Xinergy records big 2012 loss, pares down to met coal assets

Xinergy Ltd. (TSX: XRG), a Central Appalachian coal producer that was hammered by a tough coal market, said March 21 that it had a net loss of $88.8m in 2012 and a net loss of $40.4m for the fourth quarter of 2012.

This is compared with a net loss of $14.1m 2011 and a net loss of $6.5m in the fourth quarter of 2011. The company’s coal sales plunged from 2 million tons in 2011 to 1.2 million tons in 2012.

Xinergy CEO Matt Goldfarb said: “Last year proved to be an extraordinarily challenging market environment, characterized by the confluence of continued weakness in domestic thermal markets due to oversupply and an abundance of cheap natural gas, and a violent correction in the global met market occasioned by slowing Asian demand and instability in European markets. As we look into 2013, we are cautiously optimistic that both markets have bottomed and are beginning to stabilize. Firming natural gas prices, significant supply rationalization and more seasonal winter weather provide support for a potential rebound in CAPP thermal pricing. In the met market, we see the most recent hard coking coal benchmark settlement of $172/mt as reflecting not only increased demand from China, but also a supply response to the mid-2012 pricing environment that left much of the seaborne met cost curve underwater.”

Goldfarb added: “The fourth quarter concluded a pivotal year for Xinergy in which we executed well against our objectives of repositioning our asset portfolio with a focus on our premium quality, mid-vol met footprint in West Virginia, while maintaining balance sheet flexibility to withstand the market downturn. The recently announced divestiture of our Kentucky thermal operations accelerates our transformation towards a greater mix of premium quality, mid-vol met coal assets while strengthening our balance sheet to position us to drive long-term shareholder value.”

The company does not anticipate any thermal coal production in 2013, after giving effect to the sale of the Straight Creek operation in eastern Kentucky. Previously anticipated 2013 thermal coal sales from Raven Crest/Brier Creek operation in southern West Virginia have been pushed into 2015 due to a March 2013 amendment to a supply agreement covering the sale of 360,000 tons per annum previously scheduled to cover a two-year period beginning January 2013. The amended supply agreement provides for the delivery of 360,000 tons per annum beginning January 2014, and continuing through December 2015, at index-based pricing.

Xinergy’s 2013 metallurgical coal sales guidance remains unchanged from prior guidance at 300,000 to 400,000 tons from its South Fork operation in Greenbrier County, W.Va. The company anticipates capital expenditures of $35m to $40m for fiscal 2013, of which approximately $8.5m has been spent to date.

Goldfarb said: “Construction of our preparation plant and rail loading facility at South Fork remains on track to be completed by the end of the second quarter. Notwithstanding the challenging market environment, the excitement surrounding our crown jewel asset coming online meaningfully is evident amongst the entire Xinergy family.”

At this point, Xinergy has:

  • one active mining complex, South Fork Coal Co., which handles the Greenbrier County mid-vol met operation;
  • two idle facilities, True Energy LLC, a high-vol metallurgical operation in Wise County Va., and Raven Crest Mining LLC, a thermal operation in Boone County, W.Va.; and
  • the recently-acquired mid-vol metallurgical coal property formerly known as Meadow River, consisting of surface, mineral, and mining rights in Fayette, Nicholas, and Greenbrier counties, W.Va., through wholly owned subsidiary Sewell Mountain Coal Co. LLC.

On Feb. 1, the company entered into an asset purchase agreement to sell all of the assets of its Straight Creek and Red Bird operations in eastern Kentucky for $47.2m cash resulting in a gain of $11m.

Xinergy sees signs of at least a partial coal rebound in 2013

“The global market for metallurgical coal has shown modest signs of improvement following a bottoming in 2012 as global supply rationalization, accelerating Chinese industrial production and resilient North American steel utilization rates have combined to move the market closer to equilibrium,” the company said. “We believe the downturn in metallurgical coal markets in 2012 led to production curtailments of between 30 to 40 million metric tonnes on an annualized basis, as cost inflation combined with weaker pricing – particularly for certain lower quality metallurgical coals – left a substantial portion of the global metallurgical coal cost curve under water. As we look into 2013, we are encouraged by the recent surge in Chinese steel production during the first quarter, and continue to look for signs in the domestic steel industry of a sustainable level of profitability that would allow for a meaningful recovery in raw material pricing.”

Following a bottoming in the domestic market for thermal coal during the first half of 2012, natural gas prices have begun to recover with the futures curve above $4.00 per MMbtu, making thermal coal more cost competitive relative to natural gas in certain regions of the U.S., the company said. Total domestic coal consumption fell by 114 million tons, or 11.3%, during 2012, led by an 11.6% decline in coal use for power generation.

“Increased domestic consumption by power producers is expected to lead to a reversal of roughly half of this decline during 2013, with total coal consumption anticipated to increase approximately 5.8% from 889 million tons in 2012 to 941 million tons in 2013,” Xinergy said. “According to the EIA, total domestic power generation is expected to grow by 0.5% in 2013 and 1.0% in 2014, as power producers increase coal capacity utilization leading to a 6.2% increase in 2013 domestic coal generation. This increase, largely due to firming natural gas pricing, is anticipated to raise coal’s share of total domestic power generation from 37.4% in 2012 to 39.5% in 2013 (still below coal’s 42.3% share in 2011.)”

Preliminary data from the EIA indicate that 7.9 GW of coal generation were retired during 2012, representing 2.5% of installed coal capacity (and about 0.8% of total generating unit capacity), Xinergy said. Two-thirds of the coal capacity retired in 2012 was located in the Midwest and Southeast U.S., which has had a disproportionate impact on Central Appalachia coal producers like Xinergy given the group’s leverage to those regional utilities. Longer term, the company said it continues to believe that Central Appalachia will remain a vital component of domestic electricity generation. “While coal plant retirements stemming from the EPA’s aggressive regulatory stance are expected to continue to pressure higher cost operators as the basin continues to contract, we believe that our low cost CAPP thermal operations position us well for a market recovery,” Xinergy added.

Headquartered in Knoxville, Tenn., Xinergy Ltd., through its wholly owned subsidiary Xinergy Corp. and its subsidiaries, is engaged in coal mining in eastern Kentucky, West Virginia and Virginia.

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.