Corsa Coal Corp. (TSXV: CSO) said in a Nov. 9 earnings report that spot prices for metallurgical coal, which it produces in Northern Appalachia, have risen by approximately 250% on a year-to-date basis.
Corsa said it plans to increase production and sell significantly more tons of metallurgical coal over the coming quarters. Corsa commenced development work at the Acosta Deep Mine in Somerset County, Pennsylvania, which is forecasted to produce 375,000 tons per year of low-vol metallurgical coal once fully operational. Coal production at the mine is anticipated to begin in the second quarter of 2017 and ramp up over the course of the year.
In October 2016, Corsa raised C$23 million by way of a private placement of 230,000,000 common shares of Corsa to fund mine development, general corporate and working capital purposes.
As for costs:
- Northern Appalachia (NAPP) variable cost reduction efforts have been successful with the cash production cost per ton sold for metallurgical coal decreasing 10.2%, from $66.90 to $60.07, in the three months ended Sept. 30, 2016, compared to the year-ago quarter.
- Central Appalachian (CAPP) variable cost reduction efforts have been successful with the cash production cost per ton sold for thermal coal decreasing 6.7%, from $53.74 to $50.16, in the three months ended Sept. 30, 2016, compared to the prior year comparable quarter.
In September 2016, Corsa was notified that it was awarded $3,000,000 in funding under the Pennsylvania Redevelopment Assistance Capital Program (RCAP) to develop an underground coal mine in Somerset County subject to certain conditions, including: completing the Redevelopment Assistance application; confirmation that at least 50% of the required non-state funds necessary to complete the project are secured at the time of application; execution of a grant agreement; and commencement of construction within six months of the grant agreement.
Corsa ralso eached a settlement with the U.S. Environmental Protection Agency and the Pennsylvania Department of Environmental Protection on alleged Clean Water Act violations in the amount of $6.5 million. The entire $6.5 million was released from an escrow that was established in connection with the company’s acquisition earlier this decade of PBS Coals Inc. Corsa was also reimbursed for its legal expenses from this escrow. As a result of this escrow release, the settlement of this matter had no impact to the cash flows of Corsa.
George Dethlefsen, Chief Executive Officer of Corsa, commented: “Extreme global shortages of metallurgical coal have caused prices to increase 250% since earlier in the year. Corsa is taking steps to maximize coal production and sales to capitalize on the favorable market environment. In September, we commenced development work at the Acosta deep mine, which is scheduled to be in production in the second quarter of 2017. We have also increased capacity utilization at existing mines, have redirected tons sold under thermal contracts to the metallurgical market, and are exploring incremental growth opportunities within our portfolio of permitted mines. We expect Corsa’s metallurgical coal sales volumes to increase by over 70% in 2017 and we expect the 2017 sales mix to be heavily weighted towards the higher-priced export market. We will be providing further guidance on production and sales during the fourth quarter.
“The prolonged downturn in metallurgical coal prices over the past several years has left coal producers in a weakened position to respond quickly with new supply. With low metallurgical coal inventories globally, production difficulties in China and Australia, and signs of improvement in global steel pricing, we believe that metallurgical coal pricing will remain at elevated levels for an extended period of time.
“Corsa has received increased interest for metallurgical coal sales from both international and domestic steel companies over the past few months. Due the acceleration of metallurgical coal prices occurring in the middle of the third quarter, the impacts on our realized pricing for international orders will begin to be seen in the fourth quarter results. We expect average realized prices for Q4 2016 to increase by approximately 40% over Q3 2016 levels and a further increase in average realized prices in Q1 2017 as calendar year 2016 contracts roll off and as higher priced export orders are shipped. We are anticipating strong cash flows in Q4 2016 and into 2017 as a result of these increases in metallurgical coal prices. Corsa’s customer relationships, preparation plant infrastructure, rail access and coal storage capacity allows for full participation in the seaborne market and significant operating leverage to the rising price environment.”
