PRB coal demand and production continues

GILLETTE (WNE) — The coal production from Peabody Energy Corp. and Arch Resources Inc. through the first three months of 2022 aligned with the strong projections each company had for their Powder River Basin mines headed into the year, despite rail issues and other logistical challenges.

Their steady coal production comes amid an increased demand for thermal coal sold at higher prices that has carried over from last year.

But both companies have kept an eye on the short-term gains with the other fixed on the looming long-term downfall of the coal industry in the basin.

“I think we’ll continue to generate cash out of these assets but we’re simply not going to put any more cash into them,” said Paul A. Lang, Arch CEO and president, on the company’s quarterly earnings call.

“We’ll do what we have to to feed them and keep them going, but any thought of increasing production beyond what we have the ability to do with equipment on hand is completely out the door.”

From January through March, Arch sold 18.2 million tons of thermal coal, shipped out of Black Thunder and Coal Creek, its two Powder River Basin mines, as well as its West Elk mine in Colorado, according to its quarterly report. That production was on par with the 18.8 million tons sold in the previous quarter that ran through December 2021.

For comparison, Arch sold significantly less — 12.3 million tons — through the first quarter of 2021.

The majority of that coal came from Black Thunder. The company has kept its smaller Campbell County operation, Coal Creek, open for production despite its plans of gradually closing it down for reclamation, in light of the steady demand for coal.

In the same quarter, Peabody sold 20.6 million tons of Powder River Basin coal from its North Antelope Rochelle Mine, Caballo and Rawhide mines in Campbell County.

The production was nearly even with the 20.7 million tons sold in the first quarter of 2021 and less than the 22.5 million tons produced in the fourth quarter of 2021, according to its quarterly report.

Demand for thermal coal — used to produce energy and found in the Powder River Basin— saw an uptick in the latter half of 2021 due to a variety of factors, including increased natural gas prices and the expectation of a colder than normal winter.

Both companies reported logistical challenges in meeting that demand, primarily related to railway transportation issues, although those have reportedly improved month-to-month through the quarter and into April.

The start of the year for two companies controlling five of the 12 coal mines in Campbell County signaled the industry is on track for the strong year of sales they expected in 2022.

But that hasn’t affected the long-term trajectory.

Still harvesting cash

Last year, Arch announced its plans to shift its focus towards metallurgical, or coking, coal used for steel production and away from thermal coal, fast-tracking its departure from mining in the basin.

While funding its reclamation and retirement obligations on Black Thunder and Coal Creek, the company has made good on its plan to continue “harvesting cash” from those mines in their twilight years.

The company’s thermal coal mines have raked in over $1 billion in adjusted income while spending $114 million in capital over the past 22 quarters, or 5.5 years, according to the report.

Through the first quarter of 2022, Arch reported a net income of $271.9 million, a far cry from the $6 million net loss the company saw at the end of March last year.

“The Arch team executed at a high level during the first quarter, delivering record earnings despite significant rail-related challenges that constrained both coking and thermal coal shipments,” Lang said in a press release.

All while progressing towards its exit from the basin.

Its thermal mine reclamation fund reached $100 million, which is about 80% of the company’s target goal. Its goal is to have it fully funded by the third quarter of this year.

Since 2021, Arch paid $39.4 million towards its “asset retirement obligation” in the Powder River Basin but still owes $150.4 million towards those requirements.

The company instituted a reclamation fund used towards the money needed to eventually close and reclaim its PRB mines.

The company put $40 million in the fund through the first quarter of 2022, then incrementally added another $60 million throughout April, leaving it with $100 million of its $130 million goal in line with its Black Thunder retirement obligation this July, according to the report.

“With the set-up of this thermal reclamation fund, we can run this as long as it’s profitable and as long as it makes sense, but the second it stops, I have no hesitation doing what we have to do ultimately, which is close these operations,” Lang said on the call.

Peabody ramping up

Although Peabody had its mines busy hauling coal out of the basin, the international company reported a $119.5 million net loss attributable to its stock holders through the first quarter of 2022.

But the company has its eyes on the rest of the year when it expects to ramp up coal production in the basin.

Since the year began, the company invested $40 million into its basin and other U.S. mines, expecting to produce more coal through the rest of the year. Those dollars included investment in equipment overhauls and recruiting and training its workforce, Peabody officials said on the earnings call.

For this year, basically all of the company’s thermal coal volumes are priced and committed, with incremental volumes expected to come from the basin at the whims of the railway logistics.

Along with the higher volumes, the company expects a higher price of coal from the basin in the second half of the year. But the cost of producing that coal is expected to grow too, due to inflationary factors.

That coal boon may last longer than expected, as the company reported having 59 million tons of Powder River Basin coal committed in 2023.

“In the first quarter, we set the stage for the remainder of the year, addressing challenges to delivering projected volumes and costs across the platform and continued to strengthen our balance sheet while expanding the value offering we provide our customers and increasing our sold coal position,” said Peabody President and CEO Jim Grech, in a press release.

“Strong global market dynamics persist for our products, driving prices to unprecedented levels globally. With projected increased sales, we remain poised to deliver a strong 2022.”

During the Arch quarterly earnings call, and without being specific, its officials said that the company has already built a strong book of business for thermal coal into 2023.

They added that the pricing is not to the levels of 2022 but still above the historical averages prior to 2022.