Central Appalachia coal producer Xinergy Ltd. (TSX: XRG) on Nov. 14 reported a third quarter net loss of $35.6m or $0.65 per diluted share, as compared to net income of $5.4m or $0.09 per diluted share for the third quarter last year.
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the third quarter 2012 was $(7.7)m compared with $13.1m for the comparable period last year. Excluding non-recurring items, Adjusted EBITDA for the third quarter 2012 was $(6.6)m compared with $12.2m for the third quarter last year. Third quarter 2012 results were negatively impacted by a $15m asset impairment charge and significantly lower production and sales compared with the third quarter of 2011.
In the third quarter of 2012, Xinergy reported coal revenues of $16.5m on 242,390 tons sold compared with $48.7m on 531,724 tons sold for the year-ago quarter. Average realized sales price per ton was $68.16 during the quarter compared with $91.50 in the third quarter last year. Total cash costs were $17.5m or $95.17 per ton produced compared with $31.3m or $59.64 per ton a year ago.
“Challenging market conditions for both thermal and metallurgical coal persisted in the third quarter, though we believe we are seeing a bottoming in both markets,” said Matt Goldfarb, Xinergy CEO. “Xinergy has taken decisive steps to rationalize our cost structure by idling certain mines and cutting corporate overhead by roughly half, while at the same time positioning our shareholders to participate in the upside of our premium quality mid-vol met assets and low cost CAPP thermal mines as the market recovers.
Since the third quarter ended, Xinergy said it has made significant progress towards unlocking the value of its premium-quality mid vol met footprint in Greenbrier County, W.Va. Following receipt of permits in October, it began site preparation work in advance of commencing construction of a prep plant and rail siding facility at the South Fork operation. It remains focused on pushing the South Fork project forward on an expedited basis, with construction expected to be completed during the third quarter of 2013.
Also, Xinergy said it has closed on the previously announced deal to acquire a mid-vol met project in Fayette, Nicholas and Greenbrier counties, W.Va., that it refers to as Meadow River. Meadow River is an underground, Sewell-seam mid-vol project in close proximity to South Fork with an 18-24 month development schedule. The company views Meadow River as substantially enhancing its mid-vol met reserve profile, with the potential to significantly enhance its production profile when market conditions warrant the required capital spend to bring the project into development.
Xinergy said it has also entered into a three-year thermal coal supply agreement, which should further “de-risk” its asset portfolio as it awaits cash flow contribution from South Fork. The company said it continues to prioritize balance sheet liquidity, measured capital spending and fixed-cost rationalization as it navigates depressed market conditions.
Capital expenditures for the fourth quarter of 2012 include $4m for the October acquisition of Meadow River, and about $1m for site development at South Fork, with any residual capital expenditures being attributable to maintenance capital expenditures at our other mining complexes.
As of Sept. 30, Xinergy had total cash and cash equivalents (excluding restricted cash) of $46.4m. On Oct. 29, the company secured a $20m senior secured term loan financing commitment from Bayside Capital Inc., replacing the commitment previously obtained by the company in July, in order to achieve greater operating flexibility and reduced carrying costs.
Xinergy describes what it hopes is a rebounding steam market
“The domestic market for thermal coal weakened during the first half of 2012 to levels below most producers’ cash costs as a combination of cheap natural gas and mild winter weather led to substantial coal-to-gas switching and a significant increase in utility inventories,” the company reported. “During this period, the price of natural gas reached a low of $1.91 per MMbtu and utility inventories peaked at approximately 213 million tons, pushing coal’s share of power generation to a low of 32%. This decline in coal-fired generation caused gas fired generation to achieve an even share with coal-fired generation for the first time in 40 years. While historically low natural gas prices have increased natural gas’ share of domestic electricity generation, natural gas prices have since appreciated in excess of 80% from April lows, and are expected to stabilize in the $3.00 to $4.00 per MMbtu range due to reduced rig counts, decline profiles of less profitable ‘dry’ natural gas wells and increased domestic consumption due to ‘normal’ winter weather. The EIA forecasts that natural gas’ share of electricity generation will decline by 1% in 2013 as pricing for natural gas stabilizes, while coal’s share of electricity generation is forecasted to increase 1.3% in 2013.”
