CanAm Coal Corp. (TSX VENTURE: COE) (OTCQX: COECF) said June 1 that it achieved coal sales of 67,153 tons in the first quarter, up from 30,655 tons in the year-ago period, as it continues to expand its presence in the Alabama coal mining business.
“Although we delivered year over year growth for all metrics, our first quarter was challenging but, during the quarter, we undertook several key steps to position our mines to run at or near productive capacity starting in the second half of this year while at the same time improve cost efficiency,” said Tim Bergen, CanAm CEO and Director. “Operationally, first quarter production was impacted by a number of planned and unplanned events. A planned mine reconfiguration/development at Bear Creek and a management realignment at Powhatan impacted Q1 production as these changes were put in place. Q1 was also impacted to a smaller degree by an operational incident at Gooden Creek, which resulted in damage to an excavator, which impacted production at this mine.”
All of the company’s 2012 planned production is contracted for and the outlook into 2013, 2014 and beyond looks positive, Bergen added. In the first quarter, CanAm achieved a record average sales price of C$114/ton. As the company moves into second quarter and the remainder of the fiscal year, it expects to see production at existing mines improve significantly as operational changes take hold.
Other highlights and significant events for the first quarter include:
- The conclusion of a number of off-take agreements with various customers, which resulted in 100% of estimated 2012 production being contracted for. Average price increases in such contracts were 4% to 17% as compared to last year.
- Good progress was made on permitting new mines that are slated to open in 2012 and 2013, including Old Union 2, Posey Mill 2, Knight and Davis.
- All mine operations, including a mine that CanAm had before its 2011 partial buy of Birmingham Coal & Coke (BCC), were combined under one common structure in order to drive operational efficiencies.
- The company renegotiated the reclamation bonding program in place for the BCC mines resulting in the release of restricted cash.
- The company appointed Scott Bolton, a senior partner with PricewaterhouseCoopers, as the new CFO and Jos De Smedt, the prior CFO, as the President and COO. Both appointments are effective June 1.
BCC mines fall short of production target in Q1
In the first quarter, there was a contribution of 48,325 tons of coal sales from the company’s 50% ownership in BCC’s three operating mines; Bear Creek, Old Union and Gooden Creek. All of BCC’s mines produce high quality thermal coal. Production for the quarter was below its expected level of some 60,000 tons per quarter due to mine reconfiguration and infrastructure development at Bear Creek resulting in 9,000 tons of lower production for the quarter, and a mine incident resulting in equipment damage at Gooden Creek which temporarily curtailed production by about 2,000 tons. In the first quarter, BCC did not broker any third party coal.
Coal sales at the Powhatan mine were 18,828 tons compared to 30,655 tons in the prior year. Coal sales were lower as the company executed on its operational realignment strategy and brought the Powhatan mine operations under the responsibility of the BCC team. This transition reduced production at Powhatan as management changes were instituted and operational changes were put in place. These changes were successfully completed by the end of April. Coal sales were also impacted by a lower than usual recovery rate on thermal coal.
The average sales price obtained during the quarter was C$114/ton as compared to C$105/ton in the prior year or an increase of 8.6%. Strong pricing for the quarter is the result of new long term off-take contracts signed by the company towards the end of fiscal 2011 and in early 2012. Such contracts not only provide for annual price increases but some also provide cost inflation protection for labor, fuel and explosives. The new contracts are for a term of three years and therefore the company has substantially sold its production through the end of 2014.
The new Old Union 2 and Posey Mill 2 mines are on track to open in the second half of this year. As for the Davis and Knight mines, the company has decided to accelerate the permitting of the Knight mine to achieve production starting in September due to a more favorable permitting and mine development profile. The company has slowed development of the Davis mine, which is now expected to start production in 2013.
Target production for 2012 is now estimated at 390,000 to 425,000 tons (previously 450,000 to 550,000 tons), up from 256,000 tons in 2011. The reduced target is the result of lower production from Bear Creek (mine reconfiguration and development), from Powhatan (mine transition to a new management team) and from Gooden Creek (equipment failure). The deferral of the Davis mine into 2013 also contributes to the lower production target. These factors are partially offset by the acceleration of the start date of the Knight mine.
CanAm has an option to purchase an additional 30% ownership in BCC within the next two years and the remaining 20% within five years. It intends to exercise a portion of this option within the next six months, CanAm noted.
CanAm also continues to pursue the development of its long-held Buick lignite coal reserve in Colorado. CH2M HILL, an independent engineering firm, recently completed a study on alternative development opportunities for this resource and they recommended two alternatives: the production of activated carbon or the gasification of the coal to produce liquid motor and/or jet fuels.