Xinergy loses less money in Q2 2013, bides time in weak market

Xinergy Ltd. (TSX: XRG), a Central Appalachian coal producer, reported Aug. 13 that it had a net loss of $9.4m, compared with a net loss of $14.5m for the second quarter ended June 30, 2012.

“Xinergy made significant strides during the quarter, as we positioned South Fork for long-term success while continuing to take steps to rationalize our cost structure and optimize our balance sheet and liquidity amidst challenging market conditions. Our West Virginia team deserves tremendous credit for bringing our South Fork project on-line in a timely and cost-efficient manner, and for achieving operating efficiencies reflected in our South Fork cash costs trending to below $100/ton,” said Matt Goldfarb, Xinergy’s CEO.

Global seaborne coking coal market conditions deteriorated further during the quarter, as the market remains in structural oversupply. Demand weakness persisted due to a deceleration in anticipated Chinese steel production growth and fiscal uncertainty across Europe and other developing economies, Xinergy noted. Although domestic coking coal production curtailments may have accelerated during the quarter, the rationalization of Australian supply has been hindered by the significant depreciation in the Australian dollar since the end of the first quarter.

International benchmark pricing for premium hard coking coal settled at $145/tonne during the quarter, down $27/tonne from the $172/tonne in the preceding quarter, while spot transactions have been reported at levels below the current benchmark before recovering closer towards benchmark levels during early August following reports of stabilization in China’s rate of industrial production. As lower capacity utilization rates have persisted, certain steelmakers have lengthened cycle times in their coking processes, enabling them to increase their usage of lower quality metallurgical coals, Xinergy noted.

Xinergy said it 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. “The velocity of domestic production curtailments accelerated during the second quarter, in some instances involving producers of higher quality metallurgical coals who are $25-$40/t ‘out of the money’ in the current pricing environment,” it said. “The rationalization of Australian supply, however, has been less pronounced, however, as demand for Australian product has been supported due to recent depreciation in the Australian dollar. While uncertainty exists as to the timing of a balancing of the current market oversupply, long term global growth trends point towards increasing demand for metallurgical coal. These long-term demand trends, in our view, provide the Company a substantial opportunity to benefit from an eventual pricing recovery given the scarcity value and low cost position of the Company’s premium quality mid-vol met reserves.

“With spot pricing weakening during the quarter to below the $145/mt benchmark level, and then recovering somewhat in early August on the back of positive Chinese industrial production data, we view today’s coking coal market as extremely dynamic and in the process of re-calibrating,” said Goldfarb. “We feel confident that our combination of premium quality and low cost position at South Fork will prove to be a valuable growth driver as market conditions normalize. In the interim, Xinergy is taking all appropriate measures to safeguard our balance sheet to withstand the duration of the current downturn including potential non-core asset sales, working capital initiatives, further fixed cost rationalization and operational discipline aimed at matching production to market demand.”

Xinergy finishing up capital spending at South Fork

Capital expenditures were $12.6m during the second quarter, reflecting substantial completion of the South Fork infrastructure project in Greenbrier County, W.Va., and the beginning of the preparation plant construction at Raven Crest in southern West Virginia. Capital expenditures for the first half of 2013 stand at $26.6m, with full year expenditures projected at about $40m, inclusive of a previously unbudgeted equipment debt pay down.

Xinergy’s properties included one active mining complex, South Fork Coal in Greenbrier County, which is a mid-vol metallurgical operation. It also has two idle facilities, True Energy LLC, a high-vol met operation in Wise County, Va., and Raven Crest Mining LLC, a thermal operation in Boone County, W.Va., and a mid-vol met coal property in the development stages consisting of surface and mineral mining rights in Fayette, Nicholas, and Greenbrier counties, W.Va., owned through a wholly owned subsidiary, Sewell Mountain Coal Co. LLC.

At South Fork, in the second quarter of 2013, Xinergy continued producing coal from its Blue Knob surface mine and continued to mine certain areas from the Lost Flats permit. Total production for the second quarter 2013 was 52,289 tons. Cash cost per ton was $92.72 for the quarter as production increased and the company began to realize mining efficiencies. Also, the South Fork preparation plant and CSX Transportation loading facility became operational in July.

Xinergy idled True Energy, its 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 an ability to re-start production as market conditions warrant.

The Raven Crest surface and highwall miner operations and Brier Creek underground 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 around $10m, after halting construction of a prep plant during the first quarter of 2012 due to market conditions.

Xinergy’s overall coal sales volume for the second quarter 2013 was 0.05 million tons, an 86% decrease from 0.36 million tons sold for the second 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.

More South Fork coal in the sales mix drives up average sales price

The following table shows comparative detail regarding sales prices per ton for the second quarter of this year and last year:

  • Straight Creek (Kentucky Thermal), not applicable this year, $60.70 in 2012;
  • Raven Crest (West Virginia Thermal), $38.74 this year, $50.46 in 2012;
  • South Fork (West Virginia Met), $113.47 in 2013, $114.97 in 2012;
  • True Energy (Virginia Met), $46.36 in 2013, $72.80 in 2012; and
  • Average sales price, $96.19 in 2013, $63.67 in 2012.

The 51% increase in average sales price for the second quarter 2013 as compared to the second quarter 2012 was due to higher product mix from the higher-priced South Fork operations offset by lower overall demand which has resulted in significantly lower market prices for thermal coals in the second quarter of 2013 and the sale of the Straight Creek operations.

Headquartered in Knoxville, Tenn., Xinergy Ltd., through its wholly owned subsidiary Xinergy Corp. and its subsidiaries, is engaged in coal mining in West Virginia and Virginia. Xinergy sells high quality met and thermal coal to electric utilities, steelmakers, energy trading firms and industrial companies.

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.