Western Kentucky coal producer Armstrong Energy reported May 14 that in the first quarter of this year, it sold nearly 2 million tons of coal, down from nearly 2.4 million tons in the year-ago quarter.
Coal sales revenue for the first quarter decreased by $14.5 million, or 13.1%, to $96.3 million, as compared to $110.9 million in the year-ago quarter. This decrease is attributable to an unfavorable volume variance of approximately $18.3 million year-over-year due to production and delivery issues during the current quarter resulting from the inclement weather experienced in western Kentucky. This was partially offset by a favorable price variance of approximately $3.8 million due to customer mix and higher year-over-year contract prices.
Cost of coal sales decreased 12.5% to $78.8 million in the first quarter, from $90.1 million in the same period of 2014. On a per ton basis, the cost of coal sales increased during the first quarter compared to the same period of 2014, from $38.24 per ton to $40.08 per ton. This increase is due to lower productivity and inefficiencies encountered at substantially all of the mines resulting from adverse weather conditions experienced during the first quarter of 2015.
Adjusted EBITDA for the first quarter was $13.1 million, as compared to $15.7 million in the year-ago quarter. The decrease in Adjusted EBITDA resulted primarily from a decline in gross margin as a result of the unfavorable weather conditions and resulting production inefficiencies in the first quarter of this year, as compared to the same period of 2014, partially offset by lower general and administrative costs experienced in the current quarter.
The Lewis Creek underground mine, which produces coal from the West Kentucky #9 seam, experienced significant operating inefficiencies since July 2013 due to the geological conditions in the reserve being mined. As a result, a final decision was made in August 2014 not to continue advancing under the current mine plan, but rather to retreat and mine only in the eastern portion of the reserve. Armstrong completed mining of the Lewis Creek underground mine in March of this year and has begun extracting the equipment, which will be utilized at other mining operations in the future.
Armstrong is developing an additional underground mine at its Parkway mine complex, the Survant underground mine, which will produce coal from the West Kentucky #8 seam. Development is expected to be completed during the first half of 2015. There are 59.7 million tons of proven and probable reserves at the Survant underground mine as of Dec. 31, 2014. Coal mined from the Survant underground mine will be processed at the Parkway Preparation Plant prior to shipment to the ultimate customer.
Arrmstrong’s anticipated coal sales for 2015 are between 8.4 million and 8.6 million tons. Forecasted production for 2015 is lower than actual production during 2014 due to the closure of the Lewis Creek underground mine in early 2015 and lower production at the surface operations. The company anticipates lower sales due to lower utility demand resulting from lower natural gas prices and utilities retiring coal-fired plant capacity due to new regulations. As of May 1, Armstrong currently has 8.4 million tons priced and committed for 2015 at an average price of $47.67 per ton.
Capital expenditures in 2015 are currently expected to be in a range of $28 million-$31 million related primarily to the development of a new mine to replace capacity that is depleting over the next several years.
Armstrong is a producer of low-chlorine, high-sulfur thermal coal, with both surface and underground mines. Armstrong controls approximately 563 million tons of proven and probable coal reserves in western Kentucky and currently operates seven mines. Armstrong also owns and operates three coal processing plants and river dock coal handling and rail loadout facilities which support its mining operations.