Kentucky-based coal producer Rhino Resource Partners LP (NYSE: RNO) said May 3 that its response to the lackluster domestic steam coal market has been more about preserving its workforce for the future and delaying expansion projects, but that it is shutting-in some coal production.
“Our first quarter results were solid despite a weak steam coal market as we focused on fulfilling our customer contracts in a cost efficient manner,” said Dave Zatezalo, President and CEO of Rhino’s general partner, in a May 3 quarterly earnings statement. “We continued our focus on safety and improving operating efficiency, which resulted in the best safety performance in our history in the first quarter of 2012. Our diversification efforts into oil and gas properties began to show results in the first quarter as we signed a lease agreement for a portion of our Utica Shale acreage and also began to receive royalty income from our Cana Woodford investment.”
Zatezalo said the company is maintaining its focus on preserving the strength and integrity of its labor force while at the same time taking the necessary steps to keep inventory and debt at sustainable levels. While the market downturn has affected all coal operations of Rhino, it has had the least impact on the steam coal operations at Hopedale and Sands Hill in Ohio, and Castle Valley in Utah, where Rhino has longer term sales contracts in place.
“That said, we have experienced some slowdowns in shipments to certain customers under their contracted sales,” Zatezalo added. “We have responded to the demand decrease in Central Appalachia by reducing our production. The steps we have taken include working fewer shifts and days, idling select mining operations and delaying expansion plans at certain operations.”
For the first quarter, Rhino reported adjusted EBITDA of $22.2m and net income of $9m, compared to adjusted EBITDA of $16.7m and net income of $6.1m in the first quarter of 2011. Total revenues for the first quarter were $81.9m, with coal sales generating $69.6m of the total.
Rhino updated what is happening with its operations.
Central Appalachia – Rhino began operating the new highwall miner in the fourth quarter of 2011 at its Grapevine surface mine at the Tug River complex and is capable of producing at a run rate of 240,000 tons of met coal per year. Rhino’s Tug River prep plant began operating on March 19. Management expects significant cost savings and increased production flexibility from this plant’s operation. The Remining 3 surface mine at the Tug River complex is developed and commenced production on April 24. This mine can produce up to 375,000 tons per year, which can be doubled within 12 months, and production is expected to be about 50% met coal. The 3 Mile surface mine has been temporarily idled due to market conditions for its steam coal product.
Northern Appalachia – Rhino received the conditional Leesville deep mine permit in Ohio in February, subject to receipt of sewage permits. In addition, at Hopedale, Rhino is permitting a #7 seam reserve that will be accessed from the existing portal and infrastructure. These initiatives are expected to provide up to 1 million tons of production similar in quality to Hopedale’s coal within the next 18 months, depending on market conditions. Market development is ongoing.
Rhino Western – The Castle Valley deep mine in Utah is fully operational and expected to be a long term cash flow contributor to Rhino. A second continuous miner section was added and sales agreements have been reached for about 1 million tons per year over the next three years. In Colorado, Rhino has conditional approval to build a loadout at the idled McClane Canyon deep mine and Rhino continues to explore market opportunities to reopen the mine.
Eastern Met – Rhino Eastern, which is a partnership with Patriot Coal (NYSE: PCX) in southern West Virginia, has made substantial progress in safety and operating improvements at the Eagle seam operations. Rhino Eastern is constructing the new Eagle #3 mine, which is expected to begin production in late second quarter of 2012. Eagle #3 will replace and expand on Eagle #1 production, which will deplete late in the first quarter of 2013. Rhino Eastern controls a major premium met coal property that includes about 43 million tons of proven and probable reserves and is beginning to demonstrate its production potential. In addition, Rhino Eastern continues to plan a Sewell seam mine, along with a new prep plant.
Coal sales for Rhino were 1.1 million tons for the first quarter of 2012 and 2011. Coal revenues per ton of $65.11 compared to $70.17 for the first quarter of 2011, a decrease of 7.2%. Cost of operations of $57.1m compared to $61m for the same period of 2011. Cost of operations per ton of $53.41 compared to $54.53 for the first quarter of 2011, a decrease of 2.1%.
Maintenance capital expenditures for the first quarter were about $7.8m. Expansion capital expenditures for the quarter were approximately $17.6m as Rhino continued to invest in its internal development projects, consisting primarily of the Tug River prep plant construction.
Rhino is now expecting coal production in 2012 of 4.2 million to 4.5 million tons, down from a prior forecast of 4.9 million to 5.2 million tons. That includes 51% of the production from the jointly-owned Rhino Eastern operation. Rhino has cut its net income forecast for 2012 from $33m to $43m, from $45m to $55m. Guidance for 2012 has been re-forecasted and reduced to reflect demand weakness in current market conditions, especially for steam coal. This re-forecasted guidance only includes contracted sales and minimal spot sales of steam coal for 2012.