Coal landholder Natural Resource Partners LP (NYSE: NRP) announced Feb. 2 that it has completed the fifth acquisition, at a price of $40m, of coal reserves at the Deer Run longwall mine located near Hillsboro in Montgomery County, Ill.
The purchase was from Colt LLC, an affiliate of the Cline Group, founded by coal operator Chris Cline. The acquisition was funded with cash. Under these deals, NRP buys the coal reserves, then leases them back to Cline in exchange for per-ton production royalties paid to NRP over time.
In total through these five acquisitions, NRP has paid $215m of the $255m slated for the acquisition of about 200 million tons of reserves. The final acquisition for $40m will be associated with the completion of the first pass of the longwall, currently scheduled for August, NRP added.
That first longwall pass will be a big event in the coal markets, since a mine like Deer Run in its early, pre-longwall development phase produces a relatively low amount of coal. The longwall will allow Deer Run, one of several longwall mines being developed by Cline in Illinois, to work up to its full production rate. NRP has projected Deer Run for production of 8 million to 10 million tons per year, though Cline officials have offered a slightly lower forecast than that.
U.S. Mine Safety and Health Administration data shows that Deer Run, listed under Patton Mining LLC, got a production start in the fourth quarter of 2010, turned out 20,639 tons in that quarter, then produced 491,227 tons in all of 2011.
NRP noted in a December 2011 investor presentation that coal production from its properties in the Illinois Basin has increased from 5% of total output to 19% today and is expected to continue to grow significantly in 2012 as production from recent acquisitions is brought on stream.
Note that NRP doesn’t actually produce any coal on its own and mostly makes it money through the production royalties paid by the mine owners on its properties. In some cases, NRP only owns part of the reserves at any given mine, so its reported production for a mine can vary over time as the mine works different NRP and non-NRP parts of its total reserve area.
High-sulfur Illinois Basin coal like this is well situated to move into U.S. power plants with newly-installed SO2 scrubbers, with transportation and Btu advantages over more distant Powder River Basin coals. The Illinois Basin also generally has much thicker coal seams than Appalachia with very low operating costs compared to that competing production region.