Rhino Resource Partners LP RHNO announced that it has entered into an agreement with Alliance Coal, LLC to sell certain assets relating to its Pennyrile mining complex (“Pennyrile”) for cash and other consideration. The firm expects the transaction to be completed in fourth-quarter 2019.
The decision to sell the Pennyrile mine does not come as a surprise, as fluctuating sales volume from this mining complex has been adversely impacting the company’s profitability for the last few quarters.
Rhino Resource’s cost of operations and cost of operations per ton related to the Pennyrile complex was $28.2 million and $42.73, respectively, for the first half ended Jun 30, 2019. Its cost of operations and cost of operations per ton was $25.5 million and $39.39, respectively, in the comparable year-ago period. The increase in cost of operations and cost of operations per ton was due to a rise in operating expenses including labor, contract services and equipment maintenance. Notably, higher steel prices for roof support during the first half of 2019 hampered operating results from this mine.
Another firm Alliance Resource Partners, L.P. ARLP has decided to shut operations at Dotiki, which is an underground mining complex in Kentucky. The firm has decided to focus on other low-cost mines in the Illinois Basin.
Coal Companies Continue to Lose Ground
Coal has already lost the battle as the primary source of energy to natural gas in the United States. Coal companies continue to lose ground to renewable sources. This shift in loyalty is primarily due to growing concerns about rising emissions.
The latest report from U.S. Energy Information Administration (“EIA”) forecasts U.S. coal consumption in 2019 to fall to 589 million short tons (MMst), indicating a 14.3% decline from the 2018 levels, and the figure to further drop to 575.7 MMst in 2020.
Per EIA, almost 13 gigawatts of coal-fired electricity generation capacity has retired this year or is scheduled to retire by the end of 2020, accounting for 5% of the existing capacity at the end of 2018.
The gradual fall in demand in the U.S. electric utility sector is a primary cause of declining demand for coal. In addition, a drop in U.S. coal exports is hurting the prospects of coal companies. EIA projects that coal exports from the United States will drop 13.5% to 100 MMst in 2019 from 115.6 MMst a year ago. U.S. coal exports are expected to further drop to 90.4 MMst in 2020.
Can Coal Companies Fight Back?
The U.S. coal companies have been working to improve price & shipments. These companies are lowering production volumes, ceasing operations in high-cost mining complexes and cutting down operating cost to remain competitive.
To fight lower demand, Peabody Energy Corporation BTU and Arch Coal Inc. ARCH have decided to form a joint venture (JV) by merging some of their most-productive coal mines in Powder River Basin and Colorado. The aim of the JV is to combine best productive assets of both the companies and reduce costs beyond the capacity of a single company to achieve.
This joint venture has the potential to deliver desired results, as decline in the cost of operation will make it more competitive than that of natural gas and renewable sources of energy. Owing to the JV, these high-quality coal companies will no longer compete with each other for orders but will work jointly and share profits. Other coal companies might work on the same model to carry on operations.
Rhino Resource has underperformed its industry in the past 12 months.
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