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Coal exec: ESG trend 'caught fire,' is pressuring sector across the board


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Coal exec: ESG trend 'caught fire,' is pressuring sector across the board

Contura Energy Inc. executives said the U.S. coal sector is feeling the pinch of investors' growing focus on environmental, social and governance factors in making investment decisions.

Coal producers are struggling as large financial institutions around the world are increasingly severing ties to the sector over climate change concerns. Bankers, insurers and asset managers are exiting their business with the industry at a rapid clip. The movement to divest from coal is "slowly squeezing the entire coal industry like an anaconda," Benjamin Nelson, lead coal analyst at Moody's Investors Service, recently said.

"ESG issues are very, very real to us right now," Contura Energy Executive Vice President and CFO Andy Eidson said on a Feb. 11 call discussing preliminary earnings results. In January, BlackRock Inc., the world's largest asset manager, announced it would not invest in companies deriving more than 25% of their revenue from thermal coal.

"I mean, [ESG issues have] been growing in influence over the past couple of years, and now it seems to have really caught fire," Eidson said. "It's almost like a pincer movement that is really creating a lot of cost pressure across the board."

Contura Energy CEO David Stetson said coal operators are finding it harder to go out into financial markets and obtain the capital to build a new mine, expand an existing mine or get equipment financing.

"We really don't see it changing," Stetson said.

Bonding a coal mine, for example, is becoming harder, the executive said. While much of the coal market is in a down cycle, even if prices improve, few companies will be able to put together a supply response due to the inability to economically obtain insurance, finance a mining project or bond an operation, Stetson said.

"When you look at the broader insurance markets, whether it's federal Black Lung, whether it's workers' compensation, even as simple as property and casualty insurance, the coal stigma is increasing the rate per thousand on any policy," Eidson said. "The real threat is additional collateral. The demand for additional cash collateral is above what we or the industry has previously experienced. In my view, that's really become the barrier to entry for this industry because people are still cobbling together a couple of million dollars to put up a new mine or an older mine, but they're going to have to probably go 100% cash collateral on bonds."

Like other coal producers with the option, Contura hopes to direct investors to the company's shifting focus toward metallurgical coal used to make steel.

"Thermal coal and metallurgical coal are very, very different creatures," Eidson said, pointing to a lower overall carbon footprint for metallurgical coal compared to coal burned to generate electricity. "For people looking for a zero-carbon footprint, that doesn't matter. But for other people who are looking to be a bit more measured in their approach, the investment thesis behind met coal should be very different from that of thermal coal. I'm not sure that message has gotten across."

Stetson also said the looming 2020 presidential election in the U.S. is a cause for potential concern. Some candidates could move to complicate permitting or enact other policies that would either increase the cost of mining coal or reduce demand for the fuel.

The pressures are not all negative for the sector, and a constraint in the supply of metallurgical coal makes a compelling bull case for prices going forward, Eidson said.

Contura reported $497.2 million in coal revenue for the fourth quarter of 2019, decreasing from $524.0 million in the previous quarter, in preliminary earnings results released Feb. 10. Stetson said in a recent interview with S&P Global Market Intelligence that Contura is sharpening its focus on metallurgical coal production and targeting cost containment measures as it works to survive the ups and downs of the commodity market.

The company reported that efforts in recent weeks led to a $10 million reduction in administrative costs and $20 million in reductions in overhead costs.

"Through all the cultural changes we've made to create a flat, nimble operating and corporate culture, we've lowered our cost horizons," Stetson said. "We've implemented changes at all levels to make quicker decisions, and we believe that Contura is well positioned to take advantage of improving markets.