James River Coal (NASDAQ:JRCC), a major coal producer in Central Applachia, currently see a number of positive signals in the metallurgical market, tempered with some cautionary signs, said Joe Czul, President of Logan & Kanawha Coal, a James River Coal subsidiary that handles coal sales.
In North America, steel industry customers are doing well and are generally accepting contractual coal shipments on schedule, Czul noted during a March 1 earnings call. In Europe, the James River Coal customers are doing a little better than expected just a few months ago and they are cautiously optimistic for a gradual return to higher operating levels, he added.
Logan & Kanawha sells both internal production from James River Coal’s own mines and also brokers coals produced by third parties. James River Coal in April 2011 acquired Logan & Kanawha and related coal mining operations in southern West Virginia (mainly Hampden Coal) and in eastern Kentucky (Laurel Mountain properties) through its buy of International Resource Partners LP. This acquisition gave James River Coal a much bigger presence in the met coal market.
“We would not be surprised if the outlook for European steel companies continues to improve,” Czul said. “The economy in India is also improving, as inflation gets under control. Anecdotally, during our visits there, we noticed that business translated to the general business community where sentiment has improved. Our customers have growth projects that are coming onstream and we expect to see their growth forecast to be largely on track. U.S. [coal] suppliers gained market share in India in 2011 and we’re cautiously optimistic that we can hold that position in 2012.”
On the cautionary side, most James River Coal customers are being offered increased coal supplies from almost all basins. “The Canadians have increased their production year-over-year and are offering this tonnage to the market,” Czul noted. “Australian suppliers are also offering customers additional supplies for the year. New entrants are trying to hold the market share they gained in 2011, and in some cases, are offering additional supplies. In particular, Indonesia, Mozambique and Mongolia are among suppliers we see as possible competitors. Finally, our business is closely tied to the global economic growth and that growth is still anemic and susceptible to falling off.”
Socha says utility coal buyers in wait-and-see mode
James River Coal Chairman and CEO Peter Socha said that on the thermal coal side of the business, the big news is that a federal appeals court in December 2011 put a stay on the U.S. Environmental Protection Agency’s Cross-State Air Pollution Rule (CSAPR), which was due to take effect on Jan. 1 and would have altered the coal buying of a number of power generators. Socha noted that oral arguments on the case are due in April. “We looked at every case that came out of the D.C. Circuit Court of Appeals over the last couple of years [and] it appears as though the average timeline from a hearing date to a written opinion related to that case is about 16 weeks. So we would expect an opinion on the CSAPR case sometime this summer, later this summer.
Socha said he thinks the biggest single factor on the demand side for steam coal is a weak economy in the U.S. and elsewhere, with some early signs of improvement across the board and perhaps some renewed strength in the commodity market later this year.
James River Coal out of its traditional eastern Kentucky operations is particularly strong in the coal markets in the southeast U.S. and is traditionally a major supplier to Georgia Power. “[I]n talking to our customers in the southeast, their coal burn is not really going down a whole lot between ’11 and ’12, but really between ’10, ’11 and ’12,” Socha said about lower coal burn in part due to cheap natural gas and related coal-to-gas switching by power generators. “It was already at a low level. Gas prices were already in the money in the Southeast for the last several years. And so whatever could switch has switched.
Socha added: “Yes, there may be some switching going on in mid-Atlantic. I’ve read about in the industrial Midwest, their stockpiles are big. … Some of them would be coming out for coal solicitations, we believe, late this year, early next year. But by and large, they’re doing okay on their coal burn. I read a comment from a sell side conference, where one of our CFOs attended. He said his coal burn is going to be flat, pretty much flat year-over-year. They’re not going to be switching. And based on what we’re hearing, that seems to be the case anecdotally. What happens going forward? I don’t know. What happens in ’13 and ’14? I don’t know. Right now, we’re trying to work with them on ’12 and make sure that what we have under contract and what they need match up.”
