Coal Age

APR 2016

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increase of $2.55/ton over the same period a year ago. The St. Louis-based parent company of Armstrong Coal credited the EBITDA rise primarily to reductions in operational and adminis- trative costs in the October-December period. For all of 2015, Armstrong had EBITDA of $8.79/ton, up from $6.56/ton in 2014. That was among the bright spots for Armstrong during a challenging 2015 when the company's coal sales fell to 7.7 mil- lion tons from a record 9.4 million tons in 2014. Through March, Armstrong had committed sales of 5.6 million tons for 2016, but company officials are hopeful of locking in additional tons as the year progresses. During a March 23 conference call with analysts to discuss the latest earnings, Armstrong officials said the company posted revenue of $82.2 million in the fourth quarter, down from $105.7 million a year earlier. Armstrong had total 2015 revenue of $360.9 million, compared with $441.8 million in 2014. "Despite all of the bad news coming out, coal remains neces- sary and is not going away," declared Hord Armstrong, the com- pany's executive chairman and namesake. "We believe the Illinois Basin is the best basin to be in, based on the cost of min- ing coal and transportation." All of Armstrong's mines are locat- ed in western Kentucky. Armstrong also is confident that most of the potential coal- to-natural gas switching by U.S. electric utilities already has occurred, at least in the company's market. Gas prices that dipped below $2/MMBtu helped gas to dis- place more than 100 million tons of coal last year, according to Martin Wilson, the company's president and CEO. That led to a coal inventory buildup of 197 million tons, or about a 10-day supply, at the end of December. Burning off the daunting stockpile will take time, especially with mostly mild weather in the winter and early spring. "It's going to take awhile to burn down these stockpiles before the utilities can start looking at their positions for the remainder of the year," he observed. While Armstrong hopes to sell more coal this year, headwinds persist. "With inventories being what they are and gas prices being what they are and the lack of an export market, softness in demand, steel production down and excess storage of natural gas, we would need some things to happen," he said. "To get incremental tons, there would have to be some other unpre- dictable things occur, whether it be weather or destruction of the market with other producers. All the headwinds are there." In the meantime, Armstrong is redoubling efforts to trim expenses wherever possible. At the end of 2015, the company idled its Midway surface mine in Ohio County and cut back its Parkway underground mine in neighboring Muhlenberg County to one production shift. Prep plants serving the two mines also were idled. In addition, shifts at all the company's mines have been reduced to eight hours a day from the previous nine. Armstrong has committed sales of 4.3 million tons for 2017 and is looking for more. The last thing Armstrong and other ILB producers need is more competition, but that is happening with increasing efforts by Pittsburgh No. 8 seam producers in Northern Appalachia to compete in the ILB's traditional market, Wilson said. However, "they have transportation issues coming from farther away." Armstrong's estimated capital expenditures for 2016 are in the range of $8 million to $12 million, versus just less than $19 million in 2015. Liquidity remains strong at $84 million at the close of 2015, or about $9 million higher than at the end of 2014. Knight Hawk Production Stays On Track Amid all the turmoil and upheaval in the U.S. coal business, Knight Hawk Coal LLC, which limits all of its high-sulfur steam coal surface and underground mining to a relatively small area of southern Illinois, is emerging as an island of stability. The company knows its limitations and remains profitable in the niche it has carved out over the past decade or so. That is why Knight Hawk is holding steady on projected pro- duction volumes for 2016 when many of its larger — and smaller — competitors are cutting back or shutting down unprofitable operations in hopes of riding out the worst coal market in decades. "We feel good about where we're at, we're in a very strong financial position," Andrew Carter, who heads up marketing for the company owned and operated by the Carter family, said in mid- March. "We're not a huge player, but we've done things the right way. You're not going to have to worry about us going bankrupt." Such a bold statement might have seemed unnecessary sev- eral years ago when coal prices and demand were riding high and the good times seemed endless. But dozens of mostly small- er companies have gone bankrupt in the past couple of years, and lately their ranks have been joined by industry heavy- weights like Arch Coal Inc., Alpha Natural Resources and Walter Energy. There is speculation this spring that Peabody Energy, the world's largest private sector coal company, and Foresight Energy soon could be added to that list. Knight Hawk's astute management enabled the company to avoid major debt-inducing mergers and acquisitions while some companies were busy gobbling up other producers just a few years ago. That was by design, Carter said. "The best investment we've found is the investment on ourselves. It's been hard to find a deal out there that's better than what we can do internally." When Knight Hawk grows, it usually does so organically. The company this spring is opening its new Golden Eagle surface mine near the 19,701-acre Pyramid State Park near Pinckneyville in Perry County. Under an agreement with the Illinois Department of Natural Resources, Knight Hawk is allowed to use a portion of the park as a staging area for mining 240 acres of private, adjacent land owned by the company. Golden Eagle will not be a large mine. Indeed, few of Knight Hawk's mines are. But it is expected to produce about 400,000 tons of high-sulfur steam coal annually for a number of years, helping Knight Hawk meet its contractual obligations with its electric utility customers. "We'll be shipping some coal out of there fairly soon, in the next couple of weeks," Carter said. "This year we'll probably be around 200,000 tons and we'll push it up to around 400,000 tons next year or so." Knight Hawk produces around 4.7 million tons of coal in 2015 and Carter anticipates a repeat performance in 2016. "We're communicating with customers about whether they're going to take full commitments" this year, he said. "Obviously, it is a depressed market and burns are off this winter. But right now, we're sold out" for 2016 "and we're working on things for 2017 and 2018. It looks pretty decent in 2017, but we have more n e w s c o n t i n u e d 18 www.coalage.com April 2016

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