Document:

exv10w2

Exhibit 10.2

[Execution Form]

     THIS CONTINUING AGREEMENT OF GUARANTY AND SURETYSHIP ( this “Guaranty”), dated as of June 26,
2008, is jointly and severally made and given by each of the undersigned signatory parties and each
of the other Persons who shall become a party hereto from time to time by execution of a Joinder
Agreement referred to below (each a “Guarantor” and collectively the “Guarantors”), to and for the
equal and ratable benefit of the holders from time to time of the Notes referred to below (such
holders, including without limitation the Purchasers referred to below, being hereinafter sometimes
referred to, collectively, as the “Noteholders” and, each individually, as a “Noteholder”).
Capitalized terms used and not otherwise defined in this Guaranty shall have the respective
meanings ascribed to them in the Note Agreement (as hereinafter defined).

RECITALS:

     A. Westmoreland Mining LLC, a Delaware limited liability company (the “Company”), and each of
the undersigned Guarantors have entered into a Note Purchase Agreement, dated as of June 26, 2008
(as the same may be amended, supplemented, extended, renewed and replaced from time to time, the
“Note Agreement”), with the institutional investors identified in Schedule 1 attached hereto
(collectively, the “Purchasers”, and, each individually, a “Purchaser”), providing, among other
things, for the issue and sale by the Company and, subject to the terms and conditions set forth
therein, the purchase by the Purchasers severally, of the Company’s 8.02% Senior Guaranteed Secured
Notes due 2018 in an original aggregate principal amount of $125,000,000 (the “Notes”, such term to
include any such notes issued pursuant to Section 13 of the Note Agreement in substitution for any
previously issued Notes).

     B. Each of the undersigned Guarantors is, and each other Guarantor, at the time it becomes a
party hereto will be, a Subsidiary of the Company; and each Guarantor will materially benefit from
the issuance of the Notes and the maintenance of the Notes outstanding under the terms of the Note
Agreement.

     C. Each Guarantor is required to enter into this Guaranty pursuant to the terms of the Note
Agreement; and it is condition to the purchase of the Notes by the Purchasers, and a material part
of the consideration therefor, that each Guarantor enter into this Guaranty and maintain this
Guaranty in full force and effect for the benefit of the Noteholders.

     NOW, THEREFORE, in consideration of the premises and for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and for the purposes hereinafter set
forth, each of the Guarantors agrees as follows for the benefit of the Noteholders:

     1. Guaranteed Obligations. To induce the Purchasers to purchase the Notes from the Company
pursuant to the Note Agreement, each Guarantor hereby jointly and severally, unconditionally and
irrevocably guaranties to the Noteholders, and to the Collateral Agent on behalf of the
Noteholders, as a primary obligor and not merely as a surety, the full and punctual payment and
performance when due (whether on demand, at stated maturity, by acceleration, or otherwise, and
including any amounts which would become due but for the operation of an automatic stay under the
United States Bankruptcy Code or any similar laws of any country or jurisdiction) of all
Obligations, including, without limiting the generality of the foregoing, all

 

 

obligations, liabilities, and indebtedness from time to time of the Company or any other
Obligor to the Noteholders under or in connection with the Notes, the Note Agreement or any other
Financing Document, whether for principal, interest, Make-Whole Amount, fees, indemnities,
expenses, or otherwise, and all refinancings or refundings thereof, whether such obligations,
liabilities, or indebtedness are direct or indirect, secured or unsecured, joint or several,
absolute or contingent, due or to become due, whether for payment or performance, now existing or
hereafter arising (and including obligations, liabilities, and indebtedness arising or accruing
after the commencement of any bankruptcy, insolvency, reorganization, or similar proceeding with
respect to the Company or any other Obligor or which would have arisen or accrued but for the
commencement of any such proceeding, even if the claim for such obligation, liability, or
indebtedness is not enforceable or allowable in such proceeding, and including all Obligations,
liabilities, and indebtedness arising from any extensions of credit under or in connection with the
Financing Documents from time to time, regardless whether any such extensions of credit are in
excess of the amount committed under or contemplated by the Financing Documents or are made in
circumstances in which any condition to extension of credit is not satisfied) (all of the foregoing
obligations, liabilities and indebtedness are referred to herein collectively as the “Guaranteed
Obligations” and each as a “Guaranteed Obligation”). Without limitation of the foregoing, all of
the Guaranteed Obligations shall be and remain Guaranteed Obligations entitled to the benefit of
this Guaranty notwithstanding that the Collateral Agent or any Noteholder or Noteholders (or any
one or more assignees or transferees thereof) from time to time assign or otherwise transfer all or
any portion of their respective rights and obligations under or in respect of the Notes, the Note
Agreement or the other Financing Documents, or any other Guaranteed Obligations, to any other
Person in accordance therewith.

     2. Payment and Performance. Each Guarantor hereby jointly and severally promises to pay and
perform all Guaranteed Obligations immediately upon demand of the Collateral Agent, the Noteholders
or any one or more of them. All payments made hereunder by each Guarantor shall be made in
immediately available funds in lawful money of the United States of America without setoff,
counterclaim, withholding, or other deduction of any nature. This Guaranty constitutes a present
and continuing guaranty of payment and performance and not of collectibility and, accordingly, each
Guarantor waives any right to require that any action be brought against the Company, any other
Obligor or any other Person or to require that any resort be had to any direct or indirect
collateral security for the Guaranteed Obligations.

     3. Obligations Absolute. The obligations of the Guarantors under this Guaranty are
irrevocable, absolute, unconditional and continuing under any and all circumstances, and no such
obligation shall be to any extent or in any way discharged, impaired or otherwise affected, except
by indefeasible payment and performance in full thereof. The obligations of the Guarantors under
this Guaranty, and the rights of the Collateral Agent and each Noteholder to enforce such
obligations by any proceedings, whether by action at law, suit in equity or otherwise, shall not be
subject to any reduction, limitation, impairment or termination, whether by reason of any claims of
any character whatsoever or otherwise, including, without limitation, claims of waiver, release,
surrender, alteration or compromise, nor shall they be subject to any defense, set-off,
counterclaim, recoupment or termination whatsoever. Without limiting the generality of the
foregoing, the obligations of the Guarantors hereunder shall not be discharged, impaired or
otherwise affected by:

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     (a) any failure, default, omission, or delay, willful or otherwise, by the Company or
any other Obligor in the payment or performance of any of the Guaranteed Obligations;

     (b) any lack of genuineness, legality, validity, enforceability or allowability (in a
bankruptcy, insolvency, reorganization or similar proceeding, or otherwise), or any
avoidance or subordination, in whole or in part, of any Financing Document or any of the
Guaranteed Obligations, regardless of any law, regulation or order now or hereafter in
effect in any jurisdiction affecting any of the Guaranteed Obligations, any of the terms of
the Financing Documents, or any rights of the Collateral Agent, the Noteholders (or any of
them) or any other Person with respect thereto;

     (c) any increase, decrease, or change in the amount, nature, type or purpose of any of
the Guaranteed Obligations (whether or not contemplated by the Financing Documents); any
change in the time, manner, method, or place of payment or performance of, or in any other
term of, any of the Guaranteed Obligations; any execution or delivery of any additional
Financing Documents; or any amendment, modification or supplement to, or refinancing or
refunding of, any Financing Document or any of the Guaranteed Obligations;

     (d) any failure to assert any breach of or default under any Financing Document or in
respect of any of the Guaranteed Obligations; any extensions of credit in excess of the
amount committed under or contemplated by the Financing Documents, or in circumstances in
which any condition to such extensions of credit has not been satisfied; any other exercise
or non-exercise, or any other failure, omission, breach, default, delay, or wrongful action
in connection with any exercise or non-exercise, of any right or remedy against the Company
or any other Person under or in connection with any Financing Document or any of the
Guaranteed Obligations; any refusal of payment or performance of any of the Guaranteed
Obligations, whether or not with any reservation of rights against any Guarantor; or any
application of collections (including but not limited to collections resulting from
realization upon any direct or indirect security for the Guaranteed Obligations) to other
obligations, if any, not entitled to the benefits of this Guaranty, in preference to
Guaranteed Obligations entitled to the benefits of this Guaranty, or if any collections are
applied to Guaranteed Obligations, any application to particular Guaranteed Obligations;

     (e) any taking, exchange, amendment, modification, supplement, termination,
subordination, release, loss, or impairment of, or any failure to protect, perfect, or
preserve the value of, or any enforcement of, realization upon, or exercise of rights, or
remedies under or in connection with, or any failure, omission, breach, default, delay, or
wrongful action by the Collateral Agent, the Noteholders (or any of them) or any other
Person in connection with the enforcement of, realization upon, or exercise of rights or
remedies under or in connection with, or any other action or inaction by the Collateral
Agent, the Noteholders (or any of them) or any other Person in respect of, any direct or
indirect security for any of the Guaranteed Obligations;

