POWER October 2015 - 43

FUELS
4. From boom to bust. After decades of heavy mining, Central Appalachia is facing
not only resource depletion and economic redirection but also a long history of environmental
cleanup resulting from coal mining. These surface mines are all on top of historical underground
mines. Courtesy: Lee Buchsbaum
simply cut back on production to realign supply
and demand curves. But with debt payments
to make, miners need to produce. For
companies in a precarious financial position,
running a mine at a loss is preferable to closing
it.
For example, Wood Mackenzie estimated
that it may cost $44 million to shut down a 4
million ton per year CAPP coal mine. A company
like Alpha might rather run that mine
at a loss of $5 per ton ($20 million per year)
instead of paying the equivalent of over two
years' worth of losses at one time, and perhaps
encounter physical, financial, and regulatory
hurdles in eventually reopening that
mine if market conditions were to improve.
So the company becomes something like the
proverbial snake swallowing its own tail.
PRB Coal Also Is Subject to Market
Forces
While eastern export options are low, so are
prospects for growth in the Powder River Basin.
The trickle of exports from that region
Arch expects to boost its metallurgical coal
output to nearly 15 million tons by 2015 to
serve under-supplied, growing global metallurgical
markets, " it boasted (emphasis added).
According to the company's latest 2015
guidance, it is hoping to sell only 6.5 million
met tons this entire year, and the company is
taking a loss on each ton sold. So much for
early predictions.
Fueled by a widely held faith in China's
steel mills and appetite for electricity, Alpha,
Peabody, Arch, and several other producers
also built, bought, or improved their own
coastal export coal terminals too-another
incentive to push their product overseas. But
those moves only flooded the market with
cheap coal. Chinese demand eventually sputtered,
and the domestic markets withered.
" Someday this is going to be a fascinating
case study in what happens when an industry
invests at the top of the market, " said David
Gagliano, an analyst who tracks coal companies
at BMO Capital, a bank.
Collectively, the deals left all three companies
saddled with debt. Alpha still owes
its creditors almost $3.2 billion-let alone
what it owes federal and state regulators for
admitted violations of the Clean Water Act
and other environmental infractions. With
a looming debt payment of $109 million
due in August, Alpha chose instead to seek
bankruptcy protection. On August 1, 2008,
stock in Alpha had reached $104 a share.
Seven years later, the company was valued
at only 24¢. As of early September, Arch,
which is desperately trying to avoid bankruptcy
itself, through a series of financial
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legerdemain, owes its creditors upwards of
$4 billion.
Those high debt loads have further affected
coal producers who might otherwise
never grew into the flood that many producers
forecasted. The much-ballyhooed West
Coast export terminals Arch, Peabody, and
several other miners were cheerleading have
not been built and, even if they were to come
online, what markets would they serve? If

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POWER October 2015

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