Xinergy posts solid Q1, but only due to one-off events

Canada-listed Xinergy Ltd. (TSX: XRG), which has coal mining operations in Central Appalachia, said May 10 that weak market conditions reflecting reduced domestic utility demand, mild weather, record inventories, low natural gas prices and an increasingly “onerous” regulatory environment have converged to create rough times for the U.S. coal industry.

The company reported net income of $1.7m in the first quarter as compared to a net loss of $10.3m last year. EBITDA for the first quarter of 2012 was $14.6m compared to $4.6m in the same quarter last year. Excluding one-time gains and expenses related to a partial contract buyout and separate contract settlement related to two thermal coal customers, first quarter adjusted EBITDA was minus $3.7m as compared to a positive $4.7m a year ago.

In the first quarter, Xinergy reported coal revenues of $29.9m on 425,697 tons sold ($70.35 per ton) compared to $43.1m on 553,485 tons sold ($77.78 per ton) the same quarter a year ago. Total cash costs were $25.5m or $66.99 per ton compared to $28.5m or $61.18 per ton a year ago.

Xinergy Chairman and CEO Jon Nix said: “Weak market conditions reflecting reduced domestic utility demand, mild weather, record inventory levels, low natural gas prices and an increasingly onerous regulatory environment have converged to create an extremely challenging period for the coal industry. Following our decisive actions several months ago to cut our workforce by a third, match production with sales, limit capital expenditures and control costs, we have strengthened our liquidity and positioned the Company to take advantage of a market recovery. We believe the markets for both thermal and metallurgical coal sales will be challenging in the near term but continue to focus on growing the metallurgical side of our business.”

During the first quarter, Xinergy successfully added met coal reserves in both West Virginia and Virginia. At its mid-vol South Fork Coal operation in Greenbrier County, W.Va., it added over 21,000 acres bringing its controlled position to 35,800 acres. Xinergy shipped first coal production out of South Fork in April and has several permit applications pending that, when permits are issued, will allow it to significantly increase production.

Xinergy currently has the Blue Knob surface mine application, South Fork No. 2 underground application, and the Clear Fork preparation plant and rail loadout application in the review process with the West Virginia Department of Environmental Protection and anticipates requisite approvals by the third quarter of this year, the company noted. The DEP database shows an application pending for the Blue Knob No. 1 strip mine, an 852-acre operation that would work splits of the Sewell coal seam. There is no application pending for a new deep mine, though the DEP database shows South Fork Coal with a 1994 permit for the South Fork No. 2 deep mine that was originally issued to Greenbrier Coal and passed through several hands, including the Brooks Run Mining unit of Alpha Natural Resources (NYSE: ANR), before ending up in September 2011 under South Fork Coal.

At True Energy in Virginia, the company has received a permit amendment which adds significant reserves to an existing permit. It will utilize the equipment we relocated from our thermal mines to significantly increase production as the high-vol market rebounds. True Energy now has production capacity of 18,000-23,000 tons per month, after giving effect to the permit amendment and additions to the equipment fleet.

Commenting on liquidity and cost-cutting measures, Xinergy CFO Michael Castle said: “The Company continues to maintain a solid cash position of $69.5 million at March 31, 2012. We believe that cash on hand and cash generated from our operations will be sufficient to fund ongoing working capital requirements, meet our debt service requirements and fund development and capital expenditures. The Company continues to make operational and financial decisions that strengthen our liquidity position including a partial contract buyout and contract settlement with two customers that realized $18.9 million in cash to the company and released an additional $12.0 million in restricted cash. We have re-deployed mining equipment to our metallurgical mines, delayed the construction of the Brier Creek preparation plant [in southern West Virginia] and have reduced anticipated capital expenditures by $40.0 [million] to $60.0 million. The Company continues to implement cost reductions at all operations as well as aggressively managing selling, general and administrative costs. We continue to work with customers regarding current and future sales as well as continue to assess markets for thermal and metallurgical coal. With initial sales of met coal from the South Fork mine beginning in April and the permit addition at True Energy that will allow us to increase production we expect to be better positioned to update production and sales guidance in the next few weeks.”

Headquartered in Knoxville, Tenn., Xinergy Ltd., through its wholly owned subsidiary Xinergy Corp. and its subsidiaries, is engaged in coal mining in eastern Kentucky, southern West Virginia and southwestern Virginia.

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.