North American Coal net income falls in Q1 2014, to rebound later

NACCO Industries (NYSE: NC) said April 30 that subsidiary North American Coal‘s first quarter 2014 net income decreased to $5.7m from $9.6m in the first quarter of 2013.

The decrease for this lignite coal and limerock producer was primarily the result of reduced royalty and other income and reduced results at the consolidated mining operations mainly due to fewer tons sold as a result of a planned outage at a customer’s power plant, fewer limerock yards sold and a slightly higher loss at Reed Minerals, partially offset by a decrease in income tax expense.

Reed Minerals, which mines bituminous coal in Alabama, is a relatively new acquisition outside of the company’s normal business model of running large lignite surface mines.

North American Coal’s net income and revenues for the first quarter of 2014 decreased to $5.7m and $39.9m, respectively, compared with net income of $9.6m and revenues of $51.1m for the first quarter of 2013.

North American Coal sold 7.9 million tons of coal in the first quarter, against 8.1 million tons in the year-ago quarter.

Revenues decreased in the first quarter of 2014 compared with the first quarter of 2013 primarily due to fewer tons and yards sold at the consolidated mining operations as a result of a planned, but longer than expected, outage at Mississippi Lignite Mining‘s customer power plant and lower customer requirements at the limerock dragline mining operations. The customer for Mississippi Lignite Mining is the nearby Red Hills power plant.

Significantly lower royalty and other income also contributed to the reduction in revenues. The decrease in revenue was partially offset by a slight increase in Reed Minerals revenues as a small increase in tons sold was largely offset by a lower selling price in the first quarter of 2014 compared with the first quarter of 2013.

Net income in the first quarter of 2014 decreased significantly compared with the first quarter of 2013. The decline was primarily the result of reduced royalty and other income and lower operating results at the consolidated mining operations mainly due to fewer tons sold. Reed Minerals also generated a slightly higher loss than in the first quarter of 2013 primarily as a result of an increase in depreciation expense on equipment acquired during 2013 and 2014, as well as from higher repairs and maintenance expense. 

North American Coal continues to expect improved operating performance overall at its coal mining operations in 2014. At the unconsolidated mining operations, steam coal tons delivered in 2014 are expected to increase over 2013 provided customers achieve currently planned power plant operating levels in 2014.

Two new coal mines are cranking up production

Demery Resources Co.‘s Five Forks Mine commenced delivering coal to its customer in 2012 and full production levels are expected to be reached in late 2015. Liberty Fuels began production in 2013 for Mississippi Power‘s new Kemper County coal gasification power plant. Production levels at Liberty Fuels are expected to increase gradually from 0.5 million to 1 million tons in 2014 to full production of about 4.7 million tons of coal annually in 2019.

Unconsolidated mines currently in development are expected to continue to generate modest income during 2014. The three mines in development are not expected to be at full production for several years.

Mining permits needed to commence mining operations were issued in 2013 for Caddo Creek Resources and the Camino Real Fuels projects in Texas. Caddo Creek expects to begin making initial coal deliveries in late 2014. Camino Real Fuels expects initial deliveries in the latter half of 2015, and expects to mine about 3.6 million tons of coal annually when at full production.

Coyote Creek Mining is developing a mine in Mercer County, N.D., from which it expects to deliver about 2.5 million tons of coal annually beginning in May 2016.

Consolidated coal mining operations are expected to improve significantly. Tons sold at Reed Minerals are expected to continue to increase in 2014 compared with 2013 and productivity improvements and increased mining efficiencies are expected in the second half of 2014.

As part of its overall Reed Minerals improvement program, North American Coal plans to temporarily idle a higher-cost Reed Minerals mining area during the last three quarters of 2014 while it files a revised mining permit. This permit will allow for a larger contiguous mining area that is expected to improve productivity and reduce costs. While this mining area is temporarily idled, North American Coal will continue to supply current customers with coal mined from a nearby operation.

In addition during the fourth quarter of 2013 and the first quarter of 2014, North American Coal continued to acquire additional reserves and equipment near the Reed Minerals operation as part of its improvement program and the company’s plans to expand its Alabama metallurgical coal platform.

The improvements at Reed Minerals are expected to be somewhat offset by reduced results at Mississippi Lignite Mining due to fewer deliveries in 2014 compared with 2013 because of a planned outage at the customer’s power plant in the first quarter of 2014, which was longer than expected, and another significant planned outage at the customer’s power plant in the fourth quarter of 2014. Deliveries at Mississippi Lignite Mining are expected to increase over the longer term as a result of continued operational improvements at the customer’s power plant.

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

Net income to rebound in the second half of the year

North American Coal expects a significant decline in net income in the second quarter of 2014 compared with the first quarter of 2014 due to increased losses at Reed Minerals and substantially lower royalty and other income. However, in the second half of 2014, North American Coal expects net income to increase significantly compared with the second half of 2013. Productivity improvements and increased mining efficiencies are expected to result in a slight profit at Reed Minerals in the second half of 2014 compared with a large loss in the second half of 2013 but are not expected to offset Reed Minerals’ operating losses incurred in the first half of the year.

This improvement in the second half of 2014 is expected to be partially offset by significantly reduced deliveries at Mississippi Lignite Mining due to another planned outage at the customer’s power plant and lower royalty and other income than in the second half of 2013. Overall, net income for the full year is expected to decline due to expected lower first half results.

Over the longer term, North American Coal’s goal is to increase earnings of its unconsolidated mines by about 50% by 2017 from 2012 levels through the development and maturation of its new mines and normal escalation of contractual compensation at its existing mines. Also, North American Coal has a goal of at least doubling the earnings contribution from its consolidated mining operations by 2017 from 2012 levels due to benefits from anticipated continued 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 a metallurgical coal strategic initiative which includes significantly increased volume and profitability for the company over the long term.

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.