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Metallurgical expansion, demand drives Q1 earnings for coal sector

Though many in the industry are projecting weaker metallurgical coal exports this year, several companies said they expect continued demand to justify new mining projects on the latest round of coal sector earnings calls.

Eastern rail executives who haul much of the exported coking coal to the ports said they anticipate a decrease in coal revenue in 2019, however, metallurgical coal producers are planning or already are ramping up metallurgical production, especially in West Virginia, as seen with a wave of projects announced on their prior earnings calls.

Aiding in this process, West Virginia Gov. Jim Justice signed a bill into law toward the end of the quarter establishing a 35% tax rebate on new coal mining machinery and equipment, a move that analysts said at the time would be quite beneficial for Arch Coal Inc. as it develops its previously announced Leer South metallurgical coal project.

Arch CEO John Eaves said on a recent earnings call that global metallurgical capacity investment continues to lag while steel demand and pricing remain strong, "translating into solid demand growth for seaborne coking coal."

"Moreover, we see good support in the market going forward," Eaves said.

Contura Energy Inc.'s board approved another coal project in the state as well, known as the Lynn Branch coking coal development, which the company expects to produce between 1 million and 1.2 million tons a year.

Contura CFO and interim co-CEO Andy Eidson said the low-cost mine "will help bring down the overall cash cost profile of the entire met portfolio."

Consol Energy Inc. is also developing a new low-vol coking coal mine to produce more than 600,000 tons annually, which executives said will help fill the gap from output coming offline in Central Appalachia.

Seaport Global Securities LLC analysts Mark Levin and Nathan Martin wrote in a May 8 note that some investors are "rightfully concerned about potential price degradation in 2020 due to weakened international coal prices."

But Consol has "several under-appreciated factors going for it next year, including the potential for substantially more met coal sales as the company enters into lower-sulfur panels at its Enlow Fork mine," they wrote.

Warrior Met Coal Inc. is preparing its Blue Creek reserves as it decides whether to invest in the project as well, and Peabody Energy Corp.'s recently acquired Shoal Creek mine drove its adjusted EBITDA more so than any of its other 23 operations during the period.

Jeremy Sussman, Ramaco Resources Inc.'s new CFO, expects there to be a supply deficit in the coking coal market that support prices beyond 2020.

"In fact, there are a number of large metallurgical coal players that are facing financial challenges even in the current favorable market conditions," Sussman said. "Frankly, we view this as a sign of a healthy market. Lower-cost operators with good balance sheets are generating solid margins, while higher-cost players with more challenging balance sheets are struggling."

Corsa Coal Corp. CEO George Dethlefsen noted what he perceived to be a supply discipline among the larger metallurgical producers "that is keeping the market very well balanced."

On the thermal front, Midwestern flooding hurt first-quarter Powder River Basin shipments and low pricing on thermal coal being sold into Europe could affect producers who benefited from a strong 2018 global demand if the market conditions remain.

BNSF Railway Co. and Union Pacific reported service outages and rail damage after spring flooding rocked the Midwest, delaying shipments to utilities trying to build up their inventories before summer demand kicks in.

Foresight Energy LP reported that the flooding may have prevented 1 million tons of its coal from reaching the export market because water levels on the Mississippi River were too high to move the coal south. Alliance Resource Partners LP, which has operations in the Illinois Basin and Appalachia, increased its first-quarter production year over year despite the flooding, though 750,000 tons of planned shipments face delays.

Though Alliance expects export conditions to improve later this year, CEO Joseph Craft said he plans to delay growing its Illinois Basin operations, a move that could reduce volumes by nearly 1 million tons this year.

"While we expect opportunities for coal exports to develop later this year, as markets improve," he said, "it is difficult to predict the timing of when conditions will become favorable."