Coal producer Armstrong Energy hires advisors for strategic review

Western Kentucky coal producer Armstrong Energy on May 12 reported first-quarter 2016 coal sales of 1.4 million tons, down from 2 million tons in the year-ago quarter.

Revenue from coal sales of $60.4 million for the first quarter is 37.3% lower than the comparable period of the prior year primarily attributable to the decrease in sales volume. The volume decline is primarily driven by decreasing customer demand from the weak market conditions, low natural gas prices, and mild 2015-2016 winter weather leading to excessively high coal stockpiles at utilities at the end of the first quarter of 2016.

In addition, Armstrong Energy experienced an unfavorable price variance of $9.3 million for the latest quarter, driven primarily by the renewal of sales contracts at less favorable prices, as well as unfavorable transportation adjustments included as a component of the sales price in certain long-term supply agreements, as a result of declining diesel prices. 

Costs of coal sales of $52.7 million for Q1 2016 is 33.2% lower than the comparable period of the prior year due to both the decrease in volume and improved operating efficiency, primarily related to favorable repair and maintenance costs experienced at the underground mines, lower fuel costs and better mining conditions experienced at the surface mines. On a per ton basis, cost of coal sales for the three months ended March 31, 2016 totaled $36.99, which represents a decline of $3.09 per ton as compared to the same period of 2015.

Adjusted EBITDA for the first quarter totaled $4.4 million, which is a 66.2% decrease over Adjusted EBITDA for the same period of 2015 of $13.1 million.

The principal indicators of liquidity are cash on hand and availability under the revolving credit facility. As of March 31, 2016, the available liquidity was $77.4 million, comprised of cash on hand of $62.1 million and $15.3 million available under the revolving credit facility.

Said the company: “As a result of the weak market conditions and depressed coal prices, we have undertaken steps to adequately preserve our liquidity and manage operating costs, including efficiently controlling capital expenditures. During 2015, we undertook steps to enhance our financial flexibility and reduce cash outflows in the near term, including a streamlining of our cost structure and anticipated reductions in production volumes and capital expenditures.

“Based on current assumptions, we believe that existing cash balances, cash generated from operations and borrowing capacity available under our asset-based revolving credit facility will be sufficient to meet working capital requirements, anticipated capital expenditures and debt service requirements in 2016. If market conditions do not improve, we expect to continue to experience operating losses, which would adversely affect our liquidity in the future. As a result, we could be forced to take further action, including additional restructurings and reductions in capital expenditures.”

Short-term Outlook

Said Armstrong: “There continues to be weakness in the U.S. thermal coal markets driven by low natural gas prices, increased government regulations, and continuing mild weather. In addition, utilities are experiencing historically high coal inventory stockpiles as their burn is down and have, therefore, been forced to defer contracted tonnages.

“Due to the current economic environment, Armstrong continues to take steps to rationalize its production to meet the current demand levels. On April 22, 2016, Worker Adjustment and Retraining Notification (WARN) Act notices were delivered to employees of one of our mining operations and related preparation plant in anticipation of closing the Parkway underground mine. Coal production at the mine is expected to cease by the end of the second quarter of 2016.

“As of March 31, 2016, Armstrong had 5.6 million tons committed and priced for 2016, which includes amounts deferred from 2015. 

“For 2016, capital spending is currently expected to be in the range of $8 million to $12 million, which will be primarily related to maintenance capital expenditures. With respect to any significant development projects, we plan to defer them to time periods beyond 2016 and will continue to evaluate the timing associated with those projects based on changes in overall coal supply and demand.”

Review of Strategic Alternatives

Armstrong’s Board of Directors has authorized an exploration of strategic alternatives aimed at strengthening its balance sheet and improving its long-term capital structure. Armstrong has retained MAEVA Group LLC as its financial adviser and Kirkland & Ellis LLP as its legal adviser to assist the board and management with the strategic review. Armstrong said it does not expect to comment further or update the market with any additional information on the process unless and until its board deems disclosure appropriate or necessary. There is no assurance that this exploration will result in any strategic alternatives being announced or executed.

Armstrong is a producer of low-chlorine, high-sulfur thermal coal from the Illinois Basin, with both surface and underground mines. Armstrong controls over 550 million tons of proven and probable coal reserves in Western Kentucky and currently operates six mines. Armstrong also owns and operates three coal processing plants and river dock coal handling and rail loadout facilities, which support its mining operations.

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.