanks, Mark. Well, after all these years, the day before Christmas, or Hanukkah, in some cases, was very exciting. The people I must first congratulate -- everybody that worked through some tremendously difficult weather situations for two weeks prior to that. We were looking at minus 21 degree weather, wind chills, and some of you that are on the call came up and saw the conditions we were working in -- and 40 mile an hour winds and problems.

So I first of all congratulate all the guys from Sasol-Lurgi, all of the different companies that were there -- TIC. There was a tremendous effort that was headed up by Dennis Coolidge and his team and Rick Van Zyl and Andy Clark and Frank Gentle and I can't even name them all. But they did a fantastic job under those conditions.

And the main purpose for doing the runs initially was to make sure that the mechanical portions all worked properly, testing the processor for temperature and pressure, the boiler conditions -- making sure the boilers operated at specifications. And we ended up in the first run actually not making full specification. So it took a little bit of time, a few days, to get up to the design pressure and temperature, at which time the product was consistent with what we expected as K-Fuel specification.

So we were very excited that we took what was probably some of the lowest-quality coal in the Powder River Basin, less than 8000 BTU, and got up to approximately 11,000 BTU and consistently showed a removal of roughly 70% of the mercury. And that was without even yet working on the optimization of any of these removals, like of mercury or any of the other pollutants.

So the main purpose for having operated the plant at that point was to verify that the product was stable and that it was less dusty than any of the previous technologies that were available and better than standard PRB coal. And I am happy to say that this milestone, which is something that everybody says can't be done, was done and is very stable. And we had no dust.

The commercial scale production was also consistent with our bench scale operation. So this clearly deals with the expectations of scale-up. And we get a lot of questions about that. And this I think is very significant -- that we can do at this full commercial scale the kind of product quality that we experience in the smaller-scale facilities.

We also demonstrated very clearly that we could reduce the equilibrium moisture. And this is critical to the issues of reabsorption and spontaneous combustion. Without resetting that equilibrium moisture, you do have the tendency to reabsorb moisture and become very unstable in the finished product.

So the initial results really showed us that we had less fine material that was in our waste stream, which is very significant from a standpoint of ease of cleaning up our back-end least products. The second part was quite interesting -- was that we can process finer material. This helps us, again, on the economics of things of being able to use the finer fractions of the coal and optimizing more of the feedstock that we have.

Also, the reduction of the equilibrium moisture was a major item. And we found out that we had very minimal particle breakup. And this is very important from the standpoint of future breakup of the coal or dusting, and as far as the handling of the coal is concerned.

So what did we learn from all of this? I can say that we learned that we can make the specification product on a commercial scale that is stable and less dusty than PRB. And I believe this is a tremendous milestone for the Company.

And now, we move forward to the test results and the next phase. And at this stage so far, Black Hills received roughly three trucks, and they are watching the stability and the handling, which -- they observed no issues. And the results are all very good to date. It is now planned for us to send them roughly 10 to 12,000 tons in the next several weeks for continuous burn. And we are making arrangements for complete monitoring for emissions and boiler performance.

So the structure, how we have it here, is that the first stage is to make sure you can make the product, meet the specification. It does not spontaneously combust. It does not reabsorb. It is less dusty than the feedstock coal. And now, people are comfortable that we can transport this stuff. We can make it. And now, we go into the burn phase, which we will have independent third parties, together with the utility, monitoring the stacks for sulfur, for NOx, for mercury, for efficiency, for capacity and so forth.

Then we also sent a couple of trucks to an industrial user that was very pleased with it. And they said that based upon the good heat results that they got that they want more product to give us further extended burn so that they can really do more monitoring. But they liked what they saw and they want more.

We also made several large bulk tests at the site. So if any if you come up, you can see, you can kick it, you can see it, you can touch it. And you will see that we have very good product, very stable product, and that the dust is not an issue. And these are the main things that we tried to accomplish at this phase.

So the good news is that we have a very high-quality, stable product. One thing that came up yesterday, which I think you will see more and more of this kind of stuff happening -- and I have always contended that people will always want premium fuel. And that is evidenced, obviously, in this market when you see the higher prices for the higher BTU versus the lower BTU.

But once we've processed this coal, we have been finding out that there are many things we never anticipated that add value. And we just got a report of a combustion test results from the University of West Virginia (sic) in which the carbon dioxide emissions were measured at laboratory of K-Fuel coal as compared with four different Eastern compliance utility coals.

