Armstrong Energy, a major coal producer in western Kentucky, still isn’t saying how many shares it will offer in an upcoming IPO and at what price, but is saying that this common stock offering should raise about $53.8m.
On May 30, Armstrong filed with the SEC its sixth update to a Form S-1 prospectus that was initially filed in October 2011. Armstrong Energy, the parent of operating company Armstrong Coal, has applied to list its common stock on the Nasdaq Capital Market under the symbol ARMS. It estimated that the net proceeds to it from the sale of common stock in this offering will be $53.8m, which is after deducting estimated underwriting discounts and commissions and offering expenses. Armstrong’s net proceeds will increase by about $8.4m if the underwriters’ option to purchase additional shares is exercised in full.
Armstrong Energy intends to use $40m of the net proceeds from this offering to repay a portion of its outstanding borrowings under our Senior Secured Term Loan, $13.6m of the net proceeds to repay a portion of its outstanding borrowings under a Senior Secured Revolving Credit Facility and the balance for general corporate purposes, including to fund capital expenditures relating to mining operations and working capital.
Armstrong Energy is a producer of low-chlorine, high-sulfur thermal coal from both surface and underground mines in western Kentucky. Based on 2011 production, it is the sixth largest producer in the Illinois Basin and the second largest in western Kentucky. It was formed in 2006 to acquire and develop a large coal reserve holding and commenced production in the second quarter of 2008. Armstrong currently operates seven mines, including five surface and two deep, and is seeking permits for three additional mines. Its reserves and operations are located in Ohio, Muhlenberg, Union and Webster counties.
In 2011, it produced 6.6 million tons of coal, with seven mines in operation. During the first quarter of this year, it produced 2.2 million tons of coal, with seven mines in operation. Armstrong is contractually committed to sell 8.3 million tons of coal in 2012 and 7.1 million tons of coal in 2013, which represents 95% and 71% of its expected total coal sales in 2012 and 2013, respectively.
Armstrong reworks two contracts with TVA
In the category of recent developments, the company said that on Feb. 21, it amended a 2007 coal supply agreement with Tennessee Valley Authority to reduce the base tonnage to be delivered for 2012 to 1 million tons. The reopener provision for the remaining contract years has also been invoked and the parties will seek to renegotiate the terms of the contract for the remaining years. In addition, also on Feb. 21, it amended a 2008 coal supply agreement with TVA to reflect that the base tonnage to be delivered for 2012 is 1 million tons.
Also in recent developments, effective May 1, Richard Craig became the company’s Vice President of Operations. Craig has over 19 years experience in coal mining in the southeast U.S., having served most recently as the President of the Southern Kentucky business unit of Alpha Natural Resources (NYSE: ANR).
In 2011, Armstrong derived approximately 63% of its total coal revenues from sales to its two largest customers — Louisville Gas and Electric (LGE) and TVA. In 2011, coal sales to LGE and TVA constituted about 35% and 28% of total coal revenues, respectively. The multi-year coal supply agreements with LGE expire in 2015 and 2016, and the multi-year coal supply agreements with TVA expire in 2013 and 2018. However, most of its multi-year coal supply agreements with LGE and TVA contain reopener provisions pursuant to which either party can request reopening to renegotiate price and other terms for the remaining term of such agreement, and, subsequent to any such reopening, the failure to reach an agreement can lead to the termination of the agreement.
In addition, one of the multi-year agreements with TVA provides that, commencing on July 1, 2011, TVA has the unilateral right to terminate the agreement upon 60 days’ written notice, in which case TVA is required to pay a termination fee equal to 10% of the base price multiplied by the remaining number of tons to be delivered under the agreement.
One deep mine and two surface jobs in the planning stages
New and expanded coal mines are in the works. The Kronos underground mine currently is a three-unit operation, but will be expanded to four units by mid-2012. When the mine is expanded to four units, production is estimated to double to approximately 2.3 million tons annually. The estimated total cost of development for this mine, including the planned expansion to four units, is about $60m.
Kronos is located approximately three miles southwest of Centertown. It extracts thermal coal from the West Kentucky #9 seam. It produced about 0.2 million tons in 2011. There are about 22 million tons of proven and probable reserves at the Kronos mine. This coal is transported by truck to the Midway Preparation Plant and the Armstrong Dock Preparation Plant for processing and delivery.
Armstrong commenced production at the Lewis Creek mine in June 2011, at the Kronos underground operation in September 2011 and at the Maddox mine in November 2011. It currently expects that 2012 production will be approximately 8.7 million tons, compared with 6.6 million tons in 2011.
Armstrong said it is seeking permits for three additional mines. Permit applications for the Hickory Ridge surface mine have been submitted to the U.S Army Corps of Engineers and the state of Kentucky but have yet to be issued. The company is also preparing permit applications for the Ken surface mine and the Lewis Creek underground mine. It intends to submit those permit applications to the Corps and the state of Kentucky beginning in the spring of 2012.
- The Lewis Creek deep mine is projected for opening in 2013, assuming that the company receives all necessary permits in time. Lewis Creek will work the West Kentucky #9 seam utilizing two continuous miner super sections operating concurrently. Once fully operational, it is projected to produce about 1.3 million tons of clean coal per year. There are about 22 million tons of proven and probable reserves at Lewis Creek.
- Armstrong anticipates opening the Hickory Ridge and Ken surface mines in 2013 and 2014. These mines will produce thermal coal from primarily the West Kentucky #14, #13, #13A and #11 seams. Conventional truck-and-shovel operations are planned. The Hickory Ridge and Ken surface mines have around 23 million tons in total of proven and probable reserves.