Xinergy said it believes the first half of 2012 marked a bottoming of the domestic thermal market, and that the market has begun to improve slightly, albeit off a very low base. Utility inventories have seen drawdowns in the direction of 185 million tons reflecting favorable summer weather, as cooling degree days were up this year versus both 2011 and the five-year average. “Longer term, the Company continues to believe that Central Appalachia will remain a vital component of domestic electricity generation,” the company added. “While coal plant retirements stemming from the EPA’s aggressive regulatory stance are expected to continue to pressure higher cost operators as the basin contracts in the short term, we believe that our low cost CAPP thermal operations position us well to reap the benefits of market recovery.”
The global market for metallurgical coal has also shown signs of bottoming following the most recent benchmark settlement for hard coking coal at $170/tonne and the absorption of a number of distressed cargoes reported to have been priced in the $140-$150/tonne range, the company noted. “The correction in met pricing – reflecting weakening global demand coinciding with a recovery in Australian met production following resolution of long-standing labor disputes – pushed pricing across the metallurgical coal quality spectrum well below the marginal cost of production. Corresponding production cuts in Australia, the U.S. and elsewhere, however, have since brought the market closer to equilibrium as we estimate that the global met market remains oversupplied today by less than 15 million tons (representing approximately 4-5% of seaborne trade). Further, the demand side of the equation has shown signs of recovery as the Chinese economy appears to have reaccelerated after two years of slowing growth. Chinese industrial production grew 9.6% in October from a year earlier, which also reflects an increase from the 9.2% gain in September.”
Xinergy has idled Raven Crest, True Energy operations
Xinergy said that after idling production at its Raven Crest operations in southern West Virginia and True Energy operations in Virginia during the third quarter, it is beginning to realize the desired impact of its deliberate actions towards minimizing cash burn at these operations. “We continue to aggressively seek to reduce inventory levels as these mines remain on ‘hot idle,’ which enables us to bring them back into production quickly as market conditions warrant,” it said. “We continue to operate Straight Creek [in eastern Kentucky] at production levels consistent with our goal of maximizing cash flow generation. While the contracting environment with domestic utilities remains extremely challenging, the Company did enter into a three year contract with a utility customer during October for delivery from its Straight Creek operations for between one and three trains per month. The Company intends to continue to look for opportunities in the short-term to ‘de-risk’ its asset portfolio as we position the Company for growth over the medium and longer term.”
At South Fork in Greenbrier County, Xinergy began producing coal in April from the Lost Flats mine, a mid-vol met surface mine. Production has been targeted at about 10,000 tons per month and is expected to continue at this reduced level until the company completes the recently-permitted prep plant and rail loading facility. The plant and loading facility are anticipated to be fully operational by the third quarter of 2013 at which time Xinergy anticipates increasing production at South Fork to a rate of about 50,000 tons per month at which time cash costs are expected to normalize at around $100 per ton.
“Our Raven Crest surface and highwall miner operations in West Virginia were idled in the third quarter due to poor market conditions,” the company said. “We continue efforts to reduce inventory, while we assess opportunities for long-term contracts at Raven Crest and Brier Creek that would justify construction of the preparation plant that we halted during the first quarter of 2012.”
As of Sept. 30, the company continued to operate one surface mine and one contractor-operated deep mine at Straight Creek in eastern Kentucky. These two mines combined, are producing 45,000 to 55,000 tons of coal per month, which is about 30% to 35% of capacity. “This reduced rate of production allows us to meet existing sales commitments and take advantage of market opportunities as they arise while focusing on maintaining low operating cash cost,” the company noted.