Corsa Coal Corp. (TSXV: CSO) said in an Aug. 10 quarterly earnings report that spot prices for metallurgical coal have risen by over 35% on a year-to-date basis.
Corsa, which has operations in Tennessee, Pennsylvania and Maryland, said it has the ability to produce and sell significantly more tons of metallurgical coal over the short term should market conditions continue to improve.
During the three months ended June 30, 2016, Corsa continued to successfully execute on its fixed cost reduction initiatives. Corsa reached an agreement with an insurer to release certain portions of the reclamation bond cash collateral to fund certain reclamation projects, which totaled $757,000 in the second quarter. Corsa also successfully renegotiated a transportation contract liquidated damages provision to increase liquidity over the next 18 months and defer the final payment for two years until November 2020. Successful progress has also been made to reduce idle mine expenses, lower capital expenditures, reduce corporate and administrative expenses, lower minimum royalty payments and reduce water treatment costs.
Northern Appalachia (NAPP) variable cost reduction efforts have been successful with the cash production cost per ton sold for metallurgical coal decreasing 11.0% (from $66.66 to $59.34) in the three months ended June 30, 2016, compared to the prior year comparable quarter.
Corsa is updating guidance for the full year 2016:
- Updated total sales of 1,350,000 to 1,650,000 tons.
- NAPP Division sales of 850,000 to 1,050,000 tons, including metallurgical coal sales guidance of 600,000 to 700,000 tons and thermal coal sales guidance of 250,000 to 350,000 tons. This guidance remains unchanged.
- CAPP Division sales of 500,000 to 600,000 tons of thermal and industrial coal compared to previous guidance of 675,000 to 775,000 tons.
- NAPP Division cash production cost per ton sold for metallurgical coal of $57 to $62. This guidance remains unchanged.
- NAPP Division cash production cost per ton sold for thermal coal of $38 to $43 compared to previous guidance of $32 to $37/ton as a result of a shift in the timing of a customer contract commencement.
- CAPP Division cash production cost per ton sold for thermal coal of $54 to $59 compared to previous guidance of $56 to $61/ton as a result of a shift of production to lower cost mines.
The company reported: “Spot prices for metallurgical coal have risen by approximately 35% on a year-to-date basis as the price of steel has risen substantially, the destocking phase for inventories has ended, blast furnace utilization rates have risen, and imports of metallurgical coal in Asia have risen. In the past three months, weather in China and Australia has impacted production and Chinese initiatives to reduce production of metallurgical coal have been successful. Many metallurgical coal producers have very little supply availability over the coming months, which we believe will lead to further increases in prices. Over the past two years, over 55 million tons of metallurgical coal production cuts have been announced, representing approximately 18% of the annual seaborne metallurgical coal trade.
“On the demand side, we are 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 over 60% 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. We expect these supply and demand factors to continue to provide support for metallurgical coal prices in future quarters.
“The third quarter 2016 coking coal benchmark pricing increased to $92.50 per metric ton, representing an increase of approximately 10% from the second quarter of 2016 and is approximately unchanged on a year over year basis. As of July 2016, spot prices have increased past the third quarterly settlement, reaching over $100 per metric ton. If this trend continues, Corsa expects to see a further strengthening in the quarterly benchmark settlement when it is announced in September.
“Despite the increases seen in 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.
“Domestically, severe financial distress has caused high profile 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 80% 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 over the short term should market conditions continue to 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.”
The company added: “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. 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 has positioned 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.
“In response to market conditions and to improve its contract portfolio, the CAPP Division coal sales for 2016 are now expected to be in the range of 500,000 to 600,000 tons. Approximately 85% of these sales are currently committed at the midpoint of the range. Actual sales will depend on customer demand and market conditions.”
Corsa is one of the leading suppliers of premium quality metallurgical coal, an essential ingredient in the production of steel. Corsa also offers high heat content, low delivered cost coal to major utilities and industrial users in the Southeast region of the U.S.