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     (f) any merger, consolidation, liquidation, dissolution, winding-up, revocation of
charter or other organizational document, forfeiture, or other change in, restructuring or
termination of, the corporate, limited liability company or other existence of, the Company,
any Guarantor or any other Person;

     (g) any creditors’ rights, bankruptcy, insolvency, receivership, reorganization or
similar proceeding with respect to the Company, any Guarantor or any other Person, or any
action taken or election made by the Collateral Agent or any one or more Noteholders
(including but not limited to any election under Section 1111(b)(2) of the United States
Bankruptcy Code), the Company, any Guarantor or any other Person in connection with any such
proceeding;

     (h) any defense, setoff, or counterclaim which may at any time be available to or be
asserted by the Company, any Guarantor or any other Person with respect to any Financing
Document or any of the Guaranteed Obligations; or any discharge by operation of law or
release of the Company, any Guarantor or any other Person from the performance or observance
of any Financing Document or any of the Guaranteed Obligations;

     (i) in respect of the Company or any Guarantor, any change of circumstances, whether or
not foreseen or foreseeable, whether or not imputable to the Company or any Guarantor, or
any impossibility of performance by reason of fire, explosion, accident, labor disturbance,
flood, drought, act of God or the public enemy, delays or failures of suppliers, customers
or carriers, inability to obtain materials or any other causes affecting performance, or any
other force majeure, whether or not beyond the control of the Company or any Guarantor and
whether or not of the kind hereinbefore in this subdivision (i) specified;

     (j) any attachment, claim, demand, charge, order, process, lien, encumbrance or other
event, circumstance or occurrence, similar or dissimilar to the foregoing, or any
withholding or diminution at the source, by reason of any taxes, assessments, expenses,
indebtedness, obligations or liabilities or any character, foreseen or unforeseen, and
whether or not valid, incurred by or against any Person, including without limitation any
claims, demands, charges, liens or encumbrances incurred by any Person, or against any sums
payable in respect of any Guaranteed Obligations under this Guaranty with the result that
such sums are rendered inadequate or would be unavailable to make payments required by the
terms hereof;

     (k) any order, judgment, decree, ruling or regulation (whether or not valid) of any
Official Body which hinders, delays, interferes with or prevents the performance by the
Company or any Guarantor of any of its obligations under any Financing Document or any other
agreement or instrument to which it is a party or by which it or any of its property may be
bound; and

     (l) any other event, circumstance, act or omission, whether similar or dissimilar to
the foregoing, and whether known or unknown, which might otherwise constitute a defense
available to, or limit the liability of, any Guarantor, or any guarantor

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or surety, excepting only full, strict, and indefeasible payment and performance in
full of the Guaranteed Obligations in accordance with the terms of the Financing Documents.

As used in Section 3(e) above and elsewhere in this Guaranty, the phrase “direct or indirect
security” for the Guaranteed Obligations, and similar phrases, includes any collateral security,
guaranty, suretyship arrangement, letter of credit, capital maintenance agreement, put option,
subordination agreement, or other right or arrangement of any nature providing direct or indirect
assurance of payment or performance of any of the Guaranteed Obligations, made by or on behalf of
any Person.

          Each Guarantor acknowledges, consents, and agrees that additional Guarantors may join in and
become a party to this Guaranty pursuant to a Guarantor Joinder and Assumption Agreement in
substantially the form thereof attached to the Note Agreement (each, a “Joinder Agreement”),
entered into as required by Section 9.2 of the Note Agreement, and each Guarantor affirms that its
obligations under this Guaranty shall continue hereunder undiminished notwithstanding any such
joinder.

     4. Waivers, Etc. Each of the Guarantors hereby unconditionally waives:

     (a) any defense to or limitation on the obligations of such Guarantor under this
Guaranty arising out of or based on any event or circumstance referred to in Section 3
hereof.;

     (b) all notices, disclosures and demands of any nature which otherwise might be
required from time to time to preserve intact any rights against any Guarantor, including
(i) notice of any event or circumstance described in Section 3 hereof; (ii) notice of
acceptance of this Guaranty or of the reliance by the Collateral Agent or any Noteholder
upon this Guaranty (it being understood that all indebtedness, obligations and liabilities
of the Company to the Collateral Agent and each Noteholder under the Financing Documents,
whether now existing or hereafter arising, shall conclusively be presumed to have been
created, contracted for or incurred in reliance upon this Guaranty); (iii) any notice
required by any law, regulation or order now or hereafter in effect in any jurisdiction;
(iv) notice of nonpayment, nonperformance, dishonor, or protest under any Financing Document
of any of the Guaranteed Obligations; (v) notice of the incurrence of any Guaranteed
Obligation; (vi) notice of any default or any failure on the part of the Company, any
Guarantor or any other Person to comply with any Financing Document or any of the Guaranteed
Obligations or any direct or indirect security for any of the Guaranteed Obligations; (vii)
notice of, or of any information pertaining to, the business, operations, condition
(financial or otherwise), properties, assets or prospects of the Company, any Guarantor or
any other Person, or of any change therein; and (viii) notice of any sale, transfer or other
disposition of any Notes by any holder thereof (except as required pursuant to Section 13.2
of the Note Agreement);

     (c) any right to any marshalling of assets, any right to the filing of any claim
against the Company, any Guarantor or any other Person in the event of any bankruptcy,
insolvency, reorganization or similar proceeding, or to the exercise against the Company,
any Guarantor or any other Person of any other right or remedy under or in connection

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with any Financing Document or any of the Guaranteed Obligations or any direct or
indirect security for any of the Guaranteed Obligations (except for, following the
indefeasible payment and performance in full of the Guaranteed Obligations, the filing of
claims, or the exercise of rights and remedies under or in connection with the Financing
Documents, against other Obligors, in each case, as and to the extent permitted by Section
6); any requirement of promptness or diligence on the part of the Collateral Agent, the
Noteholders or any other Person; any requirement to exhaust any remedies under or in
connection with, or to mitigate the damages resulting from default under, any Financing
Document or any of the Guaranteed Obligations or any direct or indirect security for any of
the Guaranteed Obligations; and any benefit of any statute of limitations;

     (d) any defense or other right arising by reason of any law now or hereafter in effect
in any jurisdiction pertaining to election of remedies (including but not limited to anti-
deficiency laws, “one-action” laws or the like), or by reason of any election of remedies or
other action or inaction by the Collateral Agent or the Noteholders (including but not
limited to commencement or completion of any judicial proceeding or nonjudicial sale or
other action in respect of collateral security for any of the Guaranteed Obligations), which
results in denial or impairment of the right of the Collateral Agent or the Noteholders to
seek a deficiency against the Company, any Guarantor or any other Person or which otherwise
discharges or impairs any of the Guaranteed Obligations; and

     (e) any and all defenses such Guarantor may now or hereafter have based on principles
of suretyship, impairment of collateral, or the like.

     5. Reinstatement. The guarantee provided for in this Guaranty is a continuing obligation of
the Guarantors and shall remain in full force and effect. Upon indefeasible payment and performance
in full of all Guaranteed Obligations, this Guaranty shall terminate; provided, however, that this
Guaranty shall continue to be effective or be reinstated, as the case may be, any time any payment
of any of the Guaranteed Obligations is rescinded, recouped, avoided, or must otherwise he returned
or released by the Collateral Agent or any Noteholder upon or during the insolvency, bankruptcy, or
reorganization of, or any similar proceeding affecting, the Company or any Guarantor or for any
other reason whatsoever, all as though such payment had not been made and was due and owing. The
provisions of this Section 5 shall survive the termination of the Note Agreement and the other
Financing Documents.

     6. Subrogation, Etc. No Guarantor shall exercise any rights it might have against the Company
or any other Obligor arising by reason of the performance of the terms and provisions of this
Guaranty in connection with the Guaranteed Obligations (including rights of contribution, and the
like, or any rights to succeed or be subrogated to the rights and privileges of the Collateral
Agent or any Noteholder pursuant to any Financing Document), until the Guaranteed Obligations shall
have been indefeasibly paid and performed in full. If any amount shall be paid to any Guarantor by
or on behalf of the Company or any other Obligor by virtue of any right of subrogation,
contribution, or the like, such amount shall be deemed to have been paid to such Guarantor for and
shall be held in trust for the benefit of the Collateral Agent on behalf of the Noteholders and
shall forthwith be paid to the Collateral Agent on behalf of the Noteholders to be credited and
applied against the Guaranteed Obligations, whether matured or

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unmatured, in accordance with the terms of the Note Agreement and the Collateral Agency
Agreement.

