Lipari trims coal output, readies new mines for the future

Lipari Energy (TSX: LIP) has had to cut back eastern Kentucky steam coal production lately, but does have other mines that it is permitting and otherwise readying for development as existing mines run out of coal and steam coal demand rebounds.

Lipari noted in a Nov. 14 third-quarter earnings statement that it leases coal mineral rights to approximately 13,700 acres of land. Lipari began its mining operations, through subsidiary B&W Resources, when Lipari purchased all the issued and outstanding common stock of B&W Resources in September 2008. As of Sept. 30, 2012, Lipari’s mining complexes included three surface mines and one highwall mine. In addition, Lipari has one prep plant and one unit train loading facility served by the CSX railroad.

As of May 31, 2010, Lipari controlled about 14.8 million tons of recoverable coal reserves, which is about 11 years of production at its current annual rate of production. During the nine months ended Sept. 30, 2012, Lipari generated total revenues of about $56.3m on coal sales of 777,677 tons of coal and production of 665,574 tons of coal. Its revenues have resulted primarily from the sale of coal to electric utility companies in the southeastern U.S.

As of Sept. 30, Lipari had sales commitments in place for 100% of its planned 2012 production and around 90% of planned 2013 production. Lipari said it plans to capitalize on the expected increase in the pricing environment by pursuing additional long-term contracts and opportunistically selling coal on the spot market if good prices become available. Lipari’s long-term agreements for 2012 and 2013 require its customers to buy coal at prices averaging about $72 and $77, respectively, per ton, subject to quality adjustment provisions.

Lipari currently holds 23 permits and operates three surface mines and one highwall mine. In addition, Lipari has either applied for additional or incremental permits that are in various stages of processing that should enable it to produce about 1.1 million tons per year for the next nine years.

Some mines producing, others are cut back or are on hold

The company’s mines and mine projects are:

Chavies Mine – The company conducts surface, contour and auger operations at this mine in Leslie and Perry counties, Ky., which has estimated reserves of 5 million tons and resources of 11 million tons as of May 31, 2010. Lipari trucks coal from this mine to its load-out facility. Chavies has about 1,000 permitted acres, with mining being conducted in four coal seams (Hazard 5A, 7, 8 & 9) with an average seam height for all seams of about 24 inches. Typical coal quality for this surface mine is 12,200 Btu/lb and sulfur content of around 1%. Lipari plans to maintain the production from this mine at about 35,000 tons per month. Lipari is expanding this lease position with additional leases and amending the existing permits to increase the life-of-mine plan. During the nine months ended Sept. 30, 2012 and 2011, Lipari produced about 252,000 tons and 346,000 tons, respectively.

Owls Nest Mine – The company conducts surface and contour mining at Owls Nest in Leslie County. Owls Nest has estimated reserves of 2.3 million tons and resources of 7.6 million tons as of May 31, 2010. Lipari trucks coal from this mine to its load-out. Owls Nest has about 660 permitted acres and mining is conducted in two seams (Hazard 7 & 9) with an average seam height for all seams of about 50 inches. Typical coal quality is 12,500 Btu/lb, with a sulfur content of about 1.5%. Lipari is amending permits associated with this lease to allow for highwall mining and additional contour mining. This permitting will further diversify the product offerings, extend the life-of-mine plan for this acreage position, and provide for additional acquisition of leases. During the nine months ended Sept. 30, 2012 and 2011, Lipari produced about 107,000 tons and 143,000 tons, respectively. Mining was restarted in late June after being temporary idled due to permitting and market conditions. Lipari plans to produce around 15,000 tons per month from this mine.

Aces Branch (Detherage) – The company conducts surface and contour mining operations at Aces Branch in Leslie County. Aces Branch has estimated reserves of 1.3 million tons and resources of 1.8 million tons as of May 31, 2010. Lipari trucks coal from this mine to its load-out. Aces Branch has around 600 permitted acres and mining is in three seams (Hazard 7, 8 & 9) with an average seam height for all seams of about 36 inches. Typical coal quality is 12,200 Btu/lb and sulfur content is about 1.5%. Lipari has identified and secured additional acreage that is contiguous to this operation which will allow for the expansion of production, reserves and life of mine. Production has been held back due to market conditions, but Lipari plans to continue production at about 17,000 tons per month. During the nine months ended Sept. 30, 2012 and 2011, Lipari produced about 108,000 tons and 204,000 tons, respectively.

