By Steve Fiscor, Editor-in-Chief

With an interesting assortment of mines scattered across Appalachia, the Justice  family launched Southern Coal Corp. last year. The company had metallurgical and steam coal mines in Kentucky, mostly steam coal in Virginia, and PCI/steam coal mines in Tennessee. Almost all of these operations had unrealized potential.

Justice understands the met coal market. Perhaps it was a hunch or family intuition, but last fall—well before the major coal producers started talking about cross over potential and Chinese imports—he said he thought the met market was about to take off. The steam coal market softened with the economy last year and, for many mine operators, the only positive story to tell involved surging met coal prices. To participate in the coking coal market, however, a coal operator needs to have metallurgical grade coal.

Southern Coal is widely considered the largest privately-held met coal producer in the U.S. In the last year, the company has grown to 33 mines. What separates it from the other coal operators in the region is a large permitted reserve and none of its surface mining operations are classified as mountaintop removal.

During 2009, the company produced 5.5 million tons and this year it hopes to grow that figure to 6.5 to 7 million tons with 3 million going into the met market. In 2010, half of that production will be sold in met or pulverized coal injection (PCI) and next year it hopes that figure will grow 70%.

In the last year Southern Coal has invested approximately $125 million to grow its production capacity. This year the company opened Tams, a new low-vol surface coal mine in West Virginia. With access to low-vol met reserves, production from several facilities can be blended to meet a wide range of needs. In fact, the company is marketing a new mid-vol blend they have developed, which they refer to as the Ranger Mid-Vol Blend.

A major part of the investment went toward adding both underground and surface production at its A&G operations in Virginia. Southern Coal also recently acquired some assets from National Coal that will play a strategic role with its mines in Tennessee. By shifting some steam coal sales to the Tennessee operations, the company can now effectively market more of A&G’s production as a high-vol met producer rather than steam. Looking toward the future, Southern Coal recently completed feasibility studies and plans to open Locust Grove, a new longwall mine in eastern Kentucky in the next 18 months.

New Tams Surface Mine
Met coals command a high price. Low-vol met coals are selling for as much as $210/ton, while high-vol met coals are selling for $160/ton. Regulatory issues in the Appalachian market right now are driving met coal prices even higher. The high-vol A market (less than 34% volatiles) is very tight (more than $250/ton). The high-vol B is greater than 34% volatiles.

“Our operational theme is still to take as many tons as we can produce and place them in the met market,” said Jay Justice, owner, Southern Coal. “Our market priorities are the met market first, followed by the PCI market, and then the steam market.”

During May Southern Coal opened the Tams surface mine, near Beckley W.Va. Mining coal from the Sewell seam, which has 19% volatiles (and 145 reflectance), the Tams mine should produce 370,000 tons in 2010 and will reach its full annual potential of 780,000 tons in 2011.

“Most of the export coal is blended to 27% volatiles,” Justice said. “We can blend this new Tams low-vol met coal with A&G’s high-vol product to make a mid-vol product. Basically, we are able to blend to make any met product, low-vol, mid-vol, or high-vol. Right now we are marketing a 50:50 blend of Tams and A&G, which we refer to as the Ranger Mid-Vol Blend and it sells for $200/ton.” By using this strategy, the company takes a $10/ton hit on the Tams product, but improves the price for the A&G coal by about $40/ton.

For the Tams operation, the company purchased all new equipment; a Hitachi 2500 hydraulic excavator (configured as a front shovel), three 200-ton Cat 789 haul trucks, a Cat D11R dozer, a Cat 993 front-end loader, and three 150-ton 785 Cat haul trucks. “This is $40 million greenfield investment for Southern Coal,” Justice said.

The Tams surface mine uses a contour/area mining method, re-mining pre-law walls, which simplified the permitting process. “We are taking some second cuts on old highwalls and restoring the natural beauty of the region,” Justice said. “One permit was just issued. There was an existing permit. Southern Coal acquired it and it was re-issued last fall.”

