Rhino reports Q2 2016 loss; has prospects for met sales in export market

Coal producer Rhino Resource Partners LP (OTCQB: RHNO) on Aug. 10 reported a net loss of $121.9 million and Adjusted EBITDA of $4.5 million for the second quarter of this year, compared to a net loss of $8.1 million and Adjusted EBITDA of $4.1 million in the second quarter of 2015.

Approximately $118.7 million of asset impairment charges impacted the net loss for the quarter ended June 30, 2016. Total revenues for the quarter were $42.8 million, with coal sales generating $39.1 million of the total, compared to total revenues of $56.8 million and coal revenues of $48.5 million in the second quarter of 2015.

The Partnership continued the suspension of the cash distribution for its common units for the current quarter. No distributions will be paid for common or subordinated units for the quarter ended June 30, 2016.

Joe Funk, President and Chief Executive Officer of Rhino’s general partner, stated: “Our focus on cash generation resulted in positive cash flow from operations and Adjusted EBITDA during the quarter despite the historically difficult coal market. Our strong cash generation and continued support of our sponsor, Royal Energy Resources, Inc. (OTCQB: ROYE) (“Royal”), allowed us to reduce our debt by almost $6 million during the second quarter. We are pleased we were able to work with our creditors to extend our credit agreement to July 2017 with the possibility to extend the maturity to December 2017.

“Our relationship with ION Carbon & Minerals, LLC (“Ion Carbon”), an wholly owned subsidiary of AMCI Holdings, Inc. (collectively referred to as “AMCI”), has provided Rhino the opportunity to commence test shipments to major European steel companies in the back half of 2016. Rhino believes these initial test shipments could lead to potential contracted business in 2017. We look forward to the opportunity this relationship with AMCI will bring to Rhino and our unitholders and the capability for AMCI to place Rhino coals into markets where we have not historically participated. Our relationship with AMCI is an example of the insight and market strategies that Royal has provided to help us grow our cash flow in the future.”

Rhino has resumed mining operations at its previously idled underground mine at the Rob Fork complex in Central Appalachia, as it was able to secure an export met coal order for 60,000 tons that will be shipped ratable over the balance of 2016. In addition, it contracted a second met coal export order for 70,000 tons that will be shipped ratable from August 2016 through January of 2017 from the Tug Fork operations. These orders will greatly reduce the holding costs incurred on the idled operations in Central Appalachia over the balance of 2016.

Continued productivity improvements at Pennyrile in western Kentucky have lowered costs and improved the coal recovery rates at this operation compared to the prior year. Pennyrile has become a positive cash flow producer for Rhino during the first six months of 2016 as the company increased production and sales to meet contracted positions for 2016. It is fully contracted for 2016 at Pennyrile with 1.2 million tons forecast to be produced and sold this year. The company said it is confident Pennyrile will be a positive cash flow provider for the Partnership for the remainder of 2016 at these production and sales levels. Pennyrile gives it additional diversification and it expects the operation to be a significant generator of stable cash flow as it ramps up to its full potential run rate of 2 million tons per year.

In Northern Appalachia, customers took delivery of additional shipments from the Hopedale operation in Ohio compared to the previous quarter as these customers fulfil their contracted tons that were carried over from the prior year. The increased shipments helped improve Northern Appalachia results during the quarter. Rhino continues to lower the cost structure at Hopedale, but believes the ongoing production of low-priced natural gas in this region will continue to reduce the demand for Northern Appalachia steam coals in the near term. It continues to seek sales contracts for the remainder of Hopedale’s 2016 open sales position. The Sands Hill operation in Northern Appalachia (also Ohio) continued to produce positive results in the quarter. At Rhino Western in Utah, the Castle Valley operation performed well during the quarter providing positive cash flow, which Rhino expects to continue for the remainder of the year.

Coal Operations Update

Pennyrile – Pennyrile’s sales are fully contracted through 2016 and 2017 at current production levels. Productivity improvements at Pennyrile have lowered costs, improved coal recovery rates and turned this operation into a positive cash flow producer during the first six months of 2016. Rhino’s Pennyrile operations produced approximately 342,000 tons during the second quarter while coal sales were approximately 334,000 tons.

