Corsa Coal Corp. (TSXV: CSO), which last year acquired central Pennsylvania coal producer PBS Coals, said May 1 that it made progress in the fourth quarter of 2014 in cutting costs and integrating the PBS operations.
George Dethlefsen, Chief Executive Officer, said: “The fourth quarter of 2014 was a time of transition for Corsa, as we continued to make operational changes to integrate PBS into the [Northern Appalachia] Division and also adjusted to changing market conditions. At our NAPP Division in early 2015, we took several steps to lower our operating cost profile including idling two higher cost mines that had encountered challenging geology during the fourth quarter, and we shifted resources to our most productive mines. The positive financial impacts of these moves, in addition to our capital improvement program, will be seen in subsequent quarters. The [Central Appalachia] Division finished the year strong and continues to be a low cost producer of high quality thermal and industrial coal.”
Dethlefsen added: “Our priorities for 2015 include realizing additional synergies from the PBS acquisition, productivity improvement initiatives, broadening and enhancing customer relationships, and continuing to be a leader in safety and environmental compliance. During this time of depressed coal prices, Corsa will continue to take cost-cutting steps to maintain our advantaged position on the delivered cost curve. We will also continue to invest in the growth of the company, in order to position Corsa to capitalize on future improvements in coal prices.”
Fourth quarter highlights included:
- Revenues of $51,235,000 for Fourth Quarter 2014 and $140,547,000 for 2014.
- NAPP Division metallurgical coal sales of 317,000 tons in Fourth Quarter 2014 and 718,000 tons in 2014.
- NAPP Division realized price per ton sold for metallurgical coal of $92 in Fourth Quarter 2014 and $92 in 2014.
- CAPP Division thermal coal sales of 233,000 tons in Fourth Quarter 2014 and 924,000 tons in 2014.
- CAPP Division realized price per ton sold for thermal coal of $69 in Fourth Quarter 2014 and $68 in 2014.
- Completed the acquisition of PBS Coals in August 2014.
Guidance for all of 2015 is:
- Sales for NAPP Division of 895,000 to 985,000 tons, including metallurgical coal sales guidance of 725,000 to 775,000 tons and thermal coal sales guidance of 170,000 to 210,000 tons.
- Sales for CAPP Division of 775,000 to 825,000 tons of thermal coal.
- Cash production cost per ton sold for metallurgical coal at NAPP Division of $67 to $72.
- Cash production cost per ton sold for thermal coal at NAPP Division of $30 to $35.
- Cash production cost per ton sold for thermal coal at CAPP Division of $57 to $62.Outlook
The preliminary coal sales outlook for 2015 in Corsa’s December 2014 investor presentation was 2,300,000 to 2,600,000 tons which consisted of NAPP Division metallurgical coal sales guidance of approximately 1,500,000 to 1,700,000 tons and CAPP Division thermal coal sales guidance of about 800,000 to 900,000 tons. The met coal sales guidance changed due to the idling of the Kimberly Run Mine and the Barbara B Project in early 2015. The Barbara B Project was being developed for commercial production in 2015. These moves were made in response to changes in market conditions, particularly for export sales orders.
Corsa’s NAPP Division, including pre-existing operations and the PBS Coal assets, are concentrated in Somerst County, Pa., with a deep mine in nearby Maryland.
Current metallurgical coal prices continue at a level where a substantial amount of global production is uneconomic. This situation arose as a result of global producers committing to multi-billion dollar projects in a significantly higher price environment. Mines often take three or more years from final investment decision to first production. New supply came online over 2013 and 2014, a period where demand growth softened. This supply growth is expected to mitigate in 2015 as the pipeline of growth projects is exhausted and prices are insufficient to incentivize new production. Corsa expects that over time, the fundamentals of the metallurgical coal market will rebalance as supply growth ends and production cutbacks are implemented.
