Western Kentucky coal producer Armstrong Energy reported Nov. 9 that its revenue from coal sales of $65.4 million and $186.1 million for the three and nine months ended Sept. 30, 2016, respectively, are 26.7% and 33.2% lower than the comparable periods of the prior year primarily attributable to an unfavorable volume variance.
The volume variance experienced for the three and nine months ended Sept. 30, 2016, of $18.8 million and $73.9 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 $5.0 million and $18.6 million for the three and nine months ended Sept. 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 its long-term coal supply agreements as a result of declining diesel prices.
On a per ton basis, cost of coal sales for the three and nine months ended Sept. 30, 2016, totaled $34.38 and $35.70, respectively, which represents a decrease of $1.81 and a decrease of $1.17 per ton, as compared to the same periods in 2015. The decrease in the cost of coal sales per ton for the three months ended Sept. 30, 2016, as compared to the same period of 2015, is due to lower diesel fuel costs, a reduction in blasting costs at surface operations due to a higher amount of unconsolidated overburden, and lower equipment rental and equipment repair expenses. The decrease in the cost of coal sales per ton for the nine months ended Sept. 30, 2016, as compared to the same period of 2015, 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, 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.
Net loss for the three and nine months ended Sept. 30, 2016, totaled $9.7 million and $38.2 million, respectively, as compared to net loss of $145.8 million and $160.1 million for the three and nine month periods ended Sept. 30, 2015, respectively.
- Excluding the impact of prior year asset impairment and restructuring charges, net loss increased $2.6 million for the three months ended Sept. 30, 2016, as compared to the same period of 2015, due to a decline in gross margin quarter-over-quarter, partially offset by lower depreciation, depletion, and amortization (DD&A) and general and administrative (G&A) expenses incurred during the current year.
- For the nine-month period, excluding the impact of the prior year asset impairment and restructuring charges, net loss increased by $16.7 million. The variance is driven by a decline in gross margin in the current year, the impairment charge recognized in the second quarter of 2016, and the refund in the second quarter of 2015 of certain previously paid Kentucky sales and use taxes, partially offset by lower DD&A and G&A expenses in the current year.
Based on its current assumptions, Armstrong Energy believes that existing cash balances and cash generated from operations will be sufficient to meet working capital requirements, anticipated capital expenditures and debt service requirements in 2016.
The company wrote: “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. Armstronghas 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 deemed appropriate or necessary. There is no assurance that this exploration will result in any strategic alternatives being announced or executed.
The company said: “As a result of continued weakness in the U.S. thermal coal markets, Armstrong has continued to evaluate its operations and rationalize production to meet the current demand levels, as necessary. On April 22, 2016, Worker Adjustment and Retraining Notification (WARN) Act notices were delivered to employees of one of our mining operations and related preparation plant in anticipation of closing the Parkway underground mine. During the second quarter of 2016, the decision was made to continue operating the Parkway underground mine until all economically recoverable coal was depleted and, in October 2016, the mine ultimately depleted its economically recoverable reserves and ceased production.
“During the third quarter of 2016, the Company was able to secure additional coal sales for approximately 0.3 million tons for delivery in 2016 and is essentially fully priced and committed for the year at 5.9 million tons.
“Capital expenditures for the nine months ended September 30, 2016 totaled $2.1 million, which is well below prior year levels, as we continue to prudently evaluate capital spending in order to preserve liquidity. For 2016, capital spending has been further reduced to be in the range of $3.5 million to $5.0 million, which will be primarily related to maintenance capital expenditures. With respect to any significant development projects, we plan to defer them to time periods beyond 2016 and will continue to evaluate the timing associated with those projects based on changes in overall coal supply and demand.”
Armstrong is a producer of low-chlorine, high-sulfur thermal coal from the Illinois Basin, with both surface and underground mines. It controls over 550 million tons of proven and probable coal reserves in Western Kentucky and currently operates five mines. Armstrong also owns and operates three coal processing plants and river dock coal handling and rail loadout facilities, which support its mining operations.