Kentucky-based coal producer Rhino Resource Partners LP (NYSE: RNO) had net income of $5.9m in the second quarter, compared to net income of $13.0m in the second quarter of 2012.
Dave Zatezalo, President and CEO of Rhino’s general partner, said in an Aug. 1 earnings statement: “We continued to deliver positive cash flow during the quarter despite the ongoing weakness in both the met and steam coal markets. Our Utica Shale joint venture investment contributed about $1.2 million of revenue in the quarter and we expect cash flow from this investment to grow significantly as more wells are drilled and takeaway capacity continues to be developed in the region. The $10.5 million we received from the sale of our royalty interest from property we owned in the Utica during the second quarter provides us with additional liquidity as we construct the Pennyrile mine, which will add to our portfolio of stable and predictable cash flow generators. We have kept our coal inventories at low levels and we continue to forego business at prices that do not justify bringing capacity back on line.”
Pennyrile is a new underground coal mine being developed in western Kentucky. First production there remains on target for mid-2014. While Rhino’s initial five-year, 800,000 tons/year contract justifies opening the mine, the company said it is encouraged by the potential customers’ responses and continues to work on additional sales.
“We completed a companywide review of operations to identify further areas of cost reduction, to realize value from unproductive assets, and to insure that production remains in line with contracted sales,” Zatezalo added. “We are seeing limited spot activity and some increases in sales proposal requests as customer inventories continue to normalize. Any significant incremental sales will have to be done at prices that will justify adding workers. Our growth capital outlays remain focused on the Utica Shale, where we expect significant returns, and Pennyrile, which we expect to be a long term cash contributor.”
During the second quarter, the Northern Appalachia and Rhino Western operations performed in line with expectations. In the Central Appalachia operations, prices for metallurgical coal were sharply lower compared to the prior year. Rhino continues to focus on unit costs, which were significantly lower year over year.
Although weakness in the coal markets is ongoing, Rhino reiterated the guidance it provided in February in part based on the results and increased clarity of the cash flows from the Utica Shale investment.
Zatezalo stated about a southern West Virginia operation that is a partnership with bankrupt Patriot Coal: “At Rhino Eastern we continue to develop the Eagle #3 mine. Rhino Eastern production remains at low levels, sufficient to match contracted sales volumes. Quarterly results were impacted by sharply lower prices and higher unit costs due to under-utilization of the mining capacity at the joint venture.”
Coal sales fell in the second quarter in all regions
Highlights by segment included:
- In Northern Appalachia, for the second quarter, year over year coal revenues per ton increased $4.08 to $58.28 while cost of operations costs per ton rose by $3.62 to $44.25. Sales volume fell in the quarter by about 161,000 tons to 314,000 tons, primarily due to contract expirations at the Sands Hill operation in Ohio. Hopedale in Ohio remains sold out through 2014. Sands Hill reduced its production to align with committed sales. While Rhino has seen increased sales inquiries, prices have not been sufficient to justify increasing production. Limestone sales continue to be strong out of these operations.
- At Rhino Western, year over year coal revenues per ton in the quarter decreased $0.05 to $40.24 while cost of operations per ton rose by $5.36 to $32.85. Sales volumes decreased by approximately 17,000 tons to 234,000 tons. Rhino has seen an increase in inquiries for spot sales of coal from its Castle Valley deep mine in Utah and has taken advantage of these opportunities in limited cases.
- In Central Appalachia, year over year coal revenues per ton decreased $13.07 to $80.42 and metallurgical coal revenues per ton fell from $134.36 to $88.87. Cost of operations per ton in the quarter decreased year over year by $5.54 to $70.56. Year over year sales volumes decreased by 25,000 tons to 363,000 tons, while year over year production volumes increased by 105,000 tons to 436,000 tons. Rhino has maintained its inventories at low levels and continues to focus on unit costs. Rhino said it continues to make limited spot met sales and steam sales at both the Tug River and Rob Fork complexes.
- In the Eastern Met operation (joint venture with Patriot), coal revenues per ton decreased year over year from $188.34 to $106.71 while cost of operations per ton rose from $119.99 to $146.92. Year over year sales volumes decreased in the quarter by 20,000 tons to 72,000 tons, while year over year production volumes fell by 55,000 tons to 43,000 tons. With the sharp reduction in production, Rhino continues to work to limit unit costs. The Eagle #3 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.
Coal sales for Rhino were 0.9 million tons in the second quarter compared to 1.1 million for the second quarter of 2012. Total revenues and coal revenues of $66.8m and $57.0m, respectively, compared to $90.0 million and $72.2 million, respectively, for the same period of 2012.
Coal revenues per ton of $62.47 compared to $64.74 for the second quarter of 2012, a decrease of 3.5%. Cost of operations of $51.7m compared to $60.2m for the same period of 2012. Cost of operations per ton of $56.65 are compared to $54.00 for the second quarter of 2012, an increase of 4.9%.