Mechel OAO bringing idled West Virginia coal mines back into production

In October-November 2012, Mechel OAO temporarily idled its Bluestone mines in southern West Virginia due to high levels of coal inventories and adverse market conditions, but is gradually bringing at least some of them back on-line.

“In January 2013, we resumed mining operations in surface mines at Justice Energy and Dynamic Energy, and in March 2013 we resumed mining operations in Mine 65 at Keystone,” said Mechel, a Russia-based commodities producer, in an annual report filed April 16 at the SEC. “In April 2013, we started mining operations in Pocahontas No. 11 Contour and Auger No. 2 mine at Keystone. Mining operations in other mines are anticipated to resume once market conditions improve.”

The Bluestone mines are located in McDowell and Wyoming counties in southern West Virginia, near Beckley. The mines are organized around three mining complexes: Keystone No. 1 and No. 2 (collectively called Keystone), Justice Energy and Dynamic Energy, all of which are located in close proximity to each other. Together, the mining complexes comprise three active surface mines and three active underground mines.

Keystone:

  • Mine 58, room-and-pillar, life of mine to 2016, currently idle;
  • Mine 65, room-and-pillar, life of mine to 2014, in production;
  • Job 39, surface operation, life to 2030, no longer active; and
  • Pocahontas No. 11 / Contour and Auger No. 2, surface mining, life to 2031, in production.

Justice Energy:

  • Job 38, surface mine, life to 2015, in production;

Dynamic Energy:

  • Job 30, surface mining, life to 2015, in production; and
  • Bens Creek 1 (Frontier), room-and-pillar, life to 2014, idle.

Mechel has four prep plants for these operations:

Keystone:

  • KS1 plant, 2 million short tons per year of capacity, idle since February 2011 and is on care and maintenance; and
  • KS2 plant, 3.25 million short tons per year of capacity, in use.

Justice Energy:

  • Red Fox plant, 1.9 million short tons per year of capacity, in use.

Dynamic Energy:

  • Coal Mountain plant, 1.9 million short tons per year of capacity, in use, but underutilized and awaiting development of new mines.

The mines in the Keystone complex produce premium low-vol coking coal. The complex includes an active surface mine and two active underground mines. Seam thickness ranges from a few centimeters to 1.8 meters. Coal from the mines is hauled by dump truck directly to the complex’s prep plant for washing and is then dispatched to its rail loadout facility, which is served by the Norfolk Southern Railway.

The mines in the Justice Energy complex produce mid-vol coking coal. The complex includes one active surface mine. Seam thickness ranges from a few centimeters to 1.52 meters. Coal from the mine is hauled by dump truck directly to the complex’s prep plant (which is leased from landholder Natural Resource Partners) for washing and is then dispatched to its rail loadout facility, which is served by the Norfolk Southern.

The mines in the Dynamic Energy complex produce high-vol coking coal. The complex includes an active surface mine and an active underground mine. Seam thickness ranges from a few centimeters to 2.1 meters, with the majority of seams more than one meter thick. Coal from the mines is hauled by dump truck directly to the complex’s prep plant (which is leased from Natural Resource Partners) for washing and is then dispatched to its rail loadout, which is served by the Norfolk Southern.

In 2012, Mechel said it agreed on lower freight rates with the Norfolk Southern. These shipments either go directly to coking plants in North America or to port facilities for transloading into ocean-going ships. In 2010, all exports of this West Virginia coal were transported through the port of Norfolk, Va. In April 2011, Mechel began exporting coal through the port of New Orleans by trucking coal to a local river terminal and transporting it via barge down the Mississippi River to the port.

The Bluestone mining business sold 2 million tonnes of coking and steam coal in 2012, 73% of which was sold to the export market. Substantially all of the coal was sold on the spot market.

Bluestone’s coking coal sales volumes to third parties decreased by 1,138 thousand tonnes, or 43.1%, to 1,502 thousand tonnes in the year ended Dec. 31, 2012, from 2,640 thousand tonnes in the year ended Dec. 31, 2011.

Bluestone produced 1.5 million tonnes of saleable coking coal in 2012, down sharply from 2.8 million tonnes in 2011. It produced 0.4 million saleable tonnes of steam coal in 2012, down more moderately from 0.5 million tonnes in 2011.

In May 2009, Mechel acquired, through Mechel Bluestone Inc., a newly formed Delaware corporation, 100% of the shares and interests in the companies conducting the coking coal business of Bluestone Coal Corp. in West Virginia. The buy was from veteran coal operator Jim Justice.

International coal prices have ridden the rollercoaster in recent years

In describing coal market conditions, the Mechel annual report said: “Average contract prices for premium hard coking coal in calendar year 2011 were $289 per tonne (FOB Australia), up from $191 per tonne (FOB Australia) in calendar year 2010, according to CRU. Previously, the contract price for premium hard coking coal was $129 on the same basis, in JFY 2009/2010, according to CRU. The hard coking coal spot price increased during the beginning of 2010 and reached $250 per tonne (FOB Australia) in April 2010. By the end of 2010, however, prices had declined to $225 per tonne (FOB Australia), according to CRU.”

