Coal producer Rhino Resource reports Q3 2016 loss

Rhino Resource Partners LP (OTCQB: RHNO) reported on Nov. 4 that it had a net loss of $3.8 million and Adjusted EBITDA of $5.6 million in the third quarter of this year, compared to a net loss of $9.3 million and Adjusted EBITDA of $2.8 million in the third quarter of 2015.

Total revenues for the quarter were $43.4 million, with coal sales generating $41.0 million of the total, compared to total revenues of $51.9 million and coal revenues of $45.5 million in the third quarter of 2015. 

Rhino 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 Sept. 30, 2016.

Joe Funk, Chief Executive Officer of Rhino’s general partner, stated: “The sale of our Elk Horn coal leasing business, our strong cash generation and continued support of our sponsor, Royal Energy Resources, Inc. (OTCQB: ROYE) (‘Royal’), allowed us to reduce our debt by over $10 million during the third quarter and almost $14 million year-to-date. Our focus on cash generation resulted in positive cash flow from operations and Adjusted EBITDA during the quarter and year-to-date. We remain on track to meet the requirements to extend the maturity of our credit agreement to December 2017. We continue to work toward the closing of the previously announced equity exchange agreement with Yorktown Partners LLC.

“The recent rally in coal prices, particularly met coal prices, has provided us the opportunity to execute favorable sales contracts for 2017 that provide us with substantial upside opportunity if we can continue to control our costs. We have fully sold out our Central Appalachia and Pennyrile operations for 2017 and we have base-load sales at our Castle Valley operation in the Western Bituminous region and our Hopedale operation in Northern Appalachia for next year.

“All of our Central Appalachia mining complexes were in operation during the third quarter as the upturn in the global met coal market allowed us to secure coal sales for the remainder of 2016 and we have fully sold out our current steam and met coal production capacity at our Central Appalachia operations for 2017. We may add additional production capacity for 2017 in Central Appalachia if we can obtain coal sales at prices that justify the capital expansion dollars required to increase our production capabilities.

“Continued productivity improvements at Pennyrile have lowered costs and improved the coal recovery rates at this operation compared to the prior year. Pennyrile has been a positive cash flow producer for Rhino during 2016 as we have increased production and sales to meet our contracted positions. Pennyrile is fully contracted for 2017 at current production levels with 1.3 million tons forecast to be produced and sold next year. We are confident Pennyrile will be a positive cash flow provider for the Partnership during 2017 at these production and sales levels. Pennyrile gives us additional diversification and we expect it to be a significant generator of stable cash flow as it ramps up to its full potential run rate of two million tons per year.

“In Northern Appalachia, our Hopedale operation has continued to fulfill its contracted sales orders as customers have accepted their shipments. We recently agreed upon a new sales contract for Hopedale for approximately 500,000 tons from November 2016through December 2017, which provides Hopedale with a base level of sales through next year. We continue to seek additional sales contracts for Hopedale to bring it to full production capacity for 2017. Our Sands Hill operation in Northern Appalachia continued to produce positive results in the quarter as we continue to control costs as we prepare this operation to cease coal production at the end of 2016.

“At Rhino Western, we have fully contracted sales for the first half of 2017 at our Castle Valley operation as well as a base level of sales for the last six months of 2017. We continue to explore additional sales for our remaining open positions at Castle Valley and we expect this operation to be a positive cash flow contributor during 2017 at the current sales level booked for next year.

“Overall, we are encouraged by the recent price rally in the coal markets and we believe upside exists for Rhino next year as we continue to focus on cost and cash generation to bring added value to our unitholders.”

