Alliance President and CEO Joe Craft said it is able to do so because the company has shifted production to its lowest-cost mines while trimming operating costs. “We’ve been in transition to move production from our higher-cost mines to our lower-cost mines,” he said, referring in particular to the Tunnel Ridge longwall mine in Ohio County, West Virginia, that started up three years ago. Tunnel Ridge saw its production rise to 1.8 million tons in the April-June period, and 3 million tons for the first half of 2016, according to the federal Mine Safety and Health Administration, leaving it on track to meet or exceed 2015 production of 6 million tons.
Alliance made the difficult decision in late 2015 to idle its higher-cost Onton No. 9 and Gibson North underground mines in Webster County, Kentucky, and Gibson County, Indiana, respectively, in the process taking more than 4 million tons of high-sulfur coal out of production annually. Craft said he hopes Alliance can reopen both continuous miner operations at some point, although there is no timetable.
“We made the decision to cut production,” he said, adding that the strategy of more closely matching production to committed sales resulted in Alliance’s production dropping by 28.9% in the first half of 2016 compared to a year ago. Alliance produced and sold 8.3 million and 8 million tons in the second quarter of 2016, down from 9.5 million and 10.4 million tons in the year-ago quarter. The company’s production and sales for the first half of this year were 17.2 million and 15.4 million tons, respectively, versus 20 million and 19.9 million tons in the first half of 2015.
Alliance fetched a bit less from coal sales in the second quarter, $53.05/ton, down from $54.13/ton a year ago. But production costs decreased even more, to $30.93/ton in the latest quarter from $35.77/ton in the second quarter of 2015.
For all of 2016, Alliance said production should be in a range of 33.5 million to 34.5 million tons, with sales in a range of 35 million to 36 million tons. “We anticipate sales volumes to increase by 4.5 million tons in the second half of 2016,” Craft said, as buying activity is starting to accelerate. Alliance now is essentially sold out for 2016 and has obtained pricing commitments for 24.3 million, 15 million and 7.9 million tons for 2017, 2018 and 2019, respectively. It expects to secure more sales in the coming months.
On the minus side, prices in 2017 are expected to be lower than 2016. “Right now, based on what we are projecting, we would have pricing overall that will be down about 12 to 15%, somewhere in that zip code,” Craft said. “What we’re seeing is that we still have some time to go to get inventories at coal mines and utilities at a level where we can get a good response.”
Craft continues to believe that low natural gas prices, a bane to coal for the past few years, are bound to rise, at least to the level of $3/MMBtu or so, at which “we can compete very effectively and get our production levels back to what we enjoyed prior to this year.” Gas prices were hovering around $2.75/MMBtu in late July.
More good news, Craft said, is that Alliance is starting to see positive signs in the long-moribund coal market, thanks in part to hot summer weather across much of the U.S. and slightly increasing gas prices. “We expect these factors will help us,” he said.
In response to a question about whether Alliance may make a coal industry acquisition in the next 12 to 18 months, Craft said that potential scenario is “hard to handicap.” While Alliance is open to such opportunities, “two things have to happen. One, you have to have a favorable lending environment, and two, you have to have sellers that are willing to be reasonable as to the value expectations that they have for their assets.”
In a research note, Stifel analyst Paul Forward said Alliance’s quarterly earnings were higher than expected and primarily driven by the company’s Illinois Basin division, “where higher pricing ($51.78/ton vs. our estimate of $50.50/ton) and lower costs ($27.99/ton vs. our estimate of $30.50/ton) drove strong realized margins during 2016.”