Allegiance Enters US Met Market

Australian company takes a fresh look at a historic room-and-pillar operation in Colorado

Allegiance Coal Ltd. recently purchased the New Elk coking coal mine in southeastern Colorado and has embarked upon an ambitious plan to create a new source for metallurgical coal. Depending on the startup funding, the company is currently focused on returning the mine to production in late Q1 2021. They have also refined their sales strategy to include blending New Elk’s low-sulfur, high-vol B (HVB) coal with high-sulfur, high-vol A (HVA) coals from Alabama to produce a premium product, which would be exported from New Orleans, Louisiana. The blending scheme allows Allegiance to achieve its goal of 1.4 million metric tons per year (mtpy) more quickly and delays the anticipated investments it would have had to make to achieve those goals on its own.

Using this approach, Allegiance announced a revised mine plan for the New Elk mine. It keeps things simple, according to the company, and focuses on becoming efficient and profitable in the early years of production. It reduces the startup capital requirement. It also reduces the sustaining capital requirement in the early years of production.

Allegiance Coal closed on the New Elk acquisition during October acquiring all the shares in New Elk Coal Co. LLC, which owned the New Elk mine. “Timing for completion of the acquisition of New Elk could not have been better with the current strong recovery in coking coal prices toward pre-COVID levels, as previously forecast by analysts,” said Allegiance Chairman and Managing Director Mark Gray.

Cline Mining Corp. acquired the property, formerly known as the Allen mine, in 2008 for C$17 million. In 2010, the mine was reopened as the New Elk mine. Cline upgraded the mine’s infrastructure, including the prep plant and the supporting infrastructure, developed a second underground portal, and recommenced production at an estimated capital cost of some C$150 million. Production started again in 2011 and the mine operated for several months, but was forced to close in July 2012 when world hard coking coal prices plummeted. Cline filed for bankruptcy protection, which resulted in all liabilities being extinguished, and the senior secured creditor ultimately taking ownership. It has remained on care and maintenance since.

In addition to assuming the remaining Cline debt of approximately $31.6 million, Allegiance will issue $4 million in debt repayment shares. Another $3 million cash payment will be made to Cline once the $5.2 million cash reclamation bond held by Colorado Division of Reclamation, Mining and Safety is released to New Elk Coal Co. after Allegiance posts the new reclamation bond.

Allegiance Coal is a publicly listed Australian company based in Vancouver, Canada, and is focused on developing and mining metallurgical coal projects in North America and western Canada. The company is also developing the Tenas metallurgical coal project, located in northwest British Columbia, in partnership with Itochu Corp.

Updated New Elk Mine Plan

During January, Allegiance announced updates for the New Elk feasibility study that had been released in November 2019. It simplified the mine plan in the early years of production to reduce startup and sustaining capital, which would allow Allegiance more time to assess its production ramp-up options, including the Primero seam, which is located on the neighboring Lorencito property, which the company plans to acquire.

The original study reinvested earnings in the early years of production into expanding production. The updated study sees a reduction in startup capital, from $56 million to $40 million, and a reduction in sustaining capital in the first two years of production after the first six months of startup, from $67 million to $35 million. These reductions are significant. Simplifying the mine plan in the early years of production, building the balance sheet and consolidating the business, will allow them time to determine the best ramp-up option.

The updated study was undertaken by Stantec, who was the lead consultant in the original study. The focus of the work was to take out the development and mining of the Allen seam, and to run the Blue seam as a standalone mine for the life of its coal reserves.

The New Elk mine will begin producing from the Blue seam, which outcrops at surface. It is already developed with portals, fan ventilation, belting and the mains advanced 350 m underground. It is the easiest, quickest and cheapest seam within which to commence mining. With 23 million mt of saleable coal reserves at a minimum coal seam height of 4 ft, it is a significant mine operation from which New Elk can develop and expand.

As a result of the prior investment by the original mine owners and more recently Cline, the mine is fully built with upgraded infrastructure. Key mine components include a full spread of production equipment including seven rebuilt Joy 14CM15 continuous miners (one new with no hours, two with less than 2,000 hours and three with less than 3,000 hours); eight Joy SC10 shuttle cars; one feeder breaker; one roof bolter; three scoops (underground utility vehicles); several underground power centers and disconnects; conveyor drives, structure and belt; and an estimated $3.2 million in inventory and spare parts.

On the surface, the mine has a rock crusher bin receiving raw coal by conveyor belts from both portals and feeding the raw coal pad by a stacker conveyor. The stockpile’s dual underground feeding systems convey raw coal to a prep plant with a raw feed capacity of 727 tons per hour. The clean coal stockpile has an underground conveyor system that feeds coal to two 12,500-mt silos.

Room-and-Pillar Mining

Coal will be mined with continuous miners adopting the place change room-and-pillar method. Room-and-pillar mining is less capital intensive and while perceived by many to be higher in operating cost, can be extremely efficient and low cost if operated as super sections. Room-and-pillar mining is also flexible to unpredictable geology and can easily maneuver around geological intrusions when encountered, without disrupting production.

A super section involves two continuous miners operating on each section. This can be either with two continuous miners operating concurrently on a section or sequentially, that is, as one machine has completed a cut, the operator will walk through to the other side of the section and commence a new cut with the second machine. While the operator is making the new cut with the second machine, a crew-hand will reposition the first machine for its next cut. When the operator has completed the cut with the second machine, he or she will return to the first machine and execute another cut, and so the sequence continues without any, or limited, downtime in production during a shift.