The preliminary results, and this was enough for us to ask them to do broader studies and so forth, show that K-Fuel, burned in similar conditions and on similar heat value basis, that the K-Fuel coal showed as much as 10 to 12% less CO2 emissions than comparable Eastern compliance coals.

This, gentlemen, is huge. I had that suspicion. We felt that it was going to be that way. And now, this is good enough results for us to really want to go in and dig into this further. But these are the kinds of things I think you'll be seeing in the future.

So, Mark?

 Mark Sexton  - KFx - CEO 

 We are going to go ahead and open the call up for questions. And Andy Vietor will monitor the amount of time we have left and let us -- and tell us when we have time for one last caller. Let's go ahead and open it up and take questions, Jeannie.

 QUESTION AND ANSWER

Operator 

 (OPERATOR INSTRUCTIONS). Frank Bracken, Jefferies & Co.

 Frank Bracken  - Jefferies & Co. - Analyst 

 Congratulations. I've got three things I'd like to ask you. First, can you give us all a sense of timing on this Black Hills burn? When will they begin to burn the product? When will that process end? And how long does it take to actually aggregate any of that test results?

Secondly, I was hoping you could update us on your product silo and give us a handle on how that is proceeding and when we might expect a unit train to be filled?

And then lastly, when do you suppose you might hold another one of these calls to update us on that sort of thing?

 Mark Sexton  - KFx - CEO 

 I will start off, Frank. Ted is going to go ahead and answer the questions that he can. I probably was remiss; the purpose of this call was to update everyone with the initial test runs at the plant, and obviously we are very pleased with the results.

The next steps are to produce enough product to perform the Black Hills energy test burn and to complete our 14,400 ton product silo that you were referring to this quarter in order to meet the railroad unit train loading requirement.

Obviously, we are enthusiastic about commencing loading and shipping unit trains with K-Fuel product this spring. But I think at our last regularly scheduled conference call, we said at the next regularly scheduled quarterly conference call in early March we will update everyone further on test results, Company economics, production projections.

I don't want to think we're dodging any questions. We are just not -- we are gearing up to answer all of those questions at the next regular conference call. But we wanted to let everyone know what we knew about the early test results because we thought they were obviously significant.

But Ted is going to try to answer what he can. Go ahead, Ted.

 Ted Venners  - KFx - Chairman and CTO 

 Frank, on Black Hills, right now we are actually -- the plant going back online this coming week will be producing product, and we need to get about 10 to 12,000 tons over to Black Hills. There is a procedure of filing for permits to burn new fuels. They are in the process of doing that. I would say right now, basically we're looking at the end of January, the first of February.

When they do that, we have ordered special equipment in addition to what Black Hills has to monitor some of the additional emissions that we want to get good numbers on. And so some of this right now is a little bit dependent on the vendors, on getting us the stack emission control equipment. But I think we are on schedule for that timeframe that we're saying, end of January/February, but certainly before the next quarterly call.

 Frank Bracken  - Jefferies & Co. - Analyst 

 Does that mean you're going to start the burn or end the burn the end of January?

 Ted Venners  - KFx - Chairman and CTO 

 Probably start. Probably start. But it depends a little bit on their process and also what their scheduling is from their side. We don't have it down to the hour yet, Frank. But it is still within that timeframe of getting it done this Q.

The silo -- there has been some labor issues and problems. But we're still looking at loading trains in the March/April timeframe -- making it in this Q.

 Mark Sexton  - KFx - CEO 

 Well, we are going to try. We told everyone we'd have unit trains in the spring. And hopefully, that's early spring rather than late spring. And we'll know a lot more in early March. We'll have our next conference call either the last week of February or probably the first week of March.

Operator 

 Bill Burns, Johnson Rice.

 Bill Burns  - Johnson Rice & Company - Analyst 

 Quick question on the processor -- from reading the report you all put out at the end of December, it looked like you all were just running one processor. And I was wondering if you all had turned the other one on?

 Ted Venners  - KFx - Chairman and CTO 

 Bill, this is Ted. We really didn't have enough -- if we have both of the processors on, we don't have enough trucks in Wyoming and South Dakota.

 Bill Burns  - Johnson Rice & Company - Analyst 

 You volunteered to use your pickup, if I recall.

 Ted Venners  - KFx - Chairman and CTO 

 I was going to use my wheelbarrow. But anyway, when we get running like that for these truck hauls and so forth, it's just too much to have both going. And with the one, we find out everything that we can do.

 Bill Burns  - Johnson Rice & Company - Analyst 

 And then just real quick, you initially talked about having three customers. Have you shipped to the third? It did not sound like you had.

