Managing through the trough, an Appalachian leader makes bold moves to secure a long-term position
By Steve Fiscor, Editor-in-Chief
Last year, Southern Coal found itself in a position where it was idling mines, laying off workers, and doing whatever it could to survive a coal market that had turned quickly. Until 2012, the company, which was founded by the Justice Family four years ago, was on a roll. It was mining lucrative metallurgical grade coal and it also had a respectable thermal coal business. In 2011, it was operating 33 mines and produced 7.2 million tons.
Then prices in the met market began to head south and utilities began to turn their attention to natural gas. The company was forced to scale back its plans, reduce production and cut its workforce—a story all too familiar in Appalachia today. Just after the presidential election, when the situation for U.S. coal looked its bleakest, Southern Coal announced it had struck a deal with American Electric Power (AEP) that would not only save existing jobs, but allow the company to rehire and restart some of its shuttered operations (See December 2012, Coal Age, p. 6). This would be the first piece of really good news the U.S. coal industry could report in months.
Jay Justice and his father have gained great notoriety for their leadership in putting together deals that benefit all parties involved. In this case, they worked with one of their customers, which also happens to be the electric service provider for the region in which all of their mines operate, and state government officials in Virginia, West Virginia and Kentucky, to structure a long-term deal that supplies AEP with an affordable, high quality fuel.
The AEP deal also gave Southern Coal the long-term security it needed to invest and grow operations. The company has already called back the workers, bringing its total workforce to 1,700 miners working in Appalachia. It has adapted its mining plans on the surface to more effectively operate in today's regulatory environment, while it pursues higher grade reserves underground.
Then and Now
Southern Coal is the largest privately-held met producer in the U.S. What separates it from the others is the company's vast reserves. Southern Coal's permitted reserves now stand at 160 million tons. The operative term here is: permitted. Much of that reserve base is metallurgical grade coal, which commands a premium price.
The last time Coal Age reported on the company (2010), it was producing 7 million tons per year (tpy) and had its sights set on more than 8 million tpy for 2011. It was investing $125 million in mining operations and the Tams mine had broken ground in West Virginia. Production at that operation was targeted for more than 750,00 tpy with a mine life of 12 to 14 years.
The idea was to blend the production from Tams with A&G, another subsidiary in Wise, Va., to produce the Ranger Mid-Vol Blend. A&G at the time consisted of eight surface mines and two underground mines. Southern Coal was investing $10 million at both underground mines (the Imboden and the Taggart Marker mines). New equipment has being brought into service at A&G Job No. 21.
The company had also purchased some assets from National Coal and were combining them with its Premium Coal subsidiary in Tennessee. The strategy moving forward was to fill thermal contracts from Premium and divert more of A&G's production to the met market. At the time met coal prices were high. Some steel mills were paying more than $300/ton for the best quality coal.
The situation was healthy, but not perfect. Appalachian coal operators were having trouble moving coal to and through the East Coast ports. Southern Coal was considering its options as far as moving coal through Mobile or possibly New Orleans. The market, however, would turn against coal operators and the mean season of 2012 began.
Jay Justice remembers the situation all too well. "We were on target for 8.5 million tpy in 2011, but it didn't happen," Justice said. Speaking in the boardroom of Southern Coal's modest, new headquarters in downtown Roanoke, he explained how the company had "some issues with a customer not performing," which forced them to slow production drastically. By the third and fourth quarters of 2011, Southern Coal was applying the brakes because of market conditions. In 2012, the company would produce a little more than 5 million tons.
"We scaled back operations substantially in two big cuts, that took place in January and March of 2012," Justice said. "These were market-driven decisions. Prior to that, we had employed 1,300 miners and, when we announced recently that we were going to start rehiring, we had cut the workforce back to 650. We had hoped they would be temporary layoffs and now fortunately that is the case."
The cut backs were an across the board approach for Southern Coal. Almost all of the mines suffered. "We shut down mines and eliminated shifts at others," Justice said. "We reduced hours. From March 2012, we were operating at a 5 million tpy pace. It's very difficult to cut the operations from 8 million to 5 million tons and maintain efficiencies. We took other measures to help with fixed costs. We sold some equipment at two equipment auctions. We have done what we can to reduce overhead."
In November, Southern Coal an-nounced it had signed a long-term agreement with AEP. "For the last 90 days, we have been working around the clock with AEP predominantly, and other utilities, to secure what we refer to as our anchor steam business," Justice said. "We successfully negotiated a multiyear contract with AEP for 2.5 million tpy. That coal is being sourced from West Virginia, Kentucky and Virginia. That stabilized the steam side of our business." Considering that AEP will burn approximately 50 million tpy, the agreement represented 5% of its burn, but nearly 50% of Southern Coal's steam business.
