Western Kentucky coal producer Armstrong Energy reported Aug. 11 that its second quarter 2016 revenue totaled $60.3 million on 1.4 million tons sold, with year-to-date revenue of $120.8 million on 2.8 million tons sold.
Revenue from coal sales of $60.3 million and $120.8 million for the three and six months ended June 30, respectively, are 35.2% and 36.3% lower than the comparable periods of the prior year primarily attributable to an unfavorable volume variance. The volume variance experienced for the three and six months ended June 30, of $28.5 million and $55.2 million, respectively, is due to a decline in customer demand resulting in lower contracted amounts in the current year.
In addition, the company experienced an unfavorable price variance of $4.3 million and $13.5 million for the three and six months ended June 30, 2016, respectively, driven primarily by the renewal of sales contracts at less favorable prices, as well as unfavorable transportation adjustments included as a component of the price in certain of our long-term coal supply agreements as a result of declining diesel prices.
Costs of coal sales of $50.6 million and $103.3 million for the three and six months ended June 30, respectively, are 27.8% and 30.7% lower than the comparable periods of the prior year due to both the decrease in volume and improved operating efficiency. On a per ton basis, cost of coal sales for the three and six months ended June 30, totaled $35.81 and $36.40, respectively, which represents an increase of $1.40 and a decrease of $0.80 per ton, as compared to the same periods in 2015.
The decrease in the cost of coal sales per ton for the six months ended June 30 is due to the closure of the Lewis Creek underground mine in the first quarter of 2015, as this was a high-cost operation due to the poor geological conditions of the mine, plus lower repair and maintenance costs at the underground mines, lower diesel fuel costs, and lower blasting costs at the surface operations due to a higher amount of unconsolidated overburden.
Asset impairment charges totaled $3.4 million for the three and six month periods ended June 30, as compared to zero for the same periods of 2015. The current year non-cash charge related to certain advance royalties that could no longer be recouped.
Net loss for the three and six month periods ended June 30, totaled $15.0 million and $28.4 million, respectively, as compared to net income of $0.9 million and a net loss of $14.4 million for the three and six month periods ended June 30, 2015, respectively. The change in net loss is due to a decline in gross margin, as well as the impairment charge recognized during the second quarter of 2016, partially offset by lower depreciation, depletion, and amortization expense and general and administrative expenses.
The principal indicators of Armstrong Energy’s liquidity are its cash on hand and availability under its revolving credit facility. As of June 30, the available liquidity was $67.2 million, comprised of cash on hand of $52.9 million and $14.3 million available under a revolving credit facility. Based on current assumptions, the company said it believes that existing cash balances, cash generated from operations and borrowing capacity available under its asset-based revolving credit facility will be sufficient to meet working capital requirements, anticipated capital expenditures and debt service requirements in 2016.
The company added: “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 began initiatives to enhance our financial flexibility and reduce cash outflows in the near term, including a streamlining of our cost structure and reductions in production volumes and capital expenditures.
“During the second quarter of 2016, Armstrong’s board of directors 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 of directors and management with the strategic review process. Armstrong does not expect to comment further or update the market with any additional information on the process unless and until its board of directors deems disclosure appropriate or necessary. There is no assurance that this exploration will result in any strategic alternatives being announced or executed.”
As a result of continued weakness in the U.S. thermal coal markets, Armstrong has continued to evaluate its operations and rationalize production. On April 22, Worker Adjustment and Retraining Notification (WARN) Act notices were delivered to employees of one of its mining operations and related preparation plant in anticipation of closing the Parkway underground mine during the second quarter. The decision has been made to continue mining through the fourth quarter of 2016, at which time the mine will be closed as all economically recoverable coal will be depleted.
As of June 30, Armstrong had 5.6 million tons committed and priced for 2016, which includes amounts deferred from 2015.
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.