Montana board approves lease process for Signal Peak coal tract

The Montana Land Board, made up of the state’s five top elected officials, including the governor, approved at its May 21 meeting a request by the state Department of Natural Resources and Conservation to proceed with a coal lease application from Signal Peak Energy, said a local news report.

The application covers a tract of state school trust land located at the Bull Mountain No. 1 longwall mine, located 12 miles south of Roundup. The state tract is adjacent to five federal coal tracts that were recently leased by the U.S. Bureau of Land Management to Signal Peak Energy. Both the state and federal tracts are located within Signal Peak Energy’s proposed life of mine expansion area.

“Leasing the State tract does not convey the right to mine, but would trigger the preparation and submission of a detailed mine operation and reclamation plan for joint environmental and permitting review by both DNRC and [the state Department of Environmental Quality],” said a DNRC report to the board submitted just before the May 21 meeting. “If approval were granted to continue the existing mining operation into the expansion area, the State would receive rental and royalty revenue for the Common School trust.”

The land board must determine the fair market value of coal reserves prior to issuing a coal lease. Fair market value may be determined by competitive bid or through an appraisal. The DNRC recommended the board utilize the competitive bid process in conjunction with the results of the federal competitive bid process, as well as information from lease sales for underground coal mining in other states. The department said it would return to the board at a future date and present the bid results for consideration.

Expressions of interest to lease the state section date back to at least the late 1980s, the DNRC noted. Bull Mountain Coal Properties Inc. submitted an application in 2008. No lease was issued at that time, primarily due to uncertainty regarding market demand and infrastructure, the ability and timeframe required to obtain the federal coal leases, and the requirement to have a state lease in production or within an approved permit area within the ten-year primary lease term.

“Market demand and infrastructure have enabled SPE to successfully develop the mine, which produced about 5 million tons of coal in 2011,” the DNRC reported. “SPE also recently obtained coal leases from the BLM for five tracts of Federal coal located in a proposed life of mine expansion area. The State section contains approximately 11.93 million tons of recoverable coal and is also located within the proposed expansion area. The five Federal coal leases are located around three sides of the State section.”

BLM leased coal to Signal Peak on a second try

BLM said Feb. 29 that it accepted a single, high bid of $10.65m ($0.30 per recoverable ton) from Signal Peak Energy for five coal parcels in the Bull Mountains Mine No. 1 federal coal tract in Musselshell County. The competitive coal lease sale was a reoffer of the coal lease tract the BLM had up for sale in a November 2011 auction. That first bid, also from Signal Peak Energy, was rejected because it did not meet or exceed BLM’s secret estimate of the fair market value of the tracts. The rejected November bid was $5.325m ($0.15 per recoverable ton), about half of the Feb. 29 winning bid. The 2,680-acre federal lease area contains an estimated 35.5 million tons of recoverable coal reserves.

In October 2011, Ohio-based utility holding company FirstEnergy (NYSE: FE) announced that Gunvor Group Ltd. purchased a one-third interest in Global Holding, a joint venture that owns the Signal Peak longwall mine and the related Global Rail coal transportation operations. Following the sale, FirstEnergy, through its wholly owned subsidiary, FirstEnergy Ventures, has a one-third interest in Global Holding.

FirstEnergy Generation has had a long-term coal supply agreement with Signal Peak for up to 10 million tons per year. FirstEnergy said in its Feb. 28 annual Form 10-K report that FirstEnergy Generation has re-evaluated its coal usage under that agreement and has determined to resell its coal purchased from Signal Peak to an affiliate of Global Holding; provided, however, that such affiliate may require FirstEnergy Generation to repurchase up to 2 million tons annually from the existing underground mine, and, if Signal Peak develops surface mines, it could require FirstEnergy Generation to purchase an additional 2 million tons per year.

FirstEnergy has said that Signal Peak’s Bull Mountains No. 1 mine cleared some geology problems in 2011 and is scaling up for production of 10 million tons per year or more. The mine produced 2.1 million tons in the first quarter of this year, 5.1 million tons in all of 2011 and 4.4 million tons in all of 2010, according to U.S. Mine Safety and Health Administration data.

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.