Output was up by almost 500,000 tons in the third quarter at the new Tunnel Ridge longwall mine in Washington County, Pa., and Ohio County, W.Va., while Onton No. 9, in western Kentucky’s Hopkins County, also showed gains, Craft said during an October 26 conference call with analysts. Alliance, headquartered in Tulsa, Okla., purchased Onton earlier this year from Green River Collieries.
For the quarter, Alliance produced 9 million tons and sold more than 8.9 million tons at its mines in the Illinois Basin, Northern Appalachia and Central Appalachia, representing increases of 17.7% and 7%, respectively, over the third quarter of 2011. Craft said Alliance expects to produce 34.4 million to 34.9 million tons and sell 34.8 million to 35.2 million tons in 2012. Alliance has secured sales commitments for essentially all of its 2012 coal sales volumes and for approximately 37.1 million tons, 29.9 million tons and 22.8 million tons in 2013, 2014 and 2015, respectively. In the quarter, it booked new sales agreements totaling 1.65 million tons through 2014, bringing its year-to-date new sales commitments to about 28.7 million tons for deliveries through 2018.
Alliance earned $60.5 million in the three months ended September 30, down from $104.1 million a year ago. Revenues rose 5.3% to $499 million.
The earnings picture could have been even brighter, however, if the Pontiki underground mine in eastern Kentucky had not been idled on August 29. The company closed Pontiki after the federal Mine Safety and Health Administration cited Alliance for the failure of a beltline between two coal stacking tubes. The prolonged shutdown—Pontiki still was not back in operation by the end of October—cost the company an estimated $24.1 million in losses and charges in the latest quarter.
Craft said repairs at Pontiki were expected to begin “shortly” and be completed by the end of the year, with the goal of restarting the mine. He cautioned that the market outlook for Pontiki beyond 2013 “is uncertain and there are significant risks about long-term viability of the mine.”
Excluding Pontiki, the company’s cash flows “were in line with expectations” in the third quarter, said Brian Cantell, Alliance senior vice president and CFO. The proper way to interpret Alliance’s quarterly performance, he advised analysts, “is to look beyond Pontiki, which was an unexpected event.”
There are no such worries about Tunnel Ridge, Alliance’s newest major steam coal producer. The mine will continue to ramp up to 6.2 million tons in 2013 and 6.5 million to 6.8 million tons in 2014. Meanwhile, construction continues at two other new deep mines—Gibson South near Princeton in Gibson County, Ind., and White Oak No. 1 near McLeansboro in Hamilton County, Ill. Alliance acquired a preferred equity investment in privately owned White Oak Resources, the longwall mine’s original developer, last year.
Gibson South, which could commence production in the fourth quarter of 2014 or early 2015, is expected to allow Alliance to boost its exports of high-sulfur IB steam coal. White Oak No. 1 is targeted for initial production in 2013, but will not reach its peak of 6 million tons a year until 2014 or 2015.
Craft predicted the coal burn will improve in 2013, “assuming continued strength in gas prices and normal weather patterns.” The timing of the improvements, he added, “will depend on the strength of economic activity both domestically and abroad. We believe the market will rebound sometime in the second half of 2013.”
As natural gas prices near $4/mmBtu, “demand should be improving and we should not have the pressures and deferrals we felt in the early part of 2012,” Craft said. “If gas prices can stay in the $4 range, we feel like we should be okay with our set contract position.”