Central Appalachia coal producer Xinergy Ltd. (TSX: XRG) reported a net loss for the first quarter of 2013 of $1.9m, which included an $11m one-time gain on the sale of its eastern Kentucky operations, as compared to net income of $1.7m, which included an $18.9m one-time gain on contract settlements for the first quarter of 2012.
Excluding the one-time gains, the net loss for the first quarter of 2013 would have been $12.9m as compared to a loss of $17.2m for the first quarter of 2012. This $4.3m decrease is mainly attributable to $1.8m lower general and administrative expenses, and $2.8m lower depreciation, depletion and amortization expenses in the first quarter of 2013 as compared to the same quarter of 2012, the company said in a May 14 earnings report.
Xinergy’s coal sales volume for first quarter 2013 was 0.06 million tons, a 86% decrease from 0.43 million tons sold for the first quarter 2012. The decrease in sales volume was the result of the sale of the Straight Creek operations in eastern Kentucky and lower overall market demand and the resulting lower sales prices as compared to same period in 2012.
Here are comparative sales prices per ton:
- Straight Creek (Kentucky Thermal), first quarter of this year $56.84, first quarter of last year $65.98;
- Raven Crest (West Virginia Thermal), first quarter of this year $17.83, first quarter of last year $72.90;
- South Fork (West Virginia Met), first quarter of this year $106.95, null for last year;
- True Energy (Virginia Met), first quarter of this year $52.08, first quarter of last year $102.80.
The average sale price per ton was $68.16 for the first quarter 2013 as compared to $70.35 for the first quarter 2012. The 3% decrease for the first quarter 2013 as compared to the first quarter 2012 was due to higher per ton sale price from the South Fork operations in Greenbrier County, W.Va., offset by lower overall demand which has resulted in significantly lower market prices in the first quarter of 2013 and sale of the Straight Creek operations.
Highlights for first quarter of 2013 and subsequent events are:
- First quarter 2013 revenue and adjusted EBITDA of $4.1m and $(3.6)m, respectively;
- Operating efficiencies at South Fork beginning to take hold, with cash costs trending towards low $120s/ton on limited production;
- Construction of preparation plant, rail load-out and rail rehabilitation on budget during the first quarter, with project completion anticipated by end of the second quarter of 2013;
- Divested Kentucky thermal operations (Straight Creek) for gross proceeds of $47.2m as Xinergy continues to focus on its strategy of building out a high-quality met coal portfolio; and
- Total liquidity at March 31 of $37.4m (excluding $29.4m in restricted cash).
Company has bought and sold mining properties
During the fourth quarter of 2012, Xinergy acquired a mid-vol metallurgical coal property consisting of surface, mineral, and mining rights in Fayette, Nicholas, and Greenbrier counties, W.Va., through subsidiary Sewell Mountain Coal LLC.
The company’s current properties included one active mining complex, South Fork Coal in Greenbrier County, and two idle facilities: True Energy LLC, which is a high-vol met operation in Wise County, Va.; and Raven Crest Mining LLC, a thermal operation in Boone County, W.Va.
Xinergy leases or owns the mineral rights to approximately 72,000 acres, comprised of 71,000 acres in West Virginia and 1,000 acres in Virginia. In West Virginia, these mineral rights include: Raven Crest, a 12,000 acre thermal, currently idle, surface mining operation and the adjacent Brier Creek mine, a 13,000 acre thermal underground mining operation that is also currently idle; South Fork, a 35,000 acre mid-vol metallurgical mining operation; and Sewell Mountain, an 11,000 acre mid-vol metallurgical coal development project. In Wise County, Va., the company leases approximately 1,000 acres through True Energy.
“First quarter metallurgical coal benchmark prices remained below the comparable 2012 period, reflecting a global steel market pressured by limited demand growth and steel mill overcapacity,” Xinergy reported. “International benchmark pricing for premium hard coking coal settled 3% lower than the fourth quarter settlement, before recovering 4% for the second quarter settlement at $172/t. The Company continues to believe that the current pricing environment for metallurgical coal leaves a substantial portion of the seaborne market producing at levels below cash cost, with production curtailments continuing for lower quality coals as the global metallurgical coal market moves towards balancing a position of oversupply. We remain cautiously optimistic that more balanced metallurgical coal market conditions will emerge over the medium term, providing substantial opportunity for the Company’s premium quality mid-vol metallurgical coal assets to drive value for our shareholders.”
The U.S. Energy Information Administration’s May 2013 Short Term Energy Outlook forecasts that total U.S. coal consumption will increase by 7.3% from 890 million tons in 2012 to 955 million tons in 2013 as consumption in the electric power sector increases due to higher electricity demand and higher natural gas pricing. According to the EIA, consumption is expected to grow at a more modest pace of 2.2% to 976 million tons in 2014, Xinergy noted.
“While global economic uncertainties persist, continued rationalization by domestic coal suppliers, flat natural gas production growth, and favorable late winter weather helped reduce inventories and support domestic thermal coal pricing during the first quarter,” Xinergy added. “We believe that structural challenges will persist for [Central Appalachia] thermal producers, however, due to several factors including (i) the ability of electricity producers to switch to more cost competitive thermal coals from lower-cost production basins such as the Illinois Basin and Powder River Basin and (ii) coal-fired plant retirements occurring with disproportionate frequency in regions served by CAPP thermal coal. While recognizing that significant challenges exist for the CAPP thermal market, Xinergy continues to believe that low-cost thermal coal production in Central Appalachia will prove viable over the long-term, affording low-cost producers the potential to earn favorable returns on invested capital as certain higher-cost production is curtailed.”
Metallurgical Coal Operations:
South Fork – In the first quarter of 2013, Xinergy began producing coal from the new Blue Knob surface mine permit area and was completing the mining from the existing Lost Flats permit. Total production for the first quarter 2013 was 22,663 tons and is expected to continue at this reduced level until it completes the construction of the prep plant and rail loading facility, which is expected to be fully operational by the end of the secondquarter of 2013 at which time Xinergy anticipates having the ability to increase production to approximately 50,000 tons per month. At this run rate, it expects production cash costs to normalize at approximately $100/ton.
True Energy – Xinergy idled True Energy, the high-vol met surface mine in Virginia, during the third quarter of 2012 as the market for high-vol met coals softened. It is continuing to take steps to reduce inventory while maintaining the ability to re-start production as market conditions warrant.
Thermal Coal Operations:
Straight Creek – Until the sale of Straight Creek in February, Xinergy was operating one surface mine and one contractor operated deep mine during the first quarter. These two mines were producing approximately 45,000 to 55,000 tons of coal per month, representing about 30% to 35% of capacity. This reduced production allowed it to meet existing sales commitments and take advantage of market opportunities as they arose while focusing on low operating cash cost.
Raven Crest – The Raven Crest surface and highwall miner operations and Brier Creek deep mines in West Virginia were idled during the third quarter of 2012 due to poor market conditions. Xinergy anticipates completing construction of a prep plant by the end of 2013 at a total capital cost of about $10m, after halting construction of a prep plant during the first quarter of 2012 due to market conditions.
During March 2013, Xinergy amended a coal supply agreement that previously provided for the delivery of 360,000 tons per year in each of 2013 and 2014 with index-based pricing. The amendment effectively terms out the first delivery date to January 2014, continuing through the end of 2015 at the same rate of 360,000 tons per year. It continues to assess opportunities for term business to further de-risk the thermal coal operations at Raven Crest/Brier Creek.