In 2013, Southern Coal hopes to produce 9 million tons, half met and half steam. So the AEP transaction represents the lion's share of the steam production. "We have other agreements with other utilities, so all of our steam tons are sold for 2013," Justice said.
On the met side, of that 4.5 million tons, Southern Coal has a 1-million-tpy contract with ThyssenKrupp, one of the leading German steelmakers. "That contract is serviced from our new mid-vol operation at Bishop, which is now the crown jewel of the met operations. We have additional met contracts, but the rest of the met production is currently sold on a spot basis."
The AEP Decision
Like all utilities that operate coal-fired power plants, AEP is under a lot of pressure these days (See May 2012, Coal Age, p. 34). The difference of course is that AEP would be the largest. When asked about the transaction, Justice explained that AEP has adopted a philosophy that differs from other utilities. "Most of the other utilities are diverting all of their attention to natural gas," Justice said. AEP is also pursuing gas, but it has not turned its back on coal. It's trying to keep coal as part of a diversified fuel mix. And if the economy improves, as everyone hopes it will, they will need to generate power from coal."
Southern Coal has worked with AEP for a long time. "We have a great relationship. Both parties have worked together to craft a deal that makes economic sense for both sides," Justice said. "They knew how many jobs were at stake and we are very appreciative for what they have done. There are more than 1,000 families that will benefit directly by this decision and many more indirectly."
Should gas prices surge, coal as part of a diversified fuel portfolio serves as a hedge for the utility. AEP understands that coal operators can't simply bring production online at the drop of hat after being idled for months or years.
Southern Coal also has existing supply agreements with Virginia Power, Carolina Power & Light and traders on the Big Sandy River. "If demand grows, we would need more equipment to expand production beyond 9 million tons," Justice said.
|Southern Coal's Diversified Production Portfolio (2013e)|
|Tams/West Virginia||Low-Vol Met||500,000|
|Alabama Operations||Mid-Vol Met||600,000|
A Diversified Portfolio
Southern Coal produces 4.5 million tpy of met coal: 500,000 tpy of low vol met coal (Tams), 2 million tpy of mid-vol from the new Bishop and Alabama operations, and 2 million tpy of high vol with 1.5 million coming from Virginia and 500,000 tpy coming from the new Beechcreek surface mine in Phelps, Ky.
On the met side of the business, in addition to the Tams and A&G operations, Southern Coal acquired Sigmon Coal Co. and Lambert Coal Co. in Virginia, which have been rebranded as Virginia Fuel Corp. These operations were contiguous with A&G. "With this acquisition, we doubled our reserve base in Virginia," Justice said. "We have not expanded our production in total. We reduced surface mine production and increased underground production. In Virginia, we are still producing 2.5 million tpy." Once met prices declined, the company reversed its decision to redirect all of its Virginia tons into the met. Today, the Virginia operations are positioned as 1.5 million tpy met and 1 million tpy steam with the bulk of that production going to AEP.
The decision to increase underground production in Virginia was based on quality. "The move from surface to underground was a met-driven decision," Justice said. "Most of the surface mineable reserves are high-vol B. Most of the underground reserves are either high-vol A or high-vol A minus—very good met reserves."
The company's new Beechcreek mine operates two Komatsu WA900 spreads with Komatsu 475 dozers and Cat 777 trucks. Beechcreek was purchased in July 2010. It was a small permit and Southern Coal added pieces to it. "In a deal with Berwind Land Co. we obtained permits from Lexington Coal Holding," Justice said. "We have grown that to a 12-million ton reserve base with 5 million tons permitted and the remainder is in the process of being permitted. The ratio is 22:1. Beechcreek is a direct ship operation with an NS rail line nearby. The seams being mined are the Alma (three splits), Cedar Grove and Pond Creek (or No. 2 Gas).
The surface mines work two 10-hour shifts seven days per week. The underground mines still work two 9-hour shifts six days per week. The surface mines have three crews and the underground mines have two crews. At the surface mines, the A crew works five days, B crew works five nights, and the C crew works two days and two nights. "We have been able to increase our run-time hours by about 28% and that is helping our fixed costs," Justice said. "And, the men like it. They still get a good amount of overtime and a decent amount of time off, but the simple truth is most people are just happy to be working."
The Crown Jewel
Permitting for the Bishop operation began in 2010. It has 300 million tons of reserves with 6 million tons of surface mineable reserves permitted and 5 million tons of underground mineable reserves permitted. "It's a 24, 25 vol [mid-vol] coal," Justice said. "We have submitted several surface and underground permits. When approved, they will add 60 million tons to the permitted base." The property sits right on the border of Tazewell County, Va., and McDowell County, W.Va. Southern Coal acquired it from CONSOL Energy eight years ago.
