Oaktown 2, owned by the company’s Vectren Fuels subsidiary, began production this spring. Vectren is counting on Oaktown 2 and its sister deep mine, Oaktown No. 1, both in Knox County, along with changes in the mining plan at the Prosperity underground mine in Pike County, Ind., to eventually lower its operating costs. During the ramp-up phase at Oaktown 2, however, costs will be higher, company officials cautioned during a May conference call with analysts to discuss first-quarter earnings. All three mines are continuous miner operations.
Vectren spent more than $125 million to develop the two Oaktown mines. Oaktown 1 began producing coal in 2010. Lower production costs and a rise in coal sales could help Vectren’s coal mining segment return to profitability. Coal mining lost $6 million in the first quarter of 2013 and Vectren predicts the red ink could climb to $12 million by the end of 2013.
Vectren blamed most of the losses on the mild winter of 2011-12 that led many electric utilities to ramp down their coal burn, sometimes delaying coal deliveries as a result, and historically low natural gas prices. Since then, gas prices have more than doubled and the colder winter of 2012-13 helped to burn down stockpiles at many utilities.
Now, Vectren expects its three coal mines to be producing at the rate of 7.5 million tons annually in a year or so, assuming demand for high-sulfur steam coal continues to recover.
While many utilities have held back on coal purchases during the past year, “I think you’ll start to see the customers now start to be much more open about their future spending timelines,” said Carl Chapman, Vectren’s chairman, president and CEO. “But it’s really just because they’re working through those coal piles.”
In addition to lower gas prices, the company continues to believe that, longer term, reduced coal volumes from Central Appalachia due to increased government regulation and the large number of scrubbers installed by utilities in the United States, including the Midwest, should drive stronger demand for Illinois Basin coal.
Disappointment in the performance at Prosperity, which experienced thin coal seams in the first quarter as well as a significant shutdown in March because of a geological issue, prompted Vectren to implement changes in its mining plan. In April, Prosperity’s continuous mining equipment was moved to areas of the mine with thicker seams and lower-profile mining equipment was placed into service there for the first time.
As a result, “We expect the average cost per ton at Prosperity to improve for the remainder of the year,” said Jerry Benkert, Vectren’s executive vice president and CFO.
As of March 31, Vectren estimated its total IB reserves at approximately 126 million tons. Five Star Mining is the contract miner at Prosperity while Black Panther Mining serves as contract miner at the two Oaktown mines.