BLM to hold Aug. 22 auction on new Sage Creek coal reserve

The U.S. Bureau of Land Management plans an Aug. 22 auction on a 400-acre federal coal lease in the Wadge seam that Peabody Energy (NYSE: BTU) wants to add to its new Sage Creek deep mine in Colorado.

BLM said in a July 10 Federal Register notice that that this tract, in Routt County, will be leased under a lease by application (LBA) filed by Sage Creek Holdings LLC. The federal coal reserves to be offered consist of all Wadge seam reserves recoverable by underground mining methods.

The tract contains an estimated 3.2 million tons of recoverable coal reserves. The underground minable coal is ranked as bituminous C coal. The estimated coal quality on an as-received basis for the seam include: 12,776 Btu/lb; volatile matter, 38.21%; moisture, 8.72%; fixed carbon, 45.27%; sulfur 0.41%; and ash 7.39%.

The fact that this operation isn’t near any other existing any coal mining operation, and this tract is way too small to justify a new mine on its own, mean that a competing bid from an outside party in the Aug. 22 auction is very unlikely. BLM addressed that issue in an environmental assessment report on this lease action. “The alternative for another company to successfully bid on this LBA was considered, but eliminated from detailed analysis. [Peabody Sage Creek Mining] owns the surface of the 400 acres included in this LBA; therefore it is unlikely that another company would pursue bidding on this LBA. Moreover, the 400 acres would not provide a large enough area to economically develop and provide maximum economic recovery of the resource.”

Peabody is in the early stages of a process of phasing down production at its old Twentymile/Foidel Creek nearby, and ramping up production from the new Sage Creek job. Both mines work the Wadge seam. First production from Sage Creek happened in May and the company expects the longwall to start up in 2015. Sage Creek coal would move through the existing coal handling facilities at Twentymile.

The EA noted: “In 2009, Peabody Energy’s Twentymile Coal Co., Foidel Creek Mine employed an average of 490 full and part time workers with an annual payroll of approximately $28.3 million. These workers will gradually move to the Sage Creek Mine.”

Said the EA about the overall mine plan: “According to the Peabody Sage Creek Mine Permit Application, Peabody proposes to construct and operate the Peabody Sage Creek Mine (PSCM) under an initial 5-year permit, with construction in Year 1 and coal production ranging from 0.5 million tons per year (MTPY) in Year 2 to 2 MTPY in Year 5 using continuous miners. If mining and market conditions are favorable, the mine could expand from continuous mining during the initial 5-year period to full scale longwall operations, producing as much as 8 MTPY over the mine’s life. The Sage Creek Mine would replace the currently operating Foidel Creek Mine (CDRMS permit C-2009-087).”

Some of Sage Creek output headed to Hayden power plant

The Sage Creek project is backed by a new, 16-year contract to supply the Hayden power plant nearby. Peabody announced Jan. 23 an extension of the life of Twentymile lhas been secured by 40 million tons in long-term coal supply agreements. Hayden has been a long-time customer for Twentymile and Peabody’s now-shut Seneca strip mine operations in the area.

Hayden produces 446 MW with two units. It is operated by Xcel Energy (NYSE: XEL), an investor-owned utility holding company that provides electricity in seven other Western and Midwestern states.

Xcel unit Public Service Co. of Colorado (PSCo) filed November 2011 testimony at the Colorado Public Utilities Commission that said it had secured new coal supply for the Hayden plant from Peabody. “Peabody reserves at Twentymile will be exhausted at about the end of 2014,” said a PSCo official in that testimony. “However, Peabody has adjacent reserves, called Sage Creek, it is willing to develop but only if it gets a long-term coal sales contract that underpins the significant investment it would take to open those new reserves. The Peabody interests of developing a structure for a long-term contract that would underpin Sage Creek development align with Public Service’s need for a long-term, reliable supply to support the long-term operation of the plant. Public Service was able to balance its lack of competitive options with Peabody’s interests to achieve a transaction that provides a long-term supply for Hayden.” PSCo indicated that the new contract with Peabody extends from 2012 to 2027.

Hayden nominally requires about 1.6 million tons per year of coal. The prior, six-year contract with Peabody for supply to Hayden terminated at the end of 2011. Sage Creek would produce way more coal than Hayden could burn. This new contract essentially underpins the development effort for Sage Creek, with most of the mine’s coal production to be shipped elsewhere.

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.