Cline Mining thinks coal market has reached bottom, its Colorado mine still idle

Canada-based Cline Mining Corp. (TSX:CMK) said Oct. 15 that the company has three major objectives right now: to sell the company’s stockpile of metallurgical coal, to secure long-term sales contracts, and to restart production at the New Elk deep mine in southeast Colorado at the earliest opportune time.

Ken Bates, President, CEO and a Director of Cline Mining commented: “Current market conditions for coal producers continue to be challenging. Demand continues to be weak in the metallurgical coal market with prices declining across the board. The benchmark industry contract price settlement for the fourth quarter this year starting October 1 declined US$55 per tonne from the previous quarter settlement of US$225 per tonne. We are taking a longer-term view of the metallurgical coal market as our industry faces this current cyclical downturn in demand, focusing on China and India. Cline’s New Elk Mine is a major metallurgical coal mine with a large resource base of over 618 million short tons of metallurgical coking coal in place. During the short-term, the Company must navigate this difficult market by conserving its cash resources, raising In addition to its working capital requirements, the Company must secure sufficient funding to continue developing and expanding the New Elk Mine and keep its mineral claims and title in good standing. The Company is currently working on securing additional capital to meet these needs and several initiatives are underway in this regard. There is however no guarantee that the Company’s financing efforts will be successful or sufficient to fund existing commitments.”

Cline has retained a workforce to maintain the New Elk mine, idled earlier this year, and its assets in preparation for a rapid restart of coal mining immediately when the economic landscape permits.

The technical mine planning review process for operations of the New Elk mine, conducted by New Elk Coal Co. LLC Chief Operating Officer David Stone, was completed on schedule in September. The main focus of the review and subsequent mine plan was on the development of the Central Zone of the mining lease which provides optimum utilization of the already present infrastructure coupled with the highest short-term production output possible without sterilizing any of the existing resource, the company noted.

As part of the review process the entire New Elk Mine resource has been zoned geologically and short- and long-term production areas were identified and included in the plan, providing conservative and achievable outputs. The company has identified the coal seams in the Central Zone that provide the most cost-effective restart option in the short-term. These seams include the Allen seam and the Blue seam. The mine review assumes four operating development units plus an additional unit permanently set up as a spare, with a longwall being added to the productive capacity of the mine as the coal market cycle recovers. The company is initially working within the parameters of using existing equipment on site, which includes 10 continuous miners and 15 shuttle cars.

Stone said: “At this time we are completing the detailed reimplementation plan to enact the review’s outcomes. The operation can re-commence production in a structured and sustainable way rapidly upon the securing of an appropriate off-take and long-term sales contracts.”

Met coal demand, pricing suffers worldwide due to various factors

Consistent and continuing uncertainties over the European debt crisis, economic activity and signs of a Chinese economic slowdown are placing ongoing downward pressure on coal demand and prices, the company noted. “Recent reports suggest stockpiles at Chinese seaports remain high as growth in Chinese steel production grew marginally by 1% in the first half of 2012, as compared to the same period in 2011, a growth rate which lags behind its 5-year CAGR of 10%. Leading Japanese companies have recently settled the quarterly benchmark coking coal price at $170/t for Peak Downs/Saraji material and $165/t for Goonyella. This represents a $55/t reduction in price from the previous quarterly benchmark. Japan continues to be the largest importer of coking coal with an estimated intake in excess of 47 million tons followed by China with imports of coking coal estimated at 34 million tons year-to-date. While steel production in Asia has increased compared with 2011 they are still working down high coking coal inventories, which translates into a very weak spot market. The Euro-zone sovereign debt crisis has cultivated a frail demand environment. Historically, Germany has been the bellwether of European steel production and according to the World Steel Association Report, crude steel output from Germany nudged down to 3.6 million metric tonnes in July, down 5.0% over the last six months, or 2.1% lower than a year ago. This reduction has been reflective of the overall macro landscape as steel production within the European Union inched down 4.9% year-over-year to 14.2 million metric tonnes. “

Looking at Asia, Cline added, emerging steel-making countries like India seem poised for a strong fourth quarter and beyond as the capacity from both public and private steel plants are set to increase from expansion and modernization initiatives. As projected by the Indian Ministry of Steel, capacity is set to grow to approximately 200 million metric tonnes by 2020. The company said it shares the view that the market has reached its lowest level and will strengthen going forward.

“The current market outlook for coking coal remains bearish due to slow demand growth, but a recent $158 billion stimulus package announced by China in early September can act as a catalyst for a metallurgical coal rebound,” Cline added. “The package focuses on the infrastructure sector, and aims to boost the slowing domestic demand for steel. According to the Australian Bureau of Resource and Energy (BREE), China’s steel consumption in 2013 is forecasted to reach 643 million metric tonnes, a 2.0% increase relative to 2011 levels. Steel consumption in the EU is forecasted to remain stagnant through 2013 relative to 2012, due to contraction in economic growth for the European Union. The World Bank’s economic growth projection of 6.0% for India in 2013, will spur an increased appetite for steel through rising demand for infrastructure. BREE expects China to import the bulk of hard coking coal as flat domestic production schedules will force imports to increase by 15%, totalling 48 million metric tonnes in 2013. Consistent with the unchanged steel production forecast, imports of coal from the European Union during 2013 will be similar to their 2012 levels. India’s imports are believed to increase by 9% to total 23 million metric tonnes by 2013.”

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.