In what is not exactly a surprise move, CONSOL Energy (NYSE: CNX) said July 2 that it has sold its non-producing Northern Powder River Basin (PRB) assets for $170m in cash to Cloud Peak Energy (NYSE: CLD).
CONSOL said it has structured the transaction to retain an 8% production royalty interest on approximately 200 million tons of permitted fee coal. The transaction is effective as of June 29. CONSOL’s Northern PRB assets consist of three separate parcels, including Youngs Creek Mining Co. LLC and CX Ranch, both of which are 50% owned by Chevron (NYSE: CVX), and additional related properties in and around Sheridan, Wyo.
Chevron recently exited the active coal mining business with the separate sales of its Kemmerer strip mine in Wyoming and its North River longwall mine in Alabama.
“Since the 2010 acquisition of the Dominion Appalachian gas assets, CONSOL Energy has been able to pull value forward and focus on its near-term opportunity set,” said J. Brett Harvey, CONSOL Chairman and CEO. “As a result, we have been organically growing our coal and gas businesses in Appalachia while divesting properties that are more naturally suited to others.”
With this transaction, CONSOL’s asset divestitures for 2012 to date total $224m. The company expects to deploy this cash towards its 2012 capital expenditure program, which includes both growth and maintenance projects. None of the assets sold in 2012 to date has generated revenue for CONSOL.
The CX Ranch reserves, held by CONSOL for many years, are just north of the Montana-Wyoming line in Montana. The Youngs Creek reserves are just south of the line in Wyoming. CONSOL and Chevron announced plans several years ago to develop a 15-million-tons per year surface mine on the Youngs Creek property, but that project never happened. There has been some work being done lately to get rail access to the Youngs Creek reserve off a BNSF rail spur that currently accesses Cloud Peak’s part-owned Decker mine.
Cloud Peak Energy said July 2 in its own announcement that it has acquired the Youngs Creek Mining joint venture and other related coal and surface assets from Chevron U.S.A. Inc. and CONSOL Energy for $300m. Of this purchase price, $195m is allocated to the lease of approximately 450 million tons of in-place coal and $105m to the purchase and lease of 38,800 acres of land. The coal and land are well suited to support potential increased exports through the Pacific Northwest, Cloud Peak noted. Youngs Creek is a permitted but undeveloped surface mine project in the Northern PRB located 13 miles north of Sheridan, Wyo. It is 7 miles south of Cloud Peak Energy’s Spring Creek mine and 7 miles from the BNSF mainline railroad.
Cloud Peak has its eye on export coal market
“The significant coal and surface assets we acquired position Cloud Peak Energy well for future growth in our Asian exports as additional terminal capacity becomes available,” said Colin Marshall, President and CEO of Cloud Peak Energy. “The location of the coal and surface lands close to the Spring Creek mine and its rail spur should reduce development costs and allow future operating synergies to be realized. The quality of the coal is similar to that of our Spring Creek mine and offers lower sodium levels to further meet the needs of our customers.” Sodium has always been an issue for PRB mines in Montana, causing boiler and coal ash problems.
Of the approximately 450 million tons of in-place coal, the undeveloped Youngs Creek mine permits cover 291 million recoverable tons of low sulfur, high Btu subbituminous coal. Of this permitted coal, 267 million tons benefit from a royalty rate of 8% payable to CONSOL and Chevron which is below the normal 12.5% of gross proceeds payable on federal coal.
The 38,800 acres of land includes Youngs Creek surface to the south and extends to the border with Cloud Peak Energy’s Spring Creek mine to the north. The property also extends onto the Crow Indian Reservation to the west and abuts the Decker mine, of which Cloud Peak Energy owns 50%, to the east.
“This coal has the same geographic and quality advantages over Southern PRB coal as the Spring Creek mine, which have allowed us to make the majority of PRB export sales in recent years. We now have a large asset base and lots of options as to how we develop our Northern PRB operations to meet future export and domestic coal demand,” said Marshall.
Future development timing and production levels are expected to depend largely on the availability of additional export terminal capacity on the West Coast and continued strong Asian demand for thermal coal. The mine would be served exclusively by the BNSF. The BNSF/Union Pacific Joint Line stops well south of this location. As Cloud Peak Energy has not completed detailed mine development planning, the acquired coal is not expected to be reported as reserves at year-end 2012, the company noted.
New properties add to Cloud Peak’s PRB-only footprint
Cloud Peak Energy is headquartered in Wyoming and is one of the largest U.S. coal producers and the only pure-play PRB coal company. As one of the safest coal producers in the nation, Cloud Peak Energy specializes in the production of low sulfur, subbituminous coal. The company owns and operates three surface coal mines in the PRB, the lowest cost major coal producing region in the nation. The Antelope and Cordero Rojo mines are located in Wyoming, and the Spring Creek mine is located near Decker, Mont.
CONSOL, on the other hand, is based out of Pittsburgh and has been shrinking the geographic diversity of its coal production base, selling an interest in a Canadian coal mining operations years ago, and shutting a mine recently in Utah (Emery) and a few years ago in Illinois (Rend Lake). Its base of operations is several Pittsburgh-seam longwall mines in Pennsylvania and northern West Virginia, with some other outlier operations, including the Amonate operations in southern West Virginia it recently tried to sell but is now reopening to meet metallurgical coal market demand.
New PRB mines are rarely developed, making the Youngs Creek project particularly notable. Other new PRB mines on the drawing board include: Peabody Energy‘s (NYSE: BTU) School Creek mine, located near its existing North Antelope Rochelle mine in the Wyoming PRB; and Arch Coal‘s (NYSE: ACI) Otter Creek mine in Montana, which can only be developed if the long-delayed Tongue River Railroad is finally built. The Tongue River Railroad, which is now part owned by Arch Coal, recently told the U.S. Surface Transportation Board it wants a quick approval of a truncated version of the project so it can get this line built for transport of the coal out of the Otter Creek mine.
Also, an Australia-listed company, County Coal Ltd. (ASX: CCJ), wants to develop two coal mines in the Wyoming PRB that would each produce at least 5 million tonnes per year, primarily for the export thermal coal market. County Coal’s Shell Creek project is located in Johnson County near Buffalo, quite a distance west of the existing Wyoming PRB mines. The top seam of the Shell Creek project area, the Lake De Smet seam, is about 150 feet in thickness and located about 350 feet below surface. The company’s Miller project, on the other hand, is in Campbell County, near the existing Wyoming PRB mines.