Colorado coal output kicks up in 2011, new mine projects in works

Keyed by a newly-revived metallurgical coal mine in southeast Colorado, the state’s coal production and employment rose in 2011, moving Colorado back into the top ten among coal producing states, said the Colorado Mining Association in a report released June 5.

Production is still far below the record levels set in 2004, and the outlook remains “very guarded” in the near term due to adverse conditions in markets for thermal coal used in the generation of electricity, the association said. “Excessive regulations from the U.S. Environmental Protection Agency (EPA) and state mandates for more expensive fuels for electricity generation also threaten coal’s position in the energy mix over the long haul,” said the association in a June 5 statement.

The association has been fighting a Colorado clean air mandate that is prompting Xcel Energy’s Public Service Co. of Colorado unit to shut down or switch to natural ga several coal-fired units.

Colorado now ranks 9th among the coal producing states, up two notches from 2010, the association. And coal production last year increased 6% to 26.8 million tons.

Stuart Sanderson, CMA President, cautioned against reading too much into the production increases. “2010 was a record low not seen since 1996, and 2011 production was 30 per cent below 2005 levels, with the most significant declines occurring in the export markets to other states, which have fallen 59% in the past seven years. One mine closed last year and there is no reason to presently conclude, given current market conditions, that 2011 performance represents a reversal of the longer term trend.”

The closure of a mine is an apparent reference to the small McClane Canyon deep mine of Rhino Resource Partners (NYSE: RNO). Rhino shut the mine after the mine’s only customer, a Colorado power plant, shut down. Rhino is adding first-time direct rail access at the mine and is also in the middle of a years-long process with the U.S. Bureau of Land Management to lease coal reserves for the much larger Red Cliff longwall mine nearby.

The number of persons employed by Colorado’s ten producing coal mines rose by 13% to 2,504, due mainly to the opening of a new metallurgical coal mine in southern Colorado, the association noted. That is the New Elk deep mine, re-developed after many years of shutdown by Canada-based Cline Mining (TSX: CMK).

CMA reported that employees (nearly 2,200 in all) at the state’s nine thermal coal mines earned average wages and benefits in excess of $115,000 annually, tops among the state’s industrial workers. Mining was also one of the few sectors to add jobs to the nation’s economy during the recession following the 2008 financial crisis.

Coal production in northwest Colorado, the state’s principal coal mining region, has fallen by 30% since 2005 and one mine cut production by half in recent years due to the inability to a secure a long-term contract to facilitate mine expansion. Another mine had zero production in 2011.

“This is the result of uncertainty over government regulations, and the threat of excessive action by the EPA and others,” Sanderson said. “Furthermore, the production cuts that will result from the implementation of House Bill 10-1365, which mandate the closure of power plants along the Front Range using clean, high quality Colorado coal in favor of higher cost natural gas, have not yet taken full effect.” Sanderson said that will displace up to 4 million tons annually in coal sales.

The threat of EPA action is real, said Sanderson. The recently-proposed New Source Performance Standards (NSPS) for CO2 emissions effectively ban new coal power plants. Following issuance by the EPA of the Mercury and Air Toxics Standards (MATS), utilities have announced that they will have to close power plants, he added.

“What happens in Washington will eventually have an impact on communities like Craig, Colorado,” said Sanderson. “The specter of EPA regulation can have significant impacts, and has been used to justify extreme results, even when the circumstances did not justify the measures taken.”

Some Colorado coal mines are in transition

Colorado mines, with the exception of New Elk, basically produce steam coal for power plants. Some (Colowyo, Trapper, New Horizon and Deserado) produce captive coal for nearby power plants owned by parties who also own or in some way control the mines. The rest primarily produce coal for the larger market, including power plants in the eastern U.S. that need this type of bituminous, low-sulfur coal. A few years ago, the Colowyo strip mine was selling coal to the broader market, but lately its production has been trimmed to just serve captive business.

A sometimes forgotten mine is the small King II deep mine in La Plata County, which is controlled by Mexico-based cement maker Grupo Cementos de Chihuahua SA de CV and produces coal primarily for the industrial market. Other major coal producers in Colorado include Arch Coal Inc. (NYSE: ACI) with its West Elk longwall mine, and Bowie Resources LLC with its Bowie No. 2 longwall mine. Bowie No. 2 last year cleared some problem geology and has been producing more coal lately.

Among the new mine developments:

  • Peabody Energy (NYSE: BTU) is preparing to transition its big Foidel Creek longwall mine into a new reserve area, with a new mine name of Sage Creek. The Sage Creek project was aided last year by a deal for coal out of that mine with Xcel Energy. The production potential for Sage Creek could be higher than recent production from Foidel Creek.
  • Rhino said on its website about McClane Canyon: “We have temporarily idled production at McClane Canyon. We have received a conditional permit to build a rail loadout at this location and plan to restart production when market conditions are favorable. In addition to the McClane Canyon mine, we currently control three nearby federal leases consisting of approximately 7,600 acres, two of which have the potential to support a future underground coal mining operation with procurement of an adjacent federal leasehold. We began the permitting process and leasehold procurement in 2005 and expect the process to last approximately one to three more years. We are currently in an exploration process to define the volume, quality and mineability of the coal reserves.” That last part is a reference to Red Cliff, which would produce up to 8 million tons per year.
  • Another Colorado mine development for the future relates to the fact that Oxbow Mining‘s Elk Creek longwall mine is in its last few years of coal and Oxbow is looking to explore the Oak Mesa coal reserve nearby with an eye on a replacement mine.
  • Cline Mining has re-started New Elk as a room-and-pillar job, but has said a longwall could be added as soon as 2015 that would boost production to 7 million tons per year. Cline said that this year, the mine is capable of producing up to 1.2 million tons. But, due to a poor market right now, the company has decided to produce 470,000 clean tons in 2012. The mine could produce as much as 3 million tons per year in the room-and-pillar configuration.
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.