In 2013, Bishop will produce 900,000 tons from the surface mining operations and 300,000 tons from the underground mining operations. The underground mine will cut coal from two sections. One section started production in December. The second unit was scheduled to begin producing during January.
"We believe long-term the met coal market is sustainable," Justice said. "We want to grow Bishop to a 2.5 million tpy operation that will operate for a long, long time."
Southern Coal purchased two P&H 2800 electric shovels from a mine in Australia, moved them to the U.S. and refurbished them. "It cost us four times what we originally thought they would, but they will be going to work soon," Justice said. During December, Flanders was performing its pre-flight check. The shovels have totally upgraded electrics, which will improve cycle times, availability and reliability.
The company recently commissioned a $60 million, 700-tph state-of-the-art prep plant with a 100-car flood-load rail siding. Taggart built the prep plant. The reject from the plant will be backfilled into the pit. The centerpiece for this strategy and the plant is a new McLanahan plate-and-frame press, that will dewater the reject.
While other coal companies have started working with plate and frame presses (See Dewatering, p. 35) to dewater reject, Bishop will be the first to rely on the system to backfill reject into the pit.
As far as reject levels, only half of the surface mined coal will be washed, and it would have a 70% recovery (150,000 tons of reject). They are expecting a 40% recovery from the underground production (180,000 tons reject). "We have much more plant capacity than we need at this time," Justice said. "Building total production to the 2.5 million tpy level will mostly come from growing underground production."
The underground mine runs Joy 14CM15 continuous miners and Joy 10SC shuttle cars. Underground, they are mining coal from the Pocahontas No. 11, which runs 42- to 46-inches thick with 400 ft of cover. The surface mine extracts the Pocahontas Nos. 8-11 seams.
Southern Coal was able to get this operation permitted during a period where permitting has become difficult. The Virginia Department of Environ-mental Protection has been very helpful, Justice explained. Most of the surface permits do not require a valley-fill. There was an existing impoundment on the property that will be reclaimed and used for fill. "It also made it much easier to get the mine started," said Marc Merritt, manager surface mining operations, Southern Coal. "Bishop is a big project and we needed some elbow room. We ran a 6-mile, 34.5 Kva line to provide power for the shovels, the underground mine and the prep plant." While the construction activity was taking place, they used Cat 5230 hydraulic front-shovels to get the surface mine started.
The mine plan calls for two 50-ft lifts with 25-ft benches. One shovel will take the top seams, essentially pre-striping for the other shovel. A total of 15 24- to 30-inch seams, mostly the Pocahontas, are recovered. "On average we will move 3 million yd3 per month, which equates to 100,000 tons of coal," Merritt said. "With this being an area mine, we are moving the mountain over, not leveling it out." The mine will employ nine Cat 789 haul trucks and six Komatsu 730 haul trucks to haul material.
In May 2011, Southern Coal purchased mining permits and leases in Alabama from the GTM Energy bankruptcy. The operations are located in Flatrock, Ala., in the northeast part of the state. "The transaction included three permitted surface mines and we are currently operating one of the three mines," Justice said. "When one plays out, we will move to the next. We have 30 million tons of proven reserves. About one-third of that is permitted. It's all surface mineable. It's 25, 26 vol [mid-vol] coal, very similar to Bishop. As far as met characteristics, the Alabama coal has great CSR [coke strength after reaction] and both of them are great met coals."
Producing at a pace of 600,000 tpy, the Alabama operation employs two Cat 993 spreads with D11 and Komatsu 475 dozers. All of the coal is washed. Taggart built a 300-tph prep plant for the operation, which went online in August. At this pace, the Alabama properties have a 40-year life. The stripping ratio is about 28:1 clean recovered tons.
The Alabama coal has a lot of laminated partings. "You have two choices," Justice said. "You can leave great deal in the pit or you can mine it all and run it through the plant. We have about a 65% recovery."
Southern Coal markets the Alabama and Bishop coals separately and as a blend, which it refers to as "Alabishop." The ash content of the Alabama coal is higher than the Bishop coal, but the CSR value of the Alabama coal is higher than the Bishop coal. The Alabama coal has a lower sulfur content, so they complement each other.
Coal is shipped by truck to the Tennessee River and then shipped by barge to Mobile and New Orleans. "We have a tremendous transportation advantage here," Justice said. "The transportation cost is half of what it is in Central Appalachia to get coal loaded in a vessel. And, we're working all possible combinations, shipping Alabama coal to Norfolk and shipping Bishop coal to New Orleans."