 Ted Venners  - KFx - Chairman and CTO 

 No, we have not yet. And anyway, we planned on doing it here with this new run as we are getting started here this week.

 Bill Burns  - Johnson Rice & Company - Analyst 

 Well, thanks, Ted, and congratulations, boy.

Operator 

 Michael Horwitz, Pacific Growth Equities.

 Michael Horwitz  - Pacific Growth Equities - Analyst 

 Actually, Frank asked all the questions. Congratulations.

Operator 

 Bill Miller, [Hartwell] Advisors.

 Bill Miller  - Hartwell Advisors - Analyst 

 Congratulations on all your tests and startups and everything else, under the most difficult conditions. I'm curious whether, because you did take such low-quality coal and were able to upgrade it to 11,000 BTUs and take a significant amount of mercury out of it, apparently, whether this will allow you to become ahead of schedule soon, or whether the plan would be to become an integrated energy company and do everything from mining to selling and processing in between? Or whether that is part of the game plan or not?

And secondly, when do you think you'll be able to look at the plant and say, we are now going to be able to run it on a continuous basis?

 Mark Sexton  - KFx - CEO 

 On the continuous basis is soon. Ted was already referring to that. We are going to have to get geared up here for the unit trains, of which the main thing holding us back is the product silo. But as it relates to the vertical integration, we have been saying all along we need to start moving in that direction. And as you would expect, we are moving in that direction and hope we'll have some things to talk about along those lines at the next call.

What I liked the most about the initial product results was that it suggested that in addition to where we perceived some of the optimum operating points to be, that we need to be experimenting a little more with subbituminous coals and lignites to see where we can process and get better results, and in some cases if we want to design for BTUs, work the temperatures and pressure for that purpose, versus working for more efficient removal of sulfur or mercury, depending on what the target client would want to see.

And it just tells me that we have great results with our design operating points but that we need to be experimenting more on how to improve it for different parameters. And so that is what we will be doing. And because we can be client-specific and actually product supply-specific.

And I think we have enough of a database that we have a pretty good idea with what we put in, if we process it given a certain residence time, pressure, temperature, etc., what the output is going to look like. But it is just nice having that confirmation. And was nice getting -- being able to push a product that was less than 8,000 BTUs over 11 -- I think that design-wise, add about roughly 3,000 BTUs.

So if it were less than 8,000 BTUs, we probably -- the initial stable product, we knew we would be able to push it to about 10.5. That's probably what we can push it to. It was nice to know that we can push it higher than that. And we are going to be experimenting with optimizing BTUs versus pollutants.

 Ted Venners  - KFx - Chairman and CTO 

 I think -- Bill, this is Ted -- I think what this really does say is that it opens an avenue for looking at reserves that right now have no economic value, because when you look at the pricing on coals right now, and we get a lot of questions from people saying, well, jeez, 8800 is $20 and 8400 is $15 or $16. But 8000, nobody wants. And so what do you do with it?

And we're actually in a very enviable position right now of even having an arbitrage between 8000 and 8800, frankly. There is a lot of opportunity. But the world is full of stuff that nobody wants. Even in Wyoming and Montana, there's huge reserves that run between 8,200 and 7,800 that are shut in or you can get leases for $0.15 to $0.20 a ton on and do it.

So that was always the concept behind this, was to take a fuel that was not usable and make it into a premium fuel. And with these huge spreads right now that are going on, the fact that, like Mark pointed out, that we can have that 3,000 BTU spread, and more importantly, I'm seeing the issues about -- like some of that lignites we have been testing of the huge amount of mercury we removed. I mean, people have not given us the credit for this mercury issue.

And now, if we're all sort of looking at CO2, there's another issue about chlorine. People now are looking at hydrochloric acids. And the chlorine is going to be a next issue. Well, we take chlorine out. And there isn't much chlorine in western coals to start with. So it will be a lot of fun. And I think this will offer the opportunity for Mark and the business team and so forth to look at a lot of assets out there that are really cheap.

 Bill Miller  - Hartwell Advisors - Analyst 

 Ted, does this also mean the allowances for the chlorine, SOx, NOx, whatever, as well as mercury -- where are those now? And what does that do to the economics of your well? And can you discuss any further what you've learned from this particular start-up about what the costs or profitability of your next projects will be?

 Mark Sexton  - KFx - CEO 

 There is actually a discussion on what that means on our webpage called Allowing for Allowables. It goes through kind of a calculation for sulfur and where sulfur credits -- I think the example we used at the time was 700 or $800 a ton. They are now well over 1000, I have heard, much higher -- I have heard 1600. So plug those numbers in, and the actual value of ultra-low sulfur -- ultra-compliant coal is compelling.

