New coal producer Contura reports Q3 2016 loss; improved coal market

Coal producer Contura Energy, which earlier this year got the larger mines of Alpha Natural Resources in a bankruptcy sale, on Nov. 29 reported its financial results for the third quarter of this year.

“With our strong set of coal and logistics assets, well-established customer relationships, and experienced production and sales teams, we are excited to chart a new course for our recently formed company,” said Chief Executive Officer Kevin Crutchfield. “We believe Contura is well-positioned to take advantage of tremendous opportunities in the current market environment, especially in metallurgical coal markets, through our organic production and our Trading and Logistics activities.”

Coal revenues in the reported period from July 26, 2016, to Sept. 30, 2016 were $212.9 million, with Central Appalachia (CAPP) operations accounting for $37.2 million and Trading and Logistics accounting for $53.4 million. On the thermal side, Northern Appalachia (NAPP) revenue totaled $42.3 million and Powder River Basin (PRB) generated $80.0 million in coal sales.

Notable is that July 26 is when the company acquired its mines, so this report doesn’t cover the full third quarter.

During the reported period, CAPP metallurgical coal shipments were 0.6 million tons at an average per ton realization of $67.82.  Contura shipped 7.4 million tons of Powder River Basin (PRB) coal during the reported period at an average per-ton realization of $10.76, while NAPP shipments totaled 1.0 million tons at an average per-ton realization of $43.62. NAPP volumes were affected by a longwall disruption described below. The Trading and Logistics activities shipped 0.8 million tons of coal at an average price of $65.69 per ton. 

The cost of coal sales in CAPP during the reported period averaged $60.12 per ton. NAPP cost averaged $41.47 due to an abnormal rock intrusion which reduced production volumes for a majority of September. The estimated cost impact from the rock intrusion for the reported period was approximately $10 per ton compared to expected year-to-date production cost. The longwall has progressed beyond this geologic anomaly and further related disruptions are not anticipated. NAPP production returned to normal levels after a longwall move was completed in mid October. The cost of coal sales per ton for the PRB mines was $7.90, benefiting from a lower than normal overburden removal, which will likely revert to historical levels during the fourth quarter.

Contura recorded a net loss of $51.2 million, or $4.96 per diluted share for the reported period from July 26, 2016, to Sept. 30, 2016.

As of the end of the third quarter of 2016, Contura had $114.5 million in total liquidity, including $72.0 million in unrestricted cash. Total long-term debt, including the current portion of long-term debt as of Sept. 30, 2016, was approximately $304.0 million.  

On July 26, Contura acquired certain core coal assets from Alpha Natural Resources. The acquisition consisted of Alpha’s operations and reserves in Northern Appalachia (including the Cumberland longwall mine complex in Pennsylvania) and the Powder River Basin (Eagle Butte and Belle Ayr mines in Wyoming), along with three Central Appalachian mining complexes (the Nicholas mine complex in Nicholas County, West Virginia, and the McClure and Toms Creek mine complexes in Dickenson and Wise counties, Virginia).

The acquisition also included a 41% stake in a strategic export terminal Dominion Terminal Associates in Eastern Virginia with total export capacity of more than 20 million tons.

Market Overview

The global coal supply/demand dynamic has been very positive over the past few months, with both the thermal and metallurgical markets experiencing marked price improvements, Contura noted.

Metallurgical Coal – The Australian benchmark met coal price has increased from $92.50 in the third quarter of 2016 to $200 per metric ton in the fourth quarter. Even more dramatically, the spot market for Australian hard coking coal has more than tripled, from approximately $100 per metric ton as of Aug. 1, 2016, to over $300 per metric ton currently. This explosive price move has translated into significant strength in the Atlantic Basin with High Volatile A met coal price currently quoted at $262 per metric ton, up from $102 at the beginning of August 2016.

Said Contura: “We believe that a combination of reduced coal production as mandated by the Chinese government, undiminished Chinese steel production, and coal production challenges in Australia due to weather, geology and labor issues are the main drivers of the dramatic surge in metallurgical coal prices. These market trends did not have a significant impact on the reported results for the period from July 26, 2016 to September 30, 2016, however, we expect they will translate into meaningfully higher realizations for Contura’s high quality metallurgical coal in the fourth quarter and into 2017.

“According to the World Steel Association, the global demand for steel is expected to increase by 0.5% in 2017 after a forecasted 0.2% growth in 2016. More importantly for Contura, the demand in our key customer markets is forecast to grow at 2.9% in 2017 in North America with South and Central America expected to grow at a more robust 4.1%. Given the current trade environment in the US and Europe, we believe the steel trends will continue to favor the Atlantic Basin region, which would bode well for US based coal suppliers, such as Contura.”

Thermal Coal – While the price move in the thermal segment has been less robust than in the met market, it has been a welcome sign after the very difficult price environment experienced over the past few years. The API 2 price has shown strong improvements since Aug. 1, 2016, with a 43% increase from $61.75 to $88.20 per metric ton as of Nov. 15.

On the domestic thermal front, NAPP prices have increased by approximately 35% from $35.10 since Aug. 1, 2016, to $47.20 per ton as of Nov. 15, while CAPP prices have strengthened from $42.75 to $62.50 or 46%. PRB coal has seen a more modest price move over the same period with current price indications in the $11.70 range for the 8800 BTU coal, up approximately 22%. “We believe that the domestic thermal demand has stabilized over the past several months and anticipate that the policies of the incoming administration will be more supportive of a broad range of energy sources,” Contura added.

2017 Outlook

Contura anticipates its 2017 total shipments to be 43.1 million to 50.5 million tons, including 3.5 million to 4.3 million tons of captive CAPP coal, 7.6 million to 8.2 million tons of Northern Appalachian coal, and 29 million to 34 million tons of PRB coal. Included in the total shipments is the Trading and Logistics segment which is expected to generate between 3.0 million and 4.0 million tons of metallurgical coal shipments in 2017. The Trading and Logistics segment includes marketing arrangements with various coal producers and purchased coal activities.

As of Nov. 22, 2016, 30% of the midpoint of anticipated 2017 CAPP coal shipments was committed and priced at an average expected per ton realization of $101.13. Based on the midpoint of guidance, 100% of anticipated 2017 NAPP steam coal shipments were committed and priced at an average expected per ton realization of $42.31, and 94% of the midpoint of anticipated 2017 PRB shipments was committed and priced at an average expected per ton realization of $11.05. 

Contura’s 2017 guidance for its CAPP cost of coal sales per ton ranges from $63.00 to $68.00, which is an increase as compared to year-to-date 2016 performance. This increase is explained in part by a variable component of cost, such as lease royalties, that is directly related to the sales price of coal. PRB cost of coal sales per ton is estimated at a range of $9.50 and $10.50, while NAPP is estimated in the range of $28.00 to $32.00 per ton.

Contura Energy is a private, Tennessee-based company with affiliate mining operations across multiple major coal basins in Pennsylvania, Virginia, West Virginia and Wyoming.

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.