Coal transportation remains a big issue in Appalachia, not just rail transportation, but trucking as well, according to Justice. "In the past we used a couple of big guys, but we have also used a thousand little guys," Justice said. "In 2011, we purchased Todd Case Trucking, based out of Louisa, Ky. They had 70 coal trucks and were Massey's exclusive hauler. We have expanded that company to 100 trucks now. And, we now haul about 90% of our coal. This was a wise move. It has reduced our costs, but more importantly it has reduced the coal hauling headaches."
Owning a trucking company has given Southern Coal tremendous flexibility. "If we encounter rail problems, we can haul coal by truck to the river," Justice said.
Hauling More, Pushing Less
Ironically, Southern Coal was holding another equipment auction during Coal Age's December visit as more new equipment was en route. "It sounds crazy, but we are buying $70 million of new equipment from Cat at the same time we are hosting an auction for used equipment," Justice said. Southern Coal purchased 33 Cat 777 haul trucks and six 789 haul trucks.
Justice gave two reasons for the decision to move to wheel loaders operating with smaller trucks. "As a company we have moved almost completely away from dozers," Justice said. "Ten years ago we probably pushed half of the material and loaded half the material. Today we push 7% and load 93%. Dozers are economical to operate. With the lack of valley-fills in today's mining plans, the re-handle with dozers is just not cost effective. Once material is loaded into a truck, there is no reason to have any re-handle. Over the last two years, we have sold 40 dozers [D11s and 475s] and replaced them with loading equipment."
Bishop and A&G Job No. 21 both operate with large loading tools and they run 200-ton Caterpillar 789 haul trucks and Komatsu 730 haul trucks. "Everywhere else we have always operated Cat 785s and Cat 777s in combination," Justice said. "Two 150-ton Cat 785s will haul as much as three 100-ton Cat 777s. We are getting better overall productivity from three Cat 777 haul trucks than we were with two 785s. That's mainly a versatility and downtime issue. If one truck goes down, you lose 50% of your production with 785s as opposed to 33% with Cat 777 haul trucks. We study this constantly. Three Cat 777 haul trucks are just a better option. We have eliminated a lot of our 785 haul trucks."
The decision is mainly production driven, followed by versatility, and then resale value. The Cat 777 also offers a level of asset value protection. "Lots of people can use a Cat 777 haul truck," Justice said. "Even a large construction project can use a Cat 777 haul truck." During tough times, it is also easier to get tires for a Cat 777 haul truck.
In 2013, Southern Coal's underground production will amount to about 4.5 million tons. The company has nine active underground mines and it is in the process of rehabbing two mines that were acquired from CONSOL Energy, the old Jones Fork properties. The project started in October 2012. "We are getting the outside facilities set and we are just about ready to go underground," said Randy Phelps, underground operations manager, Southern Coal. "We will advance about 3,000 ft into the mountain. It was above drainage and the roof is still in great condition."
The company is also adding a single section at Wilson No. 1 (Bishop), the E3 mine, in Knott County, Ky. (Kentucky Fuels), and the Nine Mile No. 1 mine in Wise County, Va. (A&G). Most of the spreads consist of Joy 14CM15 continuous miners, some Joy shuttle cars, but mostly Auxier Welding shuttle cars, Fletcher roof bolting machines, and Joy feederbreakers, Phelps explained.
Most of the mines produce between 250,000 to 500,000 tpy. On average, mining heights are 42 to 46 inches. The Virginia operations have the most overburden, as much as 1,000 ft.
"Safety is at the forefront of everything we do," Phelps said. "We dedicate a lot of time and money to stay in compliance. That is reflected in our safety record, which is very good."
The bulk of the scale-up that Southern Coal is about to experience will come from the underground side of the business. Phelps and his team will be hiring and training a lot of miners. "A lot of good coal miners are out of work today," Phelps said. "We are looking at quite a bit of growth. It's a busy time for us and that's a good problem to have." Managing mining operations and providing jobs instills a great sense of pride for both Phelps and Merritt.
Reacting quickly, Southern Coal has turned the tables in its favor at a time when most mining companies in the region are still in survival mode. The company is committed to the coal market and it has vast permitted reserves, which will give it staying power. Moreover, whether it was moving away from valley-fills or running a prep plant without a refuse impoundment, it adapted its plans to keep operations on track.
Last year, Southern Coal selected Roanoke as its headquarters and purchased the Bank of America building in the downtown area. "We had administrative people spread out everywhere, Beckley, W.Va.; Middlesboro, Ky.; Wise, Va., etc.," Justice said. "It's difficult to get a professional to move to those 'remote' locations. Roanoke has been a great move for the company."