Two U.S. coal miners see growth amid sector's gloom
By Richard Valdmanis
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, which produces coal for steel mills, and Consol Energy, 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.
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, Southern, Duke and DTE.
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)