North American Coal net income up, plans underway for new mines

The North American Coal lignite mining unit of NACCO Industries (NYSE:NC) had net income for the fourth quarter of 2011 of $11.9m on revenues of $23.5m, compared with net income of $9.2m on revenues of $34.5m for the fourth quarter of 2010.

At the end of 2010, North American Coal’s contract to operate the San Miguel lignite mine in Texas expired. Fourth quarter 2010 results included $10.8m of revenue and $0.2m of operating profit related to operating the San Miguel mine, NACCO said in a Feb. 29 earnings statement.

North American Coal’s lignite deliveries in the fourth quarter of 2011 came in at 7.2 million tons, down from 8.6 million tons in the year-ago quarter.

Net income for the fourth quarter of 2011 increased compared with the fourth quarter of 2010 primarily due to lower employee-related costs and an increase in royalty and other income. A decline in results at the consolidated mining operations, mainly as a result of unplanned outage days at a customer’s power plant and higher cost of coal sold as a result of reduced production levels implemented to match customer inventory requirements, partially offset the improvement in net income.

For all of 2011, North American Coal reported net income of $29.4m on revenues of $81.8m, compared with net income of $39.6m on revenues of $156.8m for 2010. Results in 2010 included $45.8m of revenue and $1.1m of operating profit related to operating the San Miguel mine. Net income in 2010 also included income of $7.4m, or $4.4m after tax of $3m, related to the reimbursement of previously recognized costs for pre-development activities from Mississippi Power Co. The utility has hired North American Coal to run the adjacent lignite mine at its in-construction Ratcliffe (formerly known as Kemper County) coal gasification power project.

North American Coal expects improved operating performance at its coal mining operations in 2012. Tons delivered in 2012 are expected to be slightly higher than in 2011 provided customers achieve currently planned power plant operating levels. The company mined 27.9 million tons of coal in 2011, down from 34.1 million tons in 2010.

The new unconsolidated coal mines, which are in the development stage and will not be in full production for several years, are expected to continue to generate modest income in 2012. North American Coal also has new project opportunities for which it expects to continue to incur additional expenses in 2012. In particular, the company is working on a permit for its Otter Creek reserve in North Dakota in preparation for the expected construction of a new mine. The permit may be issued in the first half of 2012.

Overall, North American Coal expects full year 2012 net income to increase compared with 2011 net income mainly as a result of expected improvements in tons delivered at the Mississippi Lignite Mining unit. However, higher selling, general and administrative expenses as a result of increased employee-related costs and development activities are expected to partially offset the improvements in net income. Cash flow before financing activities in 2012 is expected to be higher than 2011.

North American Coal is actively pursuing domestic opportunities for new coal mining projects, which include prospects for power generation, coal-to-liquids, coal gasification, coal drying and other clean coal technologies. Furthermore, the company is encouraged that new international value-added mining services projects for coal may become available. North American Coal also continues to pursue additional non-coal mining opportunities. It currently has limerock mining activities in Florida.

Several new coal mines in the works

North American Coal mines and markets coal primarily as fuel for power generation and provides selected value-added mining services for other natural resources companies. Coal is or will be surface mined in Louisiana, Mississippi, North Dakota and Texas. It has one consolidated mining operation: Mississippi Lignite Mining. It has nine unconsolidated operations: The Coteau Properties Co., The Falkirk Mining Co., The Sabine Mining Co., Demery Resources Co. LLC, Caddo Creek Resources Co. LLC, Camino Real Fuels LLC, Liberty Fuels Co. LLC, NoDak Energy Services LLC and North American Coal Corp. India Private Ltd.

Demery, Caddo Creek, Camino Real and Liberty are in the development stage and do not currently mine or deliver coal. NoDak was formed to operate and maintain a coal processing facility. NACC India was formed to provide technical advisory services to the third-party owners of a mine in India.

NACCO’s Feb. 29 Form 10-K report outlines the existing coal mines, and also provides some details about the mines in development. No details are given on the coal reserves for these in-development mines, since the reserves are actually controlled in each case by the customer. Demery, Caddo Creek, Camino Real and Liberty are in the mine planning and design phase. Caddo Creek is involved in initial mine permitting. Camino Real is involved in substantial revisions to an existing mine permit. Geological evaluation is in process at all four locations.

Five Forks mine — Demery Resources – This mine is in the development stage and is located about three miles north of Creston, La. Demery will have no title, claim, lease or option to acquire any of the reserves at the Five Forks mine, with Five Forks Mining LLC controlling all of the reserves.

Marshall mine — Caddo Creek Resources – The Marshall mine is in the development stage and is located about ten miles south of Marshall, Tex. Caddo Creek will have no title, claim, lease or option to acquire any of the reserves. Marshall Mine LLC will control all of the reserves within the Marshall mine.

Eagle Pass mine — Camino Real Fuels – This mine is in the development stage and is located about six miles north of Eagle Pass, Tex., along the border with Mexico. Camino Real will have no title, claim, lease or option to acquire any of the reserves. Dos Republicas Coal Partnership will control all of the reserves at the mine. Unlike the other in-development mines, which involve lignite, the Eagle Pass mine will produce a sub-bituminous coal, which is one step up the heat-value scale from lignite.

Liberty mine — Liberty Fuels – This mine, which will serve the Ratcliffe power plant, is in the development stage and is located about 20 miles north of Meridian, Miss. Liberty will have no title, claim, lease or option to acquire any of the reserves. Mississippi Power will control all of the reserves. The contract mining term is for 40 years commencing the year commercial deliveries begin, which is anticipated to be 2014.

During 2010 and 2011, North American Coal entered into agreements to sell $31.4m of assets, which consist primarily of two draglines, the Form 10-K noted. The sales of the assets are expected to occur in 2012.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.