North American Coal net income slips a bit in Q3 2013

NACCO Industries (NYSE: NC) reported Oct. 30 that its North American Coal operations had net income for the third quarter of $7.8m and revenues of $52.9m compared with net income of $8.1m and revenues of $38m for the third quarter of 2012. 

North American Coal’s deliveries for the third quarters of 2013 and 2012 were:

  • 1.2 million tons from the consolidated mines in the third quarter of this year against 1.1 million tons on the year-ago quarter;
  • 6.7 million tons from the unconsolidated mines in the third quarter against 6.5 million tons in the year-ago quarter; and
  • a total between the two categories of 7.9 million tons in the third quarter, against 7.6 million tons in the year-ago period.

Revenues increased in the third quarter of 2013 compared with the third quarter of 2012 primarily due to the Reed Minerals acquisition in Alabama, which occurred at the end of August 2012. Reed Minerals contributed $18.6m to revenues during the third quarter of 2013 compared with $7.7m for the one month ended Sept. 30, 2012. An increase in reimbursable costs at the limerock dragline mining operations, higher deliveries at Mississippi Lignite Mining due to increased customer requirements and higher royalty income also contributed to the improvement in third quarter 2013 revenues.

North American Coal produces primarily lignite for captive power plants, with the Reed Minerals buy being a first foray in many years into the open market coal business. 

Net income in the third quarter of 2013 decreased compared with the third quarter of 2012. The decline was primarily the result of the absence of a $3.3m pre-tax gain on the sale of a dragline recognized in the third quarter of 2012, a net loss of $3m at Reed Minerals in the third quarter of 2013 and higher income tax expense resulting from a shift in mix of taxable income towards entities with higher estimated effective income tax rates.

The loss at Reed Minerals was the result of lower than expected sales partially due to lower demand for higher-quality metallurgical coal, higher mining costs and an increase in royalty expense. The higher mining costs are attributable to the unexpected thinning of a coal seam in an isolated area, substantial one-time costs associated with the development of a new mining area and current mining restrictions, which have significantly increased hauling distances and reduced overburden removal and equipment productivity.

For the nine months of 2013, North American Coal reported net income of $26.3m and revenues of $147.6m compared with net income of $24.5m and revenues of $81.5m for the first nine months of 2012. The 2013 financial results include $55.8m of revenues from the Reed Minerals operations compared with $7.7m in a one-month period in the 2012 third quarter.

North American Coal – Outlook

North American Coal expects improved operating performance at its coal mining operations in the fourth quarter of 2013 and in 2014. Steam coal tons delivered in the fourth quarter of 2013 and in 2014 are expected to increase over the prior year periods at the unconsolidated mining operations provided customers achieve currently planned power plant operating levels for the remainder of 2013 and in 2014.

Demery Resources Co.‘s Five Forks Mine began delivering coal to its customer in 2012 and is expected to maintain similar levels of quarterly production in the fourth quarter of 2013 and in 2014, with full production levels expected to be reached in late 2015 or early 2016. NACCO didn’t name the customer for this coal, but ADA Carbon Solutions has indicated that the mine produces feedstock for its activated carbon production facility nearby.

Liberty Fuels also commenced production of lignite coal in 2013 for Mississippi Power‘s new Kemper County Energy Facility. That coal gasification power plant is not fully operational yet. Production levels are expected to increase gradually from 1 million to 2 million tons in 2014 to full production of about 4.7 million tons of lignite coal annually in 2019. Mississippi Power has announced a start-up delay for the power plant.  North American Coal is currently evaluating the impact of this delay on its forecasted 2014 results but, based on the most recent information, the delay is not expected to have a material effect. 

At the consolidated mining operations, deliveries at Mississippi Lignite Mining are expected to be higher in the fourth quarter of 2013 compared with the fourth quarter of 2012, but slightly lower in 2014 compared with the prior year period as a result of a planned outage at the customer’s power plant. Deliveries at Mississippi Lignite Mining are expected to increase over the longer term as a result of recently implemented and anticipated operational improvements at the customer’s power plant. That captive customer is the Red Hills power plant.

Coal tons sold by Reed Minerals in the fourth quarter of 2013 are expected to be comparable to the fourth quarter of 2012, increase slightly over the third quarter of 2013 and increase in 2014 compared with 2013. Overall Reed Minerals fourth quarter 2013 operating results are expected to improve slightly compared with the third quarter of 2013 as a result of the expected increase in tons sold, provided the mining restrictions can be resolved, but still result in an operating loss since operating costs are expected to be comparable to the third quarter costs. Post-acquisition productivity improvements that increase mining efficiencies are expected in 2014 and, along with the resolution of the mining restrictions, are expected to move 2014 results toward break-even compared with the expected 2013 loss.

Unconsolidated mines currently in development are expected to continue to generate modest income in the remainder of 2013 and in 2014. The three mines in development are not expected to be at full production for several years. In the first quarter of 2013, mining permits needed to commence mining operations were issued for the Caddo Creek Resources and the Camino Real Fuels projects in Texas. Caddo Creek expects to begin making initial coal deliveries in 2015. Camino Real Fuels expects initial deliveries in the latter half of 2015, and expects to mine about 3.0 million tons of coal annually when at full production.

Coyote Creek Mining is developing a lignite mine in Mercer County, N.D,, from which it expects to deliver approximately 2.5 million tons of coal annually beginning in May 2016. The co-owners of the Coyote power plant in North Dakota, including Otter Tail Power, decided last year to switch the power plant away from coal supply from Westmoreland Coal to North American Coal’s new Coyote Creek mine.

North American Coal also has new project opportunities for which it expects to continue to incur additional expenses in the fourth quarter of 2013 and in 2014. In particular, the company continues to move forward to obtain a permit for its Otter Creek lignite reserve in North Dakota in preparation for the anticipated construction of a new mine.

North American Coal has a goal of at least doubling the earnings contribution from its consolidated mining operations due to benefits from recently implemented and anticipated operational improvements at Mississippi Lignite Mining’s customer power plant and from the company’s execution of its long-term plan at the Reed Minerals operations. The company views its acquisition of Reed Minerals as the first step in a metallurgical coal strategic initiative which includes significantly increased volume.

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.