Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
CONSOL Energy, a diversifed fuel producer in the Eastern United States, reported adjusted net income of $174 million or 76 cents per diluted share, in the quarter ended June 30, 2011, an increase of 69% from the adjusted net income of $103 million for the quarter ended June 30, 2010.
The financial results were aided largely by the coal division, which posted record revenue of $1.212 billion. This was the fifth consecutive quarter of record revenue for the coal division.
GAAP net income for the quarter was $77 million, or $0.34 per diluted share, compared to $67 million, or $0.29 per diluted share from the year-earlier quarter.
Higher-than-expected coal sales of 16.4 million tons, coupled with higher coal prices, were the primary drivers for the record$1.5 billion in total company revenue. For the quarter, coal margins expanded by $7.09 per ton, to $21.56 per ton, mainly driven by higher sales prices. Most of the increase in average realized prices came from the company’s low-vol coal sales, where realized prices were $207 per short ton, FOB mine. This approximates an FOB Terminal price of $282 per metric tonne.
Lo-Vol: Strong demand for Buchanan low-vol coal continues to contribute to attractive pricing. Low-vol supply remains very tight, as some U.S. producers have experienced lost production due to weather and underground mining conditions. Australian producers continue to struggle with returning to normal production patterns, due to labor issues and slow recovery from weather and flooding earlier in the year. CONSOL has 0.9 million tons of unpriced Buchanan coal for the second half of 2011. For all of 2011, Buchanan sales are targeted at 5.0 million tons.
High-Vol: High-vol tons continue to grow their footprint in the met markets, during the second quarter, tons have been sold into two new markets for testing purposes. Should these tests prove favorable, CONSOL plans to grow the high-vol market in the U.S., Europe, South America, and Asia. High-vol sales in 2011 are now projected to be 4.9 million tons.
U.S. Thermal: CONSOL is sold out for this category in 2011. Customer demand remains strong, due to the hot weather in the Eastern U.S. Price negotiations have begun for 2012 business. During the quarter, increased pricing added approximately$100 million of additional revenue potential to 2012 versus 2011. CONSOL expects to continue to improve realizations for open tonnage for 2012 and 2013 deliveries.
European Thermal: Demand for coal-fired generation in Europe continues to grow. During the second quarter, CONSOL shipped 640,000 tons of thermal coal to Europe. Additionally, 660,000 tons of new thermal sales were booked in the quarter at an FOB mine price of $75 per ton. European sales continue at prices equal to or better than comparable domestic prices. The total target for European thermal sales in 2011 is now 2.3 million tons.
“Our coal and gas operations continued to show improved results in safety, with incidence rates down 25% from the year-earlier quarter,” commented J. Brett Harvey, chairman and chief executive officer. “We exceeded our expectations on coal production and our sales team sold a record 1.5 million tons of Bailey coal into the high-vol coking coal market.”
“Strategically,” continued Mr. Harvey, “CONSOL Energy is participating fully in the growth of global coal markets. In 2011, we plan to export 10 million tons, which should generate over $1 billion in revenue. In the second quarter, our Baltimore Terminal loaded a near-record 41 vessels and shipped 3.4 million tons of coal. To accommodate future growth, we are expanding our terminal, we are developing the BMX Mine in the Pittsburgh seam, and we are re-starting our Amonate Mining Complex. All three of these coal projects are driven by increased worldwide coal demand.”
For the first time in decades, CONSOL’s coal division has generated more cash from our met business than from our thermal business; this demonstrates our significant presence in the growing metallurgical markets.
Expanding coal margins also drove a meaningful increase in adjusted EBITDA and Cash Flow from Operations. Adjusted EBITDA in the quarter ended June 30, 2011 was $472 million. Cash flow from operations was $360 million while capital expenditures were $331 million.
CONSOL Energy’s Gas Division continued to make progress towards its primary objective of delineating the company’s extensive Marcellus Shale holdings. The recent drilling results, combined with our low cost structure, have led the company to contract for two additional rigs, as announced on July 14. This will bring the horizontal rig count to six, as of October 1.
Despite significantly higher gas volumes, the company saw reduced profitability within the Gas Division when compared with the June quarter ended 2010. Unit gas margins fell, primarily due to much lower realized gas prices. Unit costs increased by only 3%, which the company considers notable in this inflationary environment.
The company continues to explore options for monetizing a portion of its Marcellus Shale acreage.
Story written by Michael McCrae with material from PR Newswire. Read the full news release here.
