Coal Age

JAN-FEB 2017

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12 www.coalage.com January-February 2017 news continued The Tulsa, Oklahoma-based company, which mines in the high-sulfur Illinois Basin (ILB) and Appalachia, had net income of $119.6 million in the fourth quarter, a whopping 74.1% increase over the $21.5 million it earned a year earlier, according to Brian Cantrell, the company's chief financial officer. In a difficult year when many U.S. steam coal producers treaded water or ran up red ink, Alliance earned $339.4 million for all of 2016, up from $306.2 million in 2015. Alliance, Cantrell said, is forecast to remain "solidly profitable" in 2017, generating net income of $250 million to $315 million. The company remained highly profitable last year by shift- ing production to its lower-cost mines and taking advantage of profitable opportunities when they arrived, including the com- pany's contracting of an additional 1.5 million tons of export sales in 2017, according to Joseph Craft III, Alliance's longtime president and CEO. "Entering 2017, supply-demand fundamentals continue to point to a cyclical recovery in the U.S. thermal coal market," Craft said. "Meaningfully higher natural gas prices and a colder winter have prompted us to expect increased coal demand for the first half of 2017 compared to last year." Producers, he added, have demonstrated "supply discipline" as evidenced by an 18% decline in domestic coal production and an estimated 25 million ton stockpile reduction during 2016. A resurgence in the coal export markets "has added further support to improved U.S. market conditions." Anticipating a stronger steam coal market in 2017, Alliance is planning for increased production and sales volumes from its ILB operations. This year, its coal production currently is esti- mated in the range of 37.9 million tons to 38.9 million tons, with sales estimated between 37.9 million tons and 39.2 million tons. Production and sales for 2016 were 35.2 million tons and 36.7 million tons, respectively, or 15% and 9% below 2015 levels. Already, Alliance has price-committed sales of 34.9 million tons for 2017, or 90% of its projected output. It also has sales com- mitments of 18.9 million tons for 2018. Craft said there is a possibility that market demand could ac- celerate this year. Even it does not, he is confident Alliance will be able to fill its 10% open position. "We feel confident those tons will be placed," he said. "The reason they're open today is that our customers are continuing to stick to a shorter-term buying practice instead of committing more long term." Indeed, some of Alliance's electric utility customers have been buying coal on a monthly or quarterly basis, eschewing the traditional three-year or four-year contracts that were common until just a few years ago. Several Alliance mines — the Tunnel Ridge longwall opera- tion in West Virginia and Pennsylvania; River View and Gibson South continuous miner operations in Union County, Kentucky, and Gibson County, Indiana; and the Hamilton No. 1 longwall mine in Hamilton County, Illinois — were singled out for praise for their 2016 performances. More is expected this year, especially from Hamilton No. 1, acquired by Alliance from privately owned White Oak Resources two years ago. "Our increase in production is largely driven by production at our Hamilton longwall mine," he said. There was a temporary re- duction last summer at Hamilton but a miner callback late in the year accompanied a ramp-up. In the fourth quarter of 2016, Ham- ilton produced 1.3 million tons, well above its roughly 500,000- ton quarterly pace earlier in 2016. Craft said Alliance believes Hamilton No. 1 could become its lowest-cost mine. Over the past year or so, some coal-burning utilities have tried to reduce their bulging coal stockpiles that resulted from the mild winter of 2015-2016 and historically low natural gas prices. Craft, though, said he has what may be a "minority view" that ex- plains stockpile levels. "Inventories are at the level they are right now because of util- ities' buying strategy of going short," he said. "I believe they are increasing their inventory level to complement their strategy in trying to be short" rather than enter into long-term supply con- tracts. "So I don't think inventories are a good measurement of where we are in a supply-demand perspective." Rhino and Armstrong May Merge This Year Rhino Resources Partners LP and Armstrong Energy Inc., a pair of mid-sized coal producers whose operations overlap in the high-sul- fur Illinois Basin (ILB), appear to be headed for a merger this year as a result of recent financial transactions involving Yorktown Partners LLC, a private equity and venture capital firm based in New York. Armstrong Energy was formed in 2006 by its management and Yorktown to develop steam coal reserves in the ILB. St. Louis-based Armstrong controls more than 550 million tons of proven and probable reserves in western Kentucky, part of the ILB along with Illinois and southern Indiana. All of the surface and underground mines operated by Armstrong Energy's Armstrong Coal subsidiary are in two western Kentucky counties — Ohio and Muhlenberg. Under an equity exchange between Yorktown and Royal En- ergy Resources, a South Carolina private equity firm that gained control of Lexington, Kentucky-based Rhino about a year ago, Yorktown would gain more access to Rhino's metallurgical coal holdings in Central Appalachia. Assuming Armstrong is successful in restructuring about $200 million in bonds with its bondholders, then Armstrong and Rhino essentially would merge operations. Or, at the very least, work together on finding synergies that could allow the compa- nies to develop profitable operations while reducing redundan- cies by perhaps combining some business functions. According to Scott Morris, Rhino's chief financial officer, the two companies have quite a bit of time — until December 31, 2019, to effect a potential merger. But a merger, if it happens, is expected to be completed sooner, he added. In addition to met coal in CAPP, Rhino currently produces steam coal in a variety of basins throughout the United States in- cluding the ILB, Northern Appalachia and Utah. It is in the ILB, in particular western Kentucky, however, where Rhino and Arm- strong appear to have more potential synergies. Usually, Arm- strong produces about 7 million tons annually, Rhino around 4 million tons a year. Rhino's relatively new Pennyrile underground mine, also known as Riveredge, in McLean County, Kentucky, is still ramping up after starting production three years ago. The mine, across the county line from Armstrong's operations, produced almost 1.3

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