The new Pennyrile deep mine that Rhino Resource Partners LP (NYSE: RNO) is planning for western Kentucky looks like a pretty good opportunity, considering coal quality and ease of access to river transportation, said David Zatezalo, CEO and President of affiliate Rhino GP LLC.
Asked during a Nov. 1 earnings call about Pennyrile and its prospects in the current tough coal market, Zatezalo said: “It is still a pretty tough market and Pennyrile has a quality profile that is typical of that basin, with the exception that the chlorine is somewhat lower, okay, so it’s advantaged in terms of that on coal quality. It is also advantaged in terms of transportation we can access the river directly. I consider it to be advantaged in terms of export capability because we don’t have any railroad interface with it at the present now. The overall capital requirements, I think, will be south of $50 million. We have drilled the coal seam extensively and will continue to do so. We view it to be a very uniform seam. It’s slightly thicker than what we’re used to operating in Central App certainly, and we feel it’s very good for us. The first phase of it has been approved. We had a very good reception in the market domestically, and we have not tried the market internationally yet.”
The reference to chlorine is a side-swipe at some of the coals coming out of Illinois, which like western Kentucky is part of the Illinois Basin, particularly some of the coal coming out of the new longwall mines of coal operator Chris Cline’s Foresight Energy.
The slides that accompanied the Nov. 1 earnings release show that the Pennyrile mine is officially called Riveredge, that it was bought for about $3.5m, that it includes over 30 million tons of recoverable coal, that the site is located on the Green River (a major barge thoroughfare for coal moving into the Ohio River market) and that first production could come in mid 2014.
The Pennyrile Energy LLC unit of Rhino has lately been pursuing permits for this new deep mine, located in McLean County. On July 3, the Kentucky Department for Environmental Protection put out for public notice a July 2011 socioeconomic report on the project under the name of Pennyrile Energy. The report was actually written by original project developer Delaware Resources LLC and signed by Delaware Resources President Stan Pigman.
The U.S. Army Corps of Engineers also earlier this year went out for comment on a new Section 404 permit for this project, noting in the public notice that this project is being transferred from Delaware Resources to Pennyrile Energy.
Pennyrile Energy was first listed with the U.S. Office of Surface Mining on April 19, with its immediate parent being Rhino Energy LLC. OSM data shows that a prior company involved in the project, West Kentucky Energy, was a Massey Energy subsidiary. This would have been a first foray for Massey, which was bought in June 2011 by Alpha Natural Resources (NYSE: ANR), into the Illinois Basin.
The Pennyrile/Riveredge mine could turn out up to 2.2 million tons per year and would work the West Kentucky No. 9 coal seam. Excluding a joint venture in West Virginia, Rhino produced a total of 4.6 million tons of coal in 2011, so full development of this mine would represent a sharp jump in its production. Rhino hasn’t been in western Kentucky up to now. It does have the undeveloped Taylorville deep mine project in Christian County, Ill., also in the Illinois Basin.
Rhino’s Hopedale and Castle Valley ops doing well selling forward coal
Also during the Nov. 1 earnings call, Christopher Walton, Senior Vice President and COO, said the steam coal out of the Hopedale operations in Ohio and the Castle Valley deep mine in Utah remained fully contracted through 2013 and 2014. In addition, the company has seen recent activity from steam coalcustomers that have previously delayed shipments in Northern and Central Appalachia, as well as in the Western Bituminous region, Walton noted.
“We continue the process of contracting our 2013 met coal, and while prices in the met markets are depressed, we placed the majority of the 2013 tonnage that’s needed to keep these mines open and the work crews in place,” Walton added.
Rhino Eastern, a met coal joint venture with Patriot Coal in southern West Virginia, continued normal production and produced a solid quarter as the company continued to experience lower production costs along with satisfactory sales levels, Walton said.
“We made substantial progress in securing anchor customers that want to underpin the development of our Pennyrile property in western Kentucky, Walton said. The Board of Directors of Rhino’s general partner has approved Phase 1 capital for the earthwork and development at Pennyrile. “We expect this operation will become a significant source of long-term positive cash flow going forward,” he added. “Once in full operation, we believe Pennyrile will add another significant pillar to our base steam coal operations that allow long-term contracts that generate long-term stable case flows.”
The company’s new Tug River prep plant in Central Appalachia continues to operate on a limited schedule, and once market conditions improve and the plant operates at full capacity, Rhino expects significant cost savings and increased production flexibility from this operation, Walton said.
The company’s highwall miner, which is basically a converted underground mining machine that burrows into the exposed highwall of a surface mine, continues to operate on a limited schedule, Walton noted. It’s capable of producing 240,000 tons of met coal per year from the host mine, even though it’s producing just a fraction of that amount now, he added. The Remining 3 surface mine in West Virginia commenced limited production in April, and this mine is capable of producing 375,000 tons per year when it’s operating at full capacity, Walton said.
“In our Western region, the Castle Valley mine is performing very well in the quarter as we sold over 300,000 tons, in large part due to a pickup from a customer who curtailed shipments early in the year due to a generator fire,” Walton said. “Our cost at Castle Valley has improved as our cost per ton was below $22.50 for the quarter, which we view as an outstanding achievement.” Castle Valley is a deep mine picked up a couple of years ago out of a bankruptcy sale process.
“And we’ve also begun production at our Eagle #3 mine at our Rhino Eastern joint venture during the third quarter, and Rhino Eastern continued to show positive results as our ongoing efforts to improve safety, productivity and cost structure at this operation resulted in positive returns even with the difficult market conditions,” Walton noted. “Despite the Patriot Coal Corporation’s bankruptcy, operations at the Rhino Eastern joint venture have been proceeding normally.”
At Rhino Eastern, Rhino (which owns 51% of the venture) basically produces the coal, while Patriot (49%) processes the coal in existing coal cleaning facilities. Patriot on July 9 sought Chapter 11 bankruptcy protection.
One analyst asked about the fact that at Castle Valley, Rhino is showing pricing of $35/ton in the third quarter of this year, but 2013 and 2014 sales at around $41-$42/ton. Richard Boone, Chief Financial Officer of Rhino GP LLC, said about the price difference: “We had an ash penalty on shipments with one of our major customers there that was absorbed in the third quarter. That was a one-time event that we will not have going forward. So you did see the gross revenues dip some there on the coal side.”
Zatezalo fielded a question about current pricing for various types of met coal. “[T]he qualities that we produce, I would say that the higher-vol As are probably close to $100 [per ton], the higher-vol Bs are probably about $85. The mid-vols are probably about $125, and the low-vol, we don’t sell that currently so I [could] really only speculate on what I’ve read, mostly in your writings.”
Zatezalo, answering another question, said Rhino has cut its met production in a slack market. “[W]e choose not to sell at lower prices because we don’t think it’s smart. … Generally, our workforce at those operations is working three or four days a week rather than a full production schedule as we’ve historically had them on. … But we’re trying very hard to keep the integrity of our organization together so that we’re ready to ramp back up in the event of an upbeat market.”