By Nate Trela
There is a belief in coal country that a few regulatory tweaks can revitalize the industry in the US. But among executives and advisors in the space, there's an also acknowledgement that a friendlier regime in Washington alone will not turn around the fortunes of American coal.
Coal production in the US fell to 739 million short tons in 2016, its lowest level since 1978, according to the US Energy Information Administration. The agency projects an uptick -- particularly for western coal -- in 2017 and 2018 because of an expected climb in natural gas prices. But that should be short-lived in the face of a nationwide shift to gas-and renewables for electricity generation and the shutdown of coal-fired plants.
This creates an M&A market in the US built in large part around assets that have lost favor with their current holders as coal demand drops domestically. Thermal coal miners could look overseas for investors and markets as the realities of shrinking domestic demand will continue to hurt the industry. But even offshore, they will face competition from coal producers in Australia and other locales closer to Asian markets.
"Historically, the US has been a swing producer for coal internationally," said Bob Burnham, an industry consultant, in a presentation at last week's National Western Mining Conference in Denver. On the conference sidelines, he said there’s no immediate reason to think that would change. The demand is there for coal in Asia, but the demand is intermittent, making it difficult for a company to plan for it.
"If we could get the production needs to level out, that would help,” he said.
In response to the dwindling US market, major domestic producers including Arch Coal, Alpha Natural Resources and Peabody Energy have filed for bankruptcy since mid-2015. Alpha and Arch emerged from bankruptcy in 2H16 while Peabody filed its exit plan in December 2016.
The declining demand creates a complicated M&A environment for coal, one executive said. Private operators shape up as buyers, and public companies are likely sellers. Private companies without the pressure from shareholders could ride out the ups and downs of the market more easily, and the recently restructured miners and others that are in some level of financial distress will likely consider divestitures, the exec said.
Public statements and media reports have also identified possible US coal assets that could hit the market. CONSOL Energy has said it is pursuing a separation of its coal business from its gas E&P division, which could include moving some assets to its affiliated master limited partnership (MLP), CNX Coal Resources. Atlantic Carbon, which is active in northeast Pennsylvania, announced that it received multiple approaches about selling in 2H16. And Westmoreland Coal saw a 13-D filer initiate talks about its plans for certain assets.
Trent Peterson, Energy Sustainability Manager for cement, concrete and coal producer GCC of America, said private equity could have a place in the new world of coal but said it could be too risky an investment for some funds.
Burnham said on the sidelines that certain institutional investors are backing restructured coal companies, noting a flurry of 13-D filings. Asian investors are a possibility, he noted, but in the past US-based mines have not been able to maintain those relationships for long.
James Mattern, president of Trapper Mining, said he anticipates more mines in Colorado shutting down in coming years unless the industry can shift public opinion.
"Without better outreach and education, we may never see another new coal plant built in this country," he said at the conference.
Nate Trela covers the energy and mining sectors for Mergermarket and Dealreporter from Denver. He can be reached at nate.trela@mergermarket.com.