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 nine months of 2016. The Pennyrile operations produced approximately 284,000 tons during the third quarter while coal sales were approximately 305,000 tons.
  • Northern Appalachia – For the third quarter, year-over-year coal revenues per ton decreased slightly by $0.38 to $58.75 due to a higher mix of lower priced tons shipped from the Sands Hill operation during the third quarter of 2016. Sales volume was 149,000 tons, versus 264,000 tons in the prior year and 161,000 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 $39.00 versus $37.13 in the prior year and $38.70 in the prior quarter. Coal revenues per ton increased due to higher contracted prices for coal from Rhino’s Castle Valley mine in Utah. Sales volume was 185,000 tons versus 234,000 tons in the prior year and 215,000 tons in the prior quarter. Cost of operations per ton was $28.82 versus $30.91 in the prior year and $29.54 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 $57.91 versus $49.59 in the prior year and $63.03 in the prior quarter. Metallurgical coal revenue per ton in the quarter was $63.95 versus $81.85 in the prior year and $83.72 in the prior quarter. Steam coal revenue in the quarter was $52.07 per ton versus $44.39 in the prior year and $51.99 in the prior quarter. Sales volume was 180,000 tons in the quarter versus 232,000 in the prior year and 88,000 tons in the prior quarter. Cost of operations per ton in the quarter was $38.51 versus $63.19 in the prior year and $33.95 in the prior quarter.

Discontinued Operations

In August 2016, Rhino announced it entered into an agreement to sell its Elk Horn coal leasing company in eastern Kentucky to a third party for total cash consideration of $12.0 million. The Partnership received $10.5 million in cash consideration upon the closing of the Elk Horn transaction and the remaining $1.5 million will be paid in equal monthly installments of $150,000 beginning in September 2016 through June 2017. Elk Horn is a coal leasing company that has provided Rhino with coal royalty revenues from coal properties owned by Elk Horn and leased to third party operators.

As of Dec. 31, 2015, Elk Horn controlled approximately 100 million tons of proven and probable steam coal reserves. During the second quarter of 2016, Rhino evaluated the Elk Horn assets for potential impairment based upon the initial purchase price offered by the third party and the continued deterioration of the central Appalachia steam coal markets that had adversely affected Elk Horn’s financial results. The impairment analysis determined that a potential impairment existed since the carrying amount of the Elk Horn long-lived asset group exceeded the cash flows that would be generated from the purchase price offered from the third party. Based on a market approach used to estimate the fair value of the Elk Horn long-lived asset group, Rhino recorded total asset impairment charges of approximately $118.7 million related to Coal properties as of June 30, 2016. The disposal of the Elk Horn assets and liabilities in August 2016 resulted in an additional loss of $0.5 million.

Coal sales last quarter were 0.8 million tons, which was a decrease of 12.9% compared to the third 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 $43.4 million and $41.0 million, respectively, compared to $51.9 million and $45.5 million, respectively, for the same period of 2015. Coal revenues per ton of $50.09 compared to $48.38 for the third quarter of 2015, an increase of 3.5%.

Cost of operations from continuing operations of $35.2 million compared to $47.7 million for the same period of 2015. Cost of operations per ton from continuing operations of $43.07 compared to $50.73 for the third quarter of 2015, a decrease of 15.1%.

Total coal revenues decreased approximately 9.8% primarily due to fewer steam coal tons sold in Northern Appalachia, partially offset by increased sales from the Pennyrile mine in western Kentucky. Coal revenues per ton increased primarily due to a higher mix of higher priced met coal tons sold in Central Appalachia compared to the prior period. 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 the Central Appalachia segment as the company idled a majority of operations beginning in the third quarter of 2015 to reduce excess coal inventory, which resulted in lower production and higher cost of operations per ton during this 2015 period.

Adjusted EBITDA from continuing operations of $14.9 million and net loss from continuing operations of $9.0 million compared to Adjusted EBITDA from continuing operations of $5.7 million and a net loss from continuing operations of $26.9 million in the first nine months of 2015.  Coal sales were 2.4 million tons, which was a decrease of 13.8% compared to the first nine 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.

Rhino produces and markets coal from surface and underground mines in Kentucky, West Virginia, Ohio and Utah. For the quarter ended Sept. 30, 2016, it had four reportable business segments: Central Appalachia, Northern Appalachia, Rhino Western and Illinois Basin.

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.