     7. No Stay. Without limitation of any other provision of this Guaranty, if any declaration of
default or acceleration or other exercise or condition to exercise of rights or remedies under or
with respect to any Guaranteed Obligation shall at any time be stayed, enjoined, or prevented for
any reason (including but not limited to stay or injunction resulting from the pendency against the
Company, any Guarantor or any other Person of a bankruptcy, insolvency, reorganization or similar
proceeding), each of the Guarantors agrees that, for the purposes of this Guaranty and their
obligations hereunder, the Guaranteed Obligations shall be deemed to have been declared in default
or accelerated, and such other exercise or conditions to exercise shall be deemed to have been
taken or met, and, to the full extent permitted by law, such stay, injunction or other impediment
shall not be applicable to any Guarantor’s obligations hereunder.

     8. Taxes.

          (a) No Deductions. All payments made by any Guarantor hereunder or under any of the other
Financing Documents, or in respect of amounts due hereunder or thereunder, shall be made free and
clear of and without deduction for any present or future taxes, levies, imposts, deductions,
charges or withholdings, or any liability with respect thereto, excluding taxes imposed on the net
income of any Noteholder and all income and franchise taxes of the United States applicable to any
Noteholder (all such non- excluded taxes, levies, imposts, deductions, charges, withholdings, and
liabilities being hereinafter referred to as “Taxes”). If any Guarantor shall be required by law
to deduct any Taxes from or in respect of any sum payable hereunder or under any of the other
Financing Documents, (i) the sum payable shall be increased as may be necessary so that after
making all required deductions (including deductions applicable to additional sums payable under
this Section 8(a)) such Noteholder receives an amount equal to the sum it would have received had
no such deductions been made, (ii) such Guarantor shall make such deductions and (iii) such
Guarantor shall timely pay the full amount deducted to the relevant tax authority or other
authority in accordance with applicable law.

          (b) Stamp Taxes. In addition, each Guarantor agrees to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar levies which arise from
any payment made hereunder or from the execution, delivery, or registration of, or otherwise with
respect to, any of the Financing Documents (hereinafter referred to as “Other Taxes”).

          (c) Indemnification for Taxes Paid by any Noteholder. Each Guarantor shall indemnify each
Noteholder (subject, if such Noteholder shall be a Foreign Noteholder, to compliance by it with the
applicable provisions of Section 22.8 of the Note Agreement) for the full amount of Taxes and Other
Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on
amounts payable under this Section 8(c)) paid by any Noteholder and any liability (including
penalties, interest, and expenses) arising therefrom or with respect thereto, whether or not such
Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within
30 days from the date a Noteholder makes written demand therefor.

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          (d) Certificate. Within 30 days after the date of any payment of any Taxes by any Guarantor,
such Guarantor shall furnish to each Noteholder, the original or a certified copy of a receipt
evidencing payment thereof. If no Taxes are payable in respect of any payment by such Guarantor to
a Noteholder, such Guarantor shall, if so requested by such Noteholder, provide such Noteholder
with a certificate of an officer of such Guarantor to that effect.

          (e) Payment Currency. If for the purposes of obtaining judgment in any court it is necessary
to convert a sum due under any of the Financing Documents in any currency (the “Original Currency”)
into another currency (the “Other Currency”), each Guarantor hereby agrees, to the fullest extent
permitted by law, that the rate of exchange used in respect of the payment to any Noteholder shall
be that at which in accordance with its customary practice and procedures such Noteholder could
purchase the Original Currency with the Other Currency after any premium and costs of exchange on
the Business Day preceding that on which final judgment is given.

          (f) Currency Indemnity. The obligation of each Guarantor in respect of any sum due from such
Guarantor to any Noteholder hereunder or under any of the other Financing Documents shall,
notwithstanding any judgment in an Other Currency, whether pursuant to a judgment or otherwise, be
discharged only to the extent that, on the Business Day (being a day on which it is open for
business at its principal office in the United States) following receipt by such Noteholder of any
sum adjudged to be so due in such Other Currency, such Noteholder may in accordance with its
customary practice and procedures purchase the Original Currency with such Other Currency. If the
amount of the Original Currency so purchased is less than the sum originally due to such Noteholder
in the Original Currency, each Guarantor agrees, as a separate obligation and notwithstanding any
such judgment or payment, to indemnify such Noteholder against such loss.

     9. Notices. All notices, statements, requests, demands and other communications under this
Guaranty shall be given in the manner and to the address provided in Section 19 of the Collateral
Agency Agreement; provided, that in the case of any communication to a Guarantor not a party to the
Note Agreement, such communication shall be addressed to such Guarantor at the address set forth
for the purpose in the Joinder Agreement to which such Guarantor is a party. The Collateral Agent
and the Noteholder may rely on any notice (whether or not made in a manner contemplated by this
Guaranty) purportedly made by or on behalf of a Guarantor, and the Collateral Agent and the
Noteholders shall have no duty to verify the identity or authority of the Person giving such
notice.

     10. Counterparts; Facsimile Signatures. This Guaranty may be executed in any number of
counterparts, each of which, when so executed, shall be deemed an original, but all such
counterparts shall constitute but one and the same instrument. Each Guarantor acknowledges and
agrees that a signature page of this Guaranty executed by such Guarantor and delivered by facsimile
or transmitted electronically in Portable Image Format (“PDF”) shall be equally effective as
delivery of a manually executed counterpart hereof by such Guarantor. Any Guarantor delivering an
executed signature page of this Agreement by facsimile or PDF shall also deliver a manually
executed counterpart hereof, but failure to do so shall not effect the validity, enforceability or
binding effect of this Guaranty.

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     11. Setoff; Certain Payments by Company.

          (a) In the event that at any time any obligation of the Guarantors now or hereafter existing
under this Guaranty shall have become due and payable to any Noteholder, such Noteholder shall have
the right from time to time, without notice to any Guarantor, to set off against and apply to such
due and payable amount any obligation of any nature of such Noteholder or any subsidiary or
affiliate of such Noteholder, to any Guarantor, including but not limited to all deposits (whether
time or demand, general or special, provisionally credited or finally credited, however evidenced)
now or hereafter maintained by any Guarantor with such Noteholder or any subsidiary or affiliate
thereof. Such right shall be absolute and unconditional in all circumstances and, without
limitation, shall exist whether or not the Collateral Agent or the Noteholders shall have given any
notice or made any demand under this Guaranty or under such obligation to such Guarantor, whether
such obligation to the Guarantor is absolute or contingent, matured or unmatured (it being agreed
that each Noteholder may deem such obligation to be then due and payable at the time of such
setoff), and regardless of the existence or adequacy of any collateral, guaranty, or other direct
or indirect security or right or remedy available to the Collateral Agent or the Noteholders. The
rights of the Noteholders under this Section 11 are in addition to such other rights and remedies
(including, without limitation, other rights of setoff and banker’s lien, if any) which the
Noteholders may have, and nothing in this Guaranty or in any other Financing Document shall be
deemed a waiver of or restriction on any right of setoff or banker’s lien any Noteholders may at
any time have. Each of the Guarantors hereby agrees that, to the fullest extent permitted by law,
any affiliate or subsidiary of any Noteholder and any holder of a participation in any obligation
of any Guarantor under this Guaranty, shall have the same rights of setoff as the Noteholders as
provided in this Section 11 (regardless whether such affiliate or participant otherwise would be
deemed a creditor of the Guarantor).

          (b) Upon the occurrence and during the continuation of any default under any Financing
Document or under or in respect of any Guaranteed Obligation, if any amount shall be paid to any
Guarantor by or for the account of the Company or any other Guarantor, such amount shall be held in
trust for the benefit of each Noteholder and shall forthwith be paid to the Collateral Agent on
behalf of the Noteholders to be credited and applied to the Guaranteed Obligations when due and
payable.

     12. Construction. The section and other headings contained in this Guaranty are for reference
purposes only and shall not affect the meaning or interpretation of this Guaranty in any respect.
This Guaranty has been fully negotiated between the applicable parties, each party having the
benefit of legal counsel, and accordingly neither any doctrine of construction of guaranties or
suretyships in favor of the guarantor or surety, nor any doctrine of construction of ambiguities in
agreements or instruments against the party controlling the drafting thereof, shall apply to this
Guaranty.

