Kentucky-based Rhino Resource Partners LP (NYSE:RNO), like other coal producers recently, said in its March 1 earnings statement that it is re-trenching and slimming down its coal production so it can weather a currently soft coal market.
Dave Zatezalo, President and CEO of Rhino’s general partner, said: “With the downturn in the coal markets, we are focused on fulfilling our existing contracts in a cost efficient manner while maintaining the strength and integrity of our labor force. The downturn has had the least impact on our steam coal operations at Hopedale, Sands Hill and Castle Valley where we have longer term sales contracts in place. We have responded to the demand decrease in Central Appalachia for met and steam coal by reducing our production. The steps we have taken to reduce production include working fewer shifts and days, idling select mining operations and delaying expansion plans at certain operations.”
Hopedale and Sands Hill are both in Ohio, in the high-sulfur Northern Appalachia coalfield, while Castle Valley is an underground mine in Utah.
For the fourth quarter, Rhino reported adjusted EBITDA of $24.6m and net income of $12.7m, compared to adjusted EBITDA of $17.2m and net income of $5.7m in the fourth quarter of 2010. Total revenues for the quarter were $101m, with coal sales generating $89.5m of the total.
“Our fourth quarter results were strong as we established a new Adjusted EBITDA record and continued to earn and pay distributions to our unitholders with good coverage ratios,” Zatezalo said. “These record results were achieved through solid contributions across all of our operations. This has been a year of growth and consolidation for Rhino. We continued our focus on safety, improving operating efficiency and executing our expansion efforts throughout the year. Finally, we significantly increased our reserves, both internally with our exploration program and also through acquisitions.”
Several new mines in the works
Rhino’s Central Appalachia Mining LLC unit is continuing development of the Tug River Complex in Central Appalachia. The new highwall miner began production in late November, development of the new Remining 3 surface mine in Mingo County, W.Va., is nearing completion, and the new prep plant will be online in the second quarter of 2012. This complex will provide Rhino with substantial low cost production capability of both thermal and high-vol met coal.
Rhino began operating the new highwall miner in the fourth quarter at its Grapevine surface mine at the Tug River complex, which is capable of producing at a run rate of 240,000 tons of met coal per year. The Remining 3 surface mine at Tug River has been largely developed and is fully permitted to begin production once market conditions dictate. This mine has a projected run rate of 375,000 tons per year, which can be doubled within 12 months, and production is expected to be about 50% met coal.
Zatezalo said progress has also been made at Rhino Eastern, which is a joint venture in southern West Virginia with Patriot Coal (NYSE:PCX) that produces met coal. A drilling program at Rhino Eastern proved an additional 21 million tons of premium mid-vol and low-vol met coal reserves primarily in the Sewell and Beckley coal seams.
Rhino Eastern has made substantial progress in safety and operating improvements at the Eagle #1 deep mine, with the mine successfully restarted in the third quarter. Rhino is constructing the new Eagle #3 deep mine, which is expected to begin production late in the second quarter of this year. Eagle #3 will replace and expand on Eagle #1 production, which will deplete in late 2012. West Virginia permit records show that a mine permit for Eagle #3, a room-and-pillar job in the Eagle seam, was issued on Jan. 3, with the mine located near Bolt in Wyoming County.
Rhino Eastern has continued its exploration program on the 30,000 acres of property it controls and has proven up an estimated 21 million tons of additional reserves of premium met coal. Rhino Eastern controls a major met coal resource and is beginning to demonstrate its production potential. Rhino continues to plan for the opening of a Sewell seam mine, along with a new prep plant.
The Access Energy mine in Rhino’s Deane complex in eastern Kentucky began production in the third quarter of 2011 at a projected run rate of 240,000 tons per year of high quality steam coal. Production from this mine replaced production from a depleted mine and will provide a corridor to an estimated 20- million-ton expansion reserve, about half of which is expected to be a pulverized coal injection (PCI) product with production starting in late 2013.
In Ohio, Rhino said it received the conditional Leesville mine permit in February, subject to receipt of the sewage and air permits. Ohio permitting records show that a mine permit was issued Feb. 10 to Rhino’s Leesville Land LLC unit for a room-and-pillar mine in the #6 coal seam in Carroll, Harrison and Tuscarawas counties. The permit covers 53 acres of surface support area and 9,360 acres of underground coal reserves.
In addition to the Leesville project, at Hopedale in Ohio, Rhino is in the process of permitting a No. 7 seam reserve that will be accessed from the existing portal and infrastructure. Both of these initiatives are expected to provide up to 1 million tons of production similar in quality to Hopedale’s coal within the next 18 months. Market development is ongoing.
Rhino Western’s Castle Valley mine in Utah is fully operational, with a second continuous miner section added. Sales agreements have been reached for about 1 million tons per year over the next three years.
Rhino has conditional approval to build a loadout at the McClane Canyon deep mine in Colorado, pending bonding, and Rhino continues to explore market opportunities to reopen the mine, which was idled at the end of 2010 when its customer power plant was shut. Rhino said it continues discussions with potential customers about a base sales contract at the permitted but not yet developed Taylorville deep mine in Illinois.
Coal sales up in the fourth quarter
In the fourth quarter of 2011, Rhino had coal sales of 1.3 million tons compared to 1.1 million tons for the fourth quarter of 2010. Coal revenues per ton of $68.62 in the fourth quarter compared to $65.85 for the fourth quarter of 2010, an increase of 4.2%. Cost of operations of $69.7 million compared to $55.6 million for the same period of 2010. Cost of operations per ton of $53.44 compared to $50.70 for the fourth quarter of 2010, an increase of 5.4%.
In the fourth quarter, total coal revenues increased about 24% due to an increase in tons sold along with higher contracted prices for steam coal, partially offset by a slight decrease in the mix of met coal sold. The increase in cost of operations and cost of operations per ton can be primarily attributed to increased costs in the Rhino Western segment due to increased production at the Castle Valley mine along with costs associated with temporarily idling the McClane Canyon mine. In addition, Rhino experienced higher costs in all of its operating segments due to higher commodity and fuel prices.
In all of 2011, adjusted EBITDA was $82m and net income was $38.1m, compared to adjusted EBITDA of $71.5m and net income of $41.1m (or $30.3m excluding a $10.8 million gain from the Castle Valley acquisition) for the year ended 2010.
Coal sales in 2011 were 4.9 million tons compared to 4.3 million tons for the year ended 2010. Total revenues and coal revenues of $367.2m and $333.9m, respectively, compared to $305.6m and $289.9m, respectively, for the same period of 2010. Coal revenues per ton of $68.47 in 2011 compared to $67.32 in 2010, an increase of 1.7%. Cost of operations of $267.2m compared to $220.8m for 2010. Cost of operations per ton of $54.79 in 2011 compared to $51.27 for 2010, an increase of 6.9%.
For the full year 2012, Rhino currently anticipates the following: revenue of $350m to $375m; net income of $45m to $55m; and production and sales volumes of 4.9 million to 5.2 million tons. Guidance for 2012 has been re-forecasted and reduced compared to previous figures to reflect demand weakness in the current market conditions for both steam and met coal.