Paringa switches plans for development of western Kentucky coal mine complex

Paringa Resources Ltd. out of Australia on Feb. 14 announced the results of a scoping study on the Buck Creek No. 2 Mine project, which is located within the Buck Creek mining complex and south of the Buck Creek No. 1 Mine’s proposed 3.8 million tons per annum (Mtpa) coal project in western Kentucky. 

Paringa’s President and CEO David Gay, said: “The results of the Scoping Study further illustrate that the Buck Creek Mine Complex is without doubt the best undeveloped coal project in the highly sought after Illinois Basin. The Scoping Study has yielded extremely positive results, and if we knew from the outset what we know now, we would have always developed the No. 2 Mine first. The emergence of the No. 2 Mine has transformed the economics of the project and we are very excited about the enhanced strategy of creating a staged multi-project development by building the low capex No. 2 mine first, followed by the No. 1 Mine.”

When Paringa originally acquired the coal leases comprising the Buck Creek Mining Complex from two local coal entrepreneurs in 2013, the only historical work that had been conducted on the property was in relation the No. 1 Mine, and as a result the No. 1 Mine was Paringa’s initial focus. Since the acquisition, Paringa’s U.S. team of experienced mine engineers have secured additional coal leases, undertaken expanded drilling programs, and prepared a geological model for the entire Buck Creek Mining Complex which led to the discovery of a section of coal to the south of the No. 1 Mine area that had a shallow depth from surface and could be suitable for a simple, low cost “box cut” mine development to access the coal seam.

This discovery led to Paringa commencing technical studies on this shallow section of coal (now called the No. 2 Mine) and based on the exceptional results of these studies, Paringa will now develop the low capex No. 2 Mine first, followed by the No. 1 Mine, as part of a staged development strategy for building a new “mid-tier,” high-margin Illinois Basin coal company.

Paringa wants to emulate the success of Alliance Resource Partners LP, which has built a highly successful coal company that generates strong stable cash flow. Alliance, which mines over 30 Mtpa of coal in the Illinois Basin, in part built its business by developing low capex, high margin, room-and-pillar coal operations that mine the West Kentucky No. 9 coal seam in western Kentucky. The Buck Creek Mine Complex is adjacent to an Alliance operation and will be mining the WK No. 9 coal seam at the No. 2 and No.1 mines.

As part of the first phase in developing the Buck Creek Mine Complex, Paringa will now undertake the following key steps for the remainder of 2016 year to develop the No. 2 Mine:

  • Update Louisville Gas and Electric and Kentucky Utilities contract for the No. 2 Mine – Prior to making the decision to develop the No. 2 Mine first, Paringa held discussions with LG&E and KU, and said it has received positive and supportive feedback to update the US$220 million contract for the No. 2 Mine. The company anticipates formalising with LG&E and KU the transition to the No.2 Mine over the coming months.
  • Complete Technical Studies at No. 2 – Paringa will now expedite the completion of remaining technical studies for the No. 2 Mine. The results of the technical studies for the No. 2 Mine are expected to be released during the second half of 2016.
  • Begin Permitting Process and Secure Remaining Coal Leases – Paringa will expedite the permitting process to secure those permits required to start construction at the No. 2 Mine. In addition, it said it will undertake an aggressive leasing program to secure remaining coal leases.
  • Debt Financing Discussions to Construct the No. 2 Mine – Paringa will continue advanced discussions with debt financiers in North America, including those who demonstrated significant interest to finance the No.1 Mine, with the view to begin construction of the No. 2 Mine in the June quarter of 2017.

Paringa said it will continue to seek additional coal sales with local utilities who operate scrubbed coal fired power plants on the Ohio River market and who are buyers of WK No. 9 coal. In addition, the company will assess opportunities to sell coal into a secondary target southeastern U.S. market, which is a growing market for Illinois Basin coal.

The Scoping Study confirms that the Buck Creek No.2 Mine has the potential for low capital development with total initial capital cost (Capex) of US$44 million. As a result of the shallow depth of the WK No. 9 coal seam from the surface at the proposed mine site and coal seam access area, the construction period to access coal at Buck Creek No. 2 Mine is anticipated to be approximately 12 months. Construction may begin as soon as the necessary permits are secured, and the current expectations for completing the permitting process to begin mine construction is approximately 12 to 14 months.