     13. Successors and Assigns. This Guaranty shall be binding upon each Guarantor, its
successors and assigns, and shall inure to the benefit of and be enforceable by the Noteholders and
their successors and assigns. Without limiting the foregoing, any Noteholder (and any successive
assignees or transferees of any Noteholder), from time to time may assign or otherwise transfer all
or any portion of its rights or obligations under the Financing Documents, or any other Guaranteed
Obligations, to any other Person, in accordance with the Note

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Agreement; and such Guaranteed Obligations (including any Guaranteed Obligations resulting
from an extension of credit by such other Person under or in connection with the Financing
Documents) shall be and remain Guaranteed Obligations entitled to the benefit of this Guaranty; and
to the extent of its interest in such Guaranteed Obligations, such other Person shall be vested,
ratably together with the other Noteholders, with all the benefits in respect thereof granted to
the Noteholders in this Guaranty.

     14. Severability; Modification to Conform to Law.

          (a) It is intended that this Guaranty be enforceable to the fullest extent permissible under
applicable law, but that the unenforceability (or modification to conform to such law) of any
provision or provisions hereof shall not render unenforceable, or impair, the remainder hereof. If
any provision in this Guaranty shall be held invalid or unenforceable in whole or in part in any
jurisdiction, this Guaranty shall, as to such jurisdiction, be deemed amended to modify or delete,
as necessary, the offending provision or provisions and to alter the bounds thereof in order to
render it or them valid and enforceable to the maximum extent permitted by applicable law, without
in any manner affecting the validity or enforceability of such provision or provisions in any other
jurisdiction or the remaining provisions hereof in any jurisdiction.

          (b) Without limitation of the preceding Section 14(a), to the extent that applicable law
(including applicable laws pertaining to fraudulent conveyance or fraudulent or preferential
transfer) otherwise would render the full amount of any Guarantor’s obligations hereunder invalid,
voidable, or unenforceable on account of the amount of a Guarantor’s aggregate liability under this
Guaranty, then, notwithstanding any other provision of this Guaranty to the contrary, the aggregate
amount of such liability shall, without any further action by the Collateral Agent, any Noteholder,
such Guarantor or any other Person, be automatically limited and reduced to the highest amount
which is valid and enforceable under applicable law, which (without limiting the generality of the
foregoing) may be an amount which is equal to the greater of:

     (i) the fair consideration actually received by such Guarantor under the terms and as a
result of the Financing Documents and the value of the benefits described in Section 17(b)
hereof, including (and to the extent not inconsistent with applicable laws affecting the
enforceability of guaranties) distributions, commitments, and advances made to or for the
benefit of such Guarantor with the proceeds of any credit extended under the Financing
Documents, and

     (ii) the excess of (x) the amount of the fair value of the assets of such Guarantor as
of the date of this Guaranty as determined in accordance with applicable law governing
determinations of the insolvency of debtors as in effect on the date hereof, over (y) the
amount of all liabilities of such Guarantor as of the date of this Guaranty, also as
determined on the basis of applicable law governing the insolvency of debtors as in effect
on the date hereof.

          (c) Notwithstanding anything to the contrary contained in this Section 14 or elsewhere in this
Guaranty, this Guaranty shall be presumptively valid and enforceable to its full

- 10 -

 

extent in accordance with its terms, as if this Section 14 (and references elsewhere in this
Guaranty to enforceability to the fullest extent permitted by law) were not a part of this
Guaranty, and in any related litigation the burden of proof shall be on the party asserting the
invalidity or unenforceability of any provision hereof or asserting any limitation on any
Guarantor’s obligations hereunder as to each element of such assertion.

     15. Additional Guarantors. At any time after the initial execution and delivery of this
Guaranty, additional Persons may become parties to this Guaranty as Guarantors hereunder and
thereby acquire the duties and rights incident to being such Guarantors, to the same extent as if
originally a signatory hereto, by executing and delivering to the Collateral Agent and the
Noteholders a Joinder Agreement. No notice of the addition of any Guarantor shall be required to
be given to any pre-existing Guarantor and each Guarantor hereby consents thereto.

     16. Joint and Several Obligations. The obligations of the Guarantors under this Guaranty are
joint and several. The Noteholders, or any one or more of them, may, in their sole discretion,
elect to enforce or cause the Collateral Agent to enforce this Guaranty against any Guarantor
without any duty or responsibility to pursue any other Guarantor and such an election by
Noteholders shall not be a defense to any action the Noteholders or any of them may elect to take
against any Guarantor. No Noteholder shall be deemed, by reason of any such election or otherwise,
to have waived or surrendered any rights or remedies of such Noteholder, or of any other
Noteholders, pursuant to this Guaranty against the Guarantors (or any of them), it being understood
that all such rights and remedies shall be preserved and continue in full force and effect
notwithstanding any such election or any act taken in furtherance of any such election.

     17. Receipt of Financing Documents; Benefits.

          (a) Each Guarantor hereby acknowledges that it has received a copy of the Note Agreement and
each other Financing Document, and each Guarantor certifies that each of the representations and
warranties made therein with respect to, or by, such Guarantor is true and correct. Further, each
Guarantor acknowledges and agrees to perform, comply with, and be bound by all of the provisions of
the Note Agreement and the other Financing Documents.

          (b) Each Guarantor hereby acknowledges, represents, and warrants that it receives synergistic
benefits by virtue of its affiliation with the Company and the other Guarantors and that it will
receive direct and indirect benefits from the financing arrangements contemplated by the Note
Agreement and that such benefits, together with the rights of contribution and subrogation that may
arise in connection herewith, are a reasonably equivalent exchange of value in return for providing
this Guaranty.

     18. Miscellaneous.

          (a) Generality of Certain Terms. As used in this Guaranty, the terms “hereof,” “herein,” and
terms of similar import, refer to this Guaranty as a whole and not to any particular term or
provision; the term “including,” as used herein, is not a term of limitation and means “including
without limitation.”

          (b) Amendments, Waivers. No amendment to or waiver of any provision of this Guaranty, and no
consent to any departure by any Guarantor therefrom, shall in any event be

- 11 -

 

effective unless in a writing manually signed by the Required Holders. Each such waiver or
consent shall be effective only in the specific instance and for the specific purpose for which
given. No delay or failure of the Collateral Agent or any Noteholders in exercising any right or
remedy under this Guaranty shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right or remedy preclude any other or further exercise thereof or the exercise
of any other right or remedy. The rights and remedies of the Collateral Agent and the Noteholders
under this Guaranty are cumulative and not exclusive of any other rights or remedies available
hereunder, under any other agreement or instrument, by law, or otherwise.

          (c) Telecommunications. The Collateral Agent and each Noteholder shall be entitled to rely on
the authority of any individual making any telecopy, telephonic or electronic notice, request, or
signature without the necessity of receipt of any verification thereof.

          (d) Expenses and Indemnification. Each Guarantor unconditionally agrees to pay all reasonable
costs and expenses (including reasonable attorney’s fees of a special counsel for the Noteholders
and a special counsel for the Collateral Agent, and, if requested by the Required Holders or the
Collateral Agent with respect to any relevant jurisdiction, local or other counsel consisting, for
each such jurisdiction, of a single firm approved by the Required Holders or the Collateral Agent,
as the case may be, for such jurisdiction) incurred by the Collateral Agent or any Noteholder in
enforcing this Guaranty against any Guarantor, and each Guarantor shall pay and indemnify the
Collateral Agent and each Noteholder for, and hold it harmless from and against, any and all
obligations, liabilities, losses, damages, reasonable costs, expenses (including disbursements and
reasonable legal fees of counsel to the Collateral Agent or the Noteholders), penalties, judgments,
suits, actions, claims, and disbursements imposed on, asserted against, or incurred by the
Collateral Agent or any Noteholder (i) relating to the preparation, negotiation, execution,
administration, or enforcement of or collection under this Guaranty or any document, instrument, or
agreement relating to any of the Obligations, including in any bankruptcy, insolvency, or similar
proceeding in any jurisdiction, (ii) relating to any amendment, modification, waiver, or consent
hereunder or relating to any telecopy or telephonic or electronic transmission purporting to be by
any Guarantor or the Company; (iii) in any way relating to or arising out of this Guaranty, or any
document, instrument, or agreement relating to any of the Guaranteed Obligations, or any action
taken or omitted to be taken by the Collateral Agent or any Noteholder hereunder, and including
those arising directly or indirectly from the violation or asserted violation by any Guarantor or
the Company or the Collateral Agent or any Noteholder of any law, rule, regulation, judgment,
order, or the like of any Official Body (including those relating to environmental protection,
health, labor, importing, exporting, or safety) and regardless of whether asserted by any Official
Body or any other Person.

          (e) Prior Understandings. This Guaranty, the Note Agreement and the other Financing Documents
constitute the entire agreement of the parties hereto with respect to the subject matter hereof and
supersede any and all other prior and contemporaneous understandings and agreements.

