North American Coal reports Q3 2015 loss as Alabama operations are wound down

NACCO Industries (NYSE: NC) said Nov. 3 that its North American Coal subsidiary reported a net loss of $5.3 million and revenues of $42.7 million for the third quarter of 2015 compared with net income of $3.2 million and revenues of $49.8 million for the third quarter of 2014.

The 2015 net loss includes charges of $7.5 million, or $5.8 million after tax of $1.7 million, to increase the mine reclamation obligation, and $0.5 million, or $0.3 million after tax of $0.2 million, for severance as a result of the decision to cease mining operations at Centennial in Alabama by the end of 2015.

Coal tons and limerock yards sold at North American Coal for the third quarter of 2015 and 2014 are as follows:









  

   2015

 

2014

Coal tons sold

   (in millions)

        Consolidated mines

   1.1

 

1.1

        Unconsolidated mines

   6.6

 

6.6

                        Total tons sold

   7.7

 

7.7

Limerock cubic yards sold

   5.2

 

5.2

North American Coal revenues decreased in the third quarter of 2015 compared with the third quarter of 2014 primarily due to a reduction in higher-priced tons sold at Centennial, partially offset by an increase in tons sold at Mississippi Lignite Mining attributable to fewer plant outage days at the customer’s power plant in the third quarter of 2015 compared with the third quarter of 2014. The reduction in tons sold at Centennial was primarily due to the wind down of operations. 

North American Coal’s operating results declined substantially in the third quarter of 2015 to an operating loss of $4.0 million from an operating profit of $4.4 million in 2014 primarily due to Centennial’s operating results. Gross profit at Centennial, defined as revenue less cost of goods sold, which includes all mine operating costs and the mine reclamation obligation and severance charges previously mentioned, was a loss of $15.3 million in the third quarter of 2015 compared with a loss of$3.1 million in the third quarter of 2014. Centennial’s unfavorable results were partially offset by improvements at Mississippi Lignite Mining as a result of more tons sold than in the third quarter of 2014 and an increase in royalty and other income.

For the nine months ended Sept. 30, 2015, North American Coal reported net income of $3.4 million and revenues of $122.0 million compared with net income of $8.8 million and revenues of$139.5 million for the nine months ended Sept. 30, 2014. 

North American Coal – Outlook

North American Coal expects overall improved operating performance at its coal mining operations in the fourth quarter of 2015 compared with the fourth quarter of 2014. Excluding the 2014 asset impairment charge of $105.1 million, or $66.4 million after tax of $38.7 million and the 2014 gains on the sale of assets, North American Coal expects income before income taxes in the fourth quarter of 2015 to increase substantially over the fourth quarter of 2014. Cash flow before financing activities for the fourth quarter of 2015 is expected to be modestly positive as compared with negative cash flow before financing activities in the fourth quarter of 2014. Capital expenditures in the fourth quarter of 2015 are expected to be $4.5 million.

Centennial expects to incur a loss from operations in the fourth quarter of 2015 as it winds down mining operations while fulfilling commitments under existing sales contracts. The fourth quarter loss is expected to be moderately improved from the loss recognized in the third quarter of 2015, excluding the mine reclamation and severance charges. Cash expenditures related to mine reclamation will continue until reclamation is complete. Centennial will continue to evaluate strategies to maximize cash flow, including the sale of mineral reserves, equipment and parts inventory. Some equipment and parts inventory will be redeployed to other North American Coal mine locations to minimize future capital expenditures. The company is also evaluating a range of strategies for its Alabama mineral reserves, including holding reserves with substantial unmined coal tons for sale or contract mining when conditions in Alabama and global coal markets improve.

At Mississippi Lignite Mining, tons sold and results from operations are expected to be higher in the fourth quarter of 2015 compared with the fourth quarter of 2014 when a significant planned outage took place at the customer’s power plant.

At the unconsolidated mining operations, operating results are expected to decline moderately in the fourth quarter of 2015 compared with the fourth quarter of 2014. However, this decrease will be partially offset by additional income from a full quarter of production at Caddo Creek Resources, which commenced delivering coal in late 2014, and from Camino Real Fuels, which commenced delivering coal in October 2015. Camino Real Fuels expects to mine approximately 2.5 million to 3.0 million tons of coal annually when at full production.

Liberty Fuels commenced production in 2013 but will not deliver any coal for power generation in the fourth quarter. Production levels at Liberty Fuels are expected to increase gradually beginning in 2016 and build to full production of approximately 4.6 million tons of coal annually beginning in 2023, although the timing of future deliveries will be affected by the pace at which construction of the Kemper County coal gasification power plant of Mississippi Power is completed.

North American Coal has one mine currently in development. Coyote Creek Mining 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.

Results in 2016 are expected to benefit significantly from the elimination of North American Coal’s only direct exposure to coal market price volatility with the cessation of mining operations at Centennial, as well as higher income from the unconsolidated mining operations. In 2016, Centennial expects to incur a moderate loss, excluding the effect of any potential future asset sales, as it manages mine reclamation obligations and disposes of certain assets.

Results at Mississippi Lignite Mining are expected to decline in 2016 compared with 2015. Mississippi Lignite Mining sells lignite at contractually agreed upon coal prices which are subject to changes in the level of established indices over time. The price of diesel fuel is heavily-weighted among these indices. As such, the recent substantial decline in diesel prices is expected to reduce earnings, as the decline in revenue will only be partially offset by the effect of lower diesel prices on production costs.

Income from the unconsolidated mining operations is expected to improve in 2016 as production levels increase at Camino Real and Coyote Creek commences delivering coal to its customer. Over the longer-term, North American Coal’s goal continues to be 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.

North American Coal expects to continue its efforts to develop new mining projects and is actively pursuing opportunities for new or expanded coal mining projects, although opportunities are likely to be very limited. In addition, North American Coal 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.