Hallador Energy, which expects to close a deal by Sept. 1 to buy Vectren Corp.’s (NYSE: VVC) three coal mines in Indiana, described those mines in it Aug. 1 quarterly Form 10-Q report.
On July 1, Hallador’s Sunrise Coal LLC subsidiary entered into an agreement to purchase Vectren Fuels, a wholly-owned coal mining subsidiary of Vectren Corp. Vectren Fuels owns three underground coal mines in southwestern Indiana, including the Oaktown 1 and Oaktown 2 mines at Oaktown and the Prosperity Mine located at Petersburg. The two underground mines at Oaktown are seven miles south of Hallador’s mainstay Carlisle underground mine.
The purchase price is $296m plus additional working capital adjustments, not to exceed a total of $325m. Sunrise is working with its group of banks headed by PNC Bank to secure the necessary financing. “We have been advised by PNC that commitments from the various banks in the syndication exceed the amount necessary to fund the acquisition,” Hallador repoted. “Closing is expected to occur around September 1, 2014.”
Oaktown 1, Oaktown 2, Carlisle and War Eagle will become one large underground complex representing 161 million tons of controlled reserves, with three portals, two wash plants and two rail facilities. During the last twelve months, the Oaktown mines sold 5.1 million tons of coal, the Prosperity mine sold 1.8 million tons and Sunrise sold 3.2 million tons from the Carlisle mine. Current 2015 coal sales commitments for the four mines stand at a total of 9 million tons.
Upon closing of the Vectren acquisition, Hallador will be able to access its already-controlled War Eagle reserves from the Oaktown 2 portal without spending $150m in development costs.
All coal is high-to-mid sulfur bituminous coal from the Illinois Basin. Vectren engaged contract mining companies to operate the coal mines. The contract miners will not be utilized post closing, Hallador said.
The two Oaktown mines were developed in recent years
In April 2006, Vectren announced plans to open two new underground mines, the Oaktown projects. The first of the two mines began full operations in 2010. The second mine began operations during 2013. Reserves at the two mines are estimated at about 94 million tons of recoverable No. 5-seam coal at 11,200 Btu/lb and less than 6 lbs SO2/mmBtu.
Oaktown’s location is within 50 miles of multiple coal-fired power plants. It is estimated approximately 25,000 acres of coal will be mined during the life of both mines. Through Dec. 31, 2013, approximately 2,353 acres of coal have been mined with approximately 22,647 acres remaining.
Both Oaktown mines are room-and-pillar jobs, meaning that main airways and transportation entries are developed and maintained while remote-controlled continuous miners extract coal from so-called “rooms” by removing coal from the seam, leaving pillars to support the roof.
The two Oaktown mines are separated from each other by a sandstone channel. The coal seam thickness ranges from 4 feet to over 9 feet. Their wash plant was originally sized to process 800 tons per hour and has been expanded to 1,600 tons per hour to accommodate the second mine. The two mines are connected to a railway equipped to handle 110 to 120 car unit trains. Coal is also transported via truck to customers, which include Vectren’s power plants and other third-party utilities. The total plant and development costs to date for the Oaktown mining complex are $291m, inclusive of advance royalty payments.
Prosperity is a room-and-pillar mine located on 1,100 surface acres outside of Petersburg in Pike County. The mine has a wash plant sized to process 1,000 tons per hour. The mine is connected to a railway and can handle 110 to 120 car unit trains. Coal is also transported via truck to customers, which include Vectren’s power supply operations and other third party utilities. The mine opened in 2001, and the total plant and development costs to date are $219m.
Hallador has a put a new Indiana surface job into production
In November 2012, the company purchased for $6m permitted fee coal reserves, coal leases and surface properties near Clay City in Clay County. The Ace mine is 42 road miles northeast of the Carlisle mine. It has 3.1 million tons of proven coal reserves of which we own 1.2 million tons in fee. The company mines two primary seams of low-sulfur coal which make up 2.8 million of the 3.1 million tons controlled.
Ace mine development began in late December 2012, and the mine began shipping coal in late August 2013. Ace production is in part trucked to Carlisle to blend with Carlisle’s high-sulfur coal. Many utilities in the southeastern U.S. have scrubbers with lower sulfur limits (4# SO2) which cannot accept the higher sulfur contents of the Illinois Basin (6# SO2). Hallador expects the maximum capacity of Ace to be 500,000 tons annually.
Two mine projects are also being pursued in nearby Illinois:
- Bulldog Mine (underground) – Hallador has leased about 19,300 acres in Vermillion County, Ill., near the village of Allerton. It currently controls 35.8 million tons of coal reserves. A considerable amount of these leased acres has yet to receive any exploratory drilling, so the company anticipates the controlled reserves to grow as it continues drilling in 2014. The permitting process was started in the summer of 2011, and it filed the formal permit with the state of Illinois and the appropriate federal regulators in June 2012. In July 2014, the company was notified by the Illinois Department of Natural Resources (ILDNR) that the permit application had been deemed complete which starts the timeline for the ILDNR public review process. The permit could be approved or denied no later than mid-March 2015. “Full-scale mine development will not commence until we have a sales commitment,” the company said. “We estimate the costs to develop this mine to be $150 million at full capacity of three million tons annually.”
- War Eagle Mine (underground) – Hallador has leased roughly 11,000 acres in Lawrence County, Ill., near the village of Russellville. Based on its reserve estimates it currently controls 43.1 million tons of coal reserves. This reserve is located about 20 miles southwest of the Carlisle Mine in Indiana. Initial testing indicates that this reserve’s minability and coal quality is very similar to the Carlisle reserve. Hallador anticipates filing for a mining permit in late 2014. Full-scale mine development will not commence until it has a sales commitment. The costs to develop this mine are estimated to be $150m at full capacity of 3.3 million tons annually. This is the reserve the company expects to be able to access from Oaktown 2 and that full $150m in development costs would be avoided by getting that Vectren mine and its existing infrastructure.
For the second quarter of 2014, Hallador/Sunrise Coal sold 847,000 tons at an average price of $42.66/ton. For the second quarter of 2013, it sold 774,000 tons at an average price of $44.12/ton.
Hallador said it has close relationships with customers: Duke Energy (NYSE: DUK), Hoosier Energy and Indianapolis Power & Light. It also delivers coal to an Orlando, Fla., utility through an arrangement with an affiliate of JP Morgan. “We believe these Florida sales are an indication of the trend of [Illinois Basin] coal replacing [Central Appalachia] coal that has traditionally supplied the southeast markets,” the Form 10-Q noted.