          (f) Survival. All representations and warranties of the Guarantors made in connection with
this Guaranty shall survive, and shall not be deemed waived by or as a result of, the execution and
delivery of this Guaranty, any investigation by or knowledge of the Collateral

- 12 -

 

Agent or any Noteholder, any extension of credit, or any other event or circumstance
whatsoever.

          (g) Governing Law. This Guaranty shall be governed by, and construed and enforced in
accordance with, the laws of the State of New York applicable to contracts made and to be performed
in said State

[SIGNATURE PAGE FOLLOWS]

- 13 -

 

[SIGNATURE PAGE 1 OF 1 OF CONTINUING AGREEMENT

OF GUARANTY AND SURETYSHIP]

     IN WITNESS WHEREOF, each Guarantor, intending to be legally bound, has executed this Guaranty
as of the date first above written with the intention that this Guaranty shall constitute a sealed
instrument.

	 	 	 	 	 	 	 
	 	 	WESTERN ENERGY COMPANY, a Montana corporation
	 
	 	 	 	 	 	 
	 

	 	By
	 	/s/ Douglas P. Kathol
	 	(SEAL)
	 

	 	 	 	 	 	 
	 

	 	 	 	Name: Douglas P. Kathol	 	 
	 

	 	 	 	Title: Vice President	 	 
	 
	 	 	 	 	 	 
	 	 	DAKOTA WESTMORELAND CORPORATION, a Delaware

corporation
	 
	 	 	 	 	 	 
	 

	 	By
	 	/s/ Douglas P. Kathol
	 	(SEAL)
	 

	 	 	 	 	 	 
	 

	 	 	 	Name: Douglas P. Kathol	 	 
	 

	 	 	 	Title: Vice President	 	 
	 
	 	 	 	 	 	 
	 	 	WESTMORELAND SAVAGE CORPORATION, a Delaware

corporation
	 
	 	 	 	 	 	 
	 

	 	By
	 	/s/ Douglas P. Kathol
	 	(SEAL)
	 

	 	 	 	 	 	 
	 

	 	 	 	Name: Douglas P. Kathol	 	 
	 

	 	 	 	Title: Vice President	 	 

- 14 -exv10w3

Exhibit 10.3

[Execution Form]

     THIS SECURITY AGREEMENT (this “Agreement”), dated as of June 26, 2008, is entered into by and
among each of the undersigned and each other Person which shall from time to time become a
Guarantor under the Note Agreement referred to below (each a “Debtor” and collectively the
“Debtors”), and U.S. BANK NATIONAL ASSOCIATION, a national banking association, as Collateral Agent
under the Collateral Agency Agreement referred to below (together with its successors from time
acting as such Collateral Agent thereunder, the “Secured Party”) on behalf and for the benefit and
security of the Noteholders referred to below.

RECITALS:

     A. Westmoreland Mining LLC, a Delaware limited liability company and a Debtor hereunder (the
“Company”), the Guarantors identified therein have entered into a Note Purchase Agreement, dated as
of June 26, 2008 (as the same may be amended, supplemented, extended, renewed or replaced and in
effect from time to time, the “Note Agreement”), with the institutional investors identified in
Schedule 1 thereto (collectively, the “Purchasers”, and, each individually, a “Purchaser”),
providing, among other things, for (1) the issue and sale by the Company and, subject to the terms
and conditions set forth therein, the purchase by the Purchasers severally, of the Company’s 8.02%
Senior Guaranteed Secured Notes due 2018 in an original aggregate principal amount of $125,000,000
(the “Notes”, such term to include any such notes issued pursuant to Section 13 of the Note
Agreement in substitution for any previously issued Notes), and (2) the joint and several guaranty
of the Obligations by the Guarantors.

     B. The Company, each of the Guarantors, Texas Westmoreland Coal Co., a Montana corporation
(“TWCC”), the Secured Party and the Purchasers have entered into the Collateral Agency Agreement,
dated as of June 26, 2008 (as the same may be amended, supplemented, extended, renewed or replaced
and in effect from time to time, the “Collateral Agency Agreement”), in order, among other things,
to set forth certain rights, powers and remedies of the Collateral Agent, for the equal and ratable
benefit and security of the Noteholders, with respect to the Collateral securing the Secured
Obligations.

     C. It is condition to the obligation of the respective Purchasers to purchase Notes pursuant
to the Note Agreement that the Debtors enter into this Agreement with the Secured Party and,
pursuant hereto, grant to the Secured Party for the equal and ratable benefit of the Noteholders a
first priority security interest in the Collateral provided for herein to secure the Secured
Obligations.

     D. Each Debtor acknowledges that it will materially benefit from the issue and sale of the
Notes and the maintenance of the Notes outstanding in accordance with terms of the Note Agreement,
and that, in order to induce the Purchasers to purchase the Notes pursuant to the Note Agreement,
and to assure compliance by the Obligors with the terms thereof, it is desirous of entering into
this Agreement and providing collateral security for the Secured Obligations in accordance with the
terms hereof.

     NOW, THEREFORE, in consideration of the foregoing premises, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound hereby, the parties hereto hereby agree as follows:

 

 

     1. Defined Terms.

          (a) Capitalized terms used in this Agreement, unless otherwise defined in Section 1(b) or
elsewhere in this Agreement, shall have the respective meanings assigned to them in the Note
Agreement; provided that, where applicable and except as otherwise expressly provided herein, terms
used herein (whether or not capitalized) which are defined in the Uniform Commercial Code as
enacted in the State of New York (as amended from time to time, the “Code”), shall have the
respective meanings assigned to such terms therein.

          (b) As used in this Agreement, the following terms shall have the respective meanings
indicated (terms defined in the singular to have a correlative meaning when used in the plural and
vice-versa):

          “Collateral” means all of each Debtor’s right, title and interest in, to and under the
following described property of such Debtor (each capitalized term used in this Section 1(b) shall
have in this Agreement the meaning given to it by Article 9 of the Code):

          (i) all now existing and hereafter acquired and arising Accounts, Goods, General
Intangibles, Payment Intangibles, Deposit Accounts, Chattel Paper (including without
limitation Electronic Chattel Paper), Documents, Instruments, Software, Investment Property,
Letters of Credit, Letter of Credit Rights, advices of credit, money, Commercial Tort
Claims, Equipment, Inventory, As-Extracted Collateral (including As-Extracted Collateral
from such Debtor’s present and future operations regardless of whether such mineral or gas
interests are presently owned or hereafter acquired by such Debtor), Fixtures and Supporting
Obligations, together with all products of and Accessions to any of the foregoing and all
Proceeds of all of the foregoing (including without limitation all insurance policies and
proceeds thereof);

          (ii) to the extent, if any, not included in clause (i) above, such Debtor’s present and
future contracts, agreements, arrangements, or understandings (A) for the sale, supply,
provision or disposition of any coal, natural gas, coalbed methane gas or other minerals by
such Debtor, or any one or more of its agents, representatives, successors, or assigns, to
any purchaser or acquirer thereof, and all products, replacements, and proceeds thereof
(including without limitation all coal, natural gas and coalbed methane gas sales contracts)
and (B) relating to the mining, drilling or recovery of any mineral or gas reserves for the
benefit of or on behalf of such Debtor or any of its agents, representatives, successors, or
assigns (including without limitation all contract mining, drilling or recovery agreements
and arrangements), and all products and Proceeds thereof and payments thereunder, together
with all products and Proceeds (including all insurance proceeds) of and any Accessions to
any of the foregoing; and

          (iii) to the extent, if any, not included in clauses (i) or (ii) above, each and every
other item of personal property and fixtures, both those that are now owned and those that
hereafter arise or are acquired, regardless of whether Article 9 of the Code is applicable
to any extent to the creation, perfection or enforcement of Liens thereon or therein;

2

 

excluding, however, the Subsidiary Shares of TWCC and any Proceeds thereof. Without limiting the
foregoing, Collateral includes all business records and information, including computer tapes and
other storage media containing the same and computer programs and software (including without
limitation, source code, object code and related manuals and documentation and all licenses to use
such software) for accessing and manipulating such information. Notwithstanding the foregoing
provisions of this definition, (i) this Agreement shall not be deemed to be an assignment of any
agreements, contracts or licenses to the extent the terms of such agreements, contracts or licenses
would be violated by such assignment and (ii) the term “Collateral” shall not include any
agreements, contracts or licenses which are now or hereafter held by any Debtor to the extent that
(i) such agreements, contracts or licenses are not capable of being encumbered as a matter of law
or (ii) an encumbrance thereon or security interest therein, or the inclusion thereof otherwise in
the Collateral, without the consent of the other applicable party thereto results in a violation,
breach, default or termination of such agreement, contract or license, and such consent has not
been obtained; provided, however, that the term “Collateral” shall include such otherwise excluded
agreements, contracts or licenses once consent has been obtained as well as any and all proceeds
thereof that might have theretofore been excluded from such grant of a security interest. It is
understood that each Debtor shall use commercially reasonable efforts to exclude from all hereafter
acquired and hereafter renewed material agreements, contracts and licenses restrictions on the
encumbrancing of the same or granting of security interests therein.