Do you want to add anything to that, Ted?

 Ted Venners  - KFx - Chairman and CTO 

 Well, the only thing -- that is one advantage of having really over-designed this plant in Gillette right now, is that we've got the ability to have monitoring portals and opportunities to do things where Rick, Dennis and the team there and Ron can all work on stuff for us. If mercury, say, for instance, is as high as they say it is, we are going to want to focus on mercury. If sulfur credits stay up there, and I've seen some forward numbers of $2500 in 2007, I mean, man, we're going to look at cooking it a little longer and getting more sulfur out.

This is what's so nice about having the flexibility of having technology do this, because you can make movements with temperature, pressure and time to be able to flux into wherever the monetary value is.

And now that we know that we can go to low-range fuels, which we always knew, anyway, but we didn't confirm it on commercial scale, then this opens up lignites in the South. This opens up some of the subbituminous coals in the areas of New Mexico, some of the lignites in Mississippi, Louisiana, Texas, North Dakota. I mean, this opens up a lot more areas for us.

 Bill Miller  - Hartwell Advisors - Analyst 

 Well, it sounds absolutely fabulous. And I hope you'll be able to give us a model showing how wonderful it will be at some point.

 Mark Sexton  - KFx - CEO 

 Yes, we will. One of the things is that I have asked since the eastern universities are very good in coal, is we will be doing more work with them, the University of Kentucky and University of West Virginia and so forth, to really see what are the added values of having a premium coal that is based off of western feedstocks.

And as we get those, we will do what we have traditionally have done and put them on our website. And we are excited about what we've got, and we are an open book. And the more spokespeople we got out there saying, hey, what are you all complaining about mercury for when you can buy coal with no mercury in it? So --

 Bill Miller  - Hartwell Advisors - Analyst 

 Congratulations. It sounds just wonderful.

 Andy Vietor  - KFx - Director of IR 

 Jeannie, we have time for one more question.

Operator 

 Philip Dodge, Stanford Group.

 Philip Dodge  - Stanford Financial Group - Analyst 

 My question is when you get into the unit train shipping mode and optimum utilization at Fort Union, how much of the raw material will come from your old coal property at Fort Union, the mine that you currently have? And will that vary from time to time?

 Mark Sexton  - KFx - CEO 

 We are probably going to use one-third of the production from our own and get the balance from neighboring mines. And it gives us some flexibility if we need more of our own. But basically right now, it is one-third of ours and two-thirds of others.

 Philip Dodge  - Stanford Financial Group - Analyst 

 What do you estimate the cost of that internal supply will be?

 Ted Venners  - KFx - Chairman and CTO 

 That is one of the things that Kevin and the team have come in here and will have numbers on everything in the end-of-the-quarter call. Right now, there's still a lot of work going on in opening them mine. And so you've got to actually calculate the differences of mine opening versus production, and reclamation, all that. But Kevin will, in the next call, have all of the economic numbers for everybody and the guidance.

 Mark Sexton  - KFx - CEO 

 Appreciate it. I know we all have a lot of questions about production projections, ramp-up, the Company's economics. As we get more information on test results, we will try to share those. But we expect to be answering and talking about all of these questions at our next regular call, which, as I indicated, will be the last week of February or early March.

But we are enthusiastic about commencing loading and shipping unit trains with K-Fuel this spring. I am quite excited about it. Ted has waited 20 years for this day. And we're going to focus on it, focus on what needs to be done, make sure the plant is operating in an optimal way and start focusing on those vertical integration opportunities. So hopefully, we will have a lot to talk about at the next regularly scheduled meeting.

I would like to thank you all for your interest in the Company and taking this. And Ted, did you have anything to add?

 Ted Venners  - KFx - Chairman and CTO 

 One last thing is we do have a video cam now. If people are in Denver and you want to stop by our offices, you are more than welcome to. It's getting to be more and more difficult to go to Gillette all the time. But we do have a live feed there. And we're proud to show off what we've got. So welcome to have you come there or even when you want to go to Wyoming.

 Mark Sexton  - KFx - CEO 

 All right, everyone. Appreciate your interest. We will be talking in just a few weeks.

 Ted Venners  - KFx - Chairman and CTO 

 Thank you very much.

 Mark Sexton  - KFx - CEO 

 Thank you. This concludes the call.

Operator 

 Thank you. This does conclude today's KFx conference call. You may now disconnect your lines at this time and have a wonderful evening.

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