Xinergy turns in weak Q3 2013, hangs for coal market upturn

Central Appalachian coal producer Xinergy Ltd. (TSX:XRG) reported Nov. 12 that its third quarter 2013 revenues and adjusted EBITDA were $4.5m and ($3.5)m, respectively, compared to $16.5m and ($6.6)m for the same quarter of 2012.

The decreases in revenues were primarily attributable to the sale of the eastern Kentucky thermal mining operations in the first quarter of 2013 and reductions in tons sold from 242,390 in the third quarter of 2012 to 57,589 tons in the third quarter of 2013. An increase in adjusted EBITDA in the third quarter of 2013 was the result of increased average per ton sales realization of $78.93 in the third quarter of 2013 as compared to $68.16 in the same quarter of 2012.

In August, the company shipped the first train of premium mid-vol metallurgical coal from the South Fork strip mine in Greenbrier County, W.Va. The total tons produced and sold from South Fork for the third quarter of 2013 were 57,641 and 48,532, respectively with production cash costs of $79.78 per ton and mid-vol met sales realization of $90.80/ton. Xinergy also continued the remobilization of certain idle surface mining equipment to the South Fork mine, allowing it to increase production as market conditions for met coal improve.

In the third quarter of 2013, Xinergy began construction of a $9.5m coal prep plant at the Raven Crest facility in southern West Virginia. This prep plant is expected to be fully operational in January 2014 allowing Xinergy to competitively market this low cost, high quality thermal coal to virtually all thermal markets in the eastern U.S. and Europe.

The company said it continues to evaluate possible sales of thermal and non-core assets in addition to other possible transactions in efforts to strengthen it balance sheet and improve liquidity in the near term.

“The third quarter was a period of great achievement for our company. Our South Fork preparation plant and CSX rail loadout became a reality as we saw our first mid-vol shipment completed in August. The timeline from property transaction to coal shipment was 2 1/2 years, which is nothing short of remarkable, especially considering today’s regulatory environment. I am extremely proud of our West Virginia team for this accomplishment,” said Bernie Mason, Xinergy’s Chief Executive Officer.

“We continue to focus on positioning Xinergy as a low cost producer of high quality mid-vol metallurgical and high quality thermal coals,” Mason added. “We continuously focus on cost reductions and have recently completed several cost reduction measures. These have included additional employee layoffs and the decision to reduce the size of our Board of Directors. Matthew Goldfarb, Stephen Loukas, and Jay Thornton recently stepped away from our board and I would like to take this time to thank them for their service especially during this difficult period in our industry.”

Xinergy sees modest signs of life in met, thermal coal markets

Absent a significant supply event, Xinergy said it believes 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 third quarter, as it did in the second quarter, in some instances involving producers of higher quality met coals who are $25-$40/t “out of the money” in the current pricing environment, the company added.

Demand from China has waned from earlier levels this year, but Indian steelmakers continue to bring on new coke plants and demand from Europe is steadily recovering. With many U.S. met coals being sold at a discount to today’s benchmark prices, Xinergy believes many U.S. mines will be forced to idle or close. The company believes that this situation gives it a competitive edge due to its below industry average operational costs, and high quality mid-vol met product. The company sees some firming up of met prices as witnessed with recent monthly and quarterly pricing, and supply and demand are narrowing their gap. 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 quality met coal. The company said it sees met pricing normalizing into the latter half of 2014 and into 2015 without any weather disruptions in Australia.

Thermal coal markets are still lagging in Central Appalachia (CAPP), but the company said it is starting to see a firming of pricing as evidenced by the outer curve pricing in the mid to high $70s compared to current prices in the mid $60s.

According to the Energy Information Administration (EIA) October 2013 Short Term Energy Outlook, coal production in the first eight months is down 3% from the same period last year in the U.S. The EIA projects coal production to grow by 3.1% in 2014 to 1,043MMst as inventories stabilize and consumption increases.

While recognizing that significant challenges exist for CAPP thermal market, Xinergy said it continues to believe that low-cost thermal coal production in Central Appalachia in southern West Virginia and southwest Virginia will prove viable over the long-term, affording low-cost producers the potential to earn favorable returns on invested capital as certain higher-cost production is curtailed.

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.