          “Secured Obligations” shall mean all indebtedness, liabilities and obligations of any nature
of the Company or any other Obligor, now or hereafter existing under or pursuant to or arising out
of or in connection with the Notes, the Note Agreement or the other Financing Documents, in the
case of each thereof as the same may be amended, supplemented, extended, renewed or replaced and in
effect from time to time, including without limitation, (i) the payment of the principal of,
Make-Whole Amount, if any, and interest (including interest which, but for the filing of a petition
in bankruptcy with respect to the Company or another Obligor would accrue) on the Notes, and of all
fees, expenses and other amounts payable under the Financing Documents, and (ii) the due
performance and observance of, and compliance with, all covenants, agreements, terms and conditions
of the Notes, the Note Agreement and each other Financing Document required to be observed,
performed or complied with by the Company or any other Obligor.

     2. Grant of Security Interests.

     As security for the due and punctual payment and performance in full of all Secured
Obligations in accordance with the terms of the Note Agreement and the other Financing Documents,
each Debtor hereby agrees that the Secured Party shall have, and each Debtor hereby grants to and
creates in favor of the Secured Party for the equal and ratable benefit and security of the
Noteholders, a first priority security interest in and to the Collateral subject only to Permitted
Liens of the types described in clauses (i) through (iii), (v) through (vii) and (ix) of the
definition of that term set forth in Schedule B to the Note Agreement. Without limiting the
generality of Section 4, each Debtor further agrees that with respect to each item of Collateral as
to which (i) the creation of a valid and enforceable security interest is not governed exclusively
by the Code or (ii) the perfection of a valid and enforceable security interest therein under the
Code cannot be accomplished either by the Secured Party taking possession thereof or by the filing
in appropriate locations of appropriate Uniform Commercial Code financing statements

3

 

executed by such Debtor, such Debtor will at its expense execute and deliver to the Secured
Party such documents, agreements, notices, assignments and instruments and take such further
actions as may be reasonably requested by the Required Holders from time to time for the purpose of
creating a valid and perfected first priority Lien on such item, subject only to such Permitted
Liens, enforceable against such Debtor and all third parties to secure the Secured Obligations.

     3. Representations and Warranties.

     Except as otherwise provided or permitted in the Note Agreement and without limiting any
provisions thereof, each Debtor represents and warrants to the Secured Party and the Noteholders
that: (a) each Debtor has good and marketable title to its Collateral; (b) except for the security
interest granted to and created in favor of the Secured Party for the benefit of the Noteholders
hereunder and Permitted Liens, all the Collateral is free and clear of any Lien; (c) each Debtor
will defend the Collateral against all claims and demands of all Persons at any time claiming the
same or any interest therein (other than Permitted Liens); (d) each Account and General Intangible
is genuine and enforceable in accordance with its terms and such Debtor will defend the same
against all claims, demands, setoffs (other than setoffs validly asserted under the Bank Credit
Agreement) and counterclaims at any time asserted; (e) at the time any Account becomes subject to
this Agreement, such Account will be a good and valid Account representing a bona fide sale of
goods or services by such Debtor and such goods will have been shipped to, or such services will
have been performed for, the respective account debtors; (f) no consents, authorizations or
approvals of any Person (including without limitation any Official Body) and no notices to or
filings with any Official Body are necessary for (i) the execution of the Security Documents or the
granting of the security interest in the Collateral by such Debtor to the Secured Party or (ii)
except as described in item (g) below, the perfection of any Lien or security interest granted
hereunder or the exercise by the Secured Party of its rights and remedies hereunder; (g) this
Agreement creates valid security interests in all Collateral intended by the terms hereof to be
subject to a security interest hereunder and, by virtue of the recording and/or filing, as
appropriate, of the Mortgages (Noteholders) and the filing of Uniform Commercial Code financing
statements in the respective jurisdictions of organization of the Debtors (all of which recordings
and/or filings, or arrangements for the making thereof satisfactory to the Purchasers, will be made
prior to the Closing on the Closing Date), such security interests constitute or on or prior to the
Closing Date will constitute perfected and first priority security interests in all such Collateral
(except, in the case of Collateral consisting of Accounts and Inventory, as otherwise provided in
the Intercreditor Agreement) in respect of which a security interest may be perfected by the filing
of financing statements or other documents or instruments with any Official Body (in each case
subject only to Permitted Liens of the types described in clauses (i) through (iii), (v) through
(vii) and (ix) of the definition of that term), enforceable as such against creditors of the
respective Debtors; and (h) no effective financing statement or other instrument similar in effect
covering all or any part of the Collateral is on file in any filing or recording office other than
(i) those naming the Secured Party as secured party, (ii) those securing Permitted Liens of the
types described in clauses (vi), (vii) or (viii) of the definition of that term and (iii) those
which relate to an existing financing that is to be retired with the proceeds of the Notes and
which will be terminated, or be subjected to arrangements satisfactory to the Purchasers for the
termination thereof, on or prior to the Closing Date.

4

 

     4. Further Assurances.

     Each Debtor will faithfully preserve and protect the Secured Party’s security interests in the
Collateral as prior perfected security interests under the Code, superior and prior to the rights
of all third Persons, except for Permitted Liens of the type described in clauses (i) through
(iii), (v) through (vii) and (ix) of the definition of that term set forth in Schedule B to the
Note Agreement, and will do all such other acts and things and will, upon reasonable request
therefor by the Required Holders, execute, deliver, file and record all such other documents and
instruments, including, without limitation, financing statements and extensions thereof, security
agreements, assignments and documents and powers of attorney with respect to the Collateral, and
pay all filing fees and taxes related thereto, as the Required Holders in their reasonable
discretion may deem necessary or advisable from time to time in order to attach, continue,
preserve, perfect and protect said security interests; and each Debtor hereby irrevocably appoints
the Secured Party, its officers, employees and agents, or any of them, as attorneys-in-fact for
such Debtor to execute, deliver, file and record such items for such Debtor and in such Debtor’s
name, place and stead. This power of attorney, being coupled with an interest, shall be irrevocable
for the life of this Agreement.

     5. Covenants Regarding Collateral.

     Each Debtor covenants and agrees with and for the benefit of the Secured Party and the
Noteholders that:

          (a) it will defend the Secured Party’s and the Noteholders’ right, title and security
interests in and to the Collateral and the proceeds thereof against the claims and demands of all
Persons whomsoever, other than any Person claiming a right in the Collateral pursuant to (i) an
agreement between such Person and the Secured Party or (ii) a Permitted Lien;

          (b) it will not suffer or permit to exist on any Collateral any Lien except for Permitted
Liens;

          (c) it will not take or omit to take any action, the taking or the omission of which might
reasonably be expected to result in a material alteration or impairment of the Collateral or of the
Secured Party’s rights under this Agreement, including without limitation (i) failing to maintain
all material Equipment in good operating condition in conformity with general commercial standards
of quality, ordinary wear and tear excepted, and (ii) failing to use commercially reasonable
efforts to collect when due any and all material amounts owed to such Debtor;

          (d) it will not sell, assign or otherwise dispose of any portion of the Collateral except as
permitted in Section 10.7 of the Note Agreement;

          (e) it will (i) obtain and maintain sole and exclusive possession of the Collateral (other
than Collateral required to be delivered to the Secured Party pursuant to the terms of the Security
Documents), (ii) keep the Collateral and all records pertaining thereto at the locations specified
on the Security Interest Data Summary attached as Schedule A hereto (the “Security Interest Data
Summary”), unless it shall have given the Secured Party prior notice and taken all such action as
shall be required by Law or reasonably requested by the Secured

5

 

Party to maintain the security interests of the Secured Party therein, (iii) notify the
Secured Party if an Account becomes evidenced or secured by an Instrument or Chattel Paper and
deliver to the Secured Party all Collateral consisting of Chattel Paper immediately upon such
Debtor’s receipt of a request therefor, and (iv) keep materially accurate and complete books and
records concerning the Collateral including, but not limited to, the originals of all documentation
with respect to all receivables and records of all payments received and all credits granted on
such receivables, any returned products (including coal) and all other dealings therewith, and such
other books and records required in accordance with the Note Agreement;

          (f) it will promptly furnish to the Secured Party such information and documents relating to
the Collateral as the Required Holders may reasonably request, including, without limitation, all
invoices, Documents, contracts, Chattel Paper, Instruments and other writings pertaining to such
Debtor’s contracts or the performance thereof, all of the foregoing to be certified upon request of
the Required Holders by an authorized officer of such Debtor; and

          (g) it will immediately notify the Secured Party if any material account arises out of
contracts with the United States or any department, agency or instrumentality thereof, and will
execute any instruments and take any steps required by the Secured Party so that all monies due
under such contract shall be assigned to the Secured Party and notice of such assignment shall be
given to and acknowledged by the appropriate government agency or authority under the Federal
Assignment of Claims Act.

