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Southern Coal Finds Value in the Met Market


The Justice family launches a new coal company to serve met and steam coal markets By Steve Fiscor, Editor-in-Chief

The Justice family made some bold moves earlier this year. In May 2009, they sold their flagship metallurgical operation, Bluestone Coal Corp., to Mechel OAO, a Moscow-based steel and coking coal company. At the same time, they made a successful bid for the Greenbrier Resort and rescued the property from a bankruptcy sale. A few months later, they launched Southern Coal Corp. with properties they had acquired outside of West Virginia.

It has been an interesting year for the Justice family, explained James C. “Jay” Justice III. “We bought the Greenbrier the night before we closed on the Mechel deal,” Justice said. “My father was in Washington signing the paperwork with CSX for the Greenbrier. At the same time, we were working out the details with Mechel.” The transaction with Mechel, was supposed to close the next day.

It’s impossible to be involved in the metallurgical coal business in Appalachia and not know the Justice family. They are just as well known in the communities that surround the coalfields. Their history and coal mining expertise in southern West Virginia, particularly in the Lewisburg and Beckley regions, dates back at least four generations. James C. Justice Sr. founded Bluestone Coal. His father was the chief electrician at Eastern Associated Coal Corp.’s (EACC) Kopperston mine. Jim Justice Sr. and Leo Vecellio Sr. started Ranger Fuel in the early 1960s and in 1969 that was eventually sold to Pittston. That was the beginning of Pittston’s West Virginia operations. Bluestone was formed in 1971 based on the Keystone property in McDowell County, W.Va. From 1971-1995, the company produced on average about 500,000 tons per year (tpy) of super high quality low volatile metallurgical (low-vol met) coal.

During the 1980s, Bluestone also partnered with EACC on the Colony Bay project. Colony Bay was a large strip mine. Peabody Energy bought EACC. Bluestone sold its remaining interest to Peabody Energy and the mine eventually transitioned to a large highwall mining operation. Peabody more recently spun the properties off as Patriot Coal. During the early 1990s the Justice family companies were growing, Jay Justice recalled. In 1993, his grandfather died leaving a coal mining legacy to the heir apparent. It was a sad time for the family. “After the death of Jim Justice Sr., Bluestone purchased 35,000 acres from U.S. Steel and additional acquisitions in excess of 20,000 acres from others to add to their Keystone reserve base.”

The Justice family continued to aggregate met operations in Appalachia. In 2001, Bluestone acquired the Red Fox mine from CONSOL Energy. It was a mid-vol met operation, located near Bishop, Va. Four years later, they purchased Coal Mountain from CONSOL Energy, which was a high-vol met operation located near Gilbert, W.Va.

Aside from Bluestone Coal, the Justice family also purchased some high-sulfur steam coal reserves near Hazard, Ky., in 2004. In 2007, they acquired Sequoia Energy near Harlan, Ky. Sequoia is a pulverized coal injection (PCI)/high-vol met and steam coal producer. A year later, they acquired Infinity Energy,
near Bledsoe, Ky., which produced steam coal. In late 2008, they acquired Premium Coal, a PCI/steam coal producer, which is located near Lake City, Tenn. In April 2009, they acquired A&G Coal Corp., located near Wise, Va. It has been a relatively big steam producer in the region.

The Mechel Deal
During the last 18 months, many Russian and eastern European steelmakers have been evaluating and buying U.S. coal assets. So, the Bluestone sale was probably not that surprising. What few people outside of Appalachia would appreciate, however, is that Bluestone was a life’s work for a family with a lot of civic pride. If the sale were to take place, it had to be the right buyer.

Discussion between the Justices and Mechel began in July 2008 and the deal closed in May 2009. Mechel’s CEO Igor V. Zyuzin had built a great relationship with Jim Justice. “We were confident in their abilities to manage and run these operations and to take Bluestone to the next level,” Justice said. “Mechel is a great company with solid people and dynamic innovative thinking. Also, they retained all of the great people that worked for Bluestone Coal.”

The Justice family sold the W.Va.-based coking coal assets affiliated with Bluestone Industries for $436 million in cash, approximately 83.3 million preferred shares, plus the assumption of $132 million of debt. Mechel is a Russian holding company that includes producers of coal, iron ore concentrate, steel, and ferroalloys.

“Mechel bought a great business,” Justice said. “Bluestone has a massive met coal reserve base.” At first, it was an all-cash deal, but with the global economic downturn the Justice family ended up taking some Mechel stock. For its money, Mechel received four mining complexes: two low-vol operations, one mid-vol operation, and one high-vol operation. Each mined coal using underground, surface and highwall techniques.

