Initially, Oaktown 2 was expected to follow its sister Oaktown No. 1 deep mine into production about a year or so ago. But a slow coal market blamed largely on historically low natural gas prices and a mild winter of 2011-12 that built bulging utility inventories forced the Evansville, Ind.-based company to delay Oaktown 2’s opening.
There still is no precise date when mining will begin. But Vectren officials said in late February that startup is approaching.Oaktown 2’s development essentially is completed, and the mine’s opening could “accelerate” if negotiations with unidentified prospective customers in the southeastern United States bear fruit soon, officials said.
When Oaktown 2 is producing high-sulfur steam coal, it will give the electric and natural gas company three operating underground mines in southern Indiana: Prosperity in Pike County in addition to the two Oaktown mines.
Vectren’s coal output is projected to rise appreciably as a result. After turning out 4.8 million tons of coal in 2012, the company is targeting 2013 production of 5.5 million tons, increasing to 7.5 million tons annually once all three mines are operating.
Oaktown 1 enabled Vectren to trim production costs, and the company is counting on Oaktown 2 for additional cost improvements. For example, Vectren’s coal production costs averaged $47.87 a ton in 2012 but are forecast to drop to $43.50 a ton in 2013. Oaktown 1 has helped in that regard, but Vectren also credits cost improvements at Prosperity due to “lower profile mining equipment and changes to roof-bolting plans.”
Jerry Benkert, Vectren executive vice president and chief financial officer, said, “We continue to be very pleased with low production costs at Oaktown 1, which should only improve once Oaktown 2 is in production.”
Vectren likes its location in the high-sulfur Illinois Basin, which it believes will continue to benefit from declining production in Central Appalachia and additional scrubber installation by electric utilities that should result in higher demand for IB coal.
While coal production fell 7% in the U.S. in 2012, it increased by 9 percent in the IB, Vectren noted. The company, during a February 27 investors conference in New York City, said IB coal is more likely to be used in larger, more efficient power plants with modern pollution controls, helping the region to compete against low natural gas prices.
Those gas prices continued to inch upward in early 2013, climbing above $3/mmBtu. At that price, coal-to-gas switching will be discouraged and even reversed in the IB, company officials said.
On the whole, 2012 was not a very good year for Vectren’s coal mining business, however. Coal mining lost $3.5 million for the year after contributing a $16.6 million profit to the company’s bottom line in 2011. This year is expected to be even worse, with Vectren estimating a mining-related loss of $9 million in 2014 due to weak demand.
But the company is confident of a turnaround in 2014. Already, Vectren has booked sales of 5.8 million tons at an average price of $46 per ton in 2014. The total includes about 800,000 tons currently in arbitration with an unidentified customer.