Cliffs: sale of Australian coal assets not a sign it has lost confidence in coal

Even though Cliffs Natural Resources (NYSE: CLF) (Paris: CLF)  is selling off its stake in the Sonoma coal mining operation in Australia, the company still has confidence in its U.S. coal mining assets in West Virginia and Alabama, despite weak performance from those assets lately, said Cliffs Chairman, CEO and President Joseph Carrabba during a July 27 earnings call.

He said in answer to an analyst question that the coal business has not delivered up to its expected results. But U.S. operations, like the Oak Grove mine in Alabama, crippled for much of last year by a spring tornado that damaged its prep plant, are doing better operationally. “Nevertheless, we get paid to look at the shifting sands and if the market were to stay depressed, we’ve got to continue to look at all of our assets just like Sonoma and all the rest of our assets and evaluate the coal business on the long term. We’re still like everybody else, bullish on met coal. I don’t think the macros have changed. And we don’t see on the supply side any of the good, hard coking coal that our longwall mines produce out of West Virginia and out of Alabama. They’re still heavily sought after to blend off the lower grade met coals, if you will. And I think as we watch, it’s all about Europe right now as far as the coal business in the Atlantic basin. And we’ll just have to watch the run rate of Europe. But certainly, all assets are under scrutiny in this business for Cliffs at all times.”

Laurie Brlas, CFO and Executive Vice President of Finance & Administration, added: “But I definitely would not correlate the Sonoma sale to our North American Coal business. Sonoma is pretty small, not controlled by us, not a really long life asset, trending more towards thermal coal. So that was a decision based on that particular asset.”

Carrabba added: “Yes, let me just reinforce that. Thank you, Laurie, and yes, we thought we could be at some synergies and grow a coal platform in Australia. We have not been able to do that. We think the assets are very highly priced as you see evidenced by the last few coal sales. This has been a great partnership. The mine’s only got 5 to 7 years left. It does not have any growth potential in it with the way the geology of the coal mine is and it’s a good time for us to exit on a nice little isolated asset that’s performed very well.”

Sales volume up in the second quarter as Oak Grove hits its stride

At the North American Coal segment, sales volume for the second quarter increased 21% to 1.5 million tons from 1.3 million tons in the prior year’s second quarter. The refurbishment of Oak Grove’s prep plant is complete and those circuits are fully operational. Cliffs continues to improve production volume consistency at the longwall operations, and during the quarter, moved Pinnacle’s longwall into a new panel as planned. Pinnacle is located in Wyoming County, W.Va.

“Looking ahead, we have a planned longwall move at Oak Grove slated for the third quarter, and I’m pleased to note that all of the development work is complete for that move,” Carrabba added. “During the planned downtime for the longwall move, we will continue to work down Oak Grove’s inventory stockpiles that were accumulated during the rebuild of the Concord prep plant after being hit by a tornado.”

In the North American Coal segment, revenue per ton in the second quarter was relatively flat at $120. The slight increase when compared to 2011 second quarter was due to a sales mix that was comprised of a higher proportion of premium, low-vol met coal, which almost entirely offset the lower year-over-year spot market pricing for all coal products. Also, Cliffs placed volumes with new coal customers in Asia, which have a lower realized price due to the additional freight. Cliffs is maintaining its North American coal full year 2012 revenue per ton expectation of approximately $130 to $135.

“We achieved lower cash cost per ton of $111 compared with $114 per ton in the second quarter of 2011,” Carrabba said. “This year-over-year improvement reflected greater fixed cost leverage, driven by increased production volumes from our longwall operations. Partially offsetting the improvement during the quarter was a planned longwall move at the Pinnacle mine. We estimate the longwall move negatively impacted cash cost by approximately $9 per ton during the quarter. Primarily driven by the higher proportion of metallurgical coal sales volume, which carries a higher weighted average cost per ton, we’re increasing our full year 2012 cash cost per ton expectation to approximately $110 to $115.”

Costs also continue to be impacted by the higher cost stockpile tons mined at Oak Grove last year, while the prep plant was being reconstructed. For the full year, Cliffs is maintaining expected sales volume of about 6.9 million tons, made up of 4.6 million tons of low-vol met and 1.5 million tons of high-vol met coal, with thermal coal making up the remainder of the volume. The high-vol met coal is out of the Cliffs Logan County Coal operation in southern West Virginia.

An analyst said there has been a lot of chatter in the Atlantic basin about taking discounts relative to the benchmark price of coal and asked Carrabba if Cliffs is seeing any of that for its high-quality, low-vol coals or is that just happening in the mid- and lower-grade met coals. “I think it’s more in the the high-vol As and Bs,” Carrabba said. “I think there’s more of that. But let me be clear, too, on the low-vol, there’s always chatter in the market. That’s why we have salespeople that are negotiating with customers and in a tough environment in the Atlantic basin right now, negotiations continue. I mean, I don’t spend my day on the day-to-day of it, but sure, they’re negotiating pretty hard right now on all sides. But I don’t think other than the high-vols, I don’t think it’s any more unusual than what we would normally see in the low-vols.”

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.