The U.S. Bureau of Land Management office said Sept. 18 that it has rejected a bid submitted by Kiewit Mining Properties on behalf of its subsidiary, Buckskin Mining, for the Hay Creek II coal lease tract.
The agency said the bid did not meet BLM’s secret estimate of the tract’s fair market value and was rejected. The fair market value estimate sets a bid floor that the agency won’t go under. From here, Kiewit can ask for a second auction to try and meet that value, or it can drop this leasing effort.
The unsuccessful bid was $35,070,331 ($0.21 per mineable ton) for the Hay Creek II coal tract. The 1,254-acre Hay Creek II tract contains an estimated 167 million tons of mineable coal. The coal resource consists of all reserves recoverable by surface mining methods.
This lease by application (LBA) tract is adjacent to federal leases along the northern and western lease boundary of Kiewit’s Buckskin mine. The tract was offered for sale in response to a March 2006 LBA filed by Kiewit and it submitted the lone sealed bid.
Buckskin is in a “pod” of mines north of Gillette, Wyo., with low Btu values in the coal. The Hay Creek II LBA coal is ranked as subbituminous C. The overall average quality on an as-received basis is 8,297 Btu/lb containing approximately 0.27% sulfur. These quality averages place the coal reserves near the lower end of the range of coal quality currently being mined in the Wyoming portion of the Powder River Basin. Mines north of Gillette have the lower Btu coals, with Btu content climbing for the mines south of the city.
U.S. Mine Safety and Health Administration data shows a sharp downturn in Buckskin’s production lately, which is not surprising since the low-Btu mines in the PRB tend to get hit hardest during a coal market downturn like the one seen over the last couple of years. The mine produced 7.4 million tons in the first half of this year, 18.1 million tons in all of 2012 and around 25 million tons in each of 2011 and 2010, according to MSHA data.
Rejection of a lease bid like this for not meeting fair market value is unusual, but not unprecedented. It’s happened before in recent years. What is pretty unprecendented is that Cloud Peak Energy (NYSE: CLD) said Aug. 21 that it did not submit a bid that day to BLM for the Maysdorf II North Tract LBA, which covers a tract of coal next to the company’s Cordero Rojo strip mine in the Wyoming PRB.
BLM held an auction on Aug. 21 at the request of Cloud Peak and didn’t get a single bid. This coal lease sale was being held in response to an LBA filed by Cordero Mining LLC. The coal resource offered consisted of all reserves recoverable by surface mining methods in a 1,338.37-acre area.
Cloud Peak President and CEO Colin Marshall said: “We carefully evaluated the estimated economics of this LBA in light of current market conditions and the uncertainty caused by the current political and regulatory environment towards coal and coal-powered generation and ultimately decided it was prudent not to bid at this time. Due to the configuration of the North tract and surrounding land ownership positions, we believe a significant portion of the BLM’s estimated mineable tons would not be recoverable by us if we were to be the winning bidder in the BLM’s competitive process. In combination with prevailing 8400 Btu market prices and projected costs of mining the remaining coal, we were unable to construct an economic bid for this tract at this time. We will continue to evaluate any possible future lease sales by the BLM of these tons in the North tract as market conditions improve.”
MSHA data shows that the Cordero (also called the Cordero Rojo) mine of Cordero Mining produced 17.6 million tons in the first half of this year, and 39.2 million tons in all of 2012. Cloud Peak’s Feb. 14 annual Form 10-K report said that Cordero Rojo had 331 million tons of proven and probable reserves left to mine as of the end of 2012, so the mine has something less than 10 years of coal left based on the recent production pace.