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After the IPO, Rhino Resources Charges Ahead Appalachian coal operator builds a diverse portfolio


By Lee Buchsbaum

Known primarily as an Appalachian producer, Rhino Resource Partners, LLP has set in motion an ambitious plan to mine coal from four primary reserve basins. While expanding throughout Appalachia, the company has recently taken significant steps beyond familiar borders. Beginning with its small McClane Canyon mine in western Colorado, Rhino is working to develop a longwall capable reserve in the adjacent Book Cliffs and has just acquired a former longwall mine in central Utah. In mid-November, the State of Illinois granted Rhino final permits to develop its large Taylorville reserve allowing the growing company access into the increasingly active Illinois Basin market.

As of September 30, 2010, Rhino’s operations included 11 active mines. In Central Appalachia (CAPP) where the company’s operations are headquartered, Rhino’s subsidiary, Central Appalachian Mining (CAM) operates four underground and three surface mines. Rhino’s subsidiary Rhino Eastern also holds a 51% equity interest in a joint venture with Patriot Energy that includes one underground metallurgical mine. In total, as of March 31, 2010, Rhino controlled approximately 285 million tons of proven and probable coal reserves and its joint venture controlled approximately 22.4 million tons of proven and probable coal reserves.

At the end of the third quarter, Rhino was on pace to produce just under 4.5 million tons, slightly less than 2009’s 4.7 million tons. According to various sources, Rhino is working to increase production nationwide while capitalizing on the increasingly lucrative metallurgical market. The company has approximately 12.5 million tons of proven and probable metallurgical coal reserves as well as all of the joint venture’s approximately 22.4 million tons of proven and probable coal reserves. “We are continually conducting exploration in our reserves. Over time we continue to increase our production and expand our metallurgical coal reserves,” said Christopher N. Moravec, executive vice president of Rhino’s general partner.

Following the depths of the Great Recession, by the third and fourth quarters of 2010, global steel production had returned to pre-recession levels, along with favorable met coal prices. “We believe the long-term global demand outlook for metallurgical coal is favorable,” said Moravec.

As these markets improve, Rhino has ramped up operations, including moving forward with several that were previously idled. “We have the ability to quickly bring online production at certain of our existing operations. We also have an extensive portfolio of near-term growth projects. In addition to future acquisition candidates, we will continue to look at the organic growth opportunities that we have based on assets that we have acquired over the past three to five years,” said Moravec.

Rhino intends to continue its balanced diversification, if for no other reason than to shield itself from external pressures. “While right now CAPP may not be a popular place to operate, but with problems and turmoil come opportunity. We’re not going to run away from CAPP, but we’re also using our internal resources to develop in other areas. Looking at it from a distance, it’s not just the environmental pressures that we have to deal with. It’s hard to predict where the next problems will come from, but if you’re diversified, you always have more options and alternatives,” said Moravec.

Rhino has approximately 100 million tons of assigned reserves. “We already have the infrastructure in place to develop that coal which does not require a significant amount of capital to transform that coal into cash,” said Moravec. Based on 2009 production levels, Rhino’s assigned reserve base had an approximate 20-year life.

Wexford Capital, a $6 billion investment management firm from Greenwich, Conn., started Rhino in 2003. it has since supported the company and helped consummate Rhino’s recent initial public offering (IPO). Historically, Rhino’s seminal acquisition came in 2004 when it purchased the coal assets from American Electric Power. “This was so important for us, not just because we got 68 million tons of proven and probable coal reserves, but we purchased an organization as well. Since 2003, we have also made almost $223 million of acquisitions,” said Moravec.

At the end of 2009, Rhino had almost 900 employees company-wide, with more than half of those jobs in Central Appalachia.

Rhino’s Eastern Kentucky and West Virginia Ops
Rhino’s operations in Central Appalachia include three mining complexes, consisting of four active underground mines and three surface mines, and its joint venture’s operations included one underground mine. Rhino controlled an estimated 101.7 million tons of proven and probable coal reserves and an estimated 29.2 million tons of non-reserve coal deposits in CAPP, exclusive of the reserves held by its joint venture with Patriot. Much of these are met reserves.

