Focus: Two U.S. coal miners see growth amid sector's gloom
02/05/2018 12:00
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By Richard Valdmanis
May 2 (Reuters) - U.S. electric utilities are expected to
shut hundreds more of their coal-fired power generators in the
coming years, extending a long trend away from coal and toward
natural gas that has cast a pall over the mining industry.
But not every U.S. coal company sees a bleak future.
Ramaco Resources METC.O , which produces coal for steel
mills, and Consol Energy CEIX.N , which supplies coal to larger
power plants, have ramped up investments even as the industry
shrinks.
President Donald Trump has promised to revive the coal
sector by stripping away burdensome regulation. But the two
companies say their confidence stems more from market forces
than any policy. Their bullish bets illustrate how pockets of
profitable growth can survive in troubled industries facing
almost certain decline.
Ramaco, for example, expects global demand for metallurgical
coal to rise in step with economic growth, despite the slump in
U.S. demand for the type of coal used in electric power
generators.
And Consol says it has found a way to turn the rapid decline
of coal-fired power into a strength: It has cultivated a
clientele that owns big generators that are not expected to shut
down anytime soon - making them likely to take over business
from rivals that do close.
"We can sell every ounce of coal we can produce," said David
Khani, Consol’s Chief Financial Officer. "This isn’t true for
everyone."
Consol, which mines thermal coal for power plants in
Pennsylvania, boosted capital spending last year by 50 percent
to $81.4 million, and it aims to bump that to $125 million in
2018, according to its filings.
Ramaco, meanwhile, more than tripled capital expenditures in
2017 to $75 million, making it one of the few coal producers
investing in new U.S. mines. The company went public in February
2017 at a tough time for the industry.
Those spending increases far outpace the broader sector.
Overall, the U.S. coal industry increased capital spending
in 2017 by about 27 percent, according to a Reuters analysis of
filings from publicly-traded miners - a rebound from years of
steep declines, targeted mainly at sustaining operations rather
than expanding. Many individual coal firms have cut back capital
spending.
"They’re spending as much as they need to, to maintain
production," said analyst John Bridges of JP Morgan.
U.S. coal production is expected to dip 6 percent in 2018 to
738 million tons, down from 1.17 billion tons a decade ago,
according to the U.S. Energy Information Administration.
NEW MINES
Ramaco's spending reflects its opening of five new coal
mines in the past twelve months in West Virginia, Virginia and
Pennsylvania, said Randall Atkins, Ramaco’s executive chairman.
The company expects to produce more than 2 million tons of
coal in 2018 from less than 600,000 in 2017.
The company said the downturn in the U.S. thermal coal
industry has little to do with its business. It and other
metallurgical coal producers are enjoying robust demand from
steel producers around the globe.
"Met coal is a proxy for steel, which is in turn a proxy for
a nation’s GDP," Atkins said. "The world finds itself
economically in a good place."
He said Trump’s steel tariffs could shift some of the demand
for metallurgical coal to the domestic market, but that foreign
demand for U.S. exports also remains strong.
Ramaco's share price has been volatile since launching last
year. It is trading at about $6.80, up from about $4 late last
year after strong earnings estimates. But that's only about half
of its share price last year, in part because one of its new
mining projects was delayed.
LEMONADE FROM LEMONS
Most miners producing coal for electricity are getting
battered, meanwhile, by cheap natural gas and increasingly
stringent pollution controls.
Consol is betting it can generate hefty profits from a smart
play on the downturn. It plans to serve "very large, retrofitted
coal plants that compete well against natgas and which are going
to be running at a higher capacity as other units are retired,”
said CFO Khani.
Those plants are currently running at only about 70 percent
capacity, he said, providing room for growth.
The EIA predicts that coal-fired generators that remain open
could operate above 70 percent capacity for decades as other
aging plants close. Industry-wide, plants are using less than 60
percent of their capacity now.
Consol - whose shares are up to about $31 a share from about
$22 late last year - supplies East Coast power generating
companies including Dominion D.N , Southern SO.N , Duke
DUK.N and DTE DTE.N .
Both Consol and Ramaco applaud the Trump administration’s
pro-coal stance, but their reasons for optimism lie elsewhere.
"There has been no game-changing legislation that would
allow for increasing domestic demand for U.S. coal," said
Ramaco’s Atkins.
(Additional reporting by Timothy Gardner in Washington)
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