Why underground mines cost higher compared to surface coal mines

Market Realist

A must-know overview of the US thermal (steam) coal industry (Part 4 of 12)

(Continued from Part 3)

Geographic landscape

Recall that it takes more time, pressure, and heat to form higher-ranked coal. This means higher-ranked coal is largely buried deeper in the Earth’s crust, while lower-ranked coal is closer to the surface. About 70% of total coal production from Appalachia is recovered from underground mines, while Powder River Basin mines are all surface mines. Approximately 50% of total coal production in the Interior region consists of surface mines.

Underground mining is generally more expensive than surface mining. Cash mining cost for higher-ranked coal at Appalachia Basins is much higher at above $60/short tons, based on Alpha Natural Resource’s (ANR) and Arch Coal’s (ACI) financials for Eastern operations. Conversely, cash mining cost at Powder River Basin averages ~$10/short tons, according to Cloud Peak’s (CLD), Arch Coal’s, and Alpha Natural’s financials for Western operations.

Cash and total mining cost

Cash mining cost includes all the working expenses incurred to recover coal, and excludes necessary machine and coal reserve costs. Including the cost of machines and coal reserves, the total mining cost in Appalachi basin is closer to $80.00/short tons, while miners in Powder River Basin again enjoy much lower cost of ~$11.63/short tons. Total mining cost in the Interior region, based on Peabody Energy’s (BTU) financials, stands between that of Appalachia and Powder River Basin.

Capital intensive

Underground mining is more expensive because it’s more capital intensive. Coal companies such as Arch Coal (ACI) and Alpha Natural Resource (ANR) have to drill more and use more expensive and complicated machines. Proper ventilation system is also needed to supply necessary oxygen to miners working underground, and to dilute, render harmless, and carry away the hazardous components of mine air (including methane that is potentially explosive).

Higher labor cost

Labor cost is also more expensive in underground mining, because of higher health care and benefits liabilities, greater presence of labor unions, possibility of mine collapse, and lower productivity. In Northern and Southern Appalachia basins, labor union represented 36% and 64% of total employees, respectively, in 2012. In 2013, ~55% of Walter Energy, Inc.’s (WLT) employees were part of a union.

Continue to Part 5

Browse this series on Market Realist:

Rates

View Comments (0)