To help usher in a new chapter in its development, in October 2010, Rhino recruited a veteran Central Appalachian coal executive, Dennis Hatfield, as vice president and general manager of Rhino’s Kentucky operations. He will oversee CAPP operations. “Dennis is still getting his arms around all the dynamics of our Kentucky operations. He has a tremendous amount to say grace over,” said Moravec. In this capacity, Hatfield will assume many of Moravec’s former tasks as he begins to assume more overall corporate responsibilities.

The most productive of Rhino’s CAPP operations is its Rob Fork mining complex. Located 16 miles south of Pikeville in eastern Kentucky, it has an estimated 26.2 million tons of proven and probable coal reserves and an estimated 14.6 million tons of non-reserve coal deposits. The Rob Fork mining complex is located on the CSX Railroad and consists of a 600-ton per hour (tph), heavy-media prep plant and unit train loadout with batch weighing equipment capable of loading in excess of 10,000 tons into railcars in approximately four hours. The mining complex also has significant blending capabilities allowing raw coal to be mixed with washed coals to meet a wide variety of specifications.

Multiple mines report to the Rob Fork prep plant. The largest is Mine No. 28, a three-section mine producing primarily B grade met coal. Beginning in September of 2005, Rhino developed a 2.5-mile set of parallel entries through a sandstone squeeze to access an 11-million ton block of met coal. Rhino began mining at the outcrop and drove the tunnel through some thin coal to access the heart of the mineable part of the reserve. It now serves as the main haulage for miners, materials and coal. The conveyor system sits in the entry adjacent to the travel way. “As a result of the investment, the operating costs of Mine No. 28 are much lower because we’re not hauling coal or rock to the plant via truck over county roads,” said Moravec. Coal is belted right into the adjacent plant. Maintaining a seam height of 54 inches, Rhino produces about 140,000 raw tons per month from Mine No. 28.

One of Rhino’s other significant CAPP operations is its Deane complex. Located in eastern Kentucky, Deane has a little more than 40.8 million tons of proven and probable coal reserves and an estimated 5.6 million tons of non-reserve coal deposits. This includes the original acquisition in February 2008 of reserves and infrastructure as well as additional reserves purchased in September 2008, which significantly extended the reserve life of the complex. The Deane mining complex produces steam coal from both company-operated and contract underground mines. The infrastructure consists of a 950-tph, heavy-media prep plant as well as a unit train loadout facility located on CSX with batch weighing equipment capable of loading in excess of 10,000 tons into railcars in approximately four hours.

Currently Rhino has one single section mine and one contract mine feeding the Deane prep plant. “We’re putting in a corridor mine that will become a belt conveyor tunnel to access some reserves that are more distant. This will allow us to convey rather than truck over public roads. We just started last month on our Access Energy Portal that will open up that opportunity,” said Hatfield.

“The project is similar to the corridor developed at Mine 28. The key behind the project is the access it will provide to other adjacent reserves. It’s something of a long skinny coal mine. That’s why we call it ‘Access Energy.’ It’s more about the destination than the path to get there,” said Hatfield.

As it develops the corridor, Rhino may have the opportunity to work through some mineable coal to get to the best parts of this particular reserve. “All of the seam height is large and the coal mined of good quality. So we get to mine a superior product as we develop toward our eventual destination. The corridor becomes the future of the Deane property long term,” said Hatfield.

Another area of development is Rhino’s Tug River surface mining complex. These operations consist of property in Kentucky and West Virginia that borders the Tug River. The Tug River complex had an estimated 34.8 million tons of proven and probable coal reserves and an estimated 9.1 million tons of non-reserve coal deposits. Coal production from these mines is delivered by truck to the Jamboree loadout for blending and loading. The Jamboree loadout is located on the Norfolk Southern Railroad and is a modern unit train loadout with batch weighing equipment capable of loading in excess of 10,000 tons into railcars in approximately four hours.