Bingham Project – The company began developing this operation in Owsley County, Ky., during the third quarter of 2011, utilizing contour and auger mining. Bingham has estimated recoverable reserves of 885,000 tons with resources in excess of 2.2 million tons as of May 31, 2010. Bingham has about 186 permitted acres, with mining in the Amburgey seams with an average seam height of about 32 inches. Typical coal quality is 12,400 Btu/lb and sulfur is around 1.3%. Lipari said it is aggressively expanding the lease position and amending the existing permit to increase the life-of-mine plan for this acreage position. Lipari said it has placed this permit into market deferment, conserving these reserves until the coal market becomes more stable. During the nine months ended Sept. 30, 2012 and 2011, the company produced approximately 14,000 tons and zero tons, respectively.

Tanyard – Lipari conducts surface, contour and auger mining at Tanyard in Clay County, Ky. Tanyard has estimated reserves of 800,000 tons with resources in excess of 2 million tons as of May 31, 2010. Lipari began extracting coal from this mine in July 2011. Lipari trucks this coal to its load-out. Tanyard has about 285 acres with mining in the Horse Creek seam with an average seam height of about 19 inches. Typical coal quality is 13,500 Btu/lb with sulfur content of about 0.8% and an average ash content of about 4%, all qualities needed in the pulverized coal injection (PCI) market. Lipari controls about 1,500 acres at this operation and is amending existing permits to provide for an extension of the mine plan and reserve base. During the nine months ended Sept. 30, 2012 and 2011, it produced about zero tons and 35,000 tons, respectively. Initial mining from Tanyard was completed during the third quarter of 2011. Production was idled as of August 2011 until the PCI market gains strength.

Barger Branch Project – The company began development of this operation in Clay County during the first quarter of 2012, utilizing contour and highwall mining. Barger has estimated recoverable reserves of about 750,000 tons based on internal engineering studies. This project was not included in the May 31, 2010, reserve study. The company leases a Bucyrus Superior Highwall Miner to operate on this property and other highwall properties it controls. This project has about 488 permitted acres, with mining in the Hazard 4 seam with an average seam height of about 40 inches. Typical coal quality is approximately 12,800 Btu/lb with sulfur content of about 0.8%. This project provides Lipari with reduced cost of production due to the utilization of highwall mining and the ability to extract mineral from surface mining in front of the miner. Initial production began in March 2012. During the nine months ended Sept. 30, 2012, the company produced about 172,000 tons. Lipari plans to maintain highwall production at about 25,000 tons per month. Surface mining from this site began during the third quarter of 2012. That is additional production of about 5,000 tons per month initially, increasing to about 10,000 tons per month.

Mitco/Big Valley – Lipari conducts highwall and contour mining at this mine in Clay County. Mitco/Big Valley has estimated reserves of 650,000 tons with resources in excess of 1.9 million tons as of May 31, 2010. Lipari began extracting coal from this mine in September 2011. Lipari trucks coal from this mine to its prep plant for washing. Mitco/Big Valley has about 485 permitted acres and mining is conducted in the Hazard 4 seam with a coal quality of about 12,800 Btu/lb and a sulfur content of about 0.8%. This project provides Lipari with reduced cost of production due to highwall mining. Lipari is amending existing permits to provide for an extension of the mine plan and reserve base. During the nine months ended Sept. 30, 2012 and 2011, it produced about 4,000 tons and 162,000 tons, respectively. Mining has been temporarily idled while additional reserves are added to the permitted area.

Lipari noted that there continues to be a backlog of dredge and fill, Section 404 Clean Water Act permits awaiting approval from the U.S. Army Corps of Engineers, which is a wide-ranging problem for almost all coal producers in Central Appalachia. The U.S. Environmental Protection Agency has extended its review of Section 404 permits. “If the Company is unable to obtain §404 permits on a timely basis it would be delayed in or precluded from commencing certain new operations, or in expanding certain existing operations, which could have a material adverse effect on the Company’s operations and, therefore, its results,” Lipari said. “As a preemptive measure, the Company is actively seeking properties to lease with ‘pre law’ benches and areas that do not require §404 permits.”

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.