Cline Mining (TSX: CMK) has accumulated enough coal in its stockpiles for its Colorado mine to make its first Panamax shipment and has advanced negotiations with potential buyers with confidence that it will soon conclude its first international shipment of metallurgical coal, destined for the Chinese market.
The company said in a May 15 earnings statement that it cannot with certainty provide accurate guidance on current market pricing, but reports from the industry suggest lows for coal prices of similar material, measured at the port (FOB), of $130/tonne. Cline does not expect that such pricing is sustainable for the industry as a whole and said it is confident that pricing and demand will improve in 2012.
The earnings statement covered the fiscal quarter ended Feb. 29. The company had a loss of C$20,767 and a comprehensive loss of C$7,532,263 for the first quarter of fiscal 2012 compared with a loss of C$1,039,094 and comprehensive loss of C$5,412,602 for first fiscal quarter of 2011.
The company noted that on May 9, its New Elk Coal Co. LLC unit signed a coal mining lease agreement with the Colorado Department of Wildlife (DOW) which significantly extended New Elk Coal’s original DOW coal mining property at the New Elk deep mine in Las Animas County. The initial New Elk DOW lease covers an area of 15,553 acres, and the extension area adds a further 14,387 contiguous acres, resulting in a new total coal lease area of 29,940 acres.
The extended DOW leased coal property is coal bearing and the company has commissioned consultant AGAPITO Associates Inc. to prepare a National Instrument 43-101 report of coal resources within the extended area. A resource report is expected by May 24, with the full report to be published within 45 days thereafter. The initial DOW lease area contains 330.3 million tons of coal resources out of the total of 388.5 million tons of coal resources on all of the New Elk property.
Cline dials it back in face of tougher met coal market
“The coal mining industry is presently experiencing a challenging global business climate resulting from the economic and financial conditions prevailing in the developed world, including the European Union and the USA,” said Cline, which has New Elk as its only operating coal mine. “The recessional forces have resulted in noticeable reductions in demand for commodity based industries, and particularly in global steel making. This has resulted in oversupply conditions prevailing in metallurgical coal markets, upon which our Company and similarly situated mining companies are reliant. The oversupply has naturally resulted in price cutting and high cost to marginal cost producers are facing production decisions.”
Cline said it has not been immune to market forces as evidenced by the decline in Cline’s share price by 74.6% from its high over the past 52 weeks. However, this decline is in line with other coal mining companies like CONSOL Energy (NYSE: CNX) and Peabody Energy (NYSE: BTU), the company noted.
“Despite market trends and certain delays which Cline has faced during its ramp-up to production of quality metallurgical coal, the Company has been able to take reactive measures to appropriately respond to such issues,” Cline added. “Thus, with some necessary adjustments having been made, the Company believes it has been able to withstand the turbulence and is well positioned to meet its revised near term and long term production forecasts.”
At the present time the New Elk mine has 305 employees. This level of employment is sufficient to operate two super-sections with one super-section currently idle. With two super-sections and 300 employees, the New Elk mine can produce 650,000 tons in 2012. If the company decided to add more employees (up to about the 500 level), it could operate five super-sections. That would result in the production of 1.2 million tons of coal in 2012, in which case the full operating capacity of 3 million tons of saleable coal per annum would be reached by January 2013.
The company has decided to operate one and a half super-sections over the short term, with a total employment level of 235. This alternative would generate production of 470,000 clean coal tons in 2012 and matches closely the company’s anticipated forecast of sales for 2012.
While market demand for met coal is currently weak and coal prices are significantly lower than during 2011, the company said it is cautiously optimistic that coal markets will improve during the final quarter of 2012. The company’s plan for calendar 2012 anticipates the sale of about 470,000 tons of coal, which translates into almost seven Panamax shipments. This scenario would leave the company with about C$18m to C$24m in cash, using projected prices between $130 FOBT and $160 FOBT.
To pay for all remaining operating expenditures and capital expenditures, the company will need to sell the equivalent of approximately 250,000 tons of coal, or almost four Panamax shipments of coal, by projecting over the full year the current low price for high-volatile coking coal of $130 FOBT.
A total of six continuous mining machines were employed in three walk-through super-sections in the two coal seams of the New Elk mine in March. At that time, a combined count of New Elk and contract manpower was at 360 employees. A year-to-date production at the end of February was 66,383 run-of-mine (ROM) raw tons and 19,145 clean tons of met coal. At the end of April, year-to-date production was 162,065 ROM tons and 55,539 clean tons of met coal.
Cline works way through coal seam issues
Several factors contributed to lower rates of production in the first four months of the year. The initial staging area in the Blue seam was restricted and it had to be excavated to a height of 8 feet while the seam was only 4.5 feet high. In addition, the 3.5 feet of sandstone in the mine roof allowed only very slow cutting rates while the high content of rock in ROM coal resulted in very low plant yields. Finally, the transition from the contractor’s to owner’s management with the hiring of a large number of contractor employees caused a temporary disruption.
The coal processing plant, which was upgraded in 2011, has demonstrated that it is capable of producing very high quality coal. Unfortunately, initial development in both the Allen and Blue seams required excavating additional rock intervals in order to facilitate access and ventilation in these mines, which caused excessive out-of-seam dilution. In the second half of May, the height of excavation in both seams will be reduced to 5.5 feet, which will reduce the amount of dilution and improve plant yield. It will also allow higher cutting rates in the mining faces.
In February, Cline Mining made a strategic decision to take over the management of mine operations from TK Mining Services LLC. A decision was made to terminate the TK contract effective May 1.
The upgrade of the prep plant completed in December 2011 included increasing the plant capacity from 650 to 800 ROM tons per hour, as well upgrading of the fines circuit. The fines circuit, which processes coal at sizes below 1.0 mm, is now capable of producing clean coal at below the product spec of 8% ash. This will substantially improve coal recovery and potentially improve the pricing of the coal.
The Japanese Steel Mills (JSM) have traditionally set the annual international price of met coal with the Australian coal producers commencing April 1 of each year. In 2011, the Australian coal producers insisted on quarterly pricing. The April 2011 price for premium hard coking coal was $330/tonne. Since that settlement, the price has decreased to the present reported price of $215/tonne.
Nonetheless, all major Asian steel producers have been increasing production. Additionally, in March, the Chinese mills produced 57 million tons of crude steel, a 7% increase over the previous month and Japan showed a 9% increase. This trend is projected to continue and, based on industry news, the major Australian coal producers are asking for increased pricing going forward. The spot market should also begin to firm once the recessionary forces begin to abate, Cline Mining noted.