Rhino Resource Partners LP (NYSE: RNO) (“Rhino” or the “Partnership”) is pleased to announce today the acquisition of the Elk Horn Coal Company, LLC (“Elk Horn”) for approximately $120 million in cash with no assumption of debt. Elk Horn is a coal leasing company located in eastern Kentucky with approximately 156,000 acres of owned mineral. Incorporated in 1915, coal has been mined from its properties for almost 100 years. Elk Horn will broaden Rhino’s sources of income by providing a stream of royalty income without the assumption of additional operating risk.
Elk Horn has a large reserve base and is an excellent strategic fit for Rhino. As of December 31, 2010 Elk Horn reported an estimated 128 million tons of proven and probable reserves and 157 million tons of non reserve coal deposits. These estimates were based on a 2008 independent reserve study updated by Elk Horn’s management as of December 31, 2010, based on the guidelines in SEC Industry Guide 7. As of December 31, 2010 Elk Horn had leased to third parties approximately 65 million tons of proven and probable coal reserves and approximately 55 million tons of non reserve coal deposits. Major lessees include James River, Blackhawk, Revelation, and US Coal. The Elk Horn coal is high quality, a portion is expected to meet the standards for PCI (pulverized coal injection), and the steam coal is generally high BTU with mid sulfur content
Rhino believes there is substantial upside provided by Elk Horn’s unleased reserves in Southern Floyd County, where a significant portion of the coal is expected to meet the standards for PCI. The estimated proven and probable reserves in the Southern Floyd area are approximately 40 million tons, based on the independent reserve study mentioned above. Southern Floyd includes several developed deep mines, a prep plant site, and a permitted refuse area. Management is evaluating the infrastructure needs and the best options to restart and then to increase production from this property. Options under consideration include leasing to one or more third parties, operating the mines with contractors, or operating them as Rhino company mines. Because a large portion of Elk Horn’s property is contiguous with Rhino’s Deane property (see map below), Rhino expects there to be synergies between the two operations. Infrastructure which facilitates the increase of Southern Floyd production will help accelerate development of Rhino’s contiguous northern Deane complex properties.
Over the last five years, annual production from Elk Horn’s properties has ranged from approximately 1.6 million to 4.9 million tons, and has averaged 3.2 million tons per year. Elk Horn is projecting solid production growth in 2011 as properties that had been leased to financially weak operators have been replaced by more experienced and better capitalized companies. An annualized rate of production of 3.5 million to 4.0 million tons of coal per year is expected to be reached by Q-4 2011. The lease rates are generally in the range of 6% to 9% of the coal sales revenue. Based on these factors, Elk Horn is expected to generate annualized run rate EBITDA of $15 million to $18 million by late 2011 or early 2012. In addition, a positive contribution is expected from the Southern Floyd properties, the amount has not been quantified at this time.
The Elk Horn acquisition will initially be funded from the Partnership’s existing borrowing capacity under its credit facility. Rhino intends to ultimately finance the acquisition with approximately 50% debt and 50% equity.
The Elk Horn acquisition is expected to be accretive to Rhino. Based on the Partnership’s current estimate of additional cash flow from Elk Horn, Rhino expects to recommend to its board an increase in its annual distribution of $0.10 per unit from its current annual level of $1.82 per unit, commencing with the distribution for the quarter ending September 30, 2011. Management will review the potential for additional distribution increases as a result of the Elk Horn acquisition based on its performance.
About Rhino Resource Partners LP
Rhino Resource Partners LP is a growth-oriented limited partnership formed to control and operate steam and met coal properties and other stable, cash generating non-coal natural resource assets. Rhino’s current operations are in Central Appalachia, Northern Appalachia, the Illinois Basin and the Western Bituminous region.
via Rhino Resource Partners LP Announces Acquisition of the Elk Horn Coal Company, LLC.