While presenting the company’s Q3 2023 results, J.C. Butler, Jr., president, CEO and director for NACCO Industries, Inc., discussed developments with North American Coal, the company’s coal mining segment. The Mississippi Lignite Mining Co. (MLMC) during Q2 2023 had experienced temporary operational inefficiencies related to transitioning to a new mine area and contending with some short-term adverse mining conditions caused by increased rainfall, both of which reduced production and increased costs, Butler explained. “This situation continued into the third quarter and for the same reasons,” Butler said. “We do expect production costs at MLMC to decline significantly in 2024 from recent levels. However, production costs are expected to remain above historical levels through 2024 when a pit extension in the new mine area is complete.”
MLMC moved to this new mine area because the coal reserves in Mine Area 1, where they have been mining since the late 1990s, were largely depleted. “We had to open a new mine area with additional reserves to meet our contractual coal delivery requirements, which run to 2032,” Butler said. “This was not a surprise. We’ve known that we’d need to move to a new mine area since we started mining over 20 years ago. The move to a new mine area and the related costs are now behind us. We expect to see modest improvement in Q4 2023, with results improving further in 2024. However, the biggest favorable impact will occur in 2025 and future years, as operations in this new mine area normalize.”
NACCO invested significant capital to develop this mine area, Butler explained. “These capital investments have resulted in increased depreciation expenses that will continue over the remainder of the contract term,” Butler said. The added depreciation will affect reported operating profit, but this depreciation is excluded from EBITDA, which we think is a better way to look at this part of our business because we don’t expect MLMC to open additional mine areas through the remaining contract term.”
Compared with Q3 2022, North American Coal reported an operating loss of $4.7 million and a negative segment adjusted EBITDA of $400,000. The company attributed these decreases to the substantial decline in performance at MLMC and lower customer requirements at its Coteau operation.
Looking forward, NACCO expects Q4 2023 operating results and segment-adjusted EBITDA for North American Coal to improve significantly compared with the Q3 2023, but decline substantially from Q4 2022. “We are anticipating lower production costs at MLMC,”
Butler said. “However, while production costs are expected to decline from recent levels, they are expected to remain above historical levels through 2024 when the new pit extension in the new mine area is complete. We are also anticipating a reduction in the cost per ton sold and improved profitability at MLMC, beginning with Q4 2023 and continuing into 2024.
In 2024, the company expects coal deliveries to increase moderately from 2023. Strong operating profit and significantly higher segment-adjusted EBITDA are also anticipated in 2024 compared with 2023. These increases are primarily the result of significant improvements at MLMC and increased demand for the Coteau and Falkirk mines, as well as a higher per-ton management fee at Falkirk beginning in June 2024.