Northern Appalachia

For the second quarter, year-over-year coal revenues per ton increased slightly by $0.44 to $57.21 due to a higher mix of higher priced tons shipped from the Hopedale operation during the second quarter of 2016. Sales volume was 161,000 tons, versus 253,000 tons in the prior year and 122,000 tons in the prior quarter. Sales were lower year-to-year due to decreased sales volumes from the Hopedale operation due to weak steam coal market conditions in Northern Appalachia caused by low-priced natural gas.

Rhino Western

Coal revenues per ton in the quarter increased to $38.70 versus $37.59 in the prior year and $38.08 in the prior quarter. Coal revenues per ton increased due to higher contracted prices for coal from Rhino’s Castle Valley mine. Sales volume was 215,000 tons versus 268,000 tons in the prior year and 252,000 tons in the prior quarter. Cost of operations per ton was $29.54 versus $34.16 in the prior year and $32.48 in the prior quarter. Castle Valley had lower maintenance and other expenses in the current quarter, which led to the quarter-to-quarter decrease in cost of operations per ton.

Central Appalachia

Coal revenues per ton in the quarter was $63.03 versus $58.65 in the prior year and $56.00 in the prior quarter. Metallurgical coal revenue per ton in the quarter was $83.72 versus $81.83 in the prior year and $81.61 in the prior quarter. Steam coal revenue in the quarter was $51.99 per ton versus $52.57 in the prior year and $51.02 in the prior quarter. Sales volume was 88,000 tons in the quarter versus 233,000 in the prior year and 100,000 tons in the prior quarter. Cost of operations per ton in the quarter was $33.95 versus $54.95 in the prior year and $29.99 in the prior quarter.

Asset Impairment

Rhino’s Elk Horn coal leasing company is located in eastern Kentucky and provides it with coal royalty revenues from coal properties owned by Elk Horn and leased to third party operators. The ongoing weakness in the central Appalachia steam coal markets has adversely affected the price and demand for steam coal produced by operators that mine coal on these properties. Thus, Elk Horn’s royalty revenues have also declined as the operators produce less coal and prices for steam coal are depressed. During the second quarter of 2016, the Partnership received an inquiry from a third party interested in purchasing Elk Horn. Based upon the price offered by the third party and the continued deterioration of the central Appalachia steam coal markets that has adversely affected Elk Horn’s financial results, the Partnership decided to evaluate the Elk Horn assets for potential impairment as of June 30. The Partnership recorded total asset impairment charges of approximately $118.7 million related to the Elk Horn long-lived asset group during the quarter ended June 30, 2016.

Coal sales slump in second quarter, first half of this year

Coal sales last quarter were 0.8 million tons, which was a decrease of 18.5% compared to the second quarter of 2015, primarily due to lower sales from Central Appalachia due to weak demand for met and steam coal from this region. Total revenues and coal revenues of $42.8 million and $39.1 million, respectively, compared to $56.8 million and $48.5 million, respectively, for the same period of 2015.

Coal revenues per ton of $49.01 compared to $49.51 for the second quarter of 2015, a decrease of 1.0%. Cost of operations from continuing operations of $33.9 million compared to $47.3 million for the same period of 2015. Cost of operations per ton from continuing operations of $42.43 compared to $48.33 for the second quarter of 2015, a decrease of 12.2%.

Total coal revenues decreased approximately 19.3% primarily due to fewer steam coal tons sold in Central Appalachia, partially offset by increased sales from the Pennyrile mine in the Illinois Basin. Coal revenues per ton decreased primarily because of lower prices for steam coal sold in Central Appalachia in the second quarter of 2016 compared to the same period of 2015, as well as the larger mix of lower priced tons from the Pennyrile mine. Total cost of operations decreased primarily due to lower costs in Central Appalachia and Northern Appalachia as production was reduced in these regions in response to weak market demand, partially offset by increased costs from higher production at the Pennyrile mine in the Illinois Basin. The decrease in the cost of operations on a per ton basis was primarily due to a decrease from Central Appalachia as coal was produced from lower cost operations during the three months ended June 30, 2016 compared to the same period in 2015.

In the first half of this year, coal sales were 1.6 million tons, which was a decrease of 14.2% compared to the first six months of 2015, primarily due to lower sales from Central Appalachia due to weak demand for met and steam coal from this region, partially offset by increased sales from the Pennyrile operation. Total revenues and coal revenues of $83.2 million and $75.8 million, respectively, compared to $112.9 million and $94.0 million, respectively, for the same period of 2015. Coal revenues per ton of $47.72 compared to $50.77 for the first six months of 2015, a decrease of 6.0%.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.