Seaborne benchmark contract prices for the highest quality metallurgical coal decreased to $109.50 per metric ton in the second quarter of calendar 2015, reflecting a year-over-year decrease of approximately 9%. Adjusting for inflation, the second quarter price is the lowest benchmark settlement since 2004. Many analysts view the current market fundamentals as unsustainable.
Unfavorable foreign exchange movements, low dry-bulk chartering rates, and softening oil prices have added pressure to U.S. metallurgical coal demand. Corsa estimates that approximately half of the U.S. production for domestic and export markets is unprofitable. Since on average, Central Appalachia metallurgical coal producers have higher cost structures, the great majority of the at-risk production is weighted towards that region with Northern Appalachia production making up the smallest portion of the at-risk production, Corsa added. Recent announcements of U.S. domestic steel production cutbacks have decreased the overall domestic metallurgical coal demand. However, this decrease has been mitigated in part by a corresponding increase in met coal demand in the transportation-advantaged region for Northern Appalachia producers, including Corsa. Many of the steel producers’ strongest coke plants are located in this region.
In order to make a strong and stable coke for steel companies’ production of iron, low volatile coal is a necessary ingredient in the sensitive coal blend required. NAPP Division’s metallurgical reserve base consists entirely of premium rank low volatile coal. Corsa said it is also well positioned with its close proximity to coke producers on the river systems, which are easily accessed by truck or barge and rail through Pittsburgh.
As metallurgical coal production is rationalized in places like China, Western Canada, Australia and the United States, Corsa expects the seaborne metallurgical coal fundamentals to normalize. Corsa’s short rail distance and multiple options to access the Baltimore export terminals solidify Corsa’s ability to take advantage of any recoveries in seaborne pricing.
Metallurgical coal sales in 2015 are expected to be in the range of 725,000 to 775,000 tons. As of May 1, approximately 68% of these sales are committed. Actual sales will depend on customer demand and market conditions. Vessel nominations for export sales are determined by customers and concluded on a month-by-month basis.
CAPP produces and sells high-Btu low- and mid-sulfur thermal coal used in power, industrial and specialty applications. In addition to the mines currently in production, CAPP also has a significant pipeline of thermal, speciality and industrial coal development projects which it anticipates developing. CAPP is based in Knoxville, Tennessee, and has assets in Tennessee and eastern Kentucky. CAPP currently operates the Double Mountain Deep Mine, an underground mine utilizing the room and pillar mining method, the Clear Fork Mine, a surface mine utilizing contour and high wall mining methods and the Straight Creek Mine, a surface mine utilizing contour and auger mining methods. All mines are located in Clairborne County, Tennessee.
Current Southeastern U.S. utility market thermal coal pricing declined 25% over the course of 2014. As a result, much of the Central Appalachia coal production is below the marginal cost curve. Corsa said it expects utility coal demand for Central Appalachia production to decrease in 2015. Conversely, industrial thermal demand grew 4% year over year for 2014 and Corsa expects industrial demand to grow 1% in 2015.
The CAPP reserve base exclusively consists of high BTU and high carbon content coal. These unique qualities, combined with advantaged logistics, set CAPP apart from other producers and create a niche in the utility and industrial marketplace. As a result, despite thermal supply outpacing demand in 2014, CAPP has been successful in maintaining a high level of contracted sales for the future.
CAPP will continue to target the industrial market segment as it transitions from a utility supplier to an industrial supplier during 2015. Additionally, the planned opening of the Cooper Ridge mine will position CAPP to service the industrial specialty coal markets, the company noted. Since the end market use of this coal is not for electricity, these specialty markets are relatively protected from natural gas prices and historically reflect higher pricing than the thermal markets.
The CAPP coal sales for 2015 are expected to be in the range of 750,000 to 800,000 tons. As of the date hereof, approximately 86% of these sales are committed. Actual sales will depend on customer demand and market conditions. Corsa also has sales contracts in place for 500,000 tons in 2016.