In response to weakening metallurgical and steam coal markets, Patriot Coal Corp. (NYSE:PCX) said Feb. 2 in its earnings report that it is trimming production of both types of coal, including at its Rocklick and Wells complexes in southern West Virginia.
“Metallurgical coal demand has trended downward in recent weeks, particularly in export markets,” said Patriot President and CEO Richard Whiting. “As previously announced, we have taken actions to match our met production with expected sales volume. We are reducing production at both our Rocklick and Wells complexes, with particular emphasis on higher-cost operations, and delaying certain of our met expansion plans.”
Whiting added: “Likewise, given our view that the domestic thermal coal market is likely to remain depressed for an extended period, we have conducted a rigorous review of our Central Appalachia thermal mine portfolio. As a result, we made the decision to idle the Big Mountain complex in Boone County, West Virginia, effective today. Big Mountain produced 1.8 million tons of thermal coal in 2011. This decision effectively positions Patriot with no remaining uncommitted Appalachia thermal coal in 2012.”
Patriot has met coal mining operations in southern West Virginia based around a series of smaller mines that feed into central prep plants like Rocklick. It also has some generally larger surface and deep mines there that produce most of its steam coal in that region. It has one longwall deep mine in northern West Virginia, Federal No. 2, that mostly supplies the steam market. It also has a handful of deep and strip jobs in western Kentucky that primarily supply steam coal.
The Big Mountain complex is sourced by one company-operated underground mine, Big Mountain No. 16, and two contractor-operated deep mines located in southern West Virginia, said Patriot’s February 2011 annual Form 10-K filing. Coal is produced utilizing continuous mining methods. The coal is sold on the thermal market and is transported from the prep plant to customers via CSX rail or trucked to a barge terminal on the Kanawha River.
Revenues and EBITDA both up in Q4
For the 2011 fourth quarter, Patriot reported revenues of $603.9m and EBITDA of $43.1m. Revenues and EBITDA for the year-ago quarter were $528.2m and $42.8m, respectively. For the year, the company reported revenues of $2.4bn and EBITDA of $176.7m. Revenues and EBITDA for 2010 were $2bn and $141.9m, respectively.
“Our 2011 financial performance improved over the prior year, and we made progress in a number of key areas that will contribute to more predictable performance in the future,” said Whiting. “Improvements included strengthening our operating management team, upgrading equipment and ramping up our export thermal sales. Headwinds created by low natural gas prices, mild weather, and weaker international and domestic economies impacted coal markets during the year, and market weakness continues as we enter 2012. In the near term, our management team will focus on our detailed operating plans, emphasizing swift decisions and solid execution.”
“Patriot delivered solid financial results in 2011, as we achieved higher pricing and expanded our met coal volume,” noted Patriot Senior Vice President and CFO Mark Schroeder. “Our revenues grew by $400 million in 2011, led by strong met pricing. And our EBITDA for the year increased 25 percent over last year. Importantly, our EBITDA has shown steady improvement each year since we became a public company.”
Sales in the fourth quarter totaled 7.6 million tons, including 5.8 million tons of thermal and 1.8 million tons of met coal. This compares with 6 million tons of thermal and 1.7 million tons of met coal sold in the year-ago quarter. Full-year 2011 sales volume of 31.1 million tons was comparable with the 30.9 million tons sold in 2010. Met coal sales in 2011 totaled 7.4 million tons, a 0.5 million ton increase over 2010.
“Our fourth quarter EBITDA included a gain of $18.8 million on a reserve swap in which we acquired 35 million tons of coal reserves at our Highland and Dodge Hill complexes,” Schroeder noted about two operations in western Kentucky.
A restructuring and impairment charge of $13.2m in the 2011 fourth quarter related primarily to infrastructure and reserves impacted by mine closure decisions made in the fourth quarter. During the quarter, Patriot paid $28m to purchase the Blue Creek prep plant and associated infrastructure which had previously been leased.
In line with prior estimates, capital expenditures totaled $54.9m in the 2011 fourth quarter and $174.7m for the year. Additionally, leased equipment totaled $19.1m in the fourth quarter and $113.7m for the year. For 2012, Patriot expects capital expenditures in the range of $160m to $180m.
Long-term coal prospects still look bright
The demand for met coal used in steel production is dependent on the strength of global economies. Recent concerns over a slower pace of growth in China, the European financial crisis and the strength of the U.S. recovery have caused downward pressure on steel demand. Even with these short-term concerns, U.S. coke plants are running near capacity and global steel mill percentage utilization remains in the mid-70s, Patriot noted.
For thermal coal, uncertainty over the U.S. economy and environmental regulations, weak natural gas prices and mild weather have led to reduced coal-fueled generation and coal pricing. While implementation by the U.S. Environmental Protection Agency of the Cross-State Air Pollution Rule, which was due to take effect Jan. 1, has been delayed by a federal appeals court, the future outcome of this rule remains unknown, as does the timeframe for compliance, Patriot said.
Long-term fundamentals in coal markets remain intact, the company added. Seaborne met coal demand is expected to grow by more than 170 million tonnes to 428 million tonnes by 2020, which is nearly 70% higher than the 2011 level. At the same time, seaborne thermal coal demand is expected to grow by 200 million tonnes, or more than 25%, to over 950 million tonnes by 2020.
“In thermal markets, we believe that while the domestic market will remain depressed for some time, international markets will present profitable export opportunities in the future for Eastern U.S. coals,” said Whiting. “In metallurgical markets, even with weakened global economies, current pricing remains high by historical standards. As economies strengthen and demand returns, we see excellent potential for met coal margin expansion.”
Patriot outlines 2012 sales figures
In 2012, Patriot currently anticipates sales volume of 27 million to 29 million tons, including met coal sales of 7 million to 7.8 million tons. Based on this volume, the company expects cost per ton for the Appalachia segment to be between $72 and $78. For the Illinois Basin segment in western Kentucky, Patriot expects cost per ton for 2012 to be in the $42 to $46 range. These cost estimates will be influenced by any further changes to planned production that occur over the period.
“Since the last earnings call, we sold more than 3 million tons of metallurgical coal for 2012 delivery,” said Schroeder. “About three-fourths of these tons were Panther-type quality, resulting in an average price of $135 per ton for new met tons booked. We also sold about 700,000 tons of Illinois Basin coal for 2012 delivery, at an average selling price of $50 per ton. And we sold about 250,000 tons of Appalachian thermal coal for 2012 delivery, at an average selling price of $80 per ton, of which about half related to industrial stoker business.”
Patriot aggressively sold thermal coal for 2012 delivery to European markets throughout 2011, and said it expects thermal exports in 2012 of about 7 million tons, or nearly twice its thermal exports in 2011.
Average selling prices of currently priced tons for 2012 are 13.4 million tons of thermal coal committed at $65/ton out of Appalachia, 6.6 million thermal tons committed at $50/ton out of the Illinois Basin and 5.3 million met tons committed at $144/ton out of Appalachia. For 2013, the figures are 5.1 million tons of Appalachia thermal coal committed at $67/ton, 3.9 million tons of Illinois Basin thermal coal committed at $50/ton and no met coal committed.
That lack of met coal commitments for 2013 is not unusual, since most domestic met coal buyers commit each year for the calendar year, and the export market largely depends on quarterly and yearly contracts based on an export year that begins in April. That means that the initial export met deals for the upcoming export year are only now being worked on.