Two of the customers of Indiana producer Sunrise Coal LLC advised the company that their coal stockpiles are increasing and asked it to consider storing their coal on Sunrise Coal property.
“In April 2012 we entered into a storage agreement with one customer to store 250,000 tons for a minimum of one year and up to a maximum of two years,” said an Aug. 1 quarterly financial report by parent Hallador Energy. “In June 2012 we entered into a similar storage agreement with the second customer. We will continue to sell the coal as contracted to these customers. The risks and rewards of ownership will pass from us to them as coal is placed into segregated storage. We will be paid a nominal storage fee in addition to our contracted price at the time the coal is placed in storage.”
As of June 30, the company had stored 73,000 tons for the first customer and nil for the second. It has recognized about $3m in revenue from this “bill and hold” arrangement. There were no change in payment terms with the customers and as of July 31 all receivables outstanding at June 30 have been paid.
For the first half of 2012, Sunrise Coal sold 1,444,000 tons at an average price of $43/ton. For the first half of 2011, it sold 1,581,000 tons at an average price of $41.81/ton. The lower average price for the first half 2011 is due to the mix of various contracts. The company expects coal sales for the remainder of 2012 to be in the 1.45-million-ton range with an average price of $43/ton.
Operating costs and expenses at its Carlisle deep mine averaged $25.79/ton in the first half of 2012 compared to $23.15 in 2011. The increase was due primarily to poor mining conditions in the month of March. These poor conditions persisted into part of April, but conditions have since improved. The company is also operating the mine on reduced hours due to customer demand, which has a negative effect on productivity which translates to higher costs.
For the second quarter of 2012, Sunrise Coal sold 743,000 tons of coal at an average price of $43.72/ton. For the comparable 2011 period, it sold 765,000 tons at an average price of $42/ton. Cost of coal sales averaged $25.32/ton for the second quarter of 2012 compared to $23.40 in 2011.
The company has in 2012 nearly 3.1 million tons of coal under contract at $42.53/ton, 2.9 million tons contracted in 2013 at $40.01/ton and 1.1 million tons contracted in 2014 at $46.64/ton.
Hallador points out that the current market is a rough one
“In the short-run, the market for thermal coal in the United States faces a number of challenges,” the company noted. “Unusually mild winter weather has reduced electricity generation from both coal and gas burn, resulting in a rapid build in coal inventories. The mild weather, burgeoning inventories and prolific production of nat gas has recently driven the price of nat gas to decade lows, which has increased fuel switching in favor of gas and forced the price of thermal coals lower across all production basins. Regulatory uncertainties, particularly surrounding the recently delayed Cross-State Air Pollution Rule (CSAPR), and Maximum Achievable Control Technology (MACT), are causing utilities to defer coal purchasing decisions, and in some cases to retire coal-fired generating facilities.”
The company is still working on exploration of the Allerton/Bulldog coal reserve in Vermilion County, Ill. It has leased roughly 19,500 acres in Vermilion County near the village of Allerton. Based on current reserve estimates it currently controls 32.3 million tons of recoverable coal reserves. Out of that, 16.3 million are proven and 16 million are probable.
The company filed the formal permit with the state of Illinois and the appropriate federal regulators during June. It is calling the new reserve the Bulldog mine. If the process proceeds smoothly, the company said it could receive a mining permit as early as the first half of 2013.
Incidentally, the Bulldog mine was registered with the U.S. Mine Safety and Health Administration, under Sunrise Coal, as of April 16.