Corsa is updating guidance for calendar 2016:
- Updated total sales of 1,300,000 now rising to 1,550,000 tons.
- NAPP Division sales of 850,000 to 1,000,000 tons for 2016, including metallurgical coal sales guidance of 650,000 to 750,000 tons and thermal coal sales guidance of 200,000 to 250,000 tons. This compares to previous guidance of 600,000 to 700,000 of metallurgical coal sales and 250,000 to 350,000 of thermal coal sales.
- NAPP Division sales of 250,000 to 350,000 tons for Q4 2016, including metallurgical coal sales guidance of 225,000 to 275,000 tons and thermal coal sales guidance of 25,000 to 75,000 tons.
- CAPP Division sales of 450,000 to 550,000 tons of thermal and industrial coal for 2016. This compares to previous guidance of 500,000 to 600,000 tons of thermal and industrial coal sales.
- CAPP Division sales of 125,000 to 175,000 tons of thermal and industrial coal for Q4 2016.
- 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 $41 to $46 compared to previous guidance of $38 to $43 as a result of a reduction in thermal coal sales commitments and an increase in metallurgical coal sales commitments.
- CAPP Division cash production cost per ton sold for thermal coal of $50 to $55 compared to previous guidance of $54 to $59 due to a selective shift towards lower cost production sources.
Coal Pricing Trends and Outlook – NAPP Division
Said the company: “Spot prices for metallurgical coal have risen by approximately 250% on a year-to-date basis due to constraints in the supply chain. Over the past six months, Chinese initiatives to reduce production of metallurgical coal have been very successful, and adverse weather and geology in Australia have negatively impacted exports. Many metallurgical coal producers have very little supply availability over the coming months, which we believe will lead to pricing support.
“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. Despite the rebound in pricing, supply has shown limited response as major Australian and Canadian mines are already running at maximum capacity. Incremental production from greenfield and brownfield projects may take up to two years or longer to come online, and generally face a lack of access to capital. We expect these supply and demand factors to continue to provide support for metallurgical coal prices in future quarters.
“The fourth quarter 2016 coking coal benchmark pricing increased to $200.00 per metric ton, representing an increase of approximately 115% from the third quarter of 2016, and is up approximately 140% on a year over year basis. As of October 2016, spot prices have increased well past the fourth quarterly settlement, reaching over $260 per metric ton. If this trend continues, Corsa expects to see a further strengthening in the quarterly benchmark settlement in 2017.
“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 has mitigated in 2016 as the pipeline of growth projects was exhausted.
“Domestically, severe financial distress has caused high profile bankruptcies in 2015 and 2016 which have led to significant supply cuts. 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. Mines that were inadequately maintained may now face flooding constraints, sterilizing part or the majority of the reserves. We expect the combination of these factors to limit the supply response from the U.S. in the near term.
“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 will continue to 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 650,000 to 750,000 tons. Approximately 95% 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 is aggressively seeking to increase production volumes in 2017 and will be providing guidance for 2017 production and sales later in the fourth quarter.
“Corsa’s thermal coal sales in 2016 from its NAPP Division are expected to be in the range of 200,000 to 250,000 tons. Approximately 95% of these sales are currently committed at the midpoint of the range. Actual sales will depend on customer demand and market conditions. Corsa has been successful in purchasing coal to fulfill these thermal orders at the NAPP Division, which has freed up existing coal production to move to the metallurgical market. We do not expect to sell internally-produced NAPP Division coal on the thermal market in 2017.”
Coal Pricing Trends and Outlook – CAPP Division
The company added: “Current Southeastern U.S. utility market thermal coal spot pricing has improved 20% over the course of 2016. Even with the positive spot market improvement, 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.
“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 450,000 to 550,000 tons. Approximately 95% of these sales are currently committed at the midpoint of the range. Actual sales will depend on customer demand and market conditions.”