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Top Illinois Basin coal mines not immune to market's pummeling

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Top Illinois Basin coal mines not immune to market's pummeling

Most of the top producing Illinois Basin coal mines reporteda decrease in output in the most recent quarter and one-year period.

The top 25 mines in the region were responsible for about21.9 million tons of coal production in the first quarter. That is down about18.6% from the production coming from those mines in the year-ago period.

Production from reporting mines across the region totaled25.3 million tons in the first quarter, down from 35.5 million tons ofproduction in the year-ago period. For the 12 months ending in the firstquarter, total regional production was down 17.6% from the comparable period ayear ago.

Moody's analyst Anna Zubets-Anderson said producers in theIllinois Basin may be better situated than those with a presence focused inother U.S. coal basins.

"All basins will contract, but on apercentage basis the Illinois Basin will take market share . . . it will bebest positioned among basins."

On a recent earnings call for Illinois Basin and NorthernAppalachia producer AllianceResource Partners LP, the partnership's President and CEO Joe Craftsaid uncertainty in the market has prompted Alliance to adjust production. Thepartnership is focusing on producing more from its lowest cost mines and idlinghigher cost operations.

Alliance has also been reducing its unit shifts andproduction days in an effort to survive very low coal demand.

"Our competitors have aggressively cut supply as well.Production of coal in the US during the 2016 quarter dropped more than 30%compared to the first quarter of 2015 and was down approximately 17% comparedto the sequential quarter," Craft said. "We anticipate productioncuts are likely to accelerate throughout the rest of the year as coal marketsremain oversupplied."

 

Craft said Alliance is expecting declining supplies of coaland natural gas to bring the markets more in balance later this year. He saidthat in 2017, Alliance may even be able to bring back some production as itsecures business from expiring contracts held by its competitors.

"If we look at our market region, specifically NorthernApp and Illinois Basin, we believe with the customers' current stockpiles,there's probably a 20 million ton overhang still, so that would be the tonnagethat needs to be — either supply needs to come off or demand needs to go upfrom first-quarter levels to eradicate that overhang," Craft said.

Responding to an analyst question about a recent wave ofcoal bankruptcies, Craft said customers are showing some signs of favoringcompanies like Alliance due to lower risk of its stronger financial position.He also expected that supply cuts will be accelerated by bankruptcies ascreditors push them to match demand.

"As far as tons that will be on the market, I thinkmost of the bankruptcies — in years past, a lot of the bankruptcies — there wasstill a lot of capital available to those companies that went in bankruptcy andso therefore they could come out and reorganize, get new financing and keep upproduction levels just rolling," Craft said.

Now, though, Craft said, creditors are wanting to seeproducers rationalize production, particularly for agreements where costs tomine are too high to be sustainable on above-market contracts.

While low natural gas prices have helped keep a lid on demand,an unexpectedly mild winter also took a large bite out of the demand for coal.Craft said they had committed tons to move to utilities in the winter, butelectricity generators just were not able to burn through their inventories.

"As we went through the quarter, we were gettingpushback saying 'our inventories are full,'" Craft said of verbalnegotiations with utility companies. "'We are not burning. We don't needit. Can you just delay it, we will take it by the end of the year, but we needsome help here because our inventories are full' at the utility — they were ata level they didn't want to increase them I should say. And so that's — for us,it was about a 600,000-ton impact to our sales."

According to U.S. Mine Safety and Health Administration data,Alliance's production from seven of its top mines in the Illinois Basin was up5.9% in the most recent 12 months compared to the year-ago period, but down18.8% quarter-to-quarter. Production at the company's top mine, River View, wasdown from 2.5 million tons in the first quarter of 2015 to 2.1 million tons inthe first quarter of 2016.

The Illinois Basin's high productivity means it has for sometime been able to stave off some of the largest cuts hitting the coal mines.The top-producing coal mines in the region, ranked by the last 12 months ofproduction data, have only cut production by about 5.4% compared to the12-month period a year-ago.

The total does not include mines not in the top 25,including the loss ofproduction from the Deer Run mine that is jointly owned by and Elevatedcarbon monoxide levels at the mine prompted the company to pull what was once atop-producer in the region offline.

Production across Foresight's was down year-over-year, largelydue to a lack of Deer Run production, but quarter-to-quarter the company'sthree remaining mines cumulatively boosted production about 9.6%.

Peabody EnergyCorp., which recently filed for bankruptcy, owns six of the topcoal mines in the Illinois Basin. Peabody's production in that basin was down8.8% in the first quarter compared to the year-ago quarter.