Typically, two to three shuttle cars convey coal from a continuous miner to a feeder breaker while the continuous miner is being operated. The feeder breaker sizes the coal and then feeds it on to a conveyor belt, which then transfers the coal outside the mine to the raw coal stockpile. Once a continuous miner completes a cut, and is withdrawn, a roof-bolting machine drills bolts into the roof to support the roof, or any part of it, from falling.

The capital cost for the three production units on commencement of production that forms part of the startup capital is summarized in Table 1. Pricing listed in orange is equipment already owned subject only to on-site refurbishment while all other items of equipment are required to be purchased prior to the start of production.

The cost savings derived from the existing equipment on-site is substantial. To acquire three production units new, costs almost $60 million while to compile three production units from rebuilt equipment, assuming items can be acquired, is around $20 million. This compares to the estimated capital cost of refurbishing existing equipment and buying additional items of equipment as required for three production units of just $11.6 million.

Two super sections will be established in the Blue seam with the second starting one month after the first.

New Elk’s premium coal, the Primero seam, is planned to be brought into production around 12 months after production commences in the Blue seam, once permits to mine underground in the Primero seam are reinstated. An open-pit mining permit for the Primero exists, and an underground mining permit did exist though the prior owner allowed it to lapse. Allegiance believes that the reinstatement of the underground mining permit could happen quickly provided the surface footprint does not change.

Blending Coal to Meet Specs

Allegiance Coal recently entered a four-year contract to acquire 2.7 million metric tons (mt) of high sulfur, HVA hard coking coal from Alabama, which will be used to blend with New Elk’s HVB hard coking coal prior to sale on the seaborne market.

Some of the high quality coking coals in Alabama suffer from sulfur penalties or they could be ignored as a coking coal altogether. The Pratt coal seam in Alabama is an HVA hard coking coal typically with a sulfur content (>1.5%), which is rejected both domestically and globally by the steel mills and therefore when mined, is typically sold into the domestic thermal coal market, Gray explained.

“Buying Pratt coal at a local domestic thermal coal price (with upside opportunity for the vendor), blending it with New Elk coals, and selling the blended product as a high-quality hard coking coal on the seaborne market enables Allegiance to exceed its startup production target of 1.4 million mtpy of saleable coal at substantially less capital expenditure, and to arbitrage the value of the Pratt coal while increasing the market value of the New Elk coal,” Gray said. “And, this is by no means a short-term strategy. There is an abundance of Pratt seam coal, which continues to be sold to the domestic thermal coal market from other mines, as well as large deposits of this coal sitting undeveloped.”

“When we get to blend Pratt with Primero, we truly will be delivering a premium high-vol hard coking coal product to the seaborne market for which we expect to command a premium price,” Gray said.

Allegiance has entered into a binding terms sheet, subject only to completion of formal legal documentation, with Mays Mining Inc., a private family-owned coal mining business with existing operations in Alabama. Allegiance has met with several mine owners who produce Pratt coal, all of whom are potential future partners when Allegiance increases its production at New Elk. Mays, however, is well known to the New Elk project management team and a producer Allegiance can trust to deliver, on time, and within specification.

Upon New Elk commencing production at approximately 32,500 mt/month, Allegiance will acquire from Mays 30,000 mt/month of Pratt coal, for total saleable coal of 62,500 mt/month. When New Elk reaches approximately 65,000 mt/month, which the company believes will be within six months of when production begins, it will acquire 60,000 mt/month of Pratt, bringing the total saleable coal to 125,000 mt/month.

Allegiance will pay for the Pratt coal fortnightly upon the coal being washed, weighed and tested for specification compliance at the mine site. Mays will then direct load from the mine site into a barge on the Black Warrior River, where the coal under Allegiance’s control will be barged 400 miles to the Convent Marine Terminal (CMT), and unloaded into its own stockpile awaiting ship loading and blending.

Allegiance will pay Mays a fixed price for the coal, along with a bonus payment of an agreed share of the FOB sales price above $110/mt, which Allegiance achieves for the blended coal.

In addition, Allegiance has agreed with Mays to construct a prep plant adjacent to the Pratt coal, which is also adjacent to the Black Warrior River and an existing, operational barge load out. To do so will reduce May’s haulage costs of having to truck the raw Pratt coal to a wash plant 10 miles from the mine site, and back, and avoid any port barge loading fees by direct loading from the wash plant. Helping Mays to maintain a good margin for the Pratt coal provides Allegiance with comfort that Mays will be a safe and reliable supplier. By owning the wash plant, Allegiance will be able to control the quality of the coal being loaded, and give Allegiance security around future supply.

Exporting Product

Moving New Elk coal to New Orleans instead of Houston, although marginally more costly, creates better access to steel mill vessels. CMT is the only coal terminal in New Orleans that is set up to receive coal by rail, which is the only way New Elk can move coal to New Orleans affordably. All other coal terminals in New Orleans can only receive coal via barge.

CMT has 1.35 million mt of storage capacity and annual outbound throughput capacity of 13.5 million mt. CMT has two berths capable of receiving Cape and Panamax-sized vessels. CMT also has two stacker-reclaimers enabling simultaneous ship loading from two different stockpiles for coal blending.

Allegiance can rail New Elk coal to CMT via Union Pacific and Canadian National Rail, which owns the last 50 miles of track into CMT, and CMT can accept the Pratt coal barges. A revised rail rate has been agreed with Union Pacific Rail, as well as Canadian National Rail, and the port rate has been agreed with CMT.

This article was written based on publicly available information that Allegiance Coal has recently released.