The low capex, high margin project is expected to achieve average earnings before interest, taxes, depreciation, and amortization (EBITDA) of US$33 million per annum (steady state) with average annual total operating costs (steady state; inclusive of royalties and severance taxes) of US$32.94 per ton Free On Board Barge (FOB Barge) at the project’s barge load-out facility. This “all-in” operating cost includes trucking costs from the project’s Coal Handling Preparation Plant (CHPP) to the Green River barge load-out facility totalling US$2.14 per ton. The Green River feeds into the Ohio River and is a major artery for coal out of this region moving into that market.

Utilizing the Buck Creek Mine Complex’s Coal Resource Estimate of 224.8 million tons of coal, the project can support production of 2.3 Mtpa Run-of-Mine (ROM) coal yielding approximately 1.8 Mtpa of saleable clean coal at steady state production.

Capital costs for the Buck Creek No.2 Mine have been benchmarked against similar underground and surface mines in the region that mine the WK No. 9 coal seam in similar conditions, utilizing identical mining and processing techniques and equipment. In addition, the capital intensity (inclusive of leased equipment) of the Buck Creek No.1 Mine is similar to other new coal developments in the Illinois Basin by public listed companies that have started construction since 2007.

During the December 2015 quarter, Paringa executed its “cornerstone” coal sales agreement with LG&E and KU for future coal sales from the proposed Buck Creek No. 1 Mine, totaling US$220 million of contracted sales. Paringa has adopted the LG&E and KU long term contract prices for the project’s Blended Product (11,200 Btu/lb) for the Scoping Study from 2018 to 2022 and Hanou Energy Consulting LLC‘s latest Illinois Basin coal price forecast for years 2023 to 2035.

The Buck Creek No.2 Mine has particularly attractive coal quality properties compared to existing mines operating in the Illinois Basin. On a product basis, together with a 4% addition to equilibrium moisture, the coal has a high range heat content of 12,121 Btu/lb, which the company said compares very favorably with the larger producing mines in the Illinois Basin. One important characteristic to be considered in the Illinois Basin is the chlorine content, a particular issue for some mines in Illinois. The project’s chlorine content is a relatively low 0.14% and thus has a significant advantage over many other new developments in the Illinois Basin which typically have values exceeding 0.3%.

Paringa previously announced to the Australian Securities Exchange (ASX), as part of the BFS for the Buck Creek No. 1 mine, an increase of the Coal Resource Estimate (CRE) for the Buck Creek Mining Complex to 224 million tons (~203 million tonnes) in the Measured and Indicated categories.

The mine plan includes a total production of 43.7 million ROM tons and 33.5 million clean (i.e. marketable) tons.  The Buck Creek No. 2 Mine is projected to produce 2.3 million ROM tons per year, and 1.8 million clean tons per year at full production over a 20-year mine life.  Due to the size of the resource, the potential exists to add an additional unit and increase annual production. Future technical studies, plans, and designs are needed to evaluate the potential for production increases.

Production from the proposed Buck Creek No. 2 Mine will come from two continuous miner supersection units. Each supersection unit is equipped with two continuous miners and two roof-bolting machines for enhanced productivity.

The equipment must be sized to fit the coal seam height or additional extraneous material must be taken from the roof or floor to accommodate larger equipment. In general, larger equipment will have higher horsepower and greater productive capacity. The Buck Creek No. 2 Mine plan is based on successful performance at nearby mines and incorporates a cutting height of 4.5 feet.

At full production, staffing for the Buck Creek No. 2 is expected to total 165 employees that are non-union, highly skilled and sourced predominately from nearby population centers.

Clean marketable coal will be loaded into trucks to be hauled to the proposed location of the Buck Creek barge loading dock facility. The company holds necessary permits required to construct the barge load-out facility approximately two miles northwest of the project’s plant site. The barge load-out will consist of a ground-based tower connected to a floating work barge by a 170-foot-long conveyor belt. The tower will stand approximately 45 feet (14 meters) above the river and 90 feet (27 meters) away from the river bank with a 30-foot (9 meter) wide by 120-foot (37 meters) long work barge anchored on piers situated 30 feet (9 meters) from the river bank. The system will have a design capacity of 2,500 tons per hour.

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.