Socha noted that reports of historically cheap $2.50/MMBtu gas prices are no big deal in some areas of the country, since most power generators who want to run more gas-fired capacity did so long before the price got that low. “Once you get sort of sub-$4, you’re switched,” he said. “If your break line between switching and not switching is $4, and gas is at $3.25 or $3.50, you’ve already switched. It doesn’t really matter if gas hits $2.50. You’re not going to switch anymore. It’s not a dimmer. It’s more like a light switch. And for our guys in our service territories, they pretty well switched. The Midwest, Texas, some of the other areas, they may not have hit that point yet. Gas may not have been economic yet.”
Socha said a lot of coal buyers for power generators are in a wait-and-see mode right now. “[T]hey want to see what happens with CSAPR or what happens with the EPA regulation. … They want us to see what happens with their coal burn in the summertime this coming summer. They know what it is by now. They know it was in the wintertime and they want to see where natural gas prices are and where exports are. This is not that unusual. Most of our year-forward conversations with customers are with the utilities. The truly serious conversations really are in the September, October timeframe because they are now coming out of summer.”
Summer, due to air conditioner load, is a peak burn season for power generators. So a lot of the post-summer plans for power generators can’t be pinned down until they see what their summer burn was and what that did to their coal stockpiles.
James River brings new mines into play
C.K. Lane, the Senior Vice President and COO at James River Coal, noted that pretty much everyone in Central Appalachia (eastern Kentucky, southern West Virginia and Virginia) has announced production cuts. “We’re watching our production and we’re continuing to reduce our overtime,” Lane added. “We’re not working any Saturday production days right now. We are taking some additional days off. We’ll continue to do that through 2012 to reduce production. What we try to do is match up days with holidays to give our employees an extended weekend around the different holidays, such as Easter and Memorial Day. So we’ve kind of got those planned throughout the year. We have delayed some startup of some of our replacement mines to also manage our production going forward. We completed the Phase 1 dam for our new impoundment at McCoy Elkhorn [in eastern Kentucky]. We’re very pleased to get that part done for us. We also started developing the Hazard #4 seam at Abner Branch at our Bledsoe operation [in eastern Kentucky]. This is a lower sulfur reserve and will help us in the market going forward by reducing our overall sulfur to the Bledsoe operation.”
At Hampden Coal in southern West Virginia, the company started a new mine called Mine 6A, Lane added. It replaced the Mine 3A that mined out. The company’s James River Coal Service unit also restarted the Lewis Creek surface mine in eastern Kentucky, replacing the Bear Branch surface mine that mined out. And the Stacy Branch surface mine in eastern Kentucky got a new state permit, but the U.S. Army Corps of Engineers permit is still pending. “This is a permit that we’ve been working on since 2006 located in the Hazard area,” Lane added about Stacy Branch.
At the Triad Mining operation in Indiana, it’s the same story as the last couple of quarters, Lane said. “We’re running our operations at a reduced rate just to match up with our customer demand and shipments and control our inventory,” Lane said. “As you know, that Midwest has a higher sulfur coal and so we don’t build a lot of inventory there. We did get our new Log Creek Loadout in operation. We shipped our first train by rail to Kentucky Utilities on January 10.”
James River Coal said it expects to ship 6.7 million tons of Central Appalachia coal in 2012 for the thermal, stoker and pulverized coal injection markets. It plans to ship 2.8 million tons of met coal out of Central Appalachia in 2012. And out of Indiana, projected 2012 shipments would be up to 2.8 million tons.
In its March 1 annual Form 10-K report, James River Coal said that in 2011, South Carolina Public Service Authority (20%) and Georgia Power (11%) were its largest customers by revenues. No other customer accounted for more than 10% of total revenues.
In 2011, James River Coal sold about 9.3 million tons of coal in Central Appalachia (CAPP) at an average selling price of $107.28/ton. In the CAPP region, it currently has about 7.9 million and 1.3 million tons contracted to be sold in 2012 and 2013, respectively, at average selling prices in excess of $90/ton and $80/ton, respectively. Current market prices for steam and met coal in the CAPP region are substantially below the company’s average 2011 sales price for those coals.
In 2011, the company sold around 2.5 million tons of coal out of Indiana at an average selling price of $42.49/ton. In Indiana, it currently has about 2.7 million and 2.1 million tons contracted to be sold in 2012 and 2013, respectively, at average selling prices in excess of its 2011 average selling price.