Surface Lease

EXHIBIT 10.11


SURFACE LEASE


THIS SURFACE LEASE, made this 23rd day of February, 2000, by and between NGHD LANDS, INC., a West Virginia Corporation, T. C. LANDS, INC., a West Virginia Corporation, AED, LLC, a West Virginia Limited Liability Company, LARRY A. DEITZ and GLORIA K. DEITZ, his wife, and MAXEY ANN TULLY, widow, (hereinafter collectively called "Lessor"), and COASTAL COAL-WEST VIRGINIA, LLC, (hereinafter called "Lessee");


NOW, THEREFORE, WITNESSETH that, for and in consideration of the rents and royalties herein reserved and to be paid by Lessee to Lessor as hereinafter provided and of the terms, conditions, covenants, stipulations and agreements herein contained and to be kept and performed by Lessee, Lessor does hereby demise and lease unto Lessee the surface interests owned by Lessor in and to that certain tract or parcel of land situate in Glade District, Webster County, West Virginia, and more particularly described on Schedule A, attached hereto and made a part hereof (the "Property"), the approximate location of which is shown on the map attached hereto and made a part hereof and marked for identification:


[REFER TO SURFACE - SCHEDULE A AND MAPS EXHIBIT 1 AND EXHIBIT 2]


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which Property, together with the rights granted Lessee in Article II hereof, is sometimes hereinafter referred to as the "demised premises", and Lessee does hereby accept this demise and lease and the same is made upon the following terms, covenants and agreements, that is to say:


ARTICLE 1


TITLE AND ACREAGE


1.1 No Warranty of Title or Acreage. Lessor hereby leases unto Lessee only such surface rights in and to the demised premises as Lessor owns and has the right to lease. This lease is made without any representations or warranties of any kind as to title or covenants of rights to lease or of quiet or peaceful possession, express or implied. Moreover, this lease is a lease in gross and not by acre and in the event there should be a deficiency of acreage in any of the tracts subject to this lease, such deficiency shall not impose any liability upon Lessor or in any way affect any provision of this lease, including without limitation, the minimum annual royalty required to be paid by Lessee. The parties acknowledge that the map attached hereto is for convenience only and shows only the approximate location of the demised premises and its boundary lines. Lessor makes no representations or warranties of any kind, either expressed or implied, as to contiguity of any individual tracts or parcels of land of which may comprise the demised premises.


ARTICLE II


MINING RIGHTS


2.1 Grant of Mining Rights. Subject to the provisions of Article I above, Lessor, to the extent that Lessor owns and has the right to do so, hereby grants unto Lessee the right to use the surface of the demised premises in connection with its mining and removal of any coal in, on,


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or under the demised premises by any mining method, excluding the auger mining method, which will recover not less than eighty percent (80%) of such coal within the entire leased premises, together with all necessary and convenient rights with respect thereto, including but not limited to the following:


It is understood and agreed by and between the parties hereto that the Lessee shall make a good faith, reasonable effort, to adopt and implement a mining plan which will recover no less than eighty percent (80%) of the recoverable coal on the leased premises. After having exhausted all reasonable efforts to obtain permits which will accomplish such removal percentages as are required hereunder, the Lessor agrees to consider in good faith alternate plans. In connection with any such reconsideration, Lessee shall be provided with copies of any and all documentation related to the permitting procedure for review by Lessor's Engineers.


(a) Rights-of-Way. All necessary rights of way over and across the demised premises with the right to construct, operate and maintain thereon railroads, roads, haul ways, conveyors, power lines, water lines, drain ways and other ways necessary or convenient for the exploration, mining and processing of the coal in, on, or under the demised premises.


(b) Structures. The right to construct buildings, tipples, preparation plants, power stations and other structures which Lessee may deem necessary or convenient for use in connection with its coal mining operations under this lease.


(c) Surface. The right to disturb, remove and utilize so much of the surface of the demised premises and the stone, sand and water thereon and right to cut and use (subject to the provisions of Section (f) hereof) so much of the timber situate on the demised premises as may be necessary or convenient for Lessee's coal mining operations on, in, or under the demised


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premises as may be necessary or convenient for Lessee's coal mining operations, subject to like consent having been obtained from the owner(s) of any outstanding interest.


