Hallador Energy, which relies for much of its revenue on its Sunrise Coal mining operations in Indiana, said in a Nov. 5 Form 10-Q report that it faces a series of headwinds and tailwinds for its operations.
The headwinds include:
- Competition in the power generation market from low-priced natural gas, along with mild winters and summers that hold down power demand;
- The Obama Administration’s “dislike of burning coal to generate cheap and reliable electricity”;
- “Onerous” environmental regulations, plus overzealous and misled environmentalists;
- Competition from new mines opening in the Illinois Basin; and
- The slow U.S. economy.
The tailwinds that are major positives for the company include:
- Major shift in utilities replacing Central Appalachia (CAAP) coal with Illinois Basin (ILB) coal;
- More power plants are installing SO2 scrubbers enabling them to burn high-sulfur coal;
- The Sunrise coal can compete with natural gas down to $2.75/Mcf; and
- Coal is the fastest growing fuel worldwide.
Demand for coal produced in the ILB is expected to grow at a rate faster than overall U.S. coal demand due to ILB coal having higher heating content than Powder River Basin (PRB) and lower cost structure than CAAP coal, the company said. Many utilities are scrubbing to meet emission requirements beyond just sulfur compliance, even utilities that burn exclusively PRB. Once scrubbed, those utilities are usually capable of burning ILB coal.
The Sunrise Coal backlog of current coal contracts is:
- Q4 2013, 825,000 tons, at an average price of $43.99/ton;
- Year 2014, 3.145 million tons, at $42.96/ton;
- Year 2015, 1.2 million tons, at $41.40/ton; and
- Year 2016, 338,000 tons, at $40.57/ton.
All of the company’s underground coal reserves are high sulfur (4.5-6#) with a heat content in the 11,500 Btu/lb range. The new Ace surface mine in Indiana is low sulfur (1.5#) with a Btu content of 11,400.
The company’s main producer is the Carlisle deep mine in Indiana. It is located near the town of Carlisle in Sullivan County and became operational in January 2007. The mine has several advantages including:
SO2 – Historically, Carlisle has guaranteed a 6# SO2 product; however, with the addition of the Ace-in-the-Hole Mine the company can blend lower sulfur coal with Carlisle coal and guarantee a mid-sulfur product which should command a higher price and increase the customer base. Carlisle has supplied coal to 11 different power plants.
Chlorine – These reserves have lower chlorine (<0.10%) than average ILB reserves of 0.22%. Much of the ILB’s new production is located in Illinois and possesses chlorine content in excess of .30%. Chlorine can have corrosive effects in power plant boilers.
Transportation – Carlisle has a double 100 rail car loop facility and a four-hour certified batch load-out facility connected to the CSX railroad. The Indiana Rail Road (INRD) also has limited running rights on the CSX to the mine. Dual rail access offers a freight advantage to more customers. Long term, the CSX anticipates this coal being shipped to southeast markets via its railroad. On occasion, this coal has been shipped to three power plants via truck.
Ace mine has limited reserves, but major advantages
In November 2012, the company purchased for $6m permitted fee coal reserves, coal leases and surface properties near Clay City, Ind., in Clay County. The Ace mine is 42 road miles northeast of the Carlisle mine. The company controls 3.1 million tons of proven coal reserves. It will mine two primary seams of low sulfur coal which make up 2.9 million of the 3.1 million tons controlled. Both of the primary seams are low sulfur (2# SO2). Mine development began in late December 2012 and it began shipping coal in late August 2013. The coal is trucked from Ace to Carlisle for blending and rail loading.
The company currently has a contract at Carlisle which requires it to blend coal from Ace to meet sulfur specs. It also expects to ship low sulfur coal from Ace direct to unscrubbed customers that require low sulfur (2# SO2). It expects the maximum capacity of Ace to be 500,000 tons/year. Ace currently has 20% of capacity contracted for 2013 and 2014. During the third quarter, the company sold 17,000 high sulfur and 17,000 low sulfur tons from Ace.
The company has leased roughly 19,300 acres in Vermillion County, Ill., near the village of Allerton. Based on its reserve estimates it currently controls 35.6 million tons of coal reserves. Many of the leased acres have yet to receive any exploratory drilling, thus the controlled reserves should grow. Permitting was started in the summer of 2011 and the company filed the formal permit with the state of Illinois and federal regulators during June 2012. It currently expects to receive an approved mining permit in the first or second quarter of 2014. Full-scale mine development will not commence until it has a sales commitment.
The company has also leased roughly 11,000 acres in Lawrence County, Ill., near the village of Russellville. Based on reserve estimates it currently controls 29.4 million tons of coal reserves. Permitting will start this fall and the company anticipates filing the formal permit with the appropriate regulators during the second quarter of 2014. This reserve is located about 20 miles southwest of the Carlisle mine. Initial testing indicates that this reserve’s minability and coal quality is very similar to the Carlisle reserve.
On May 31, the company purchased a multi-commodity truck/barge terminal. Over 17 acres of secured area is available. The terminal is at mile point 743.8 on the Indiana bank of the Ohio River between Rockport and Grandview, Ind. Currently the dock will handle third party commodities. In the long term, the company plans to ship coal through the dock. The terminal is in close proximity to the Norfolk Southern railroad, the CSX railroad and American Electric Power‘s Rockport power plant. The company does not expect revenue from this asset until late 2014.
Coal sales up, coal prices down in the first nine months of this year
In the first nine months of 2013, the company sold 2,431,000 tons at an average price of $42.42/ton. For the first nine months of 2012, it sold 2,255,000 tons at an average price of $43.57/ton. The lower average price is due to the mix of various contracts.
Operating costs and expenses averaged $28.37/ton in the first nine months of 2013 compared to $25.72 in 2012. The increase was due primarily to poor mining conditions in the months of January, February, April and May. Additionally, costs increased due to below normal wash plant recovery (60-63%) in the months of May and August.
For the third quarter of 2013, Sunrise Coal sold 817,000 tons at an average price of $42.82/ton. For the third quarter of 2012, it sold 810,000 tons at an average price of $44.63/ton. Operating costs and expenses averaged $28.65/ton in 2013 compared to $25.61 in 2012.