Several U.S. coal producers announced plans to invest in additional mine capacity during fourth-quarter 2018 earnings calls, but analysts are skeptical that the market is turning away from share repurchases in favor of capital expenditures.
Large publicly traded coal companies have focused on returning cash to shareholders instead of growing volumes after recovering from a wave of bankruptcies in the mid-2010s that were largely driven by debt-fueled acquisitions.
"Investors are still skeptical of increased capital spending," B. Riley FBR analyst Lucas Pipes said. "... with the exception of one company, those announcements were not too well received."
Arch Coal Inc. shares rose 10% in the week following the company's Feb. 14 announcement that it will develop its Leer South project in West Virginia, tapping into reserves of high-vol A metallurgical coal. The development is expected to add about 3 million tons per year to Arch's portfolio.
"It's a very attractive project from a financial return perspective," Pipes said.
Warrior Met Coal Inc. is also exploring the possibility of mining its 114 million-ton Blue Creek reserve in Alabama, another high-vol A coking coal source. That reserve could generate 3 million tons annually and serve as the company's portfolio cornerstone, Warrior CEO Walter Scheller said. Warrior expects Blue Creek to be fully permitted and shovel-ready by early 2020 and will then decide whether to continue with development.
Other metallurgical coal expansions include Corsa Coal Corp., which intends to double coal production over the next two years from 2017 levels as it continues to bring new Northern Appalachia mines online, and Consol Energy Inc., which is seeking a permit for its Itman low-vol coking coal project in West Virginia.
Foresight Energy LP resumed development in January at Deer Run, an Illinois Basin thermal longwall mine that was idled in spring 2018, while Alliance Resource Partners LP plans to spend between $360 million and $400 million on capital expenditures in 2019 as it targets growth in its coal, oil and gas businesses.
Benjamin Nelson, senior credit officer and lead coal analyst at Moody's, said the moves, and how investors react, are worth keeping an eye on, but the relatively low number of announcements suggests producers are "somewhat skeptical that good export market conditions that we see today will last."
"If you truly think the export market is going to be strong for a while, for a period of several years or more, you would probably want to invest in some capacity to leverage it," Nelson said, "but we're not seeing that so much, only a little bit in met."
It can also be difficult to tell whether new capacity is expanded capacity or serving to offset depleted mines, Nelson said. Overall, he projects that production will decline over the next few years as domestic demand for thermal coal continues to wane.
Hallador Energy Co. increased its 2019 sales guidance by nearly 1 million tons to 8.2 million as the company seeks to take advantage of tightening supply in the Illinois Basin. But Peabody Energy Corp., the largest U.S. coal producer, plans to reduce thermal coal production at several mines, especially in the Powder River Basin, as the company focuses on its coking coal mines in Alabama. The producer said Feb. 6 that it will reduce the 2019 production target for North Antelope Rochelle, its flagship Powder River Basin mine, by 10 million tons compared with 2018 output.
"At current market levels, we're not generating margins we find acceptable for our investors," Peabody President and CEO Glenn Kellow said.