“We are conducting extensive core drilling and identifying some seams that have met characteristics and continue to find ways to participate in the met market as much as we can,” said Hatfield. Rhino is currently in the process of gearing up another Tug River operation, the Calloway North surface mine project near Phelps, in Pike County, Ky. According to filed documents, the relatively small operation will employ up to 40 miners. Listed as “temporarily idled” by MSHA, through the first three quarters of 2009 when it was last active, the mine produced a little more than 130,000 tons. MSHA also lists a temporarily idled Calloway South as well. Sources indicate Rhino may produce up to a 500,000 tons annually at the revived operation.

In early 2011, Rhino also expanded its existing Bevin’s Branch surface operation from one single spread of equipment operating one shift per day to two spreads operating two shifts per day. Sources suggest the company intends to ramp up production to an annualized rate of roughly 500,000 tons.

The main challenge in ramping up production at these operations is “refurbishing equipment and obtaining additional manpower,” said Jack Holbrook, general manager, CAPP operations, Rhino Resources. At its CAPP operations, Rhino uses a fairly conventional set of Cat equipment spreads at its surface mines and Joy continuous miners and shuttle cars at its underground mines, explained Holbrook.

Also part of its Tug Fork complex, Rhino operates the Grapevine Surface mine. Last year the company successfully deployed a highwall miner at this location. Due to the highwall’s operating characteristics, the mine is now accessing additional met quality reserves.

Rhino Eastern’s Joint Venture
Located in Raleigh and Wyoming counties, W.Va., Rhino Eastern is a joint venture between Rhino and Patriot Coal. Rhino maintains a 51% stake ownership in the project and is responsible primarily for running operations while Patriot is responsible for sales and coal preparation. The Rhino Eastern mining complex contained an estimated 22.4 million tons of proven and probable coal reserves and an estimated 34.3 million tons of non-reserve coal deposits, consisting of premium mid-vol and low-vol metallurgical coal.

The joint venture acquired the Rhino Eastern complex in May 2008 and commenced production in August 2008. Raw coal is trucked from the mine to a facility owned by Patriot where it is sized, washed and shipped by truck or via one of two rail loadouts, located on both CSX and NS.

Rhino Eastern is a room-and-pillar mine. “Overall coal height is 52 to 54 inches. We have another portal in the same reserve that’s already faced up that will support additional sections. We also have the ability to add another two sections to the existing mine,” said Hatfield.

In addition to the existing operations, Rhino Eastern has also acquired a contiguous 26,000-acre met coal reserve adjacent to the active operation that will support future mining operations. “We’ve drilled extensively over the last year doing exploration work to try to determine how to exploit that reserve. As we assemble the information and quantify what we have there, we hope to develop additional met operations in the future,” said Moravec.

Hopedale & Other NAPP Operations
Rhino controlled an estimated 67.8 million tons of proven and probable coal reserves and an estimated 39.2 million tons of non-reserve coal deposits in Northern Appalachia.

The Hopedale mining complex, Rhino’s most productive underground operation, includes an underground mine located in Hopedale, Ohio, approximately 5 miles northeast of Cadiz. Hopedale produces approximately 1.5 million tons per year of coal from the 6A seam. The mining complex has access to an estimated 18.5 million tons of proven and probable coal reserves and an estimated 19.5 million tons of non-reserve coal deposits. Coal produced from the Hopedale mine is first cleaned at Rhino’s Nelms prep plant and the adjacent rail load out facility. “Most of the coal we produce in northern Ohio is similar to the high Btu Pittsburgh-seam quality,” said Moravec.

Rhino also operates two surface mines spread over 10,000 acres at its Sands Hill mining complex located near Hamden, Ohio. At the time, Sands Hill had an estimated 8.6 million tons of proven and probable coal reserves and an estimated 1.9 million tons of non-reserve coal deposits, as well as limestone reserves. In 2009, Rhino completed refurbishment of a river-front barge and dock facility on the Ohio River. The infrastructure also includes a prep plant. “Sandhills’ two surface mines serve the local industrial market and, with the river dock now operating, we can access the Ohio River utility market as well,” said Moravec.