(d) Subjacent Support. The right to mine by approved mining method all of the mineable and merchantable coal within and underlying the demised premises without leaving any subjacent support for the overlying strata and without being liable for any damages which may be caused by the removal of all of such coal to the objects or structures located on the surface of the demised premises; provided, however, that with respect to any part of the surface of the demised premises where Lessor may not own all of the interest therein, Lessor's waiver of subjacent support on that portion of the surface is conditional upon Lessee obtaining a like waiver from persons owning any outstanding surface interest or other interests and situate within the demised premises.


(e) Surface Deposits. The right to deposit upon the surface of the demised premises slate, rock, dirt, bone, refuse and other unmerchantable materials and waste water resulting from the mining, removing, processing and marketing of the coal mined by Lessee from the demised premises; provided, however, that Lessee shall comply with such reasonable regulations and limitations as Lessor may prescribe and with all statutes, regulations and rules which may now or hereafter be enacted or prescribed by the United States of America or the State of West Virginia or any other governing body which regulates the disposal of such waste, overburden or refuse material; and provided further, however, that Lessee shall, during the term of this lease, and at all times thereafter, be fully and completely responsible for the treatment and/or removal of any water, overburden or refuse materials placed by Lessee on the demised premises which shall be required by any governmental agency, including, but not limited to, the elimination of any fires, drainage or ecological problems or other environmental hazards.


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Subject to all of the limitations, requirements and conditions hereinabove contained in this paragraph, Lessee may deposit such overburden as is hereinabove described from adjoining and coterminous lands if, and only if, the making of such deposits is clearly and reasonably necessary in order to facilitate removal of Lessor's coal; and, such additional deposits are permitted only to that extent, that is to say removal of Lessor's coal, subject to the approval of Lessor. Any violation of this provision shall be an event of default having equal dignity with non-payment of rents or royalties to be paid under this Lease.


Lessor has the option to sell to Lessee all surface area contained in this lease or, subject to Lessor's approval, any surface area required for the placement of overburden, refuse, valley fills and ponds for the mining of Lessor's coal and adjoining landowners' coal as described above, Lessor shall convey to Lessee such surface area at the cost of One Dollar ($1.00) per acre. Any such conveyance shall reserve to the Lessor rights of way for ingress and egress over and across same. Provided, however, that any such transfer shall not release Lessee's obligation to pay minimum royalties, tonnage royalty and wheelage as is otherwise provided in this Lease.


Further, in the event Lessee surrenders this Lease Agreement pursuant to Article 4.1 of the Coal Lease executed July 1, 1999, with this Surface Lease, Lessee agrees to convey to Lessor the surface land shown as Tract WE49 contain 50 acres and the neighboring tract of 13 acres which are owned by Lessee which are overlying the coal tracts owned by Lessor pursuant to the same terms and conditions as contained in paragraph 2.1(e) of said Surface Lease, excluding the payment of wheelage by Lessor to Lessee for transportation of any adverse coal over and across said property conveyed.


(f) Timber. The right to damage or destroy any timber on the demised premises which damage or destruction is occasioned by Lessee's mining operations and other activities in


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connection therewith; provided, however, Lessee shall give Lessor at least six (6) months written notice of Lessee's intention to damage or destroy any of such timber and Lessor shall have the right during such six (6) month period to cut and remove all or any part of such timber and subject to like notice and consent being obtained from the owner(s) of any outstanding interest in said demised premises; provided, further, if Lessor shall fail to exercise the right herein granted, Lessee shall thereafter have the right to cut, burn or remove such timber without being obligated to pay for the same.


(g) Wheelage. The right to transport over and across the demised premises coal mined from lands other than the demised premises ("adverse coal") upon the payment to Lessor of an amount of money equal to (a) Ten Cents ($0.10) or (b) one-fourth of one percent (1/4 of 1%), whichever is greater of the gross selling price, as hereinafter defined, for each ton of two thousand (2,000) pounds of such adverse coal so transported over or across the entire demised premises as follows: GROUP 1: 35-Acre tract (WE45), 82.20-Acre tract (WE46), 36-Acre tract (WE46A), 75-Acre tract (WE47), 24-Acre tract (WE50), 83-Acre tract (WE51), 129-Acre tract (WE48), and 25-Acre tract (WE44) have been pooled and regardless of which tract is being used for transporting over or across as aforesaid, the Lessors (owners) shall be paid wheelage as follows and as shown on Map Exhibit 1 Surface Wheelage:


GROUP 1: - -------- NGHD LANDS, INC. 21.64% AED, LLC 35.66% T. C. LANDS, INC. 14.60% LARRY A. DEITZ 28.10%
------
TOTAL 100.00%


All such payments for adverse coal shall be made annually on or before February 25th. Payments for the wheelage of adverse coal shall not be credited on minimum annual royalties.


