Elk Horn reported an estimated 128 million tons of proven and probable reserves and 157 million tons of non reserve coal deposits. These estimates were based on a 2008 independent reserve study updated by Elk Horn’s management as of December 31, 2010, based on SEC guidelines. Elk Horn had leased to third parties approximately 65 million tons of proven and probable coal reserves and approximately 55 million tons of non reserve coal deposits. Major lessees include James River, Blackhawk, Revelation and US Coal. The Elk Horn coal is high quality, a portion is expected to meet the standards for PCI (pulverized coal injection), and the steam coal is generally high Btu with mid sulfur content.
Rhino believes there is substantial upside provided by Elk Horn’s unleased reserves in Southern Floyd County, where a significant portion of the coal is expected to meet the standards for PCI. The estimated proven and probable reserves in the Southern Floyd area are approximately 40 million tons, based on the independent reserve study mentioned above. Southern Floyd includes several developed deep mines, a prep plant site and a permitted refuse area. Management is evaluating the infrastructure needs and the best options to restart and then to increase production from this property. Options under consideration include leasing to one or more third parties, operating the mines with contractors, or operating them as Rhino company mines. Because a large portion of Elk Horn’s property is contiguous with Rhino’s Deane property, Rhino expects there to be synergies between the two operations. Infrastructure which facilitates the increase of Southern Floyd production will help accelerate development of Rhino’s contiguous northern Deane complex properties.
Over the last five years, annual production from Elk Horn’s properties has ranged from approximately 1.6 million to 4.9 million tons, and has averaged 3.2 million tons per year. Elk Horn is projecting solid production growth in 2011 as properties that had been leased to financially weak operators have been replaced by more experienced and better capitalized companies. An annualized rate of production of 3.5 million to 4 million tons of coal per year is expected to be reached by Q4 2011. The lease rates are generally in the range of 6% to 9% of the coal sales revenue.