A first-time longwall began operating in the first quarter of this year at the Sugar Camp mine in in southern Illinois, with an initial longwall planned for the third quarter at the Hillsboro mine in Illinois, meaning that at least 14 millions tons per year of new high-sulfur coal supply is just hitting the market.
Foresight Energy Partners LP, founded by coal operator Chris Cline, filed on April 12 its first amended Form S-1 with the SEC related to a planned IPO. The initial Form S-1 was filed in February. The updated filing still doesn’t show how many units of this limited partnership will be offered to the public and at what price. That usually doesn’t happen until the third or fourth update is filed, as the company gauges investor reaction to the company and its prospects. Foresight plans to apply to have its common units listed on the New York Stock Exchange under the symbol FELP.
Foresight’s four mining complexes all work the high-sulfur Herrin No. 6 coal seam and consist of:
- Williamson, a longwall mine in southern Illinois, currently producing coal with one longwall and two continuous miner units, with a productive capacity in excess of 7 million tons per year;
- Sugar Camp, a longwall mine in southern Illinois, currently producing coal with one longwall and three continuous miner units, with a productive capacity of 28 million tons per year when all four of its longwalls are operational, the first of which began in the first quarter of 2012;
- Hillsboro, a longwall mine in central Illinois, currently producing coal with two continuous miner units, with a productive capacity of 27 million tons per year when all three of its longwalls are operational, the first of which is expected to begin in the third quarter of 2012; and
- Macoupin, a continuous miner operation in central Illinois with a productive capacity of 3 million tons per year.
Williamson was apparently the most productive underground coal mine in the United States for the fourth quarter of 2011 on a clean tons produced per man hour basis, Foresight noted. “Our leading productivity translates into low costs, and we believe we are the lowest cost underground coal producer in the United States at $19.85 per ton in 2011,” the company added. “We believe it is not only important to be a low cost producer at the mine but also on a delivered basis to end users. As a result, we have developed infrastructure to provide each mining complex with multiple transportation options, providing widespread cost competitive access to both domestic and international markets. We believe we are among the largest United States exporters of thermal coal, and, in recent years, we have exported approximately 33% of our coal to Europe, South America, Africa and Asia.”
Eight longwalls, 65 million tons per year in the plan
The four mining complexes (Williamson, Sugar Camp, Hillsboro and Macoupin) are designed to support up to eight longwall mining systems, giving them a combined productive capacity of up to 65 million tons of high Btu coal per year. Longwall mining is a highly-automated, underground mining technique that enables high volume, low cost coal production. The output of a longwall mining system includes production from two continuous mining units. These continuous mining units contribute to the production levels of a mining system but their primary function is to prepare underground conditions for longwall operations.
Foresight sells a significant portion of its coal under agreements with terms of one year or longer. It markets coal to a diverse customer base including electric utility and industrial companies in the eastern U.S., as well as the seaborne thermal coal market. For 2012, 2013 and 2014, it has secured coal sales commitments for approximately 14.5 million tons, 13.8 million tons and 11.3 million tons, respectively, of which all in 2012, about 9.3 million tons in 2013 and approximately 6.9 million tons in 2014 are priced.
In 2010, Foresight produced 7.2 million tons of coal, and in 2011, it produced 10.4 million tons of coal and generated revenues of $500.8m and Adjusted EBITDA of $192.5m. In 2011, it generated $82.1m of net income.
“We recently started a new longwall mining system at Sugar Camp and we plan to commence a new longwall system at Hillsboro in the third quarter of 2012, which we expect will significantly increase our coal production,” the company said. “We are currently producing coal from continuous miners at Hillsboro, and the underground and surface facilities at Hillsboro are already largely constructed. At full run rate, each of these longwall systems has a targeted productive capacity of at least 7 million tons per year. Sugar Camp and Hillsboro are designed to provide us with organic growth opportunities for subsequent years by adding additional longwall mining systems to the same complexes. Because we have already made the significant investment in large scale surface and underground infrastructure, our growth from these complexes will have shorter lead time and lower costs than greenfield development, which will enable us to generate incremental cash flows.”
Many domestic utilities have installed or are planning to install SO2 scrubbers, which is expanding the market for high-sulfur coal from the Illinois Basin and Northern Appalachia, Foresight noted. According to estimates from consultant Wood Mackenzie, 198 GWs, or 63% of total capacity, of electric generating units in the U.S. was scrubbed in 2011. Wood Mackenzie expects scrubbed capacity to increase to 268 GWs, or 100% of total capacity, by 2025. In addition, Wood Mackenzie forecasts domestic Illinois Basin demand increasing by over 75 million tons within the next 15 years, with much of the demand from the southeastern and midwest regions.
