Coal producer Rhino Resource Partners swings to loss in Q1 2013

Coal producer Rhino Resource Partners LP (NYSE: RNO) reported Adjusted EBITDA of $13.1m and a net loss of $0.2m in the first quarter of this year, compared to Adjusted EBITDA of $22.2m and net income of $9m in the first quarter of 2012.

Total revenues for the quarter were $74.7m, with coal sales generating $67.4m of the total.

Dave Zatezalo, President and Chief Executive Officer of Rhino’s general partner, said in a May 2 statement: “We delivered positive cash flow during the quarter despite the ongoing price weakness and lower volumes in both the met and steam coal markets. We expect cash flow from our Utica Shale joint venture investment to ramp up as takeaway capacity comes on line in the next few months. On April 5th we received $10.5 million from the sale of our royalty interest from property we owned in the Utica, which provides an enhancement to our liquidity. This liquidity will benefit us while we are in a transition period as we expect earnings from our Utica Shale investment to increase and as we construct the Pennyrile mine, which will add to our portfolio of stable and predictable cash flow generators. While the quarterly results reflect a weaker coal environment, we feel we have done a good job of managing our costs with reduced volumes. We have managed our inventories to low levels and we have rejected business that did not justify bringing capacity back on line.”

Zatezalo added: “At our coal operations, we continue to focus on safety while controlling operating costs. We have reduced production to align it with projected sales until market conditions improve. Any significant incremental sales will have to be done at prices that will justify adding workers. Our growth capital outlays are focused on the Utica Shale, where we expect significant returns, and Pennyrile, which we expect to be a long term cash contributor.”

Rhino has commenced earthwork development on the Pennyrile underground mine property in western Kentucky and production remains on target for mid-2014. While an initial 800,000-tons per year, five-year contract will justify opening the mine, Zatezalo said the company is encouraged by the potential customers’ responses and continue to work on additional sales. Pennyrile is located on the navigable Green River in western Kentucky, which flows into the Ohio River. “We anticipate this project will generate long term, stable and predictable cash flows similar to our Hopedale and Castle Valley operations once it is at full production,” Zatezalo said. Hopedale is a deep mining operation in Ohio, while Castle Valley has a deep mine in Utah.

In Northern Appalachia, unit prices improved in the first quarter and costs declined as Hopedale remains fully contracted through 2014, while volumes declined at Sands Hill in Ohio. The Rhino Western operations at Castle Valley experienced higher unit costs, and was hit by an accidental death of a worker during the quarter. While sales volumes were down at the Central Appalachia operations, unit costs rose only slightly.

Zatezalo stated: “At Rhino Eastern we continue with development work on the Eagle #3 mine. Production at Rhino Eastern has been reduced to contracted sales levels as we do not want to participate in sales at current prices. Quarterly results were negatively impacted by sharply lower prices, as well as our portion of a $0.9 million non-cash inventory write-down.” Rhino Eastern is a joint venture with Patriot Coal that produces metallurgical coal in southern West Virginia.

Results by region are mixed

Northern Appalachia – Year over year coal revenues per ton increased $2.95 to $58.09 while cost of operations costs per ton fell by $1.79 to $40.01. Sales volume fell by approximately 100,000 tons to 349,000 tons, primarily due to contract expirations at Sands Hill. Hopedale remains sold out through 2014. Sands Hill reduced its production to align with committed sales. While Rhino said it has seen increased sales inquiries, prices have not been sufficient to justify increasing production.  Limestone sales continue to be strong.

Rhino Western – Year over year coal revenues per ton decreased $0.57 to $40.50 while cost of operations per ton rose by $3.80 to $31.96. Volumes were approximately flat at 237,000 tons. Rhino said it has seen an increase in inquiries for spot sales of coal from its Castle Valley mine and has taken advantage of these opportunities in limited cases.

Central Appalachia – Year over year coal revenues per ton decreased $3.15 to $89.32 while cost of operations per ton rose by $1.07 to $68.21. Year over year sales volumes increased by 43,000 tons to 420,000 tons, while year over year production volumes fell by 181,000 tons to 388,000 tons.  Inventories are now at low levels, and with the sharp decline in production, Rhino said it was pleased at keeping a lid on unit costs. Rhino’s highwall miner was moved to the Remining 3 surface mine in southern West Virginia.  The miner is expected to return to the Grapevine mine in the third quarter. Rhino continues to make limited spot met sales and steam sales at both the Tug River and Rob Fork complexes. A non-cash charge of $1 million was incurred due to the loss of a continuous miner at Access Energy.

Eastern Met – Year over year coal revenues per ton decreased $74.31 to $121.30 while cost of operations per ton rose by $28.12 to$148.34. Year over year sales volumes decreased by 28,000 tons to 51,000 tons, while year over year production volumes fell by 69,000 tons to 37,000 tons. Again, with the sharp reduction in production, Rhino said it continues to work diligently to limit unit costs. The Eagle #3 deep mine began production in the third quarter of 2012. While Eagle #3 is expected to have a capacity of 490,000 tons per year, activity has been severely curtailed due to limited contracted sales and low spot prices. Rhino recorded its portion of a non-cash inventory value charge of $0.9m during the quarter to reflect the current market value of Rhino Eastern’s met coal inventory.

Rhino’s coal sales were 1.0 million tons in the first quarter compared to 1.1 million for the first quarter of 2012. Total revenues and coal revenues of $74.7m and $67.4m, respectively, compared to $81.9m and $69.6m, respectively, for the same period of 2012. Coal revenues per ton of $67.00 compared to $65.11 for the first quarter of 2012, an increase of 2.9%. 

Total coal revenues decreased about 3.1% primarily due to a decrease in tons sold due to ongoing weakness in the met and steam coal markets. Coal revenues per ton increased primarily due to a higher mix of metallurgical coal sold in the first quarter of 2013 compared to the same period of 2012. Cost of operations decreased year to year due to decreased production due to weakness in the met and steam coal markets.

Cost of operations per ton increased due to costs incurred in Central Appalachia to prepare a surface mine for future highwall mining that resulted in minimal tons sold, along with increased costs at the Castle Valley mine due to the sequence of mining where Rhino performed more higher cost advance mining during the first quarter of 2013 compared to more lower cost retreat mining that was performed in same period of 2012. Net income was also negatively impacted by approximately $1.0m due to the write-off of a continuous miner that was damaged at one of its Central Appalachia underground mines.

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.