Coal market boom casts bullish trajectory for Corsa as it prowls for M&A ops

14th September 2017

By: Henry Lazenby

Creamer Media Deputy Editor: North America

     

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VANCOUVER (miningweekly.com) – Surprising as it may seem, coal demand is at an all-time high, with the current heydays spelling “good profits and rising margins” for several miners in this space, including US-focused Corsa Coal.

The TSX-V-listed miner, which produces coal from six mines, has one development mine and operates three preparation plants, has weathered the unprecedented price downturn without needing bankruptcy protection and is now poised to double metallurgical (met) coal sales over the next two-and-a-half years, CEO George Dethlefsen tells Mining Weekly Online in an interview.

While metallurgical coal prices have dropped somewhat from their record levels in April, once the Australian export terminals returned to service after the impact of Cyclone Debbie, the international price for met coal has risen to just more than $200/t, which is about $15/t higher than the ten-year average, Dethlefsen said, noting that steelmaking met coal prices fell to a low of $81/t just two years ago – the most challenging time for the market in 50 years.

“Now the market is in full recovery, helped in part by total production disruption during 2014 to 2016 that drove prices higher today, and the industry can now look forward to a healthy year of profits,” he advised.

CHANGED INDUSTRY
During the coal price downturn, there were more than 50 bankruptcies, including seven of the largest US coal producers. Some such as Patriot Coal, even went through bankruptcy proceedings twice.

One result of this, explained Dethlefsen, is that the industry is significantly different today from what it was just five years ago, with a new ownership base emerging in the wake of the business reorganisations. This brought a different – and desperately needed – mindset change to the coal industry.

While Corsa escaped the need for bankruptcy protection, it also emerged from the price downturn owned 80% by private equity firms, as is the case with many other companies, which brings an improved sense of discipline.

Dethlefsen noted that the coal industry has often been an enemy of itself and, with a more disciplined investor base now owning coal companies, this trend will hopefully end. He noted that the scars from 2015/16 are, however, still very fresh in the coal industry’s collective memory, mainly brought on by several poor debt-based acquisitions and collapsing prices.

To withstand the price crisis, Corsa embarked on several rounds of cost-cutting initiatives across its portfolio, and approached every participant across the supply chain for help in the form of debt renegotiation, debt payment deferrals and compromises with service providers and suppliers to make it through the slump.

Some difficult decisions were taken, including the shuttering of several higher-cost operations. “While [these were] some of the most difficult decisions I had to make in my life, it was necessary to preserve the other jobs and for the company to survive the ordeal largely intact,” he said, noting that Corsa now employs about 400 people.

GROWING DEMAND
Corsa is now nearly completely focused on the steelmaking met coal side of the business, through the Northern Appalachia Division (NAPP). NAPP is based in Somerset, Pennsylvania, and is mainly focused on met coal production in Pennsylvania and Maryland. Corsa markets and sells its NAPP coal to customers in North America, Europe, South America and Asia.

However, the company still serves some thermal customers through its well-connected infrastructure in the Central Appalachia Division (CAPP), based in Knoxville, Tennessee. The unit is focused on thermal, industrial and met coal output in the Central Appalachia coal region and sales in the south-eastern region of the US, as well as export markets.

Dethlefsen advised that about 70% of all sales this year have been made to international markets in the EU, India, South America and South Korea. Having doubled sales in the past year, he expects met coal sales to grow about 20% next year, with the strategic aim and potential to double sales in the next two-and-a-half years.

“We’ve done that in the past year and would like to do it again. We are well positioned to grow organically, which entails bringing on more mines in our geographic areas, where we have the infrastructure in place to process the coal.

“We have about four-million tons a year of preparation plant infrastructure capacity in place, of which we will only use about 1.5-million tons of capacity next year in Pennsylvania. We also have the mining permits in hand to allow us to do just that,” Dethlefsen stated.

The company also operates a successful sales and trading platform through which it wins business on the international market and fulfils orders by purchasing coal from third parties and blending that coal with its own, in a much less capital intensive manner. Dethlefsen noted that this platform can make money in any price environment and entails a low-cost operation at attractive margins.

Corsa is also running an exploration and permitting programme, which aims to find new reserves and mines.

Corsa is also constantly evaluating new mergers and acquisitions (M&A) opportunities and, to that end, has recently strengthened its managerial capabilities with the appointment of a new M&A leader. Dethlefsen also has a background in M&A, which he said remains “near and dear” to his heart.

“We’d like to get at least one acquisition done in the next 12 months. It’s our goal to kick things up to four-million tons a year of met sales over the next three-and-a-half years, and we have a credible plan to do that.”

COAL'S IMPORTANCE
According to Dethlefsen, the US coal industry has received strong support from the Donald Trump-led administration, which intends to kick-start economic growth. There has been a lot of emphasis on deregulation of the industry, with more actions in the planning stage, which has helped improve investor confidence.

“The tone at the top has helped to lift the lid and help coal miners raise cash again, as seen in the string of coal-based initial public offerings, debt offerings and an active M&A scene,” Dethlefsen advised.

However, he voiced some concern about whether things will get done, as reflected by the difficulties the Trump administration has experienced in Congress so far. This could provide a platform for executive orders to start gaining traction in the near term.

The fact remains, he said, that coal demand has never been higher than what it is today. About 30% of the world’s energy comes from coal. While in the developed world it is facing headwinds, the global market has grown by about 70% since 2000, driven mainly by its use in developing jurisdictions in Asia, such as China and India.

“We’re having a good year. Coal production is up 20% so far this year in the US, coal exports are up 50% over 2016 [and], when you look at China and India’s economies, they are both extremely dependent on coal, with over 70% of energy coming from coal in the two countries. Coal is so helpful to raise the quality of life for millions of people. It is an affordable option to start the economic engines of developing jurisdictions, and has been linked to increased literacy rates, longer life expectancy and higher standards of living,” he stated.

“Access to low-cost energy is imperative. I’m bullish on the industry; the heydays are right now," said Dethlefsen.

Meanwhile, Corsa updated its 2017 guidance in August, calling for up to 347 118 t more met coal sales this year, to a range of between 1.59-million tons and 1.82-million tons, while thermal coal sales are expected to decline by between 15 000 t and 25 000 t, to a range of between 860 000 t and 925 000 t.

The company's NAPP division's met coal cash production costs are expected to come in between $65/t and $70/t, with the CAPP unit forecast to produce thermal and met coal at cash costs of $55/t to $60/t.

Edited by Samantha Herbst
Creamer Media Deputy Editor

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