The average stripping ratio is 28:1. While that is well above the industry average, so is the price the coal commands. The Tams operation has 3 million tons permitted and a 10 million ton reserve overall, which translates to a 12- to 14-year life.

Southern Coal has invested more than $1 million in a new rail loadout, located near Beckley. About 20% of the Tams production needs to be washed and the rest would be shipped raw. The company has a third party toll-wash agreement with a neighboring prep plant.

Acquiring the Tennessee Assets
During April, Ranger Energy Investments, an investment firm owned by the Justice family purchased assets associated with the New River Tract in Eastern Tennessee owned by National Coal for $10 million. The assets included the Baldwin prep plant, the active No. 5A mine, the idled No. 3 surface mine, a loadout and an impoundment with more than 25 years of life remaining. Along with five permits and certain liabilities, the transaction also included the coal mineral rights to approximately 22,000 acres, which will be leased to Ranger Energy for a 6% to 8% royalty.

A publicly held coal producer, National Coal serves the steam coal market, and it owns and operates several properties, including the Baldwin and Turley assets in Tennessee. National Coal views the Turley assets as strategic to its business plan, Justice explained, and the company was willing to sell some of its non-core assets to raise cash. “National approached us asking if we would be interested in purchasing the Baldwin assets,” Justice said. “Ultimately the deal worked out well for both parties. We now have the infrastructure we needed and they were able to raise cash from a non-essential asset.”

Ranger Energy Investments is the bondholder for National Coal. If the company defaults, the remaining assets would revert to the bondholder. National Coal has an interest payment that comes due in June. “All indicators from our side is that they will not default on the payment,” Justice said.

In 2008, when Southern Coal originally purchased Premium Coal, the com-pany knew it had a phenomenal 250-million-ton reserve base with a lot of permitted reserves, but it also knew it had very limited infrastructure. “Getting an impoundment permit in Tennessee these days is virtually impossible,” Justice said. “It was very difficult to expand Premium Coal without the infrastructure. In fact, Premium was selling coal to National Coal for quite some time because we were out-producing what our infrastructure could handle.” The Premium Coal product, which is currently being sold into the steam market, is also a PCI quality coal.

By buying the National Coal assets, Southern Coal can effectively increase its production in Tennessee and move the steam contract from A&G to Tennessee. A&G is now a 91% met coal producer. “As in all good deals it is our hope that with this transaction National is able to do well,” Justice said.

A&G Expansion
Last year A&G was producing around 2.5 million tpy, with 1 million going to the high-vol market and 1.5 million tons headed to power plants. Factoring in the acquisition of the National Coal assets, Southern Coal can fill A&G’s steam contract with increased production from Baldwin. “Now that frees up more potential met sales at A&G,” Justice said. “We have a 2.5 million tpy high-vol met
at A&G.

Last year, A&G consisted of eight surface mines, two underground mines (the Imboden and the Taggart Market mines), two rail loadouts, and the Canepatch prep plant.

Currently, the Imboden mine is running with two sections and a third was expected to start at the end of June. Taggart Marker has two sections running with a third to start in August. “We have invested more than $10 million at each mine,” Justice said.

Southern Coal purchased a new Hitachi 3600 ($5 million) and six Cat 789 haul trucks ($2 million each) for A&G Job No. 21. “On that job we have an O&K shovel and a Hitachi shovel,” Justice said.

The company also bought a 1,000-tph heavy-media cyclone prep plant in Wise, Va. “That will handle our increased deep mine production,” Justice said. “They are performing some minor refurbishment work and the plant should come on line during August. The plant was idled for about five years. New belts were installed and all of the electrics were rewired, moving the plant from distributed controls to PLCs.”

That was a $7 million investment. A&G coal will be trucked to the plant, which has a load-out on the NS line. A&G will wash a steam coal product at its existing Canepatch plant for a specialty stoker coals. The Wise plant will be used for A&G met production.

