Lipari trims back Kentucky coal output to meet slack market

Lipari Energy (TSX: LIP), one of several Canada-listed companies involved in Appalachian coal production, ran into lower sales and had to idle a mine in southeastern Kentucky in the first quarter due to slack power industry demand caused by a mild winter and coal-to-gas switching.

That has become a familiar refrain from U.S. coal producers, large and small. First quarter 2012 tons sold by Lipari decreased by 17.6% and production decreased by 20% over first quarter 2011 from 286,424 tons to 229,000, the company noted in a May 15 financial statement. First quarter revenues decreased by 18.7% as a result of the decrease in tonnage sold. Lipari generated earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) of $0.28m during the first quarter of 2012. Adjusted EBITDA, after accounting for a change in the fair value of warrants, lease expenses and other adjustments, was $0.62m during the first quarter of 2012.

“Our first quarter results were down due to a decrease in demand for coal brought on by a mild winter and low natural gas prices,” said John Liperote, CEO of Lipari. “We idled one surface mining operation during the quarter in an effort to reduce costs; however, we continue to be pleased with the highwall miner production at the Barger Branch Mine, as we are now in our second full month of production. We are continuing to maintain a low debt ratio as we continue to prospect and develop our mineral reserve base.”

The company’s first quarter average sales price was $72.05/ton, down from $73.01 in the year-ago quarter. Its cash cost per ton of coal produced in the first quarter was $49.34, up sharply from $37.41 in the first quarter of 2011. Total operating cost per ton sold in the first quarter was $77.70, up from $60.88 in the year-ago quarter. Cash cost per ton produced includes all costs associated with the operation of the mines, preparation plant and rail loadout facility inclusive of royalty expenses. Total operating cost per ton sold includes all cost of sales inclusive of depreciation, depletion and amortization.

Lipari has sales commitments in place for 100% of its planned 2012 production and about 75% of its planned 2013 production at prices averaging about $72/ton for 2012 and $78/ton for 2013.

Lipari pursues expanded old and brand-new mine projects

Lipari’s coal sales are predominantly to utilities through a mix of forward contracts and short-term sales. Lipari’s corporate office is located in London, Ky. The company mines, processes and sells thermal coal from mines located in southeastern Kentucky. Lipari began its mining operations when it purchased all the issued and outstanding common stock of B&W Resources in September 2008. As of March 31, Lipari’s mining complexes included three surface mines and one highwall mine.

Chavies mine – The company conducts surface, contour and auger operations at this mine in Leslie and Perry counties. It had estimated reserves of 5 million tons and resources of 11 million tons as of May 31, 2010. Lipari trucks coal from this mine to its loadout facility. Chavies is composed of about 1,000 permitted acres, with mining being conducted in four coal seams (Hazard 5A, 7, 8 and 9) with an average seam height for all seams of about 24 inches. Typical coal quality for this surface mine is 12,200 Btu/lb and 1% sulfur. Lipari plans to maintain the production from this mine at approximately 35,000 tons per month. Lipari is expanding this lease position with new leases and amending existing permits to increase the life of mine plan for this acreage position. During the three months ended March 31, 2012, and 2011, the company produced about 81,000 tons and 127,000 tons, respectively.

Owls Nest mine – Lipari conducts surface and contour mining operations at Owls Nest in Leslie County. Owls Nest has estimated reserves of 2.3 million tons and resources of 7.6 million tons as of May 31, 2010. Lipari, through its subsidiary B&W, began extracting coal from this mine in 2007. Lipari trucks coal from this mine to its loadout facility. Owls Nest is composed of approximately 660 permitted acres and mining activities are conducted in two seams (Hazard 7 and 9) with an average seam height for all seams of about 50 inches. Typical coal quality for this surface mine is 12,500 Btu/lb and 1.5% sulfur. Lipari is amending permits associated with this lease to allow for highwall mining and additional contour mining. This permitting will further diversify the product offerings of Lipari, extend the life of mine plan for this acreage position but provide for additional acquisition of leases. During the three months ended March 31, 2012, and 2011, the company produced about 53,000 tons and 34,000 tons, respectively. Due to permitting and market conditions, Owls Nest production has been temporarily idled but is expected to continue in the third quarter at about 15,000 tons per month.