Additionally, Rhino also controlled an estimated 26.8 million tons of proven and probable coal reserves and an estimated 1.2 million tons of non-reserve coal deposits at its Leesville field in Ohio. Located near Hopedale, this reserve is currently in the permitting process. To the east, Rhino also controlled an estimated 13.8 million tons of proven and probable coal reserves and an estimated 7.6 million tons of non-reserve coal deposits at its Springdale field in Pennsylvania.

Opportunity for a Western Transition
After years of providing small amounts of trucked coal to the now closed Xcel Energy Cameo power plant, Rhino’s McClane Canyon mine, located on Colorado’s western slope near Grand Junction, has been temporarily idled. The McClane Canyon mine had access to an estimated 6.4 million tons of proven and probable coal reserves and an estimated 25.2 million tons of non-reserve coal deposits.

“McClane Canyon is currently in transition. As the rail loadout facility on the Union Pacific becomes operational, the market reach of that coal will expand. As it does, we’ll put contracts in place and re-open that mine. We are currently planning to restart production at the McClane Canyon mine in late 2011 or early 2012,” said Moravec.

In addition to the McClane Canyon mine, Rhino also controls three nearby BLM federal leases, two of which have the potential to support a future underground coal mining operation with procurement of adjacent federal leasehold. Rhino began the permitting process and leasehold procurement in 2005. The company is currently in an exploration process to define the volume, quality and mineability of the coal reserves.

“Though we are well grounded in the realities of the permitting processes, we think the project has tremendous potential. When the time is right, we’ll be ready to move forward. The mine would be located in Colorado’s Book Cliffs and the coal is similar in quality to other mines in the Book Cliffs area. Though it is very low sulfur coal, it will require preparation. The reserve we’ve identified is one of the few remaining thick, contiguous blocks of longwall minable coal in the area,” said Moravec. Some estimates suggest that the coal block Rhino is attempting to access contains more than 100 million tons of premium high Btu, low sulfur coal.

With the closing of the McClane Canyon mine looming on the horizon, in August 2010 Rhino completed the acquisition of certain mining assets of C.W. Mining Co. near Huntington, Utah. The assets acquired are located in Emery and Carbon counties, Utah, and include coal reserves and non-reserve coal deposits, underground mining equipment and infrastructure, an overland belt conveyor system, a loading facility and support facilities.

Despite the fact that the former owners used to operate it as a longwall mine, Rhino is re-opening it as a room-and-pillar mine. “It’ll be fairly traditional. The geology is strong and very different from the 3,000 foot cover mines found in other areas of Utah,” said Moravec.

Since the acquisition, Rhino has been refurbishing, re-equipping and manning the new operation. “As we begin 2011, we’re still on track to begin moving coal in the first quarter. After hiring 53 employees, we are fully staffed, fully equipped and are ready to go We received the last required permit on January 12 and commenced production on January 13,” Moravec said.

Hopes for a Clean Coal Partnership
In November 2010, Rhino received its remaining outstanding mining permits from Illinois allowing the company to continue and ramp up development work on its planned Taylorville mine which will be able to extract from a 110 million ton block of Herrin No. 6 coal.

Located nearly adjacent to where Rhino is developing its mine, Texas-based Tenaska Energy is hoping to construct its Taylorville Energy, a proposed 716-megawatt (gross), 602-mw (net) Integrated Gasification Combined-Cycle power plant. Though Rhino has no contract and does not represent to be involved in supplying the proposed plant, Rhino’s coal reserves lie “practically underneath” where the plant or a similar one may be constructed.

However, if the plant is not built, the Taylorville mining project still has a wide spectrum of opportunities. “We’re not hanging our hat singly on Tenaska. NS bisects that property. We’ve got good truck and rail access as well as potential access to the river. As always, we’re carefully evaluating all of the options before us,” said Moravec.

Buchsbaum is a Denver-based freelance writer and photographer specializing in industrial subjects. He can be reached through his Web site at www.lmbphotography.com or by phone at 303-746-8172.