At the time, Mechel was growing and the properties aligned well with the company’s long-term business plans, Justice explained. “We handed them the keys to a multi-million-ton coking coal business and they are planning to take it to 7 million tpy,” Justice said. The sale of Bluestone Coal was a clean break for the Justice family. “We really like running coal companies,” Justice said. “After completing a sale of that magnitude, many people would have probably gone back to house and kicked back, but that’s not for us. We built a great company in Bluestone and we would like to do that again.” They launched Southern Coal Corp. during July 2009.

Southern Coal Corp.
The Justice family had sold all of its W.Va.-based operating assets, but they still had the Sequoia, Infinity, Premium, A&G properties and the reserves near Hazard. “Not to say that we wouldn’t entertain selling a portion of our company, we would like to keep growing Southern Coal Corp.,” Justice said. “We have a significant amount of reserves. We’re always looking to purchase other operations. We would like to build the company to a 10 million tpy producer.”

In 2009, Southern Coal will produce a total of 5.5 million tons. They employ 730 people in a three state region. The current plan is to grow total production to 7.3 million tons by 2010 and the company has already sold 5 million tons of its 2010 production. The Justices are sticking with a business model they understand, placing a high priority on the met market first, followed by the PCI market, and then, depending on coal quality and the market, sell the remaining production into the steam market. Met coal commands the highest prices and PCI coals are sold at a slight discount to high-vol met coals.

“The biggest problem facing any coal producer today is the ability to sell coal,” Justice said. “We are really optimistic about the met market. Some of our coal is met coal, some is PCI, but what keeps us up at night the most is the steam coal market. Will the economy bounce back in time to consume some of these stock piles or are we looking at years of $55/ton coal?” Fortunately, most of Southern Coal’s steam coal is already sold for 2010.

In general Southern Coal operates both deep and surface mines on most of its properties. The underground mines use typically Joy 1415 continuous miners with Joy 10SC shuttle cars. On the surface, most of the mining equipment consists of Cat spreads with Superior highwall miners at Sequoia and Infinity. They also have two Addcar highwall mining systems, one at A&G and one at Premium Coal. The company has a few small Hitachi excavators, but the only non-Cat shovel is a Terex-O&K unit at A&G.

The steam market is why the Justice family branched into Kentucky. “We were almost exclusively a met coal producer in West Virginia,” Justice said. “We wanted to diversify into the steam market. The Hazard property became available. It’s a higher sulfur property. Because of that we were able to acquire it for a relatively good price. As the use of scrubbers evolves, the Hazard property will become more valuable.”

In 2004, the Justice family purchased a reserve base of 30 million permitted tons of high-sulfur steam coal near Hazard. They plan to open the Kentucky River surface mine in 2010, which is expected to produce 300,000 tpy. “As the market for these coals comes back, we will expand,” Justice said.

Sequoia Energy
The Justice family acquired the Sequoia operation in May 2007 from Gerald Burleson and Stanley Ditty. At the time, Sequoia was only deep mining. A total of three deep mines produced 700,000 tpy of steam and PCI coal. In 2009, Sequoia will produce 1.3 million tpy. The vision for Sequoia is five single-section deep mines, two contour mines with highwall mining operations.

Three deep mines and a contour operation with a highwall miner are operating now. By the first quarter of next year, they plan to bring on an additional two underground mines and another contour mine with a highwall miner. “In 2010, we are forecasting Sequoia to produce 2 million tpy,” Justice said. “It all depends on the changing dynamics of the marketplace. All of Sequoia’s production could go into the PCI market. The Harlan seams and Upper Harlan, are considered high-vol met blend coals as well.”

The attractive features of the Sequoia property is the infrastructure and coal quality, Justice explained. “Sequoia has compliance coal and that’s a great selling point,” Justice said. “It also had a tremendous amount of infrastructure, the plant, loadouts, etc., that was really under utilized. The previous owners were producing about 400,000 to 600,000 tpy and the operation is capable of mining 2 or 3 million tpy. They also had a tremendous amount of surface mineable reserves that were sitting idle.”

Refuse handling was a limiting factor for the operation. The 750-tph Sequoia prep plant recently installed a new refuse conveyor and belt presses to improve refuse handling. “Before we were hauling it out of the plant in articulated dump trucks to a refuse area,” Justice said. “We have spent millions of dollars on a new refuse conveyor and new belt presses to dewater the refuse. The entire system was scheduled to begin operating in mid-November. That will greatly alleviate the refuse handling problems.”