The company added: “There was no significant volatility in spot prices in 2010 due to the stable development of global steel industry. Minor price fluctuation occurred due to seasonal factors and traders stocking activity. At the beginning of 2011, hard coking coal spot prices increased sharply to $350 per tonne (FOB Australia) due to supply disruptions caused by heavy floods in Queensland, Australia, according to CRU. Since then, coal supply has normalized and spot prices decreased to $305 per tonne in June 2011, according to CRU. In the final quarter of 2011, the price declined sharply to $235 per tonne in November, according to CRU.

“In the first quarter of 2012, the contract price was set at $235 per tonne, while spot prices declined from $219 per tonne (FOB Australia) in January to $210 per tonne (FOB Australia) in March due to sluggish demand, according to CRU. As a result, the contract price for the second quarter of 2012 was reduced to $210 per tonne. Nevertheless, industrial actions at BMA operated mines led to an increase in spot prices to $224 per tonne in June, and the contract price for third quarter was settled at $225 per tonne, according to CRU. In the third quarter of 2012, the spot market for hard coking coal became oversupplied and the price declined sharply to $140 per tonne (FOB Australia) in September. As a result, the contract price for the last quarter of 2012 was set at $170 per tonne, according to CRU. The supply-side has been forced to react to significantly lower prices and output reductions occurring in China, the United States and Australia. Furthermore, demand strengthened and spot prices slightly increased to $157 per tonne (FOB Australia) in December 2012, according to CRU.”

Prices for steam coal reached $86 per tonne (CIF Amsterdam/Rotterdam/Antwerp) at the beginning of 2010 and then declined to $73 per tonne by the end of the first quarter of 2010, Mechel added. Prices increased further during 2010 and reached $122 per tonne at end of 2010. The main reason for this price growth was the stable growth of the global economy. In the first six months of 2011, prices for steam coal fluctuated around 2010 year-end levels. The price for steam coal was $123 per tonne (CIF Amsterdam/Rotterdam/Antwerp) in June 2011. In the final quarter of 2011, steam coal prices decreased to $111 per tonne in December. During the first half of 2012, steam coal prices declined from $106 per tonne (CIF Amsterdam/Rotterdam/Antwerp) in January to $87 per tonne in June. In the second half of 2012, prices for steam coal were generally stable fluctuating around $90 per tonne.

Mechel describes two U.S. lawsuits

In 2008, the Pinnacle Mining Co. unit of Cliffs Natural Resources filed a suit against the Bluestone companies and a third-party engineering firm in the U.S. District Court for the Southern District West Virginia. Pinnacle asserts claims against the defendants for negligence, strict liability, violation of the federal Surface Mining Control and Reclamation Act, and injunctive relief. The case arises from deep mining activity conducted by Bluestone companies in the “safety zone” under a coal slurry impoundment maintained by Pinnacle at its longwall mining operation in Wyoming County. The parties filed a joint motion to stay, and the court granted the stay, which has allowed additional time for the regulatory agencies involved to determine what steps are necessary for remediation. A plan has been submitted by the defendants and was approved by the West Virginia Department of Environmental Protection.

“We have completed the installation of pumps to dewater the mine in accordance with the plan and provided Pinnacle with access to online data about mine water levels available in real time regime 24/7,” said Mechel. “At present, we have unresolved issue regarding Pinnacle’s access to the underground part of the mine. Our position is that, unlike the surface area of the mine, the underground part of the mine should not be available for anytime inspection by Pinnacle since the area was sealed due to safety reasons. We are currently trying to resolve this issue with the WVDEP. We are defending the matter and have asserted issues of comparative fault by the plaintiff and our engineering company at the time of the incident in November 2007. We have full indemnity on this claim from the previous owner of Bluestone in accordance with the terms of the acquisition agreement, however, there is no assurance that the previous owner of Bluestone will not contest our requests for indemnification.”

In May 2009, “Suncoke” (apparently a spelling variation for coke producer SunCoke Energy) served Bluestone with a claim for failure to perform its obligations under contracts to supply coal to Suncoke in 2008. The claim related to events prior to the Mechel acquisition of the Bluestone companies. Suncoke has demanded about $67m in damages plus attorney fees. In March 2010, Suncoke filed a lawsuit with the Superior Court of the State of Delaware in New Castle County against Bluestone claiming damages for failure to supply coal in 2008 and 2009. The proceedings were stayed in connection with the settlement discussions. On November 2011, after failed mediation, Mechel filed a statement of defense and a counterclaim. In December 2012, the parties entered into a settlement agreement providing that Bluestone pays to Suncoke $15m in cash within two years and an additional $1.6m as discounts under coal sales agreements.

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.