Cliffs sees smooth Q1 with both longwalls operating well

During the first quarter, U.S. coal production volume for Cliffs Natural Resources (NYSE: CLF) (Paris: CLF) increased 30% to an all-time quarterly high of 1.8 million tons, in large part because both of the company’s longwalls – at the Oak Grove mine in Alabama and Pinnacle mine in West Virginia – are operating well.

As a result of the operational success achieved at Pinnacle and Oak Grove, the Cleveland-based company plans on executing longwall moves earlier than expected, said Cliffs Chairman, President and CEO Joseph Carrabba during an April 26 earnings call. Carrabba was joined by Executive Vice President, Finance and Administration and CFO Laurie Brlas.

“In the coal markets, spot pricing during the quarter was continually under pressure and softer relative to last year,” Carrabba said. “However, we believe we have experienced the bottom. This will be especially evident if we see continued supply side shocks including industrial actions or adverse weather in primary production basins. The softer market in the quarter required our global marketing group to seek out new customers in nontraditional markets for our North American Coal products. Although this environment is more challenging, it has created an opportunity to establish relationships with new coal customers in Asia. As you all know, we place significant volumes of iron ore into this region. However, our exported North American coal products have historically been placed into Europe.”

Due to increased inventory stockpiles built up at both Pinnacle and Oak Grove, the next longwall moves are not expected to impact the company‘s sales volume outlook. “Not only have the operational improvements at most longwall mines increased product availability, but the improvements have also meaningfully contributed to higher profitability due to the product’s premium quality, along with lower cash cost per ton, which Laurie will describe in more detail,” Carrabba added.

Brlas said that in the North American Coal segment, revenues per ton in the first quarter were relatively flat at $122. The slight decline, when compared to the 2011 first quarter, was primarily due to softer market pricing. As a result, Cliffs is decreasing its North American coal full year 2012 revenue per ton expectation to $130-$135. This expectation includes about 75% of the expected 6 million tons of met coal sales committed and priced at $143 per ton net back to the mine.

Cliffs achieved lower cash cost per ton of $97 in the first quarter compared with $109 per ton in first quarter 2011. This 11% year-over-year improvement reflected greater fixed cost leverage driven by increased production volumes from the longwall operations. All of the company’s major capital projects in the North American Coal segment are now complete, Brlas noted.

Increased low-vol metallurgical coal production levels in the first quarter of 2012 were achieved at Pinnacle and Oak Grove. Pinnacle production in the first quarter of last year was impacted by a longwall move, which did not occur in the first quarter of this year. Oak Grove’s first quarter 2012 production levels were impacted positively by the installation of a new longwall shearer during 2012. Oak Grove’s prep plant resumed operating at partial capacity in January 2012, following repairs made after a lightning strike last year, and reached its normal operating level during April.

Decreased high-vol met coal production levels at the Cliffs Logan County Coal LLC operation in southern West Virginia in the first quarter of 2012 were due to downtime related to equipment repairs and in response to the softened market demand, said Cliffs in its April 26 quarterly Form 10-Q report filed at the SEC.

North American Coal sold 1.4 million tons during the first first quarter compared with 1.3 million tons during the same period last year. This increase in volume was a result of higher inventory availability at Pinnacle due to strong production performance in the first quarter of 2012. Partially offsetting the volume increase was lower sales price due to the market price softening in the seaborne market for low- and high-vol coal. The realized price in the first quarter at the North American Coal operating segment was on average a 5.9% decrease, 2.3% increase and 7.1% increase for low-vol, high-vol and thermal coal, respectively, over the comparable prior-year period.

Cliffs is maintaining its 2012 North American Coal sales and production volume expectations of about 7.2 million tons and 6.6 million tons, respectively. Sales volume mix is anticipated to be about 4.5 million tons of low-vol met coal and 1.6 million tons of high-vol met coal, with thermal coal making up the remainder of the expected sales volume.

Cliffs also noted in the Form 10-Q: “On June 24, 2010, the West Virginia [Department of Environmental Protection] filed a lawsuit against the Pinnacle Mine and other West Virginia coal mining operations alleging non-compliance with its NPDES discharge permit. The complaint alleges various exceedances of the permit’s effluent quality limits and seeks injunctive relief and penalties. An initial penalty proposal of $1,011,200 was received in March 2012. Pinnacle has implemented a selenium control plan and installed effective control measures. Pinnacle disagrees with numerous alleged violations and has met with the West Virginia DEP to present facts supporting a review and possible reduction of the proposed penalty. A follow up meeting is anticipated in May 2012.”

Cliffs, an international mining and natural resources company, is the largest producer of iron ore pellets in North America, a major supplier of direct-shipping lump and fines iron ore out of Australia and a significant producer of high- and low-vol met coal.

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.