Approximately 75% of 2012 expected coal production has been sold, which includes sales of about 1.8 million tons to Vectren South, an official of Indiana-based Vectren Corp. (NYSE:VVC) said during a Feb. 16 earnings call.
Vectren currently operates two deep mines, the older Prosperity mine and the new Oaktown No. 1 job, in Indiana through its Vectren Fuels subsidiary. Much of that coal goes to the regulated Vectren South power plants in Indiana, with the rest sold on the open market.
Jerome Benkert, the company’s Executive Vice President and CFO, said in that in the coal mining business, margins will be somewhat compressed in 2012 compared to 2011, and closer to the lower end of the $5 to $6 per ton range that the company gave in its third quarter call in November. The current softer market price for new coal sales and the expiration in 2012 of some older, higher priced contracts will limit the coal segment’s earnings contribution for the year compared to a strong 2011 performance
The parent company looks for Vectren Fuels to contribute approximately $11m to nonutility net income in 2012, down from $16.6m in 2010. Vectren Fuels is expected to increase its coal production and sales to about 6 million tons this year from just over 5 million tons in 2011, primarily as a result of the opening of the Oaktown No. 2 deep mine, which is anticipated in the third quarter of 2012.
Approximately 75% of 2012 expected production has been sold, which includes sales of about 1.8 million tons to Vectren South. Expected margin for 2012 is about $5 per ton excluding freight, compared to roughly $7 per ton in 2011. The company expects a decrease in the cost per ton in 2012. But it also expects a decrease in revenue per ton compared to 2011, which is due primarily to the expiration of the older, higher priced contracts in 2012 that are being re-priced at lower current market prices.
For 2012, less than 1 million tons of coal sales to Vectren South remain at the higher 2008 contract prices. Those higher price contracts will end this year. About 1 million additional tons of coal output in 2012 will help drive expected cost per ton down, since these additional tons will come from the lower cost Oaktown No. 1 mine and the company will be able to allocate fixed costs over even more tons produced, Benkert noted.
Additionally, contributing to the expected cost decrease year-over-year 2012 compared to 2011 are productivity improvements. Vectren expects that it will be very near or at full production at Oaktown No. 1 in 2012, producing 2.9 million to 3 million tons. Mine productivity improvements in 2012 include that all three of the continuous miner units in Oaktown No. 1 have now been cleared by the U.S. Mine Safety and Health Administration to use deep cuts, allowing the continuous miners to mine about 36 feet before they have to pull out to allow for roof support and other mining support activities to proceed. Previously, two of the mining units were only cleared for mining 20 feet and 30 feet.
In addition, at both Prosperity and Oaktown No. 1, much more of the mining in 2012 within the room-and-pillar approach will be in certain sections located off the mains called panels, where mining productivity is much greater than in the main entryways. Beginning in 2013, Vectren expects to mine about 7.5 million tons per year, which will equate to all three mines being at or near full production. About 40% of the 2013 production is sold, of which Vectren expects 2.1 million to 2.5 million tons to be sold to Vectren South.
Oaktown No. 1 and No. 2 are both listed with the U.S. Mine Safety and Health Administration under contractor Black Panther Mining LLC. Oaktown No. 1 went into production in the fourth quarter of 2009 and turned out 1 million tons in 2010 and 2.7 million tons in 2011, according to MSHA data. Prosperity, listed with MSHA under contractor Five Star Mining Inc., produced 2.5 million tons in 2011 and 2.7 million tons in 2010.