Powder River Basin coal production down 15% in recent 12 months

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U.S. coal production and employment nosedived in the second quarter, and much of the lost tonnage would have come from the Powder River Basin that spans southeastern Montana and northeastern Wyoming.

The region is the largest producer of coal in the nation and heavily relies on demand from domestic power generators, which have reduced coal consumption as the COVID-19 pandemic squeezes electricity demand. Coal production from the region fell 21.5% quarter to quarter and was down 15.4% for the 12 months ended in the second quarter as the economic fallout from the virus added to a secular decline in demand for thermal coal.

Peabody Energy Corp. produced 14.0 million tons of coal from the North Antelope Rochelle mine in the recent quarter. The mine is the largest in the country and produced 19.5 million tons in the second quarter of 2019.

The company recently took a $1.42 billion asset impairment on the value of the mine as it expects low natural gas prices and competition from renewables to continue to wear down demand for Powder River Basin coal.

"While we still believe coal is essential to a reliable energy grid and that our Powder River Basin assets are best positioned to serve that demand ... we do expect coal's long-term share of the U.S. generation mix to remain below prior-year levels," Peabody CEO Glenn Kellow said on an Aug. 5 earnings call.

Similarly, Arch Resources Inc.'s Black Thunder mine, the second-largest mine in the country by production volume, pulled back coal output from 16.7 million tons in the second quarter of 2019 to 10.1 million tons in the second quarter of 2020. The company has been pivoting to a focus on metallurgical coal from its eastern U.S. operations as the outlook dims for domestic thermal coal sales.

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"The second quarter was tough, clearly, as volumes declined significantly in the face of historically weak natural gas prices and substantially reduced power demand," Arch COO and Senior Vice President John Drexler said on a July 28 earnings call. "The upshot was negative cash margins in both the Powder River Basin and other thermal segments."

Arch "mobilized quickly to adjust to the new reality" and began overhauling its cost structure to align with lower volumes, Drexler said. The company recently eliminated 200 positions at its thermal coal operations through voluntary separations.

"All told, Arch has now reduced its combined corporate and thermal workforce by approximately 560 positions or roughly 25% over the course of the past 12 months, and we are prepared to continue to make whatever adjustments are needed going forward to compete," Drexler said.

Peabody and Arch are working to form a joint venture of their western U.S. coal assets. The companies say the deal would make coal more competitive with other fuels, but they have received pushback from the Federal Trade Commission due to concerns about the deal's potential negative impact on competition in the basin.

"Although current market realities in the PRB have diminished investor interest, we continue to see robust upside potential in the event that the joint venture prevails in court," B. Riley FBR analyst Lucas Pipes wrote in an Aug. 7 note to investors. "As such, we believe a successful joint venture announcement could serve as a bullish catalyst for both Arch and Peabody in the [second half of 2020]."

The Navajo Nation's Navajo Transitional Energy Co. LLC is a relatively new presence to the coal mining region, after buying three mines in the aftermath of Cloud Peak Energy Inc.'s bankruptcy reorganization. The company produced 8.9 million tons of coal in the second quarter, down from 11.0 million tons in the prior quarter and 11.9 million tons in the second quarter of 2019.

Eagle Specialty Materials LLC, another relatively new entrant into the region, mined 5.3 million tons of coal in the quarter from its two mines, down from 5.8 million tons in the prior quarter and 7.9 million tons in the second quarter of 2019.

The company acquired the two mines in the region during the bankruptcy reorganization of Blackjewel LLC, which had recently acquired the mines after Alpha Natural Resources LLC filed for bankruptcy and spun the assets off into Contura Energy Inc. Contura subsequently began an exit of the thermal coal sector to focus on metallurgical coal production.