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(h) Waiver of Barrier Pillars. The right to mine coal upon the demised premises without maintaining barrier pillars between the demised premises and any adjacent or contiguous property which may now or at some future time be owned, leased or controlled by Lessee; provided that, the owners of such adjacent or contiguous property also consent in writing to waive their rights with respect to the maintenance of barrier pillars, and further subject to like consent being obtained from the owner(s) of any outstanding interest.


2.2 Operations On Other Properties. Lessee shall not have the right to use the demised premises in connection with its operations on other lands, except for the transportation of adverse coal on, across or over the demised premises is provided for in Paragraph 2.1(g) above, and the deposit of overburden from other properties as set forth in the second paragraph of ARTICLE II, 2.1(e).


ARTICLE III


EXCLUSIONS FROM LEASE


3.1 Exceptions and Reservations. This lease is made expressly subject to, and Lessor excepts and reserves from the demised premises and from the operation of this lease, the following: the entire ownership and control of the surface of the demised premises and all rights pertaining thereto, except only to the extent herein expressly leased to Lessee, together with the stone, sand, water and timber, with the full right to lease, use, enjoy, operate and develop the same in any manner which may seem appropriate to Lessor; and together with the right of Lessor, its lessees, assigns and contractors to use all presently existing and hereinafter constructed roads over and across the demised premises; provided, however, that the exercise by Lessor of its retained ownership and control of the elements and rights excepted in this Article shall not unreasonably interfere with the requirements and safety of the operations of Lessee.


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3.2 Prior Deeds, etc. Lessor further excepts from this lease any and all rights, easements, conveyances, rights-of-way, deeds, contracts, leases and agreements heretofore granted or made by Lessor or any of its predecessors in title and any and all possessory rights which may pertain to or affect the demised premises appearing of record or visible on the ground.


3.3 Inspection By Lessee. Lessor has disclosed to Lessee that prior mining operations have been prosecuted in, on and under the demised premises and the surface of the demised premises used in connection therewith and Lessor makes no warranty or representation regarding the condition of the demised premises. Lessee represents that it has inspected the demised premises and accepts the same as they now are.


ARTICLE IV


TERM


4.1 Term. The rights granted herein are for, except as hereinafter provided, an initial term of five (5) years commencing February 23, 2000, and ending June 30, 2004, ("Primary Term"). If and only if at the end of the Primary Term of this Lease, the Lessee is conducting active mining operations on the demised premises as described below and paying tonnage royalties as herein otherwise provided, and shall have fully kept and performed all of the covenants, agreements, promises and conditions of this Lease, may at its sole option upon the giving of written notice six (6) months in advance of the end of the Primary Term, or the first extended term as the case may be extend this Lease for a period of two (2) additional five (5) year terms; for a total term of no more than fifteen (15) years.


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28.00 Acres (WE45)
188.00 Acres (WE46)
50.00 Acres (WE49)
73.00 Acres (WE47)
202.00 Acres (WE48)
20.75 Acres (WE50)
76.00 Acres (WE51)


Lessee reserves the right to surrender this Lease Agreement with one hundred eighty (180) days notice to Lessor, and, if Lessee opts to surrender this Lease prior to the initial five (5) year term, then Lessee shall pay to Lessor the amount due as advance minimum royalty for the remaining portion of the initial five (5) year Primary Term.


4.2 Entry After Termination. Lessee shall have the right, and the obligation, after the termination for any reason of this lease, to enter upon the demised premises for the purpose of reclaiming areas disturbed by its operations and otherwise complying with the requirements of any federal, state and local law, rule, regulation or ordinance.


ARTICLE V


TONNAGE ROYALTY


5.1 Tonnage Royalty. Lessee covenants and agrees to pay to Lessor as tonnage royalty for each ton of coal of two thousand (2000) pounds mined and removed by approved mining method from the demised premises, an amount of money equal to (a) Sixty Cents ($0.60) or (b) Three Percent (3%) of the gross sales price, whichever sum is greater, of said coal f.o.b. the loading point, for each ton of two thousand (2,000) pounds of coal mined. The following tracts have been pooled for the purpose of payment of tonnage royalty:


25.00 Acres (WE44)
35 Acres (WE45)
137.50 Acres (WE46)
36 Acres (WE 46A)
129.00 Acres (WE48)


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24 Acres (WE50)
83.00 Acres (WE51) GROUP 1


