That may help explain why Alliance continues to develop and open new mines in the Illinois Basin and Northern Appalachia while many producers are pulling back in the teeth of a triple whammy for the coal industry: Decade-low natural gas prices coupled with tougher federal Environmental Protection Agency rules that are causing some electric utilities to retire older coal units or switch them to gas, and lower electricity demand stemming from a still shaky economy.
Craft, though, believes the worst may be about over in the industry’s historic boom-or-bust cycle and brighter days are ahead. By 2016, he wants Alliance to be producing at the rate of 50 million tons a year, up from the 35.4 million to 36.2 million tons it expects to turn out this year.
“We’re going to bottom out for coal consumption in 2012, then start some increase in 2013,” he told the National Association of Publicly Traded Partnerships conference in Greenwich, Conn., in May. “We believe there will be some switching back to coal in 2013” by utilities looking to take advantage of currently low gas prices.
Unlike some of its competitors, Alliance has not been affected much by the move to gas, according to Craft. “We had some customers switch to gas, but not at the plants we’re selling to,” he said. “We haven’t had anybody shut down a plant we’ve been targeting in the past or in the future.”
For much of this year, natural gas has been selling around $2/mmBtu, a price at which coal has trouble competing. Craft maintained existing gas prices are not sustainable because investors “want a return on their investment and aren’t getting it at $2 gas.” If gas hits $3.50/mmBtu, he said, “We’ll see some of the switching come back to coal from natural gas.”
In fact, Craft said it would not be a stretch to see gas prices climb to $4/mmBtu in 2013. “If that happens, the impact on coal will be small,” he said, adding, “I do believe we’re going to see $4 gas sooner than later because of economics.”
In the meantime, Alliance is pushing ahead with several new underground mine projects. The longwall system at its new Tunnel Ridge operation in Washington County, Pa., and Ohio County, W.Va., began running May 16. By sometime next year, the mine should be producing at the rate of 6.5 million to 6.8 million tons annually.
Under construction in southern Indiana, the Gibson South mine is expected to play an important role in boosting Alliance’s foreign coal exports. To date, the company has not focused as heavily on the export market as some of its competitors. But that may be changing.
Craft said the lower-sulfur coal at Gibson South, which will be a continuous miner operation, “will sell well in the international market.” As a result, it is possible, he said, that Alliance will increase its overseas shipments from the current 3.5% to 10%. Gibson South will produce more than 3 million tons annually once it starts up in 2014.
Craft also has high hopes for White Oak Resources’ No. 1 longwall mine under construction in Hamilton County, Ill. Alliance is investing more than $400 million in privately-owned White Oak, including for reserve acquisition and mine development. The mine should produce more than 6.5 million tons of high-sulfur coal a year by 2015.
Although the current mine plan calls for a single longwall system at No. 1, “If the market allows, they can go to two longwalls,” he said.
Alliance has the largest market share in the IB, Craft said, although that position could be threatened in a few years by billionaire Christopher Cline’s Foresight Energy Partners, which operates or is developing four large deep mine complexes in Illinois. Eventually, the Foresight mines could produce as much as 65 million tons annually.
Craft, in response to a question, got in a little dig at Cline. “He has taken a riskier approach,” Craft said. “He didn’t go out and secure contracts to bring on his investment.” And while Cline’s Illinois mines are participating more in export markets than Alliance, “the price is lower than what [Cline] would get in the U.S. electric utility market.” Moreover, Cline’s Illinois coal “is a higher chlorine product compared to what we produce. Most utilities will not buy a higher chlorine product because of what it does to their boilers.”