Southern Coal also purchased Baden Reclamation, which operated a surface mine in Clintwood, Va., about 20 miles from the A&G property. Several pieces of equipment were purchased for this project as well, two Cat D11T dozers, a Cat 993K front-end loader, and three 150-ton 785 Cat haul trucks. Justice expects production at this mine to double from 20,000 tpm to 40,000 tpm. The coal from Baden Reclamation is considered high-vol met production. It is hauled back to A&G’s Paragon load-out.

Future Endeavors
In 2010, Southern Coal expects to produce 6.5 to 7 million tons. In 2011, the company hopes to produce 8.3 to 8.7 million tons. Nearly one-half of the 2010 production will be sold into either the met or PCI market, Justice explained, and next year he hopes that figure will grow to 70% or more. “Last year, we had hoped to be a 7.3 million tpy in 2010,” Justice said. “However, we were not able to develop the PCI market for Sequoia as had been originally planned. That has been throttled back for now. As soon as that happens, the tide will turn. Sequoia is waiting on the market.

“We still have the desire to grow the operation to 10 million tpy by 2012-13,” Justice said. “Expansion-wise, we would probably rely solely on the PCI market. Our met coal will be sold out for the period.” When the company gets to 10 million tpy, Justice hopes to maintain that 70% met/PCI threshold.

Southern Coal ships 65% of its export coal through Lamberts Point on Norfolk Southern, 5% domestically, and the balance between a combination of river barge and CSX rails through the Gulf of Mexico. Similar to other coal operators, the company has sold some coal to the Chinese steel mills. Justice is concerned with the rail bottleneck between the mines and the port.

“The railroad is having a difficult time keeping up with met coal exports,” Justice said. “There is no ground storage at Lamberts Point. We could truck it to the river and ship by barge  to Mobile. Some PCI coals could be transloaded rail-to-barge to Mobile. And, we are actively pursuing a port position in Mobile for the PCI coal from Sequoia.”

“We think that our current operations need to be met or PCI,” Justice said. “The below-drainage coal that we have at Sequoia is 1.3 MMlb-SO2, which is more attractive than some coals out there. We might have a competitive freight advantage to the southeast, but to be priced competitively, it would have to be a longwall operation.”

Growing coal production in Appalachia is a formidable task right now. “The absolute biggest challenge we face is the changing regulatory environment,” Justice said. “Our attitude is that we will conform to the changes, but that doesn’t mean it will be easy.”

The situation is such that most of the future growth, Justice explained, will probably have to come from deep mine production. “Our trump card is the massive amount of reserve we have permitted which is in excess of 125 million tons,” Justice said.

Southern Coal is in the process of developing a longwall operation, Locust Grove, located near Harlan, Ky. At its Sequoia operations, the mining is all above drainage coal. This is below drainage coal under the Sequoia property.

Through a lease buy-back arrangement, Southern Coal has access to a 40-million-ton reserve in the 8-ft thick Hance seam, near the old Lynch No. 37 mine. Justice envisions a 2-million-tpy longwall mining operation coming online in the next 18 to 24 months. “We will have four continuous miners on longwall development,” Justice said. “From the bottom of the hollow floor it’s about 200 ft below drainage, but the average overburden would be 1,200 ft. The depth would require shaft haulage with significant infrastructure. We are in the shaft-design stage now.” Southern Coal plans to build a new prep plant to support the Locust Grove mine.

Aside from seeing the prices in the met market unravel, Justice is concerned about mine safety. “The heavy enforcement on the surface mining side of the business is forcing more production underground, which places more miners per ton in a less safe environment,” Justice said. “Our people are very important to us and we try to keep safety at the forefront. We are investing more money in safety training for employees. We are assembling additional mine rescue teams in Virginia and Kentucky. I do not know if anyone is immune from suffering a tragedy, but you certainly need to do everything you can to try to prevent it from happening.”