75.00 Acres (WE47) GROUP 2


(a) Each such payment of tonnage royalty shall be paid to each individual owner her/his/its prorata share as the ownership is pooled and is shown in GROUP 1 and GROUP 2, as follows:


GROUP 1: NGHD LANDS, INC. 21.64%
AED, LLC 35.66%
T. C. LANDS, INC. 14.60%
LARRY A. DEITZ 28.10%
------
TOTAL 100.00%


GROUP 2: MAXEY ANN TULLY 50.00%
T. C. LANDS, INC. 50.00%
------
TOTAL 100.00%


5.2 Definition of Gross Sales Price. As used in this lease, the term "gross sales price" shall mean the gross price at which Lessee sells coal mined and removed from the demised premises f.o.b. the loading point without any deductions for sales commissions, selling costs, advertising, credit losses, transportation costs, taxes of any kind (other than sales or use taxes), discounts, or other expenses of deductions whatsoever; provided, however, that in the event any sale of such coal by Lessee shall not be at arm's length, then the gross sales price for such sales shall be the gross sales price received by other operators mining and producing coal of a similar kind and quality in the area of the coal produced by Lessee which is sold at arm's length.


5.3 Definition of Loading Point. The term "loading point" for purposes of this lease, shall mean the point at which the coal is loaded f.o.b. for shipment by truck, railroad or barge or such other point where the ultimate consumer takes custody of the coal with respect to coal not shipped by rail or barge as the parties hereto may from time to time agree to in writing.


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5.4 Payment of Tonnage Royalties. Lessee covenants and agrees to pay to Lessor all tonnage royalties on or before the 25th day of each calendar month for all coal mined and removed during the preceding calendar month.


5.5 Weighing of Coal. The quantity of raw coal mined and removed from the demised premises shall be weighed and determined by true and accurate scales, duly calibrated for accuracy at least every six (6) months at Lessee's expense by an independent licensed engineer qualified to make such calibration, and/or volumetric measurements, and shall be reconciled to truck weights. Lessee shall be required to give an accurate and separate accounting for each individual coal tract. In addition, the scales shall be inspected and certified at least annually by the West Virginia Department of Labor as correct. Lessor, and its authorized representatives, shall have the right to inspect the scales at any time during Lessee's normal operating hours; provided, however such inspection shall not unreasonably interfere with Lessee's operations. Lessee shall keep an accurate record by date of the number of truck loads from each separate tract, along with the weight of each truck load, with accompanying printout, hauled from each mine or pit each day supported by a truck count at the pit or mine.


(a) In addition to the foregoing, Lessor shall have the absolute right, upon demand:


(i) to have produced and provided to the Lessor or to a duly authorized
representative of the Lessor certified copies of any and all
documents relating to tonnage production allocated to the demised
premises whether such allocation is made within the current
corporate entity of the Lessee, a subsidiary corporate entity, or an
independent contractor, reconciled to and with truck weights;


(ii) to measure and compute by engineering methods the tonnage removed
from the premises.


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(b) Any Agreement with any independent contractor shall require such contractor to provide to the Lessor upon demand copies of documents relating to the tonnage production on which payment to contractor was made.


(c) In the event such information or such calculation exhibits a discrepancy between sums paid as Production Royalty, and tonnage removed from the premises, any dispute in relation thereto shall be submitted to arbitration as hereinafter provided.


5.6 Commingling.


(a) Prior to any commingling of coal mined from the demised premises with coal mined from other properties, Lessee shall weigh and make a reasonable determination of the reject percentage of coal mined from the demised premises pursuant to the terms of this Lease, making use of acceptable engineering methods for the industry.


(b) The Lessor reserves the right to measure and compute reject percentage by any available acceptable engineering method. And in the event of a discrepancy or disagreement in connection with same, the same shall be submitted to arbitration as hereinafter provided.


(c) If there is any loss of coal subsequent to commingling, such loss shall be allocated fairly and equitably to all parties whose coal is commingled.


