CONSOL Energy (NYSE: CNX), hit by production problems in its coal operations, said Oct. 25 that it had a net loss for the third quarter of $11m, or ($0.05) per diluted share, compared to net income of $167m, or $0.73 per diluted share from the year-earlier quarter.
The loss for the Pittsburgh-based company was due to a series of planned and unplanned idlings, as the company scaled back coal production to meet a weaker market, which will also have a residual impact during the fourth quarter.
The one unplanned item was the previously announced collapse of two newly-installed conveyor belts that move coal from the Enlow Fork and Bailey longwall mines in the Pittsburgh seam in southwest Pennsylvania to the Bailey Preparation Plant. This incident caused a total of four longwalls, two in each mine, to be idled for about three weeks, at which point one rebuilt conveyor belt was re-started. Production from these mines was at about 60% of normal for most of the remainder of the third quarter. The company’s third quarter net income would have been an estimated $53m higher had the conveyor belt incident not occurred. This impact is before the receipt of any insurance proceeds and any other proceeds under the indemnity provisions of the construction contract.
Much lower sales from the company’s flagship low-vol Buchanan longwall mine in southwest Virginia also reduced third quarter profitability, as the company chose not to sell into a market that was experiencing an inventory de-stocking.
“CONSOL is serious about maintaining market discipline,” said J. Brett Harvey, CONSOL chairman and CEO. “Our premium low-vol coal is a scarce resource. When temporary market imbalances occur as they did this quarter with our overseas customers, we choose to idle our mine rather than force tons into the market. Our actions, as well as the actions of others, should enable the metallurgical coal market to come into balance faster. We have a strong balance sheet with a high level of liquidity, which allows us to exercise production discipline.”
The lower level of production impaired costs per ton. In the Coal Division across all of its tons, CONSOL had 2012 third quarter fully-loaded costs of $55.84 per ton. This was an increase of $1.46 per ton from the year-earlier quarter. The company expects costs per ton to decrease as its mines return to more normal schedules.
Cash flow from operations in the third quarter was $162m, as compared to $457m in the year-earlier quarter. CONSOL continues to invest in its future, in both coal and natural gas, by investing $438m in the 2012 third quarter on capital projects. Some of these projects, such as the new BMX Mine, which is essentially a third longwall for Bailey, are a multi-year investment. CONSOL’s plan is to complete the BMX Mine in early 2014 and then reassess the viability of other coal expansion projects. CONSOL said it does not expect to invest in new expansion projects until coal markets improve.
After investing a projected $1.5bn in coal and gas projects this year, the company expects to end 2012 with no cash on its balance sheet and nothing drawn against its revolving credit facilities.
Fourth quarter should be better, though met market still a challenge
“The return of Bailey and Enlow Fork mines to normal production at the beginning of the fourth quarter will certainly be helpful for CONSOL’s earnings going forward,” said Harvey. “Strengthening spot gas prices and a projected sequential increase in both coal and gas production will also be helpful. The steel market, though, remains challenging for all of the categories of our metallurgical coals.”
The Buchanan mine is expected to restart the week of Nov. 5 with a five-day work week schedule, while the Amonate met coal mining complex, located mostly in McDowell County, W.Va., is likely to remain idled for the remainder of 2012.
Excluding the impacts of Buchanan and Bailey/Enlow Fork production shortfalls, CONSOL’s coal production costs in the quarter ended Sept. 30, 2012, were $55.84 per ton, or an increase of $1.46, or 3%, from the year-ago quarter. The majority of the cost increase was volume related, as there were four additional weeks of longwall idling that lowered volumes during the quarter.
Coal production in the third quarter consisted of 0.8 million tons of low-vol, 0.7 million tons of high-vol, and 10.1 million tons of thermal, for a total of 11.6 million tons. Amonate production of 53,000 tons is included in the low-vol category.
Of the thermal coal production, 9.3 million tons were from Northern Appalachia and 0.8 million tons were from Central Appalachia. The company’s lone mine outside of these areas, Emery in Utah, has been shut for some time. During the third quarter, thermal coal inventory decreased by 0.8 million tons, when compared to the quarter ended June 30, 2012.
Coal Marketing Update:
- Low-Vol: Low-vol coal continues to be oversupplied in a world economy that has weakened in the last six months, the company noted. Steel utilization rates remain weak in Europe and Brazil, which are CONSOL’s natural export markets. Benchmark settlements between major steel producers and coal suppliers recently settled at prices that, when adjusted for transportation, were lower than expected. The Low-vol forecast calls for sales of 0.6 million tons in the fourth quarter of this year at an average of $134.64 for those tons committed already, with these other tons and average prices for only tons actually committed in those periods: all of 2012, 3.4 million tons ($141.72); 2013, 3.9 million tons ($130.35); and 2014, 4.9 million tons (no price average given).
- High-Vol: CONSOL expects shipments to China will return to normal levels once a drawdown of their inventories is complete. It expects a recovery to occur in the second quarter of 2013 as global steel production improves. The sales projections and average prices for committed tons are: fourth quarter 2012, 0.5 million tons ($81.07); all of 2012, 3.4 million tons ($65.46); 2013, 2.7 million tons ($73.23); and 2014, 4.8 million tons ($75.53).
- U.S. Thermal: Warm summer temperatures and Northern Appalachia production issues combined with production cutbacks in other basins have contributed to reduced inventories at utility stockpiles. Also, the potential return of normal winter weather and the strengthening natural gas price are catalysts for improving domestic thermal markets. CONSOL has 96% of its Northern Appalachia coal sold for 2013 and has recently completed pricing for over 3.5 million tons of Bailey thermal product at or in excess of $60 per ton. For all thermal sales, the projections are: fourth quarter 2012, 12.9 million tons ($61.21); all of 2012, 49.1 million tons ($61.66); 2013, 49.5 million tons ($60.63); and 2014, 51.4 million tons ($62.27).
- Global Thermal: CONSOL expects to continue to sell thermal coal into European markets under contract.