     6. Preservation of Rights.

     Each Debtor assumes full responsibility for taking any and all necessary steps to preserve all
rights of the Secured Party and the Noteholders with respect to the Collateral against all Persons
other than anyone asserting rights in respect of a Permitted Lien. No Debtor will move its chief
executive office as set forth in the Security Interest Data Summary with respect to such Debtor
unless it shall take all action satisfactory to the Secured Party as the Secured Party may request
and as shall be required by applicable Law to maintain the security interests of the Secured Party
in the Collateral intended to be granted hereby and in the other Security Documents at all times
fully perfected with the same or better priority and in full force and effect.

     7. Additional Rights of Secured Party.

          (a) At any time and from time to time whether or not an Event of Default then exists and
without prior notice to or consent of any Debtor, the Secured Party may at its option take such
actions as the Secured Party deems appropriate (i) to attach, perfect, continue, preserve and
protect the Secured Party’s prior security interests in the Collateral, and/or (ii) subject to the
provisions of Section 7.2 of the Note Agreement, to inspect, audit and verify the Collateral,
including reviewing all of such Debtor’s books and records and copying and making excerpts
therefrom, provided that prior to an Event of Default or a Potential Default, the same is done with
advance notice during normal business hours to the extent access to such Debtor’s premises is
required, and (iii) to add all liabilities, obligations, reasonable costs and expenses reasonably
incurred in connection with the foregoing clauses (i) and (ii) to the Secured Obligations, to be
paid by the Debtors to the Secured Party for the benefit of the Noteholders upon demand; and

6

 

          (b) At any time and from time to time after an Event of Default exists and is continuing and
without prior notice to or consent of any Debtor, the Secured Party may (but shall have no
obligation to) at its option take such action as the Secured Party deems appropriate (i) to
maintain, repair, protect and insure the Collateral, and/or (ii) to perform, keep, observe and
render true and correct any and all covenants, agreements, representations and warranties of any
Debtor hereunder, and (iii) to add all liabilities, obligations, costs and expenses reasonably
incurred in connection with the foregoing clauses (i) and (ii) to the Secured Obligations, to be
paid by the Debtors to the Secured Party for the benefit of the Noteholders upon demand.

     8. Remedies Upon Event of Default.

     Upon the occurrence of any Event of Default under the Note Agreement and for so long as such
Event of Default shall be continuing:

          (a) The Secured Party shall have and may exercise all the rights and remedies available to a
secured party under the Code in effect at the time, and all such other rights and remedies as may
be provided by Law or as are set forth below, including without limitation to take over and collect
any or all of any one of more Debtor’s Collateral, and to this end each Debtor hereby appoints the
Secured Party, its officers, employees and agents, as its irrevocable, true and lawful
attorneys-in-fact with all necessary power and authority to (i) take possession immediately, with
or without notice, demand, or legal process, of any of or all of the Collateral wherever found, and
for such purposes, enter upon any premises upon which the Collateral may be found and remove the
Collateral therefrom, (ii) require any Debtor to assemble the Collateral and deliver it to the
Secured Party or to any place designated by the Secured Party at such Debtor’s expense, (iii)
receive, open and dispose of all mail addressed to any Debtor and notify postal authorities to
change the address for delivery thereof to such address as the Secured Party may designate, (iv)
demand payment of or upon all Accounts, Payment Intangibles, Chattel Paper, Instruments, Investment
Property, Letters of Credit, advises of credit and similar property and rights to payment included
in the Collateral, (v) enforce payment of all such Accounts, Payment Intangibles, Chattel Paper,
Instruments, Investment Property, Letters of Credit, advises of credit and similar property and
rights to payment, by legal proceedings or otherwise, (vi) exercise all of any Debtor’s rights and
remedies with respect to the collection of all such Accounts, Payment Intangibles, Chattel Paper,
Instruments, Investment Property, Letters of Credit, advises of credit and similar property and
rights to payment, (vii) settle, adjust, compromise, extend or renew all of the Collateral, (viii)
settle, adjust or compromise any legal proceedings brought to collect all or any part of the
Collateral (ix) to the extent permitted by applicable Law, sell or assign all of the Collateral
upon such terms, for such amounts and at such time or times as the Secured Party deems advisable,
(x) discharge and release any Collateral, (xi) take control, in any manner, of any item of payment
or proceeds from any account debtor, (xii) prepare, file and sign any Debtor’s name on any proof of
claim in bankruptcy or similar document against any account debtor, (xiii) prepare, file and sign
any Debtor’s name on any notice of Lien, assignment or satisfaction of Lien or similar document in
connection with any of the Collateral, (xiv) do all acts and things necessary, in the Required
Holders’ sole discretion, to fulfill any Debtor’s obligations under the Financing Documents, (xv)
endorse the name of any Debtor upon any check, Chattel Paper, Document, Instrument, invoice,
freight bill, bill of lading or similar document or agreement relating to any of the Collateral;
(xvi) use any Debtor’s stationery and sign such Debtor’s name to verifications of any of the
Collateral and notices

7

 

thereof to account debtors; (xvii) access and use the information recorded on or contained in
any data processing equipment or computer hardware or software relating to the Collateral or
proceeds thereof to which any Debtor has access, (xviii) demand, sue for, collect, compromise and
give acquittances for any and all Collateral, (xix) prosecute, defend or compromise any action,
claim or proceeding with respect to any of the Collateral, and (xx) take such other action as the
Required Holders may deem appropriate, including extending or modifying the terms of payment of any
Debtor’s debtors. This power of attorney, being coupled with an interest, shall be irrevocable for
the life of this Agreement. To the extent permitted by Law, each Debtor hereby waives all claims
of damages due to or arising from or connected with any of the rights or remedies exercised by the
Secured Party pursuant to this Agreement, except claims arising (to the extent so arising) from
gross negligence or willful misconduct by the Secured Party.

          (b) The Secured Party shall have the right to lease, sell, give an option or options to
purchase, or otherwise dispose of all or any of the Collateral at public or private sale or sales,
with such advance notice as may be required by Law (it being agreed by each Debtor that, to the
fullest extent permitted by applicable Law, ten (10) business days’ advance notice of the time and
place of any public sale, or the time after which any private sale is to be made, shall constitute
reasonable notice), in lots or in bulk, for cash or on credit or any combination of cash and
credit, or for future delivery, and upon such other terms as the Required Holders, in their sole
discretion, may deem reasonable. The Secured Party shall not be obligated to make any sale of the
Collateral regardless of notice of sale having been given. The Secured Party may adjourn any
public or private sale from time to time by announcement at the time and place fixed therefor, and
such sale may, without further notice, be made at the time and place to which it was so adjourned.
The Secured Party shall have the right to conduct such sales on any Debtor’s premises or elsewhere
and shall have the right to use any Debtor’s premises without charge for such sales for such time
or times as the Secured Party may see fit. The Secured Party may purchase all or any part of the
Collateral at public or, if permitted by Law, private sale and, in lieu of actual payment of such
purchase price, may set off the amount of such price against the Secured Obligations.

     9. Benefits; Application of Proceeds.

     The security interest in each Debtor’s Collateral granted to and created in favor of the
Secured Party by this Agreement shall be for the benefit of the Secured Party and the Noteholders.
Each of the rights, privileges, and remedies provided to the Secured Party hereunder or otherwise
by Law with respect to any Debtor’s Collateral shall be exercised by the Secured Party only for its
own benefit and the benefit of the Noteholders, and any of such Debtor’s Collateral or proceeds
thereof held or realized upon at any time by the Secured Party shall be applied as set forth in
Section 5 of the Collateral Agency Agreement.

     10. Storage of Collateral.

     If the Secured Party repossesses or seeks to repossess any of the Collateral pursuant to the
terms hereof during the continuance of an Event of Default which shall have occurred, then to the
extent it is commercially reasonable for the Secured Party to store any Collateral on any of any
Debtor’s premises, each Debtor hereby agrees to lease to the Secured Party on a month-to-month
tenancy for a period not to exceed one hundred twenty (120) days at the Secured Party’s

8

 

election, at a rental of One Dollar ($1.00) per month, the premises on which the Collateral is
located, provided it is located on premises owned or leased by such Debtor.

