CONSOL Energy (NYSE: CNX) said April 26 that it is re-starting as of May 1 the longwall at its Blacksville #2 mine in northern West Virginia, which has been down lately due to slack thermal coal markets, in part due to new sales of thermal coal into Asia.
The company said in its first-quarter earnings statement that it has largely concluded negotiations with thermal coal customers concerning deferred shipments, enabling it to resume thermal guidance for the second quarter and beyond.
“We have been managing our way through this challenging environment,” said J. Brett Harvey, CONSOL Chairman and CEO. “The very warm winter, weakened economy, and low natural gas prices have quickly turned a tight coal environment into a surplus. Fortunately, CONSOL Energy began 2012 with all of our thermal coal contracted for the year at favorable pricing, nearly one-half of our expected gas production hedged at $5.25 per Mcf, and nearly $400 million of cash on the balance sheet. I believe that CONSOL Energy is well-positioned to capture the next upcycle, as our lower cost mines remain well capitalized and our inventory levels only grew modestly.”
On the coal export front, CONSOL’s Baltimore Terminal expansion is due for completion in the third quarter, which will continue driving CONSOL’s long-term expectations for rising thermal and met coal exports. Harvey noted that overseas steelmakers have been taking advantage of a lull in the strong longer term market to pressure coal producers into accepting prices lower than the benchmark.
CONSOL idled its longwall at the Buchanan mine in southwestern Virginia, effective March 9, in an effort to refrain from selling its premium hard coking coal at a discount. As a result of extensive negotiations, CONSOL has now come to terms with its customers and, as a result, will re-start the longwall at Buchanan, which produces low-vol met coal out of a split of the Pocahontas seam, on May 1.
Total costs per ton, across all of CONSOL’s coal production in the first quarter, were $54.40, or an increase of $8.97, or 20%, over the year-ago quarter. The March idling of the Blacksville and Buchanan longwalls accounted for $1.43 of this increase, so that total costs per ton were $52.97 excluding the idling costs. This was actually a decrease, however, from the December 2011 quarter. All of these costs now exclude general and administrative, which management has decided not to allocate to coal (and gas) categories from this point forward.
In the high-vol met coal category, average operating costs per ton increased due to the mix of mines shipping coal in this category. Specifically, the company had more Central Appalachia mines shipping high-vol tons. These smaller mines have higher cost structures than the Northern Appalachia mines that shipped exclusively in the year-earlier quarter.
Coal production in the quarter consisted of 1 million tons of low-vol, 1 million tons of high-vol, and 13.7 million tons of thermal, for a total of 15.7 million tons. Of the thermal coal production,12.5 million tons were from Northern Appalachia and 1.2 million tons were from Central Appalachia. During the first quarter, thermal coal inventory was increased by 0.4 million tons, when compared to the quarter ended Dec. 31, 2011.
As for latest marketing results in each coal category:
Low-Vol – CONSOL reached agreements with steelmakers to re-price 457,000 tons of its premium low-vol coal, while contracting 224,000 tons of new sales. CONSOL will be receiving $119/ton, FOB Buchanan for this coal, which translates into an FOB (Australian) terminal price per tonne of approximately $185.
High-Vol – Softness in the Asian met markets during the quarter has affected the realized high-vol price. Pricing in other high-vol markets, though, remained relatively stable. The net effect is that realized pricing was below the low end of the previously estimated range of $68-$75/ton, FOB mine.
U.S. Thermal – CONSOL’s thermal coal continues to be sold out for 2012. Due to the factors cited earlier, however, thermal customers have requested deferrals on about 5 million tons, because their inventories are very high. CONSOL is working to re-schedule deliveries, some of which will occur beyond 2012. Because of the lack of clarity for 2013, discussions for new thermal sales have not yet begun.
Global Thermal – CONSOL has reacted to softness in the European thermal market, its traditional overseas thermal market, by successfully initiating sales to India during the quarter. For the second quarter, vessels have been contracted to continue to supply both the India and China thermal markets. These incremental markets are providing CONSOL with the sales volume needed to re-start the longwall at the Blacksville #2 mine.
CONSOL is estimating total coal sales of 14.2 million to 14.9 million tons in the second quarter of this year and 58.9 million to 60.9 million tons in all of 2012, 59.4 million to 61.4 million in 2013 and 63.5 million to 65.5 million tons in 2014.
- The low-vol met sales are estimated at 0.7 million to 0.9 million tons in the second quarter, 4.1 million to 4.2 million tons in 2012, 4.5 million to 4.7 million tons in 2013 and 4.3 million to 4.5 million tons in 2014.
- High-vol met sales, basically out of Pittsburgh seam mines in Northern Appalachia that also produce thermal coal, are projected at 1.2 million to 1.3 million tons in the second quarter, 4.5 million to 4.7 million tons in all of 2012, 5 million to 5.1 million tons in 2013 and 5.6 million to 5.8 million tons in 2014.
- Thermal coal sales are projected at 12.1 million to 12.7 million tons in the second quarter, 50 million to 51.7 million tons in 2013, 49.3 million to 51 million tons in 2013 and 53 million to 54.6 million tons in 2014.
CONSOL has recently revived its Amonate met coal operation, which is centered around the Amonate prep plant in McDowell County, W.Va., with operations straddling the West Virginia-Virginia line. Total estimated coal sales for 2012, 2013 and 2014 include 0.3, 0.6 and 0.6 million tons, respectively, from Amonate. But none of the Amonate tons has been sold yet, CONSOL said.
CONSOL has 12 bituminous coal mining complexes in four states and reports proven and probable coal reserves of 4.5 billion tons. Much of its coal production is centered around several big Pittsburgh-seam longwall mines in Northern Appalachia, including the Bailey-Enlow Fork complex in southwest Pennsylvania. It is also a leading Eastern U.S. gas producer, with proved reserves of 3.5 trillion cubic feet.