The increase in net income came despite falling coal sales revenue and shipments.

For the June quarter, Foundation had an unaudited $399 million in coal sales revenue, 1.43% lower year-on-year, while shipments came to 16.4 million tons compared to 17Mt in the corresponding 2008 period.

The Powder River Basin operations made 12Mt of coal shipments in the quarter, 400,000t stronger year-on-year, while the company’s Northern Appalachian shipments were 3.3Mt compared to 3.4Mt year-on-year.

However, Foundation noted the 2008 June quarter shipments included 300,000t of purchased coal, so actual company production lifted in the 2009 second quarter by 200,000t.

“Northern Appalachian production was largely unaffected by a longwall move at Emerald in the second quarter, demonstrating the value of running two longwalls at the facility,” Foundation said.

Central Appalachian production was a different story, as Foundation decided to idle the “relatively high-cost” Laurel Creek mining complex in West Virginia back in February.

Foundation said June quarter shipments from Central Appalachia decreased to 1.1Mt due to the idling of Laurel Creek and production cuts at its Kingston and Pax operations.

Looking at the cost of coal sales per ton during the June quarter, Foundation pegged back the expense of its Northern Appalachian output by 21.5% year-on-year to $27.65/t.

The cost of Central Appalachian output actually rose 11.7% to $60.75/t, partly because of lower shipment volumes.

Higher equipment repairs, taxation and diesel fuel costs saw the company’s Powder River Basin operation expenses rising 9.7% to $9.07/t when compared to the 2008 June quarter.

Earnings before interest, tax, depreciation and amortisation for the recent quarter reached $99.7 million, a 47% jump year-on-year, with Foundation saying this reflected higher average realisations in all active productive regions and lower cost of sales, somewhat offset by lower Appalachian shipments.

Market outlook

While electricity production was down 4% year-on-year for the quarter, Foundation noted that thermal coal inventories had recently peaked at 180-190Mt, representing the highest stockpile since the 1980s.

“These inventory levels suggest that more than 100Mt of production may need to be removed from the market to both balance supply with demand, and work stockpiles back down to manageable levels,” Foundation said.

“Currently US production cutbacks are running at an annualised run rate of approximately 100Mt.

“Cutbacks have accelerated through the second quarter and relatively weak spot market pricing has begun to force high-priced production from the market, as evidenced by several recent bankruptcies in the industry.”

But the large thermal coal producer said the US outlook was starting to improve slowly and it expected the late 2008 and early 2009 periods to represent the depths of the recession.

“The decrease in electricity demand, and therefore coal demand, can be anticipated to moderate and eventually turn to modest growth in 2010.

“Because much of the elimination of high-cost production that occurred during the current downturn is likely permanent, any growth in demand could result in demand outstripping supply once excess inventories have been pared to more typical levels.

“Depending on the speed and strength of economic recovery, the depth and duration of production cuts, and various other factors including weather, market tightness for thermal coal should occur in late 2010 or early 2011.”

For domestic metallurgical coal production, Foundation said the current recession had driven steel inventories to a 25-30 year low and production was running below even today’s anaemic demand.

“Given the resulting inventory tightness, a few mills and blast furnaces have been brought back online and capacity utilisation has crested the 50 per cent mark, though it is still low by historical standards.”

Foundation is still looking to growth in China and India for the commodity and noted that China recently booked a significant volume of spot coking coal as it took advantage of favourable pricing and the tightening Asian seabourne metallurgical coal market.

Merger and cash position

With Foundation and Alpha Natural Resources shareholders to vote on the merger this Friday, Foundation chairman and chief executive James F. Roberts said if it received approval, the merger to create the third-largest US coal producer was expected to close the same day.

Despite the merger proposal, Roberts said Foundation had not taken its eye off the ball in terms of day-to-day operations.

Commenting on the June quarter performance, he said the results would have been stronger if customer deliveries had not been reduced due to the downturn and excessively high inventory levels at many domestic coal-fired electricity plants.

Foundation had an unaudited cash position of $30.9 million at the end of June.

The company’s quarterly net income performance resulted in a return of 67c per share, up from the loss of 10c per share in the 2008 June quarter.