Corsa Coal Corp. (TSXV: CSO) said June 2 that despite a very challenging coal pricing environment, it achieved positive Adjusted EBITDA in the first quarter of this year at its Northern Appalachia (NAAP) and Central Appalachia (CAPP) Divisions.
NAPP productivity improvement initiatives and cost containment efforts have been successful, with the cash production cost per ton sold for metallurgical coal decreasing 32% from the fourth quarter of 2014. In February 2015, Corsa restructured its senior management team by appointing Peter Merritts to the role of President–NAPP. NAPP operations for the company center on mines and prep plants in and around Somerset County in central Pennsylvania. This includes the PBS Coals operations bought last year from steel producer OAO Severstal.
Key operating metrics for the company in the first quarter include:
- NAPP metallurgical coal sales of 159,000 tons.
- NAPP realized price per ton sold for metallurgical coal of $87.
- NAPP cash production cost per ton sold for metallurgical coal of $65.
- CAPP thermal coal sales of 200,000 tons.
- CAPP realized price per ton sold for thermal coal of $67.
- CAPP cash production cost per ton sold for thermal coal of $62.
George Dethlefsen, Chief Executive Officer, commented: “Corsa made great strides in the first quarter to lower the overall cost profile and drive productivity improvement across the operating locations. At NAPP, targets for production and cost performance were exceeded, in particular at the Casselman Mine, as the cash production costs declined $30 per ton from the fourth quarter. Corsa continued to integrate the assets acquired in the PBS transaction and the results of those integration efforts have put us in a highly favorable position on the domestic metallurgical coal delivered cost curve. Corsa’s cost control and productivity improvement efforts at NAPP resulted in an increase in cash margins of $21 per ton from the prior quarter despite a decrease of $5 per ton in realized pricing. Despite the cost improvements, Corsa’s statement of operations was negatively impacted by declining coal spot prices, higher surface mining costs at the CAPP Division due to difficult winter weather, the impact of idle mine expenses at the NAPP Division, and approximately $14 million of impairment and write-off charges.”
Dethlefsen added: “North American metallurgical coal producers are enduring a time of extreme financial distress, and we expect this situation to lead to a rationalization of supply in the coming months and quarters. Corsa is uniquely positioned from a mining cost, coal quality, and infrastructure standpoint to grow both organically and through acquisitions during this trough in the market.”
Corsa is maintaining guidance for calendar 2015 as per Corsa’s Management’s Discussion and Analysis for the year ended Dec. 31, 2014, which is as follows:
- Total sales of 1,670,000 to 1,810,000 tons.
- NAPP Division sales 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.
- CAPP Division sales of 775,000 to 825,000 tons of thermal coal.
- NAPP Division cash production cost per ton sold for metallurgical coal of $67 to $72.
- NAPP Division cash production cost per ton sold for thermal coal of $30 to $35.
- CAPP Division cash production cost per ton sold for thermal coal of $57 to $62.
Coal Pricing Trends and Outlook
Corsa said: “Current metallurgical coal prices remain at depressed levels 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. Large scale 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% and a decline of 6% from the first quarter of calendar 2015. Adjusting for inflation, the second quarter price is the lowest benchmark settlement since 2004.
“Unfavorable foreign exchange movements, low dry-bulk chartering rates, and softening oil prices have added downward pressure on demand for U.S. metallurgical coal. Corsa estimates that greater than 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. 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 metallurgical 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.
“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 expects that this rebalancing will occur first in the domestic U.S. market as the combination of financially distressed producers and high cost mines will create additional mine closures. 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 the date hereof, approximately 81% of these sales are committed at the midpoint of the range. 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.”
Corsa said: “Current Southeastern U.S. utility market thermal coal spot pricing declined 25% over the course of 2014. As a result, much of the Central Appalachia coal production is uneconomic. Corsa expects utility coal demand for Central Appalachia production to decrease in 2015. Conversely, industrial thermal demand grew 4% year over year for 2015 and Corsa expects industrial demand to grow in 2015.
“The CAPP mineral 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 2015, 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. The planned opening of the Cooper Ridge mine will position CAPP to service the industrial specialty coal markets. These specialty markets are well suited for CAPP’s coal qualities and 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 775,000 to 825,000 tons. As of the date hereof, approximately 92% of these sales are committed at the midpoint of the range. Actual sales will depend on customer demand and market conditions. CAPP also has sales contracts in place for 500,000 tons in 2016.”
Prep plant in Pennsylvania has been temporarily idled
The CAPP Division is based in Knoxville, Tennessee, and is focused on thermal and industrial coal production and sales in the Southern Appalachia coal region of the United States. 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.
CAPP currently operates one preparation plant. The thermal coal produced from the underground mine is trucked to the preparation plant where it is processed. The plant is located, in Claiborne County, Tennessee. The plant has an operating capacity of 350 tons of raw coal per hour and load out facilities adjacent to a Norfolk Southern (NS) rail line with dual NS and CSX Transportation load out capability. Coal is usually shipped by rail; however, it can also be shipped by truck. All CAPP operating mines are within seven miles of the preparation plant.
In NAPP, the Quecreek deep mine was temporarily idled on March 12, 2015, in order to manage existing inventory levels and to maximize the future value of the reserve base. Production at Quecreek resumed on May 19. In early January 2015, both the Kimberly Run Mine, an underground mine, and the Barbara B Project, an underground development project, both located in Somerset County, Pa., were idled. The Kimberly Run Mine was nearing the exhaustion of its economic reserve life and was NAPP’s highest cost per ton underground operation in 2014. The Barbara B Project was being developed for future commercial production. Certain personnel and equipment from these mines were transferred to the Casselman (in Maryland) and Quecreek deep mines, which are NAPP’s lowest cost per ton underground operations. The Kimberly Run Mine has been permanently closed and will be sealed in 2015.
NAPP currently operates two preparation plants and has one preparation plant that is temporarily idled. The raw metallurgical coal produced from the mines is trucked to the prep plants where it is “washed” using conventional coal processing techniques and stored for shipping. All plants have load outs adjacent to a rail line. Coal is usually shipped by rail; however, it can also be shipped by truck. All of the prep plants are located in Somerset County. The Cambria Plant has an operating capacity of 325 tons of raw coal per hour, storage capacity for 120,000 tons of clean coal and 180,000 tons of raw coal and load out facilities adjacent to a CSX line. The Shade Creek Plant has an operating capacity of 450 tons of raw coal per hour, storage capacity for 120,000 tons of clean coal and 125,000 tons of raw coal and load out facilities adjacent to a NS line. The Rockwood Plant has an operating capacity of 325 tons of raw coal per hour and load out facilities adjacent to a CSX line. The Rockwood Plant was temporarily idled on May 1 in order to consolidate clean coal production at the Cambria and Shade Creek Plants.