NACCO Industries (NYSE: NC) reported Aug. 2 that its North American Coal unit had an operating profit of $4.8 million, net income of $3.3 million and revenues of $23.1 million in the second quarter of 2016, compared with operating profit of $2.4 million, net income of $4.2 million and revenues of $37.9 million in the second quarter of 2015.
The company’s total coal deliveries came in at 7.3 million tons in the second quarter, against 7.4 million tons in the year-ago quarter.
North American Coal’s Centennial operations, which represented an unusual foray into the bituminous coal mining business in Alabama, had an operating loss of $1.9 million and revenues of $0.3 million in the second quarter of 2016 compared with an operating loss of $6.5 million and revenues of $11.9 million in the second quarter of 2015. The reduction in Centennial’s revenue was primarily the result of significantly reduced tons sold due to the end of mining activities on Dec. 31, 2015. Centennial’s operating loss declined as substantially lower operating costs were required to conduct the remaining operations of selling equipment, maintaining permits and completing mine reclamation. These reduced costs were partially offset by a net loss on the sale of assets in the second quarter of 2016 and the absence of a net gain on the sale of assets in the second quarter of 2015.
Excluding Centennial, North American Coal reported Adjusted operating profit of $6.7 million and Adjusted revenues of $22.8 million for the second quarter of 2016 compared with Adjusted operating profit of $8.9 million and Adjusted revenues of $26.0 million for the second quarter of 2015.
The decrease in North American Coal’s Adjusted revenues was primarily due to reductions in tons sold and the selling price per ton at the Mississippi Lignite Mining Co. in the second quarter of 2016 compared with 2015, as well as a decrease in royalty and other income. Tons sold atMississippi Lignite Mining were lower as a result of an increase in outage days at the customer’s power plant, and the selling price per ton was lower due to the decline in diesel prices during 2015 and 2016 that resulted in a lower index-based coal sales price.
The decrease in Adjusted operating profit during the second quarter of 2016 compared with 2015 was primarily attributable to higher selling, general and administrative expenses resulting from higher employee-related costs and professional fees, a reduction in royalty and other income and lower operating results at the consolidated mining operations. This decrease was partially offset by an increase in operating profit at the unconsolidated mining operations as newer mining operations began or increased production.
Operating results declined at the consolidated mining operations due to lower operating results at Mississippi Lignite Mining, partially offset by improved operating results at the limerock mining operations from an increase in yards delivered. Operating results at the Mississippi Lignite Mining were lower due to the decrease in revenue, partially offset by a reduction in cost of sales. Cost of sales includes both production costs and changes in inventory. The reduction in cost of sales was due to a decrease in total production costs, as well as the capitalization of more production costs into coal inventory in the second quarter of 2016 compared with 2015.
For the six months ended June 30, 2016, North American Coal reported net income of $11.6 millionand revenues of $53.4 million compared with net income of $8.7 million and revenues of $79.3 millionfor the six months ended June 30, 2015. Excluding Centennial, North American Coal reported Adjusted income of $14.7 million and Adjusted revenues of $52.7 million for the six months endedJune 30, 2016 compared with Adjusted income of $16.2 million and Adjusted revenues of $57.9 million for the six months ended June 30, 2015.
North American Coal – Outlook
North American Coal expects an increase in tons sold in the second half of 2016 compared with the second half of 2015. 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 the second half of 2016 compared with the same period in 2015, primarily due to an expected decrease in income at Mississippi Lignite Mining.
Mississippi Lignite Mining expects a significant decrease in operating results due to an increase in cost of sales. Cost of sales includes both production costs and changes in inventory. Mississippi Lignite Mining expects an increase in total production costs and increased costs related to the recognition of a portion of production costs previously capitalized into inventory as more tons are sold than produced as part of a planned reduction in inventory levels during the second half of 2016.
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.
Coyote Creek Mining Co. began delivering coal in the second quarter of 2016 and expects to deliver approximately 2.5 million tons of coal annually when at full production.
Liberty Fuels began delivering coal to its customer, the new Kemper coal gasification plant of Mississippi Power, in July 2016 for facility testing and commissioning. 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 Kemper facility will reach full generation capacity.
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 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 approximately 5.0 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.
Centennial expects to incur moderate but substantially lower losses in the remainder of 2016 than in the same period of 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.
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.