Hallador Energy (NASDAQ Capital Market:HNRG) was able in 2011 to boost production at its Carlisle deep mine in Indiana and is still working to develop the Allerton coal mine in nearby Illinois, the company said in its March 2 annual Form 10-K report.
Carlisle is operated through subsidiary Sunrise Coal LLC. In 2011, the company sold 3,307,000 tons at an average price of $41.71/ton. For 2010, it sold 3,050,000 tons at an average price of $42.31/ton.
As of the end of 2011, assigned to the Carlisle mine were 46 million tons of coal reserves compared to beginning of year reserves of 46.7 million tons. Primarily through the execution of new leases, reserve additions of 2.6 million tons replaced about 80% of 2011 production of about 3.3 million tons.
In addition to the Allerton reserve, Hallador said it is currently evaluating multiple mining projects which could add to its coal reserves by the end of 2012. Some of these projects are near the Carlisle mine and if they come to fruition the company expects to utilize existing wash plant facilities and the Carlisle loadout.
The company has leased roughly 19,500 acres in Vermillion County, Ill., near the village of Allerton. Estimates are that it currently controls 32.3 million tons of recoverable coal reserves; 15.8 million which are proven and 16 million which are probable. Much of the 19,500 acres of leases has yet to receive any exploratory drilling, thus controlled reserves may grow as the company continues its exporatory drilling in 2012. The permitting process was started in the summer of 2011 and Hallador anticipates filing the formal permit with the state of Illinois during the second quarter of 2012. If the process proceeds smoothly, the company anticipates receiving a mining permit in the first half of 2013. Full-scale mine development will not commence until there is proven market demand and there are sales commitments.
Most sales made to Duke, Hoosier, IP&L
Over the past three years, Sunrise Coal has sold over 90% of its coal to three investment-grade customers in Indiana: Duke Energy (NYSE:DUK); Hoosier Energy, an electric cooperative; and Indianapolis Power & Light, a subsidiary of AES Corp. (NYSE:AES). During 2011, it sold 300,000 tons of coal to JEA in Florida, which was unusual for the company in terms of market region. Hallador said there are currently no more contracts with JEA, but that discussions with other Florida utilities are ongoing. “We believe these discussions are the continuation of the trend of Illinois Basin (ILB) coal replacing Central Appalachia coal that traditionally supplied the southeast markets,” Hallador added.
There are several scrubbed power plants in Florida, including the newly-scrubbed Crist Units 4-7 of Gulf Power and Crystal River units 4-5 of Progress Energy Florida, that can take high-sulfur coal like that produced at Carlisle.
Only about 37% of Sunrise Coal’s 2014 expected coal production is contracted for and there are no contracts extending past 2014. Of the 46 million tons of coal reserves assigned to the Carlisle mine, only 6.9 million tons are under contract.
Hallador said that under its current coal contracts, it would sell 2.9 million tons in 2012 at an average of $42.35/ton; 2.9 million tons in 2013 at $40.14/ton; and 1.1 million tons in 2014 at $46.34/ton. For 2013 and 2014 it has a contract for 900,000 tons each year with one customer and the coal company has agreed to reopen the contracted price during 2013. Each side has agreed to negotiate in good faith; however, if they can’t reach an agreed upon price, the customer has the right to call the tons at the higher contracted price or if it doesn’t call the tons then Sunrise Coal has the right to put the tons to that customer at the lower contracted price. For the 2013 and 2014 average coal price projections, the company used the lowest price option within this contract considering the current low state of the coal markets.
Two of Hallador’s major coal contracts allow it to pass on changes in costs to comply with mandates issued by the U.S. Mine Safety and Health Administration or other government agencies. In late December 2010, it submitted a report which was reviewed by an outside consulting firm engaged by customers. In January 2011, the two customers agreed to reimburse Hallador about $1.9m for costs incurred uring 2008 and 2009. Hallador then submitted incurred costs for 2010 in September 2011 for $4m. One of the customers paid $2m in February and discussions continue with the other customer.
Hallador outlines near-term market challenges
“In the short-run, the market for thermal coal in the United States faces a number of challenges,” said the Form 10-K. “Unusually mild winter weather has reduced electricity generation and thus both coal burn and gas burn, resulting in a rapid build in coal inventories that now stand at greater than 180 million tons nationwide, an increase of more than 30 million tons from just three months ago. The mild weather, burgeoning inventories and prolific production of natural gas has recently driven the price of natural gas to decade lows, which has increased fuel switching in favor of gas and forced the price of thermal coals lower across all production basins. Regulatory uncertainties, particularly surrounding the recently delayed Cross-State Air Pollution Rule (CSAPR), and Maximum Achievable Control Technology (MACT), are causing utilities to defer coal purchasing decisions, and in some cases to retire coal-fired generating facilities.”
The company added: “That being said, two of our customers have advised us that their coal stockpiles are increasing. We have orally agreed with one of the two customers to store 300,000 tons of coal on our property from the summer of 2012 to the summer of 2013. We will continue to sell the coal as contracted to this customer. The risks and rewards of ownership will pass from us to them. We will be paid an additional storage fee on the stored tons. We continue to work with the other customer and their inventory issues; a possible solution may also include storing their contracted tons. At this time we are unsure as to the ultimate outcome of these discussions.”
If Sunrise Coal’s future cash mining costs remain in the historical range of $24-$25/ton over the next two years and if expected maintenance capital expenditures each year are in the $10m-$12m range, the company said it expects to generate ample amounts of cash flow.
Top production rate of 3.9 million tons/year at Carlisle
At Carlisle, there are two sister wash plants engineered to work together with an annual capacity of 3.5 million-3.9 million clean tons at current recoveries. Sunrise Coal can expand underground production to meet this capacity.
The Carlisle mine’s historical coal specs are:13.15% moisture; 11,483 Btu/lb; 8.63% ash; and 5.27 lb SO2. Compared to other Illinois Basin mines, these reserves have lower chlorine (<0.10%) than the average in the Illinois Basin of 0.22%, Hallador noted. The relatively low chlorine content makes it highly attractive to buyers given their desire to limit the corrosive effects in their power plants.
The Carlisle mine has a double 100 rail car loop facility and a four-hour certified batch loadout facility connected to the CSX Transportation railroad. The Indiana Rail Road (INRD) also has limited running rights on the CSX to the mine. Dual rail access gives the company a freight advantage to Indiana customers. “Long term, the CSX anticipates our coal being shipped to southeast markets via their railroad,” Hallador added. The mine is accessible by truck and is within 90 miles of nine coal-fired plants that have been retrofitted to burn high-sulfur coal like this.
The Carlisle mine, located in Sullivan County, accesses coal via a slope entry and is a room-and-pillar operation. The coal is mined in the Indiana V coal seam, which is high-vol bituminous coal. The current mine plan indicates 15,100 acres of mineable coal with an approximate 4′ to 7′ seam thickness in the project area. Current production capabilities at Carlisle are projected to be in the range of 3 million to 3.3 million tons per year giving the mine a reserve life of about 15 years.