Atlantic Coal consolidating the niche US anthracite industry

At present, Atlantic owns the open-cast Stockton Colliery in Pennsylvania, the only US state where anthracite is mined. Along with his business partners, UK entrepreneur Steve Best bought the mine from its original owners, the lately embattled Pagnotti family, and reversed it into AIM cash shell Summit Resources in late 2007 to fulfil expansion and consolidation plans.

The mine presently produces around 200,000 tons of anthracite a year. For the uninitiated, anthracite is a hard, very high-grade coal, sold for wider profit margins than other coals – predominantly for heating homes or industrial uses such as making steel and titanium, filtering water, tinting glass and, perhaps most importantly, turning beer bottles brown. On the market anthracite per tonne selling price has been between $115 for industry up to $150 for home use. Atlantic has historically sold around 40% of its output to steel makers, 30% to other industry and 30% for home heating, the highest-margin of the three but only for the colder months from November to March.

Before pursuing its consolidation plans, Best and co aimed to ensure their own mine was running at its most efficient, to make a good impression on prospective vendors. To which end the company has spent the last two years implementing a significant capital investment, with new mine plans, new engineers appointed to ensure the mine runs cost effectively and at maximum efficiency and most recently a new. However, as is typical with such things, it has all taken much longer than expected. The most recent development is a $3.5 million hydraulic excavator that will, according to Kuenzel, ‘significantly increase production and reduce the cost base, helping us get to 400,000 tons per year.’ This is the last piece of the colliery’s $10 million redevelopment and could be assembled in the very near future.

As a result of the new mine plan, Stockton’s remaining reserves have been calculated at around 4 million tons of raw coal, or ‘run-of-mine’ coal (ROM), which, after the washing process that is required to bring it up to saleable quality, equates to approximately 2 million tons of washed anthracite. This gives Stockton a mine life of about 10 years from now.

A market update back in November informed that the company had, in the 4 months from July to October Atlantic, produced 109,257 tons of ROM and 33,070 tons cleaned. From this, it had sold 32,348 tons in the period and received revenues of circa $4 million, up from $3.4 million in the 6 months to June. In its yard it has stockpiled 71,386 tons ROM and 6,365 tons clean. But most importantly, Stockton has become cash flow positive from operations due to the rise in sales and production.

As well as bringing the colliery up to scratch, over the last year Atlantic has been active, though not particularly successful, in its corporate activity. But, while falling at the final hurdle of a pair of potential acquisitions, it has effected two contractual manoeuvres of significant benefit. Firstly, it has renegotiated with the Pagnottis to stop selling the 100,000 tons of ROM coal a year at a fixed price that was written into the original contract, and instead effectively pay a deferred consideration. This, says Atlantic, will save it $10m-plus. Furthermore, just this April, the company negotiated a deal with coal broker Xcoal, which has ‘significant strategic supply agreements particularly with major integrated steel makers in both the Atlantic and Pacific regions’, to supply its anthracite. Says Kuenzel: ‘They are taking 5,000 initially and have agreed to take up to 150,000 tons of clean coal or, if production is great they can take 50% - so if we were to produce 400,000 tons they could take 200,000 of it. This is the first step and we want to continue to build it up as they want more. We see this as a strategic partnership rather than just a one-off contract.’

Of the failed takeovers – one further afield in the US and one in South Africa – Kuenzel says in the former case ‘the price changed and we didn’t want to over-pay’ and in the latter the target wanted an all-cash deal rather than the cash-equity mix offered, though, on the upside, Atlantic made small £85,000 profit from the sale of the stake it has built up. Kuenzel adds that both were bituminous coal producers and the company has firmly decided to stick to its original strategy of consolidating the Pennsylvanian region.

‘Our aim is in the next 12-18 months to add 30-40m tons, which will give us a mine life of around 30-40 years,’ says Kuenzel, adding that the company plans to acquire sites on a royalty basis, and so not risk large amounts of cash up front.

Stockton is the fifth or sixth largest mine in the region, which is proliferated by smaller family-owned collieries. ‘The younger generation have mostly left the region and don’t have an interest in running a small mine in Pennsylvania,’ says Kuenzel. ‘We’re not just focused on smaller ones, there are larger ones that are family run, typically owned by around 50 family members who are used to getting the income but it’s hard for them to run. And there are some sites that are dormant. We have the benefit of being a public company with better access to capital in the UK and North American. We can consolidate and run a more efficient business.’

Atlantic thinks it will be able to pay a royalty to each mine’s owners of around $4 a ton and so still maintain a significant profit.

To begin with, a number of collieries have been indentified within a 10 mile radius that would add ‘around 10m tons’ and remain highly cost-effective as the company could utilise the ‘significant’ excess capacity at its washing plant. Further afield in the state, the is around 300 million tonnes of further probable reserves within a 30 mile radius.

Kuenzel says ‘we have a foot in the door, we know the region and the people. A lot was dependent on us getting Stockton running profitably first. So we have now proved what we said about the site and we can now get on with the consolidation.’

Atlantic, which has a market cap of £8.9 million at the present 0.6p share price, will be releasing annual results in early May.

http://www.proactiveinvestors.co.uk/companies/news/15727/atlantic-coal-consolidating-the-niche-us-anthracite-industry--15727.html