     11. Debtors to Remain Liable.

     For the avoidance of doubt, if the proceeds of any sale or other disposition of or collection
or other realization from or upon the Collateral are insufficient to pay all Secured Obligations in
full (including, without limitation, the costs and expenses of such sale, disposition, collection
or realization), the Debtors shall be liable for the deficiency and the reasonable costs and
expenses incurred by the Secured Party and any Noteholders in connection with the collection of
such deficiency (including the reasonable attorneys fees and disbursements of counsel for the
Secured Party and of a special counsel for the Noteholders, and, if reasonably requested by the
Secured Party or the Required Holders with respect to any relevant jurisdictions, local or other
counsel consisting, for each such jurisdiction, of a single law firm approved by the Required
Holders for such jurisdiction).

     12. Waiver by Debtors.

     Each Debtor hereby waives, for itself, and all who may claim under it, insofar as it now or
hereafter lawfully may, (a) presentment, demand, protest or any notice of any kind in connection
with this Agreement, the other Security Documents or any Collateral (other than notices required by
the express terms of this Agreement), (b) all rights of redemption, appraisement, valuation, stay,
extension or moratorium now or hereafter in force under any applicable law that would be effective
to prevent or delay the enforcement of this Agreement or any other Security Document or the
absolute sale of the Collateral or any portion thereof or interest therein pursuant to the
provisions hereof and, to the extent applicable, the provisions of the other Security Documents,
and (c) except in the case of gross negligence or willful misconduct, all claims, damages and
demands against the Secured Party and any Noteholder arising out of the repossession, retention or
disposition of the Collateral or any portion thereof pursuant to the provisions hereof or of any
other Security Document.

     13. Termination of Agreement.

     Upon (i) indefeasible payment and performance in full of the Secured Obligations in accordance
with the terms hereof, of the Note Agreement, and of the other Financing Agreements, and (ii) the
satisfaction of all other conditions set forth in Section 18 of the Collateral Agency Agreement to
the termination thereof, this Agreement and all obligations of the Debtors hereunder (excluding
those obligations which by their terms expressly survive such termination) shall terminate and be
of no further force and effect, and the Secured Party shall thereupon, upon the written request and
at the sole expense of the requesting Debtor, promptly return to a Debtor such of the Collateral
and such other documents delivered by such Debtor hereunder as may then be in the Secured Party’s
possession. Until such termination, however, this Agreement shall remain in full force and effect.

     14. Delay No Waiver; Cumulative Remedies, Etc.

     No failure or delay on the part of the Secured Party in exercising any right, remedy, power or
privilege hereunder shall operate as a waiver thereof or of any other right, remedy,

9

 

power or privilege of the Secured Party hereunder or available to it at Law or otherwise; nor
shall any single or partial exercise of any such right, remedy, power or privilege preclude any
other or further exercise thereof or the exercise of any other right, remedy, power or privilege.
No waiver of a single Event of Default shall be deemed a waiver of a subsequent Event of Default.
The rights and remedies of the Secured Party under this Agreement are cumulative and in addition to
any rights or remedies which it may otherwise have, and the Secured Party may enforce any one or
more remedies hereunder successively or concurrently at its option.

     15. Notices.

     All notices and other communications required or permitted to be made under this Agreement
shall be in writing and shall be given as provided in Section 19 of the Collateral Agency
Agreement.

     16. Security Interest Data.

     Each Debtor represents, warrants and agrees that as of the date hereof, all information
contained on the Security Interest Data Schedule is accurate and complete in all material respects
and contains no material omission or misrepresentation. Each Debtor shall promptly notify the
Secured Party of any changes in the information set forth thereon.

     17. Rights to Information Specifically Enforceable.

     Each Debtor acknowledges that the provisions hereof giving the Secured Party rights of access
to books, records and information concerning the Collateral and such Debtor’s operations and
providing the Secured Party access to such Debtor’s premises are intended to afford the Secured
Party with immediate access to current information concerning such Debtor and its activities,
including without limitation, the value, nature and location of the Collateral so that the Secured
Party can, among other things, make an appropriate determination after the occurrence of an Event
of Default, whether and when to exercise its other remedies hereunder and at Law, including without
limitation, instituting a replevin action should any Debtor refuse to turn over any Collateral to
the Secured Party. Each Debtor further acknowledges that, should such Debtor at any time fail to
promptly provide such information and access to the Secured Party, the Secured Party would have no
adequate remedy at Law to promptly obtain the same. Accordingly, each Debtor agrees that such
provisions hereof may be specifically enforced by the Secured Party and waives any claim or defense
in any such action or proceeding that the Secured Party has an adequate remedy at Law.

     18. Entire Agreement; Amendments, Etc.

     This Agreement together with the other Financing Documents constitutes the entire agreement
between and among the parties with respect to the subject matter hereof and supersedes all prior
agreements relating to a grant of security interests in the Collateral provided for herein by any
Debtor. No term of this Agreement may be amended, waived, discharged or terminated orally, but
only by an instrument in writing signed by each Debtor and the Secured Party (acting at the
direction of the Required Holders) or pursuant to a Joinder Agreement entered into as contemplated
by Section 9.2 of the Note Agreement by a Person which shall thereby become an additional Guarantor
(and a Debtor hereunder).

10

 

     19. Successors and Assigns.

     This Agreement shall be binding upon and inure to the benefit of the Secured Party and the
Noteholders and their respective successors and assigns, and each Debtor and each of its respective
successors and assigns, except that no Debtor may assign or transfer such Debtor’s obligations
hereunder or any interest herein.

     20. Governing Law.

     This Agreement shall be governed by, and construed and enforced in accordance with, the laws
of the State of New York.

     21. Severability.

     Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall,
as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability
without invalidating the remaining provisions hereof, and any such prohibition or unenforceability
in any jurisdiction shall (to the full extent permitted by law) not invalidate or render
unenforceable such provision in any other jurisdiction.

     22. Counterparts.

     This Agreement may be executed in any number of counterparts, and by different parties hereto
in separate counterparts, each of which when so executed shall be deemed an original and all of
which taken together shall constitute but one and the same agreement.

     23. Descriptive Headings, Etc.

     The descriptive section and other subdivision headings which are used in this Agreement are
for the convenience of the parties only and shall not affect the meaning of any provision of this
Agreement. References in this Agreement to a particular section or other subdivision, or to a
particular schedule or exhibit, shall, unless otherwise specified herein, be deemed a reference to
that section or other subdivision of, or that schedule or exhibit to, this Agreement.

[SIGNATURE PAGES FOLLOW]

11

 

[SIGNATURE PAGE 1 OF 2 TO SECURITY AGREEMENT]

     IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have
executed and delivered this Agreement as of the day and year first above set forth.

	 	 	 	 	 	 	 
	 	 	WESTMORELAND MINING LLC	 	 
	 
	 	 	 	 	 	 
	 

	 	By
	 	/s/ Douglas P. Kathol
	 	(SEAL)
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Douglas P. Kathol	 	 
	 

	 	Title:
	 	Vice President	 	 
	 
	 	 	 	 	 	 
	 	 	WESTERN ENERGY COMPANY	 	 
	 
	 	 	 	 	 	 
	 

	 	By
	 	/s/ Douglas P. Kathol
	 	(SEAL)
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Douglas P. Kathol	 	 
	 

	 	Title:
	 	Vice President	 	 
	 
	 	 	 	 	 	 
	 	 	DAKOTA WESTMORELAND CORPORATION	 	 
	 
	 	 	 	 	 	 
	 

	 	By
	 	/s/ Douglas P. Kathol
	 	(SEAL)
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Douglas P. Kathol	 	 
	 

	 	Title:
	 	Vice President	 	 
	 
	 	 	 	 	 	 
	 	 	WESTMORELAND SAVAGE CORPORATION	 	 
	 
	 	 	 	 	 	 
	 

	 	By
	 	/s/ Douglas P. Kathol
	 	(SEAL)
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Douglas P. Kathol	 	 
	 

	 	Title:
	 	Vice President	 	 

 

 

[SIGNATURE PAGE 2 OF 2 TO SECURITY AGREEMENT]

	 	 	 	 	 	 	 
	 	 	U.S. BANK NATIONAL ASSOCIATION,	 	 
	 	 	as Secured Party	 	 
	 
	 	 	 	 	 	 
	 

	 	By
	 	/s/ Brian J. Kabbes
 

	 	 
	 

	 	Name:
	 	Brian J. Kabbes	 	 
	 

	 	Title:
	 	Vice President

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