NACCO Industries (NYSE: NC) said in a May 4 earning statement that the company ceased mining operations at North American Coal‘s Centennial Natural Resources mine in Alabama at the end of 2015.
However, certain wind-down and reclamation activities are on-going. Because Centennial is no longer an active mine, management believes adjusting the 2016 and 2015 reported U.S. GAAP financial results to exclude Centennial’s results will assist investors’ understanding of the performance of the active operations of both NACCO Industries and North American Coal.
North American Coal reported net income of $8.3 million and revenues of $30.3 million in the first quarter of 2016, compared with net income of $4.5 million and revenues of $41.3 million in the first quarter of 2015.
North American Coal delivered 7.8 million tons of coal in the first quarter, about even with the year-ago quarter. It also delivered 6.8 million tons of limerock in the first quarter, up from 4.5 million tons in the year-ago quarter.
Excluding Centennial, North American Coal reported Adjusted income of $10.2 million and Adjusted revenues of $30.0 million for the first quarter of 2016 compared with Adjusted income of $7.9 million and Adjusted revenues of $31.9 million for the first quarter of 2015.
North American Coal’s Adjusted revenues decreased in the first quarter of 2016 compared with the first quarter of 2015 primarily due to a reduction in tons sold at Mississippi Lignite Mining as a result of an increase in outage days at the customer’s power plant in the first quarter of 2016. The decline in revenues was partially offset by an increase in revenues related to an increase in limerock yards delivered at the limerock mining operations and higher royalty and other income.
The captive customer for Mississippi Lignite Mining is the 440-MW Red Hills Power Plant.
The increase in Adjusted income was primarily attributable to improved operating results at the consolidated mining operations. Operating results improved at the Mississippi Lignite Mining during the first quarter of 2016 compared with 2015 as a result of lower operating costs, including diesel fuel and major repairs expenses. Improved results at the limerock mining operations from higher deliveries also contributed to the increase in Adjusted income.
North American Coal – Outlook
North American Coal expects an increase in tons sold in 2016 compared with 2015 at its coal mining operations. Despite this overall increase in tons, and excluding Centennial’s results in both 2016 and 2015, North American Coal expects a decrease in income before income taxes in 2016 compared with 2015, primarily because of an expected decrease in income at Mississippi Lignite Mining.
Mississippi Lignite Mining sells lignite at contractually agreed upon coal prices which are subject to changes in the level of established indices over time. Because the price of diesel fuel is heavily-weighted among these indices, the recent substantial decline in diesel prices is expected to reduce earnings at Mississippi Lignite Mining in 2016. This decline is anticipated to be only partially offset by the beneficial effect of lower diesel prices on production costs.
Production levels are expected to increase in 2016 over 2015 levels at Camino Real, which anticipates a full year of coal deliveries in 2016 after commencing deliveries in October 2015. Camino Real expects to mine approximately 2.5 million to 2.7 million tons of coal annually when at full production. The company operates the new Eagle Pass surface mine in Texas, which is located next to the Mexico border and is expected to serve customers in Mexico.
Liberty Fuels expects to begin delivering coal for power generation in the third quarter of 2016. Production levels at Liberty Fuels are expected to increase gradually and build to full production of approximately 4.5 million tons of coal annually beginning in 2022, although the timing of future deliveries will be affected by when the customer Kemper County coal gasification power plant of Mississippi Power is commissioned.
Coyote Creek Mining in North Dakota expects to deliver approximately 2.5 million tons of coal annually beginning in the second quarter of 2016. Its customer is the Coyote Station, which is co-owned by parties including Otter Tail Power.
Bisti Fuels commenced its transition into the contract miner role at the Navajo Mine on the Navajo Nation in New Mexico on Jan. 1, 2016. The mine, formerly operated by BHP, supplies the Four Corners power plant. The production period is scheduled to begin when the customer completes a pending commercial transaction with the existing contract miner, which is expected to occur by Dec. 31, 2016. Production levels are expected to be 5.0 million to 6.0 million tons of coal per year. While Bisti Fuels is recognizing income during the transition period, it will not receive cash payments until the production period begins.
Over the longer-term, North American Coal’s goal continues to be to increase earnings of its unconsolidated mines by approximately 50% 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.
Income related to a full year of deliveries at the Camino Real mine, the commencement of deliveries at the Coyote Creek and Liberty Fuels mines and income at Bisti Fuels will contribute to this goal in 2016 and beyond. However, generally low U.S. inflation rates, as reflected in typical market indices, such as the Consumer Price Index and the Producer Price Index, will determine the extent to which contractual compensation at the unconsolidated mines will change year by year. Achievement of the goal to increase earnings of the unconsolidated mines by 50% is currently expected to occur in 2017 or 2018, but timing will depend on future inflation rates and customer demand.
Centennial Natural Resources ceased mining operations as of Dec. 31, 2015 but wind-down and reclamation activities are ongoing. In 2016, Centennial expects to incur a moderate but substantially lower loss than in 2015, excluding the effect of any potential future asset sales, as it manages mine reclamation obligations and disposes of certain assets. Centennial will continue to evaluate strategies to maximize cash flow, including through the sale of mineral reserves, equipment and parts inventory. The company is 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.
Total assets associated with Centennial, excluding intercompany balances and deferred taxes, are $31.5 million at March 31, 2016, compared with $45.5 million at December 31, 2015. Cash expenditures related to mine reclamation will continue until reclamation is complete or ownership of the mines is transferred.
North American Coal expects to continue its efforts to develop new mining projects and is pursuing opportunities for new or expanded coal mining projects, although future opportunities are likely to be very limited. In addition, North American Coal continues to pursue additional non-coal mining opportunities, principally in aggregates.