Vectren’s coal mining unit lost $300,000 in the first three months of 2012, dragged down by an unusually mild winter that hurt sales. As a result, utility customers’ coal burn fell, inventories swelled and some power companies deferred or reduced coal deliveries as allowed under existing contracts. A year ago, the mining segment posted a $1.6 million profit.
Oaktown No. 1, a continuous miner operation that went into production more than a year ago in Knox County, Ind., remains a bright spot for the company.
Carl Chapman, Vectren chairman, president and CEO, told analysts during a May quarterly earnings call that the company profited from Oaktown No. 1’s improved productivity that led to results substantially better than in the first quarter of 2011.
At Prosperity, a deep mine in Pike County, Ind., the thin coal seams and extra roof bolting “caused an increase in the cost per ton above plan in the prior year,” he said. Vectren uses contract miners for both mines—Five-Star Mining at Prosperity and Black Panther Mining at Oaktown No. 1.
Overall, Chapman said the tonnage cost at both mines would have been even better “had we not slowed production to better match the current market demand.” For all of 2012, Vectren is targeting a margin of approximately $3.50/ton on coal sales, assuming a full-year tonnage cost of about $43.50/ton, which the company believes can be achieved through cost improvement initiatives at Prosperity and even better production at Oaktown No 1.
Vectren is in the process of switching to lower-profile mining equipment at Prosperity to reduce the amount of rock mined along with the coal, which should improve mining efficiency. The company also is working with the Mine Safety and Health Administration to modify the mine’s roof control plan that, if approved, “will help lower future costs associated with roof bolting while maintaining our high safety standards.”
Vectren still intends to bring the new Oaktown No. 2 underground mine, the sister mine of Oaktown No. 1, into production in the fourth quarter of this year. “As Central Appalachia coal production continues to decline and as scrubbers continue to be installed, we believe our Indiana coal mines are well positioned to capture additional sales as market demand recovers,” Chapman said.
According to Jerome Benkert, Vectren CFO and executive vice president, the company continues to negotiate coal sales agreements with “multiple other parties.” Chapman said coal pricing for 2013 will be impacted by the weather this summer and gas price predictions for next year.