Corsa Coal Corp. (TSXV: CSO), which produces coal in Appalachia, said in a May 18 earnings report for the first quarter that spot prices for metallurgical coal rose 10% over the course of the first quarter, and are up approximately 25% in 2016.
With an open sales position and the ability to increase production as the year progresses, Corsa said it expects to immediately benefit from these increases in prices for metallurgical coal.
Its Northern Appalachia (NAPP) operations in Maryland and central Pennsylvania secured a new thermal coal sales order that brings Corsa’s committed and priced production up to 70% for fiscal 2016.
The Central Appalachia (CAPP) division has substantially completed the mine development for the Cooper Ridge Deep Mine. This mine is expected to strategically reposition CAPP into the specialty coal and industrial coal markets which typically generate premium pricing.
NAPP currently operates: the Casselman Mine, an underground mine in Maryland utilizing the continuous mining method; the Quecreek Mine, a deep mine utilizing the continuous mining method; the Ash Mine, a surface mine utilizing contour and highwall mining methods; and the Rhoads Mine, a surface mine utilizing contour mining methods. All mines but Casselman are located in Somerset County, Pennsylvania. NAPP currently operates one preparation plant and has two prep plants that have been temporarily idled in response to market conditions.
CAPP currently operates: the Double Mountain Deep Mine, an underground mine utilizing the continuous mining method; the Straight Creek Mine, a surface mine utilizing contour and auger mining methods; and the Cooper Ridge Deep Mine, which is currently developing the main line entries. All mines are located in Claiborne County, Tennessee. CAPP currently operates one preparation plant.
NAPP cost reduction efforts have been successful with the cash production cost per ton sold for metallurgical coal decreasing 18.2% (from $76.09 to $62.23) in the first quarter compared to the prior year comparable quarter.
CAPP cost reduction efforts have also been successful with cash production cost per ton sold for thermal and industrial coal decreasing 20.8% (from $61.96 to $49.05) in the first quarter compared to the year-ago quarter.
In March 2016, Corsa raised $8 million from its largest three investors as well as its senior lender by way of a non-brokered private placement of common shares to fund working capital and for general corporate purposes, the details of which were previously announced. In March 2016, Corsa amended its secured term loan to provide covenant relief and the ability to pay interest by adding such interest to the principal amount of the facility through the first quarter 2017, the details of which were previously announced.
George Dethlefsen, Chief Executive Officer of Corsa, said: “We have seen a significant improvement in pricing for steel and raw materials used in the steel value chain in early 2016, including metallurgical coal. We believe that January 2016 marked a 12-year bottom for metallurgical coal prices and that renewed infrastructure spending and the effects of metallurgical coal production cuts will cause prices to recover to a point on the supply cost curve where producers are cash margin positive again.
“Some areas of the world have experienced shortages in 2016 for high quality metallurgical coal and we believe that the domestic supply chain is extremely fragile and prone to supply disruptions. We will continue to execute on our plans to reduce our controllable costs and lower our fixed cost profile in 2016.
“At our NAPP Division, due to the weak market environment leading into Q1 2016, we showed discipline by reducing our export sales shipments, which negatively impacted fixed cost absorption and impacted profitability. We believe that Q1 2016 pricing will represent the lowest period of realized prices for the company in 2016.
“At our CAPP Division, we reduced mining costs per ton by over 20% year-on-year and continued to execute on the development of the Cooper Ridge mine in order to diversify into the industrial coal markets.
“We are currently evaluating multiple accretive growth projects and believe that now is the time to pursue growth. Corsa’s advantaged position on the mining cost curve, access to coal processing infrastructure, and logistical advantages will enable us to expand volumes as the price environment recovers.”
Coal Pricing Trends and Outlook
Spot prices for met coal have risen by approximately 25% on a year-to-date basis as the steel prices have risen substantially, the destocking phase for inventories has ended, blast furnace utilization rates have risen, and imports of metallurgical coal in Asia have risen. U.S. metallurgical coal exporters have benefited from a weaker U.S. dollar versus the Australian and Canadian dollars.
Over the past three years, coal producers have made limited capital expenditures to develop new mines and maintain existing mines. Over the past two years, approximately 48 million tons of met coal production cuts, representing approximately 16% of the annual seaborne metallurgical coal trade, have been announced.
On the demand side, Corsa said it is seeing increases in steel demand globally, which is leading to very low inventory levels and long wait times for steel orders. This has increased steel prices by approximately 40% in the United States on a year-to-date basis.
Corsa believes that increased infrastructure spending in Asia and the United States will continue to drive steel demand and reverse the decline in crude steel production that was experienced in 2015. It expects these supply and demand factors to continue to provide support for met coal prices in future quarters.
The second quarter 2016 coking coal benchmark pricing increased to $84.00 per metric ton, representing an increase of approximately 4% from the first quarter of 2016 and a year-over-year decrease of approximately 23%. The second quarter price is the third time the benchmark settlement was below $90 per metric ton since 2004, on a nominal basis, and represents a point on the cost curve where analysts estimate a substantial portion of the global seaborne production is unprofitable.
As of April 2016, spot prices have increased past the second quarterly settlement. If this trend continues, Corsa expects to see a further strengthening in the quarterly benchmark settlement. Despite the increases seen in early 2016, current metallurgical coal prices remain at levels where a substantial amount of global production is uneconomic. Prior to the upturn in pricing in early 2016, the five-year downturn in metallurgical coal prices represented the longest and deepest downturn in pricing in over 60 years.
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 2016 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. As metallurgical coal production is rationalized in places like China, Western Canada, Australia and the United States, Corsa expects the seaborne met coal fundamentals to normalize.
Domestically, severe financial distress has caused high-profile coal company bankruptcies in 2015 and 2016 and may lead to additional supply cuts in the near future. This situation has also created an environment where producers are deferring capital expenditures, not reinvesting in reserves or permitting efforts, and are highly vulnerable to supply disruptions. For these reasons, Corsa believes that the domestic market is poised to rebound faster than the international seaborne market.
Corsa’s geographic proximity to over 50% of domestic coke production capacity and short rail distance and multiple options to access the Baltimore export terminals solidify Corsa’s ability to take advantage of any recoveries in coal pricing.
Corsa’s metallurgical coal sales in 2016 from its NAPP Division are expected to be in the range of 600,000 to 700,000 tons. Approximately 70% of these sales are currently 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 has the ability to produce and sell significantly more tons of metallurgical coal in 2016, should market conditions improve.
Corsa’s thermal coal sales in 2016 from its NAPP Division are expected to be in the range of 250,000 to 350,000 tons. Approximately 90% of these sales are currently committed at the midpoint of the range. Actual sales will depend on customer demand and market conditions.
Current Southeastern U.S. utility market thermal coal spot pricing declined 25% over the course of 2015. As a result, much of the Central Appalachia coal production is uneconomic. Corsa expects utility coal demand for Central Appalachia production to decrease in 2016. Conversely, industrial thermal demand grew 4% year over year for 2015 and Corsa expects industrial demand to grow in 2016.
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, Corsa said. 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 2016. The 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 Division coal sales for 2016 are expected to be in the range of 675,000 to 775,000 tons. Approximately 55% of these sales are currently committed at the midpoint of the range. Actual sales will depend on customer demand and market conditions.