America West Resources (NASDAQ OTC: AWSR) plans to deploy a longwall at its small Horizon deep mine in Utah during 2013 or 2014 subject to obtaining sufficient financing, with longwall operations in general producing an average of 3 million to 6 million tons of coal per year.
America West Resources, which began talking in 2010 about the plan for a longwall, offered an update on that planning in its May 16 annual Form 10-K report. That report filing, by the way, was delayed as the company worked through some financial data for 2011. Incidentally, the company told the SEC in a May 15 filing that it will also be late with its Form 10-Q report covering the first quarter of this year.
There are approximately 16 million tons of proven reserves of recoverable coal remaining under lease at the Horizon mine, which is anticipated to take more than 30 years to mine at the current, non-longwall production rate. In 2009, America West initiated an aggressive expansion program at Horizon with a goal of increasing coal production from about 22,000 tons to about 90,000 tons per month. During the second half of 2010, after signing customer contracts that required additional production, average monthly coal production approximated 26,000 tons.
In 2011, average coal production was approximately 32,000 tons per month. America West deployed an additional continuous miner during 2011, which has been used to increase production during part of the year and is currently being used in exploration. The company said it has purchased additional mining and safety equipment and invested in mine infrastructure during late 2010 and 2011. The company plans to deploy a third continuous miner during 2012, subject to obtaining sufficient financing, which is expected to escalate production to over 90,000 tons per month.
U.S. Mine Safety and Health Administration data shows Horizon producing 121,010 tons in the first quarter of this year and 370,150 tons in all of 2011.
During 2011, America West Resources and its Hidden Splendor Resources production subsidiary had contracts with four customers to deliver a certain quantity of coal at fixed prices on a “take or pay” basis, subject to other terms and conditions that are standard in the industry. “Our strategy is to have a combination of long-term and short-term delivery contracts,” the Form 10-K added. “However, we have sold the majority of our base (pre-longwall) production for the next three years.” During fiscal 2011, the company derived about 99% of total coal revenues from sales to the four largest customers — The Amalgamated Sugar Co., PacifiCorp, Enserco Energy Inc. and the Intermountain Power Agency.
Coal from Horizon is loaded into trucks which haul the coal either directly to end users or to loadouts where it is loaded into rail cars and transported to customers. The Horizon mine is about eight miles from the nearest rail loadout, Wildcat, which the company acquired during the third quarter of 2011, and about 16 miles from the loadout facility previously most commonly used to ship its coal.
“We believe that there is already a shortage of Utah coal supply, given the prevailing demand,” said the Form 10-K. “Our management anticipates that the demand for clean, compliant Utah coal will remain strong, resulting in higher spot prices in the future. Our Company’s strategy is to expand operations and our production capabilities by (i.) operating two additional continuous miner sections; (ii) opening a third section of the mine to meet prevailing domestic demand and (iii.) inserting an 800 foot longwall system during 2013 or 2014 to meet an anticipated increase in global demand for compliant coal. Longwall operations typically result in production volumes 300% to 500% more than continuous mining operations, while lowering production costs by as much as half.”
Company says it’s in default on some financing
As of Dec. 31, 2011, the company had approximately $21m in short-term debt and a working capital deficit of approximately $28m. As of the date of the Form 10-K report, the company owed approximately $3m to Zions Bank (which may be in technical default, though America West said it has received no notice of default in this regard), its primary secured creditor, and approximately $2m to general and priority unsecured creditors.
“The Company is in actual or technical default with respect to this $7 million of debt owed to its creditors,” the Form 10-K added. “In addition, the Company has approximately $15.6 million in debt to shareholders and approximately $100 thousand in unsecured bridge loans from third parties. If any of these loans go into default and/or are accelerated, the Company would not have adequate funds to repay the loans, and the Company’s business may be adversely affected. … We need additional capital in 2012 to implement our business plan and meet our financial obligations.”
The Horizon mine is currently operational, producing “compliant” thermal coal from the Hiawatha seam. The average height of the seam as it runs through the mine is about seven feet. Typical raw coal quality (including dilution) includes the following general characteristics: moisture, 7.56%; ash, 9.87%; 11,946 Btu/lb; and sulfur, 0.55%.
Horizon coal was sold at an average price of about $37/ton and $36/ton during the years ended Dec. 31, 2011, and 2010, respectively. The lower sales price per ton during 2010 is due to the company having to sell a portion of its coal production at lower spot prices during the first and second quarter of 2010, as the company did not have long-term sales contracts until the summer of 2010. The company’s average sales price per ton under existing sales contracts is about $38/ton.
The company’s average production cost per ton sold, excluding mine development costs, of coal for the year ended Dec. 31, 2011, was about $35/ton. Production costs per ton were extraordinarily high during the year due to the company having to intermittently idle the mine during part of 2011 due to lower demand for coal in the western U.S. and a force majeure implemented by one of its larger customers.
Management’s plan is to continue to escalate production to an average of 60,000 tons per month during 2012 by operating its second continuous miner. The company estimates it will achieve cash positive operations at an average of 60,000 tons of production per month. In addition, the company plans to lease or acquire and deploy a third continuous miner, a shuttle car, and other key equipment to enable Horizon to operate as a three-section mine during 2012.
Management estimates there are in excess of 100 million tons of additional recoverable coal reserves adjacent to the Horizon mine that are controlled by Carbon County and the U.S. Bureau of Land Management. In March 2009, the BLM granted the company a lease modification to access and lease about 6.8 million tons of proven reserves of recoverable coal from the adjacent reserves. The company said it intends to pursue the acquisition of additional adjacent reserves.