High prices for eastern coal and for gas helped deliver what J Brett Harvey, president and chief executive officer, described as exceptionally strong first quarter earnings performance for the US mining major.
Production capacity in both the coal and the gas segments increased over the last two years, improving Consol’s risk profile and “giving us greater earnings potential and more flexibility to manage problems that arise at individual production sites," Harvey said.
Higher prices for eastern coal contracts significantly affected revenues, contributing to a 27% improvement in sales revenues from coal, compared with the first quarter last year.
The company’s output was not profoundly affected by the ongoing problems at the Buchanan Mine, closed since February following a fire. Buchanan typically produces 300,000-400,000 tons of coal per month and delivers about 20% of the company's total gas production.
No timetable has been set for re-entering the mine, but Consol has declared force majeure on its contracts for Buchanan coal scheduled for shipment through the end of May 2005.
"Our coal segment results were remarkable when you consider the impacts of the fire at the Buchanan Mine that occurred on February 14," said Harvey.
"Overall coal segment production rose 7.7% and operating margins [average realized price less operating costs] were $13.54 per ton for the quarter just ended, up more than 44% from the first quarter last year.”
Consol’s coal production increased 1.3 million tons to 18.2 million from 16.9 million, thanks to the re-activation of the Loveridge Mine in March 2004, the expansion of the McElroy Mine in October 2004, reactivation of the Emery Mine in August 2004 and the opening of the Miller Creek complex in October 2004.
Sales of coal improved to 17.4Mt and average realized prices increased by 22% to $6.24/t. Total costs increased $2.18/t, or 8.3%.
The cost of labour increased as the company brought in additional manpower to maintain development rates. Consol has also had to increase labour rates in certain regions to maintain competitive wage rates.
Harvey said he was most pleased with the increase in financial margins (averaged realized price less total cost) of 164%.
"Ultimately, the coal business is as much about margins achieved as it is about tons produced or sold. Our coal operations achieved excellent margins this quarter."
During the quarter, high flow conditions on the Ohio River stopped the McElroy and Shoemaker mines from loading coal to customers, resulting in both mines being idled for several days. The company expects no material effects on financial performance from these events.
The company is on track to meet overall production targets for coal for the year, Harvey said, with coal and gas demand expected to remain strong.
"We are bullish particularly on our high-Btu, Northern Appalachian coals because of their recent price performance and the clear trend to the retrofitting of scrubbers and other pollution control devices on existing power plants in our market area," Harvey said.
Recent clean air regulations issued by the US Environmental Protection Agency and the current high price of sulphur dioxide allowances have accelerated the timing of scrubber installations at many plants.
"We expect a substantial increase in scrubbed capacity of existing coal-fired power plants in the East by 2008," he said.
"The additional technology will favour the higher sulphur, higher Btu coals we produce in Northern Appalachia. Moreover, until the scrubbers are installed, we are well hedged with contracts for our Northern Appalachian products."
