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Western coal faces declining output, stagnant pricing despite Contura mine sale

Coal prices in the Powder River Basin are low, and the recent sale of Contura Energy Inc.'s two mines in the region is unlikely to change that, according to analysts.

Seaport Global Securities LLC analysts Mark Levin and Nathan Martin estimated in a Dec. 18 note that about 93 million tons of PRB coal had yet to be priced at the end of the third quarter — about 26% of total production in the region.

"We think this is one major reason why PRB production will likely come in lower than flat in 2018," they said. "Moreover, with so much coal yet to be priced, we are beginning to believe that absent a big move in natural gas prices and/or a very cold rest of December through February, PRB producers will put out 2018 volume guidance in late January/early February that is well below flat YOY."

The analysts called Contura's decision to sell its Eagle Butte and Belle Ayr mines to Blackjewel LLC "a good one, maybe even a great one," noting the move reduces Contura's balance sheet asset retirement obligation from $200 million to $83 million, frees up $25 million in unrestricted cash, create significant income tax deductions, provides $50 million in royalty payments and reduces capital expenditures by $10 million to $12 million.

However, the move will not likely help prices in the PRB.

"As for what the sale means to the overall PRB market, we don't think it matters much. We tend to doubt Blackjewel bought the mines, which produced a collective 24.5 million tons in the first three quarters of 2017, to shut them down," Levin and Martin said, because those assets generate about $30 million per year in EBITDA.

Other analysts have said the sale will increase uncertainty in the region. Blackjewel recently announced the formation of a joint venture with two other entities to market its thermal and metallurgical coal from both the PRB and Appalachia.

These factors led the Seaport analysts to lower their 2018 volume projection for the region by 3%.

On the other hand, they see Central and Southern Appalachia benefiting from increased metallurgical coal production, growing by 1% and 8%, respectively.

Illinois Basin production will fall 1% and Northern Appalachia output will decline 2% due to the idling of Virginia Conservation Legacy Fund Inc.'s Federal No. 2 mine and Mepco Intermediate Holdings LLC 4 West Mine, according to their forecast.

Martin and Levin predicted U.S. metallurgical coal exports will rise 10% in 2018, from 53 million tons to 58 million tons, with thermal coal exports shrinking 10% from 40 million tons to 36 million tons as API2 prices decrease after the winter heating season.