CONSOL Energy (NYSE: CNX), a major U.S. gas and coal producer, on July 29 reported a net loss of $25m for the second quarter, compared to a net loss of $13m from the year-earlier quarter.
Among other special items, the company recognized a gain of $30m related to a coal contract customer buyout. CONSOL received a cash payment of $30m for Bailey tons out of Pennsylvania that were dedicated to a non-core market. Now, CONSOL said it will be able to re-market these tons into core markets.
CONSOL’s Coal Division produced 8.3 million tons in the second quarter, achieving the mid-point of the guidance range of 8.1 million-8.5 million tons. Weaker markets for metallurgical coal, though, cut into pricing for low-vol and high-vol coals. Thermal coal pricing was also lower in the quarter, when compared to the year-earlier quarter. Higher thermal coal sales volumes, however, enabled the thermal coal business to generate more cash before capital expenditures and depreciation, depletion, and amortization (DD&A) than in the year-earlier quarter.
The thermal coal segment achieved cash production costs of $40.47 per ton in the 2014 second quarter. This cost was lower than the $43.11 per ton cash production cost in the year-earlier quarter despite geologic issues at the Enlow Fork Mine in southwest Pennsylvania and the change-out of a shearer at the new Harvey (formerly BMX) Mine, located near Enlow Fork and also working the Pittsburgh coal seam.
In total, CONSOL’s active coal operations generated $179m of cash before capital expenditures and DD&A. This was an increase of $4m from the year-earlier quarter.
“CONSOL Energy did what we said we’d do,” commented Nicholas DeIuliis, company president and CEO. “In coal, we managed through some typical operating issues to again achieve our production target. In the first half of 2014, the Coal Division generated nearly $400 million in cash (before capital expenditures and DD&A). For the second half of 2014, our tactical focus remains on safety, compliance, and operational execution.”
|CONSOL re-looks at, adds to Pittsburgh seam reserves|
In June 2014, CONSOL completed a multi-year re-evaluation of its remaining Pittsburgh seam longwall-mineable reserves utilizing mine plans and mining horizon assumptions specific to each mine/reserve. In prior years, reserves estimates were based on a fixed 70% mining recovery of the Pittsburgh seam main bench only.
This reevaluation is primarily predicated on advances in mining technology which have increased both mine recovery and the recovery of additional coal above the Pittsburgh main seam and advances in mine planning and modeling technology allowing CONSOL to estimate and capture these changes. As a direct result of this reevaluation, which was audited by a third party, the company’s Pittsburgh seam reserve tonnage increased by 442 million tons to 1.805 billion tons.
CONSOL said it is also updating its estimate of its Illinois Basin coal reserves, where it has no current mining operations but still holds major reserves, like at the long-shut Rend Lake longwall mine in Illinois. This study should be complete in the next few months.
Coal production in the second quarter hit the guidance mid-point
For the second quarter, CONSOL’s Coal Division achieved the mid-point of its guidance range by producing 8.3 million tons. Realized prices per ton were lower for each category of coal than in the year-earlier quarter. Low-vol and high-vol coking coal prices reflected the oversupply of coal used in steelmaking, while thermal coal pricing was lower because of the roll-off of some higher-priced legacy contracts.
Coal costs in the low-vol coal category in the 2014 second quarter were much improved over the year-earlier quarter on a per ton basis despite lower volumes, as the mine was optimized to reflect lower production. Coal costs in the thermal coal category were improved when compared to the year-earlier quarter, but not as good as what was achieved in the 2014 first quarter. Geologic issues at the Enlow Fork Mine and an equipment change-out at the Harvey Mine led to higher-than expected thermal costs per ton. The challenging geology at Enlow Fork Mine is expected to continue until about mid-August.
Coal Marketing Update:
- Low Vol – Production cuts continue to take place, both in the U.S. and elsewhere, and a better supply/demand balance will eventually occur in the market. CONSOL currently expects to ship about 5 million tons of met (both low-vol and high-vol) in 2014. This is 1 million tons lower than the projection the company made three months ago. The Buchanan low-vol mine in Virginia shipped 0.95 million tons in the second quarter of 2014. CONSOL has been very active in the domestic met market for 2015, and expects to increase its 2015 domestic sales of low-vol by at least 50%. CONSOL’s sales efforts are aided by having the lowest cost low-vol mine in the U.S. and by having a strong balance sheet.
- High Vol – Bailey coal continues to have a place in the high-vol market, even though the overall met market remains weak. CONSOL will continue to send tons where they create the most shareholder value. In the second quarter, 330,000 tons of Bailey production was sold into the high vol markets.
- Thermal – For 2014, CONSOL has been able to consistently transport all Bailey coal produced, even though there have been challenges with capacity in the U.S. rail system. CONSOL has been able to move these tons to market due to having dual rail access facilities that can load 130 car trains in less than two hours, and also because of efficient logistics coordination with both the Norfolk Southern and CSX railroads and its customers. For 2015 and 2016, CONSOL continues to successfully market Bailey tons into target core markets. During the second quarter, nearly 5.0 million annual tons were committed for 2015, and 4.0 million tons were committed for 2016. An additional 9.0 million tons are currently under negotiation for 2015 and 2016.
CONSOL is estimating coal sales in 2014 of 31 million to 33 million tons, with a range of 31 million to 35 million tons currently expected for 2015.