North American Coal adding lignite production; sees ‘poor’ results in Alabama

NACCO Industries (NYSE: NC) said May 5 that its North American Coal unit had first quarter 2015 net income that decreased to $4.5 million from $5.7 million in the first quarter of 2014 primarily as a result of lower operating results at the consolidated mining operations mainly due to fewer tons sold as a result of reduced coal requirements at a customer’s power plant, in part as a result of a significant planned outage during the first quarter of 2015.

Coal tons and limerock yards sold at North American Coal for the first quarter of 2015 and 2014 were:









 

2015

 

2014

Coal tons sold

(in millions)

        Consolidated mines

1.0

   

0.8

 

        Unconsolidated mines

6.8

   

7.1

 

                        Total tons sold  

7.8

   

7.9

 

Limerock cubic yards sold

4.5

   

5.0

 

North American Coal revenues increased slightly in the first quarter of 2015 compared with the first quarter of 2014. That was primarily due to an increase in tons sold at Mississippi Lignite Mining Co. as its customer’s power plant did not have a planned outage in the first quarter of 2015, in contrast to a significant outage during the first quarter of 2014. The minemouth customer for this operation is the 440-MW Red Hills power plant.

This revenie increase was largely offset by a decrease in tons sold at Centennial Natural Resources (formerly known as Reed Minerals) in Alabama due to reduced coal requirements at a customer’s power plant, in part as a result of a significant planned outage during the first quarter of 2015.

North American Coal’s net income declined in the first quarter of 2015 compared with the first quarter of 2014 primarily as a result of lower operating results at the consolidated mining operations. The decline in results at the consolidated mining operations was mainly due to a higher loss at Centennial resulting from a reduction in tons sold and no capitalized costs related to mine development in 2015. The higher loss at Centennial was partially offset by a substantial improvement in results at Mississippi Lignite Mining as a result of the increase in tons sold.

Gross profit at Centennial, defined as revenue less cost of goods sold, which includes all mine operating costs, was a loss of $5.4 million in the first quarter of 2015 compared with a loss of $2.0 million in the first quarter of 2014. The increase in Centennial’s loss was expected due to a customer’s planned power plant outage and no capitalized costs related to mine development in 2015.

North American Coal – Outlook

North American Coal expects overall improved operating performance at its coal mining operations in 2015 compared with 2014. At the consolidated coal mining operations, tons sold and results from operations are expected to be substantially higher than in 2014 at Mississippi Lignite Mining because no planned outages are scheduled at the customer’s power plant. Two significant planned outages took place in 2014 at the plant that are not expected to re-occur in 2015.

Faced with the ongoing weakness in the Alabama and global coal markets, and higher anticipated coal processing costs related to more stringent coal quality requirements, North American Coal is focused on managing the Centennial business based on cash generation. The management team is managing operations in line with conservative volume estimates, altering mining plans, identifying and implementing less costly coal processing methods, managing production methods and volumes to optimize cash flow, and evaluating capital employed, including selling certain non-core assets. In this context, Centennial expects mining areas to be reduced from three currently to a single mine area during the second half of 2015.

Centennial’s operating results, cash flow before financing and EBITDA are expected to improve significantly in the last three quarters of 2015 compared with 2014, excluding the asset impairment charge recognized in 2014, largely due to increased tons sold, improved cost effectiveness and reduced capital employed. A reduction in Centennial’s annual depreciation and amortization expense of approximately $6.0 million as a result of the asset impairment charge taken in 2014 will be reflected in the improved 2015 results. However, operating results in 2015 at Centennial, including non-cash charges, are expected to remain in a substantial loss position due in part to the loss incurred in the first quarter of 2015 and also to increasing coal processing costs in the remaining three quarters of 2015 to comply with a change in customer requirements for coal to be sold beginning in the fourth quarter of 2015.

Management believes that actions taken during 2015 will position Centennial for further improvement in cash generation in 2016, assuming that market conditions do not deteriorate. The company believes that efforts to manage the Centennial business around conservative volume expectations and manage for cash will help to position this business to take advantage of any rebound in the coal market that may occur over time.

At the unconsolidated mining operations, steam coal tons delivered in 2015 are expected to increase from 2014 based on customers’ currently planned power plant operating levels and as a result of production increases at the newer mines.

  • Demery Resources Co.’s Five Forks Mine in Louisiana commenced delivering coal to its customer in 2012 and full production levels are expected to be reached in 2016. The customer is a maker of activated carbon, ADA Carbon Solutions LLC.
  • Liberty Fuels commenced production in 2013 but has not delivered any coal to its customer. Production levels at Liberty Fuels are expected to increase gradually beginning in the second half of 2015 to full production of approximately 4.4 million tons of coal annually beginning in 2020. Construction of Mississippi Power‘s Kemper County Energy Facility adjacent to Liberty Fuels is still in process, and the pace of completion may affect the pace of the increase in deliveries.
  • Caddo Creek Resources Co. commenced delivering coal in late 2014 out of its Marshall mine in Texas. The customer is Cabot Norit Americas, a maker of activated carbon.

Unconsolidated mines currently in development are expected to continue to generate modest income in 2015.

  • The mining permit needed to commence mining operations was issued in 2013 for the Camino Real Fuels project in Texas. Camino Real Fuels expects initial deliveries out of the Eagle Pass mine in the second half of 2015, and expects to mine approximately 2.5 million to 3.0 million tons of coal annually when at full production.
  • Coyote Creek Mining Co. received its mining permit in October 2014 and is developing a mine in Mercer County, North Dakota, from which it expects to deliver approximately 2.5 million tons of coal annually beginning in mid-2016. This is the first major new mine permitted in North Dakota since the late 1970s. The mine is scheduled to begin delivering coal to the Coyote Power Station operated by Otter Tail Power in May 2016. The original coal contract for the plant, which is a minemouth operation, expires in May 2016. In October 2012, the Coyote owners entered into a lignite sales agreement with Coyote Creek Mining to deliver the annual coal supply needs of Coyote Station beginning in May 2016 and running through 2040. This will replace a Westmoreland Coal mine that has served the Coyote plant for many years.

Capital expenditures for 2015 are now expected to be $12.4 million, a decrease from the $24.1 million projected at the end of 2014. Capital expenditures during the last three quarters of 2015 are expected to be $11.4 million, comprised largely of $9.0 million for replacement equipment and land at the Mississippi Lignite Mining Company and approximately $1.6 million at Centennial. The reduction in expected capital expenditures reflects North American Coal’s continued efforts to manage capital employed at appropriate levels.

Over the longer-term, North American Coal’s goal is to increase earnings of its unconsolidated mines by approximately 50% by 2017 from the 2012 level of $45.2 million through the development and maturation of its newer mines and normal escalation of contractual compensation at its existing mines. The power plant served by Mississippi Lignite Mining, a consolidated mine, received significant improvements and upgrades in 2014 during planned power plant outages, which are expected to improve the operating performance and reliability of that power plant. North American Coal expects that these improvements will increase tons sold and profitability of this mining operation above historical levels in 2015 and beyond, except when planned or unplanned power plant outages occur.

The company noted that the outlook at Centennial is “poor” at this time due to low coal prices, low demand and higher coal processing costs. North American Coal is currently not prepared to forecast significant GAAP earnings at Centennial and will not do so until these price and demand conditions improve.

North American Coal expects to continue its efforts to develop new mining projects. The company is actively pursuing domestic opportunities for new or expanded coal mining projects, but opportunities are likely to be very limited. North American Coal also continues to pursue additional non-coal mining opportunities, principally in aggregates.

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.