Infinity
The Justices acquired the Infinity complex from the Lewis family in April 2008. It was a 400,000 tpy complex that consisted of two surface mines, a mountaintop mining (MTM) operation and a contour/highwall mining operation. In 2009, they expect to produce 850,000 tons. By increasing utilization of its surface mining assets, Justice explained, Infinity’s output increased by 450,000 tpy. They hope to grow the capacity of the complex to 1 million tons by 2010. More recently, they purchased an adjacent property from National Coal, which included the 400-tph Unicorn prep plant. The Infinity complex has 150 million tons of reserves, 15% of which are permitted. Coal is mined from the Hazard Nos. 5, 7, 8, 9, 10, and 11 seams. “We have one deep mine at Infinity and beyond 2010 we will probably start more deep mines,” Justice said. The deep mine is operating in the Hazard No. 5. The contour mine extracts coal from the Nos. 7 and 8 seams and MTM mines the rest.

“Infinity has a great preparation plant and the surface mine reserves have relatively low stripping ratios, 8:1 to 12:1,” Justice said. “There are no railways running into Leslie County, Ky., where this operation is situated. We have to truck Infinity coal to Sequoia. Since there is no railway, none of the reserves have been mined. There is a tremendous amount of untouched reserves in the region.”

Premium Coal
Located near Lake City, Tenn., Premium Coal has 250 million tons of reserves. “We purchased it from the Swisher family in September 2008,” Justice said. “This is a real diamond in the rough.”

The previous owners controlled the property since 1952. It was a classic family-owned operation that mined 100,000 tpy, Justice explained. “Simply put, it’s a 62,000-acre reserve, with a minimal amount of depletion,” Justice said. “The reserve base in Tennessee is phenomenal.”

Right now, Premium is producing at a rate of 700,000 tpy. “In 2010, we will be at 1 million tpy with half of that production coming from deep mining,” Justice said. “By that point we will have a two-section underground mine and one contour mine with an Addcar highwall miner. Adding the second section to the deep mine will grow the production from 700,000 tpy to 1 million tpy.”

Premium has 30 million tons of reserves permitted. The deep mine cuts coal from the Walnut Mountain seam. The surface operations mine coal from the High Splint and the Grassy Spring seams. Southern Coal recently upgraded the Premium plant, which is located near Bryceville, Tenn., from 200 to 400 tph raw feed capacity. Premium produces steam, stoker, and PCI coals.

A&G Coal
Located near Appalachia, Va., A&G consists of eight surface mines, two underground mines, two highwall miners, two rail loadouts, and the Canepatch prep plant. In 2009, it will produce 2.85 million tpy. In 2008, it produced 3.1 million tpy and it’s expected to produce 3 million tons in 2010. Production dipped this year because of customer demand.

“Since we acquired it, we are developing the two underground mines,” Justice said. The seam height is 55 inches. Prior to the Justice acquisition, it was mostly all surface mining. The two underground mines are two section mines. They upgraded the plant from 250 to 400 tph raw feed capacity.

Going forward, the vision for A&G is to be a 1.75 million tpy high-vol met and 1.25 million tpy steam mine. The met coal is found in the Imboden, Kelly, and Taggart seams. They mine a total of 14 seams, including the Creech, High Splint, Wilson, and Red Wine seams. The surface mines have enough reserves to last 20 years and the life for the underground mines is estimated at 15 years for current permitted boundaries. A&G employs 450 miners.

“As a traditional surface mining company, and that’s what they were exclusively until we acquired them, they do a really nice job,” Justice said. “The equipment there is much larger than most of our other operations. The smallest loader on the property is a Cat 994. The equipment is big and can handle big ratios.”

In addition to the surface mining expertise, Justice explained that the untapped met market potential was also very attractive. “They weren’t deep mining any coal and all of that is met coal,” Justice said. “A lot of surface reserves could easily be classified as met coals, but they weren’t marketing them that way.

A&G is in the process of transitioning from all-surface, all-steam production plan to surface mining combined with underground production. “We have one underground mine running and we will bring on another underground mine by January 2010,” Justice said. This is representative of the changing dynamic that Southern Coal is trying to instill in its operations. In many cases Southern Coal is adding an underground mining component to a traditional surface mining operation or vice versa. And, then they are also trying to broaden their marketing horizons.

Justice doesn’t see current permitting issues as the biggest threat to their Appalachian coal operations. “We try to stay abreast of policy changes,” Justice said. “We’re not trying to permit a 5,000-acre surface mine. We have moved much of our surface mining production toward contour mining. In some cases, we’re growing by adding underground production. Obviously, we are not immune to regulatory changes and we’re doing our best to work within our means. If you can’t sell the coal though, permits do not matter.” Justice believes that the met market is improving. “In November and December we will ship 85,000 tons and 100,000 tons of met coal respectively out of A&G,” Justice said. Steam-wise, there might be a little light at the end of the tunnel.” And a little light is all the Justice family needs to make Southern Coal a success.