Aces Branch (Detherage) – The company conducts surface and contour mining at Aces Branch in Leslie County. Aces Branch had estimated reserves of 1.3 million tons and resources of 1.8 million tons as of May 31, 2010. Lipari began extracting coal from this mine in September 2010 and trucks coal from this mine to its loadout facility. Aces Branch has about 600 permitted acres and mining is done in three seams (Hazard 7, 8 and 9) with an average seam height for all seams of about 36 inches. Typical coal quality for this surface mine is 12,200 Btu/lb and 1.5% sulfur. Lipari has identified and secured additional acreage that is contiguous to this operation which will allow for the expansion of production, reserves and life of mine. Lipari plans to maintain the production at about 17,000 tons per month. During the three months ended March 31, 2012, and 2011, Lipari produced about 63,000 tons and 50,000 tons, respectively.

Bingham Project – The company began developing this mining operation located in Owsley County during the third quarter of 2011, utilizing contour and auger mining. Bingham had estimated recoverable reserves of 885,000 tons with resources in excess of 2.2 million tons as of May 31, 2010. Bingham has about 186 permitted acres, with mining activities being conducted in the Amburgey seams with an average seam height of about 32 inches. Typical coal quality is 12,400 Btu/lb and 1.3% sulfur. Lipari is expanding the lease position and amending the existing permit to increase the life of mine plan for this acreage position. Lipari has placed this permit into market deferment, conserving valuable reserves until the coal market improves. During the three months ended March 31, 2012, and 2011, the company produced about 14,000 tons and zero tons, respectively.

Tanyard – The company conducts surface, contour and auger mining at Tanyard in Clay County. Tanyard has estimated reserves of 800,000 tons with resources in excess of 2 million tons as of May 31, 2010. Lipari began extracting coal from this mine in July 2011. Lipari trucks coal from this mine to its loadout facility. Tanyard has about 285 acres with mining conducted in the Horse Creek seam with an average seam height of about 19 inches. Typical coal quality is 13,500 Btu/lb and 0.8% sulfur, and an average ash content of about 4%, all qualities needed to enter the pulverized coal injection (PCI) market supplying the steel industry. Lipari controls about 1,500 acres at this operation and is amending existing permits to provide for an extension of the mine plan and reserve base. During the three months ended March 31, 2012, and 2011, Lipari produced about zero tons and 16,000 tons, respectively. The initial phase of mining was completed during the third quarter of 2011. Production from this reserve was idled as of August 2011 until the PCI specialty market gains strength.

Barger Branch Project – The company began development of this operation in Clay County during the first quarter of 2012, utilizing contour and highwall mining. Barger has estimated recoverable reserves of about 750,000 tons based on internal engineering studies. This project was not included in the May 31, 2010, reserve study. Lipari leases a Bucyrus Superior Highwall Miner to operate on this property and other highwall properties controlled by Lipari. This project has about 488 permitted acres, with mining conducted in the Hazard 4 seam with an average seam height of about 40 inches. Typical coal quality from this mine is 12,800 Btu/lb with 0.8% sulfur. This project provides Lipari with reduced cost of production due to the utilization of highwall mining and the ability to extract mineral from surface mining in front of the miner. Initial production began in March. During the three months ended March 31, the company produced approximately 15,000 tons.

Mitco/Big Valley – Lipari conducts highwall mining and contour mining at this mine in Clay County. Mitco/Big Valley has estimated reserves of 650,000 tons with resources in excess of 1.9 million tons as of May 31, 2010. Lipari began extracting coal from this mine in September 2011. Lipari trucks coal from this mine to its preparation plant where it is washed for shipment to customers. Mitco/Big Valley has about 485 permitted acres and mining activities are conducted in the Hazard 4 seam with a coal quality of about 12,800 Btu/lb and 0.8% sulfur. This project provides Lipari with reduced cost of production due to the utilization of highwall mining. Lipari is amending existing permits to provide for an extension of the mine plan and reserve base. During the three months ended March 31, 2012, and 2011, the company produced about 4,000 tons and 60,000 tons, respectively. Mining has been temporarily idled at this location while Lipari continues to add additional permitted area.

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.