5.7 Monthly Report. At the same time that Lessee is required to pay tonnage royalties to Lessor, Lessee shall furnish to Lessor statements signed by a responsible person having knowledge of the facts showing the quantity of all coal mined from the demised premises during the preceding calendar month, the gross sales price of each type of coal f.o.b. the loading point, the number of tons sold at each price, the seam or seams from which all of such coal was produced, the method of mining, a summary of coal produced from the demised premises categorized by tract identification numbers from Schedule A and Map Exhibits to be supplied by


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Lessor. Upon request, copies of certificates of the weigh master or other official of the railroad or barge lines of weights of such car, or barge of coal shipped during such month over such railroad or barge line and the weight of all coal mined and removed from the premises by Lessee during such month and not shipped by railroad or barge will be available at the Lessee's office for the Lessor to review and/or copy.


5.8 Lessee's Books and Records. Lessee shall keep accurate books of accounts showing separately all coal mined and removed by Lessee from the demised premises and the gross sales price of such coal together with such additional facts as may be necessary for a just accounting of rents and royalties. Lessee shall keep and preserve all statements showing realization on all coal sold by Lessee, including the statements of all sales agents. Lessor, its agents and attorneys shall have access at any and all reasonable times to all of such records and to the offices where such records are kept for the purpose of inspecting, auditing and making copies of such records.


ARTICLE VI


MINIMUM ANNUAL ROYALTY


6.1 Minimum Annual Royalty. For each lease year of the initial five (5) years this Lease is in effect, Lessee covenants and agrees to pay to Lessor a minimum annual royalty for each tract as scheduled below:


SCHEDULE B


25.00 Acres (WE44)
35.00 Acres (WE45)
137.50 Acres (WE46)
36.00 Acres (WE46A)
129.00 Acres (WE48)
24.00 Acres (WE50)
83.00 Acres (WE51)


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Sub-total $ 4,690.00 GROUP 1 75.00 Acres (WE47) $ 750.00 GROUP 2
----------
Total $ 5,440.00


(a) Each such payment of minimum royalty shall be paid to each individual owner her/his/its prorata share as the ownership is pooled and is shown in GROUP 1 and GROUP 2, as follows:


GROUP 1: NGHD LANDS, INC. 21.64%
AED, LLC 35.66%
T. C. LANDS, INC. 14.60%
LARRY A. DEITZ 28.10%
------
TOTAL 100.00%


GROUP 2: MAXEY ANN TULLY 50.00%
T. C. LANDS, INC. 50.00%
------
TOTAL 100.00%


Said minimum annual royalty shall be payable on or before the first day of each lease year of the initial five (5) year Primary Term. Lessee shall have the right during any succeeding year during the term of this Lease, including any extension thereof, to mine, free from tonnage royalty, an amount of coal sufficient to make up any minimum annual royalty paid in excess of the tonnage royalty in any prior year of this Lease.


(b) After the initial five (5) year Primary Term, there will be no minimum annual royalty payments required.


(c) Failure to mine on the 43.54 acre tract shall not constitute a breach in the terms of this agreement nor does active mining on this tract secure the duration of the lease under the Primary Term.


(d) If for any reason Lessee fails to mine 20,000 tons of coal from the demised premises, as outlined on Map Exhibit 1 Surface which is attached hereto and made a part hereof, in any lease year after the Primary Term, at the end of each of any such year Lessee will owe


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Lessor Four Thousand Four Hundred Dollars ($4,400.00) non-recoupable rent, payable to each individual Lessor her/his/its prorata share as shown in Group 1 and Group 2, Article 5.1 hereof and as shown on Map Exhibit 1 Surface.


6.2 Recoupment. Lessee shall, for the life of this Lease, have the right in any lease year of the term of this lease to credit and recoup tonnage royalties due on account of coal mined during such lease year, or any prior lease year of the present Lease only, all payments of minimum annual royalties made for such lease year, against the prorata share of each individual owner as outlined in Group I and Group 2, and against each individual tract as outlined in Schedule B. The payment of any tonnage royalties in any lease year in excess of the minimum annual royalties paid for such lease year shall not be credited on the minimum annual royalties thereafter required to be paid in any subsequent lease year or years.


ARTICLE VII


OPERATIONS AND MINING PLANS


7.1 Covenant to Mine. Lessee covenants and agrees that it will promptly commence and diligently develop and prosecute mining operations hereunder in an energetic, efficient and skillful manner, according to approved and modern methods of mining, and with the use of adequate, sufficient and efficient mining machinery and equipment, reasonably adapted to the conditions encountered, all to the end that all the mineable and merchantable coal shall be mined, produced and sold from the demised premises, as is consistent with practical and modern mining methods and prudent mining practices, having due regard always for safety and preservation of the demised premises as a coal mining operation, all in compliance with all laws, rules, regulations, and or ...