There are other coal producers, by the way, looking to take advantage of this market opportunity. Arch Coal (NYSE: ACI), for example, is in the final stages of permitting its 3.5-million-tons per year Lost Prairie room-and-pillar mine in Illinois and is trying to line up customers for it. Alliance Resource Partners LP (NASDAQ: ARLP) has invested in the new White Oak No. 1 longwall mine in Illinois, with first production expected in 2013 and a longwall start in 2014, with production expected at a top rate of about 6.5 million tons per year.
Foresight has direct and indirect access to all five Class I rail lines. It also controls a seaborne export terminal in Louisiana and the new Sitran rail-to-barge terminal on the Ohio River. It has long-term contractual access to two additional barge-loading river terminals on the Ohio and Mississippi Rivers and an additional seaborne export terminal in Louisiana. In order to protect access to these transportation options, it has entered into agreements with terms up to 20 years. Across all transportation options, it currently has 8 million tons of seaborne coal throughput capacity per year, and plans to increase capacity to 10 million tons of seaborne coal throughput per year in the near-term and 18 million tons of annual seaborne coal throughput in the long-term without investing major additional capital.
Sugar Camp, Hillsboro profiled
Sugar Camp, the mine with the just-started longwall, is wholly-owned by subsidiary Sugar Camp Energy LLC. As of January 2010, its assigned reserve base contained approximately 1.328 billion tons of clean recoverable proven and probable coal with an average heat content of 11,722 Btu/lb. Sugar Camp is located approximately 12 miles north of the older Williamson mine. Sugar Camp’s first de minimis coal shipments occurred in late August 2010. The longwall system began production in the first quarter of 2012. The first longwall panels mined are 1,400 feet wide. The planned longwall panel lengths range from 18,000 feet to over 22,000 feet and have seam height of about 6 feet.
Sugar Camp operates in the same Herrin No. 6 seam, and uses a similar mine design and most of the same equipment as Williamson. Certain of Sugar Camp’s infrastructure, including its bottom development, slope belt, material handling system and rail loadout, were designed to support multiple longwalls. Sugar Camp is expected to have an annual productive capacity of approximately 12 million to 14 million tons when its first two longwall mining systems begin operations.
Coal is washed at Sugar Camp’s preparation plant and then shipped by rail to market. Sugar Camp has direct access to the Canadian National/Illinois Central railroad which can deliver its coal to the Ohio and Mississippi rivers to serve the domestic thermal market or to New Orleans to serve the international market. Foresight has also developed additional transportation infrastructure to give Sugar Camp indirect access to the Norfolk Southern, CSX Transportation and BNSF railroads as well as future potential access to the Union Pacific railroad.
Sugar Camp has a contract mining arrangement with M-Class Mining, a third party mining contractor. The mine is actually listed with the U.S. Mine Safety and Health Administration under M-Class Mining. M-Class is paid on a cost-plus basis for coal that is produced and processed from Sugar Camp’s mine. As of the end of 2011, M-Class employed 169 workers at Sugar Camp, 150 of which worked underground. Sugar Camp leases its reserves from RGGS Land and Mineral, Ruger and the Tennessee Valley Authority.
Hillsboro, the mine with the longwall due in the third quarter, is wholly-owned by subsidiary Hillsboro Energy LLC. As of January 2010, its assigned reserve base contained approximately 879 million tons of clean recoverable proven and probable coal with an average heat content of 10,961 Btu/lb. The first longwall panels to be mined are 1,400 feet wide. The panel lengths are around 15,000 feet and have a seam height of about 7.37 feet.
Hillsboro will operate in the same Herrin No. 6 seam, and use the same mine design and essentially the same equipment as Williamson. However, as the initial mining area at Hillsboro has around 1.5 more feet of coal thickness than Williamson, it will use a larger shearer and thus Foresight currently expects that the production and productive capacity at Hillsboro will surpass Williamson. Hillsboro is designed for an annual capacity of 7 million to 9 million tons.
Coal is washed at Hillsboro’s prep plant and then shipped by rail or truck to market. Hillsboro has direct access to the UP railroad which can deliver its coal directly to customers or to the Mississippi River to serve the domestic thermal market or the international market through New Orleans. Foresight is developing additional transportation infrastructure that will ultimately give Hillsboro access to the NS railroad, the Sitran river terminal on the Ohio River and all rail access to New Orleans.
Hillsboro has a contract mining arrangement with Patton Mining LLC, a third party mining contractor. Patton will be paid on a cost-plus basis for this coal. As of Dec. 31, 2011, Patton employed 102 workers at Hillsboro, 86 of which worked underground. Hillsboro leases its reserves from Colt LLC and from a subsidiary of Natural Resource Partners (NYSE: NRP).