The Rowland and Marianna coal mine projects are still on-track for development, despite a recent market softening that has seen Alpha Natural Resources (NYSE:ANR) cut back on its expected 2012 production, said Alpha President Kurt Kost during a Feb. 24 earnings call.
The Marianna project is on track for production beginning in 2013, Kost said. “And if we look at our overall capital portfolio for this coming year, we have roughly $30 million to $40 million targeted for Marianna and probably another $10 million to $20 million associated with other metallurgical, just expansion of existing operations on the metallurgical side,” Kost added. “So it’s a key part of our focus going forward. The Rowland properties are probably still a few years out in advance, but our development and expansion at Deep Mine 41 is another area along with Marianna. And when the market comes up to the point where it’s ready to sustain and accept the higher levels of production, we’ll have the high quality coking coals to deliver.”
Marianna is a mine project in southern West Virginia with a projected capacity of about 1 million tons per year, with a mine life of over 15 years and a projected capital cost of over $60m. Deep Mine 41 is a project in Virginia with a projected top production level of up to 1.8 million tons per year, with a mine life of over 35 years and a capital cost of up to $50m.
Massey Energy, which Alpha acquired in June 2011, had announced in 2010 that it had begun development of a new met coal mine within its Rowland reserve in Raleigh County, W.Va. The Rowland reserve consists of 56 million tons of mostly low- and mid-vol met coal and is located adjacent to Massey’s Marfork operation. The new mine is the first among several that are planned to be combined in a new mining group on the Rowland reserve, said at the time. Massey estimated that the new resource group will eventually produce as much as 2 million tons of met coal annually.
Asked during the call about Alpha’s met coal production capacity two years out, Alpha CEO Kevin Crutchfield said the current soft market doesn’t change what the company has talked about before. “I would still characterize it very strongly in the 28 million to 30 million ton range” Crutchfield said. “There is upside from there, but that’s what we’ve talked about publicly so far.” As for Marianna, he said the mine would produce world class coal that is going to have a market under any set of market circumstances and that’s why Alpha has decided to proceed full bore on development.
Paul Vining, one of the most respected coal sales experts in the U.S. coal business and the Chief Commercial Officer at Alpha, fielded a question about whether a strong fourth quarter of production and sales from Alpha’s Belle Ayr and Eagle Butte mines in the Powder River Basin can be sustained in 2012.
“I think Kurt can comment on the production side, but I’d say the outlook for 2012 in the Powder River is very much an issue of execution into certain markets,” said Vining. “And you’ll see that we’ve indicated a strong sales book, but a fairly wide range in the west and that really is a recognition that there are some customers, particularly long distances down into the south and say, east of the Mississippi in the Midwest, that are struggling with some very low natural gas and low power prices, and we are working with those customers. We fully expect to realize the full value of any contracts that we have in place. But what form and shape that takes is yet to be determined.”
Kost added about the PRB mines: “Operationally the mines ramped very well in the fourth quarter. If you annualized that production it was like 55 million, 56 million tons on a full year basis. So capability-wise, execution in the field, the infrastructure is there to do very well. It’s just mainly going to be matter of sales and as Paul mentioned, the ability for the customers to manage with the higher inventories and the production coming out of the basin.”
U.S. utilities sell export coal – really
Vining also answered a question about sagging prices lately on the API2 international steam coal price index and what level of international pricing will be needed to sustain U.S. exports. “[I]f you look at what’s happened to the API2, you can pretty much correlate it a bit with what’s happening in Central App,” Vining said. “And in the past couple of months, there’s been a shift of Central App production into the Atlantic market. It’s pushed some arbitrage opportunities of actually Columbian coal moving from Atlantic into the Pacific Rim as the Newcastle prices have held up. And somewhat it’s representative of some distress coal that’s out there on the part of utilities who don’t want to burn it….”
Vining added: “As we go through the year, we’re going to get to a more solid set of economics to come off production and realistic operating cost for Central App producers and we should see the curve move up in API2 and if you look at the carry right now between ’12 and ’13, it’s on the order of $10 or more per ton. That’s a recognition that there’s going to be a shift here. And if you look at 2013 for instance and you take freight and you take some railroad rates, you can come up with a handle for Central App 12,000 plus Btu coal that’s north of $70 a ton at the mine. So from a competitive standpoint, I’m pretty optimistic about the Central App coal shifting some tons, significant tons from these domestic markets into the Atlantic realm.”
Asked in a follow-up question about whether U.S. utilities are actually re-selling some of their unused coal on the export market, Vining responded: “Oh, absolutely, and that’s part of what’s happened. If you take a look at the OTC markets for PRB and Central App both, the reason they’re so rather ugly, quite frankly, here in the near quarters is because everybody’s book is long and they’re shoving tons into the OTC and they’re doing it because producers like ourselves are holding their feet to the fire on performance and they are taking actions to try to offload those tons and that’s shoving some of that product out of the country.”
Massey/Alpha ops being combined in weak market environment
In July 2011, Alpha doubled down on its Central Appalachia production exposure by acquiring Massey Energy, which at that point was the biggest coal producer in Central App. Crutchfield answered a question about how that Central App exposure in a weak thermal coal market feels right now and how the weak market fits into a rationalization of the combined Massey/Alpha mining operations.
“It is a function of having a longer term view versus a snapshot view because I mean this is a marathon, it’s not a sprint,” Crutchfield said. “We want to be thoughtful and prudent about how we comb through our portfolio to figure out what makes sense. But I do think longer term – I think Paul would agree that there is a place for Central Appalachian high Btu coal on the Atlantic seaborne markets. It’s got a huge Btu advantage over really any of its competitors. The key for us is going to be sorting out logistics from a standpoint of where these assets sit and how you get it into the seaborne markets and then longer term what do you think is sustainable. But clearly in a $2.50 [mmBtu] gas environment and winter days like today, 67 degrees here this morning, I’m not sure that’s a good point in time to take a snapshot because things are going to change from here. I just don’t think what we’re going through right now is sustainable by any stretch.”
Crutchfield added: “But I would also vocally acknowledge, I think we’ve been fairly transparent about this so far, that as we get through the number one thing of protecting the met franchise and augmenting it where we can, but then creating the durable long-lasting sustainable thermal franchise, we’re going to end up with a list of stuff that doesn’t fit in either one of those buckets and we’re going to have to sort that out. We are on it. We’re aggressively pursuing it. We’ve got some of the most talented people in the company looking at it. I don’t think we will do anything that’s imprudent or ill timed. But we are working very diligently through that process now.”
Alpha currently expects to ship between 107 million and 124 million tons of coal in 2012, including between 20 million and 25 million tons of eastern met coal, 42 million to 48 million tons of eastern steam coal and 45 million to 51 million tons of PRB coal. Alpha has said it has cut expected 2012 production of thermal coal by 2.5 million tons, and lower-quality met coal by 1.5 million tons, due to weak markets.