GILLETTE — Arch Natural Resources’ plans to accelerate its exit from mining Powder River Basin coal is coming into more focus as the company already has kicked final reclamation work at its Coal Creek mine into full gear and expects the mine to be closed in about 18 months.
The aggressive timeline to shutter the Campbell County thermal coal mine was announced Tuesday morning in the company’s year-end financial report.
“We plan to accelerate our efforts to shrink our footprint in our Powder River Basin mines,” said Arch President and CEO Paul Lang during a year-end earnings call. “And we expect to achieve that in an employee-sensitive way.”
Basically, that means reducing the workforce at Coal Creek as much as possible through attrition, he said.
Along with the Black Thunder mine near Wright, Arch’s two PRB mines have historically been models of efficiency and production, but continued declines in the U.S. thermal coal market has pushed the company to abandon thermal coal to focus on its metallurgical operations.
While Arch hasn’t yet finalized a plan for moving to full reclamation mode at its flagship Black Thunder mine, it’s working with the state to recalculate what Lang called an “onerous” reclamation obligation.
He also said the company is “confident” Black Thunder will generate enough cash to cover all those costs.
Arch Resources announced last year its plans to get out of thermal coal and the PRB after a federal judge upheld a Federal Trade Commission denial of a proposed joint venture between Arch and Peabody Energy Corp. Under the joint venture, Peabody would have been 66% owner of the companies’ combined Western assets and would have operated them. Without that, Arch is quickly moving to build up its coking coal operations, Lang said.
Arch intends to become “the premiere producer of metallurgical coal in the United States,” he said. To that end, the company is moving with “a strong sense of urgency.”
Arch’s shift to a reclamation focus at Coal Creek and Black Thunder increased in the fourth quarter of 2020, Lang said. That includes transferring about 40 workers from Black Thunder to Coal Creek.
The plan is to reduce the reclamation obligations for Coal Creek by about $40 million. That’s because for the purpose of bonding, reclamation costs are estimated as the highest possible. The actual costs the work is much less for the company to do itself.
What that means for the 78 employees at Coal Creek is to continue working mining some coal while doing more reclamation work, said Chief Operating Officer John Drexler.
The workforce at Coal Creek already is down nearly 50% from 2017 when it employed 149 people, according to the federal Mine Safety and Health Administration. The 2.1 million tons of coal the mine produced last year also is down 16% from 2.5 million tons in 2019, and it’s a 77% drop from the 9 million tons mined in 2017.
At Black Thunder, the mine finished the year with a workforce of 988 people, MSHA reports. It’s the first year the second-largest producing mine in the United States has had fewer than 1,000 employees since 2006, when it had 994 workers.
For the year, Black Thunder’s workforce is down 232 people from at the end of 2019, or 19%.
Also, the 50.2 million tons of coal produced by Black Thunder in 2020 was down 30% from 72 million tons in 2019. It also marks the lowest annual production at the mine since 1999 when it produced 48.7 million tons.
Despite Arch Resources posting a net income loss of $78.5 million in the fourth quarter of 2020 and $344.6 million for the year, company officials say they’re confident the PRB mines can still produce enough cash to pay for their own closures.
The year-end report shows that despite a challenging year for thermal coal, Coal Creek and Black Thunder continued to generate cash for the company. The 13.3 million PRB tons sold in the fourth quarter showed a positive cash flow of $1.58 per ton. While down in volume from the 18.1 million tons sold in the fourth quarter of 2019, it was an improvement over the $1.37 margin realized that year.
“Arch’s legacy Powder River Basin segment continued to generate significant levels of cash in excess of capital expended during the fourth quarter of 2020, despite thermal demand weakness,” the company says in it’s year-end financial report.
“We expect our thermal mines to continue to generate sufficient levels of free cash to fund their own reclamation and closure costs,” said Arch Chief Financial Officer Matthew Giljum. “We will put some of that cash to work immediately — through the accelerated closure of Coal Creek and other efforts — while directing the remainder to initiatives such as sinking funds to pre-fund future mine remediation costs.”
In response to Arch's announcements Tuesday, a Wyoming-based environmental conservation group responded with questions about the company's plans to cover reclamation costs.
"We remain concerned that the reclamation plan is not aligned with the closure date of the mine, and we call on our regulators to ensure timely and effective reclamation at the mine," Powder River Basin Resource Council Chairwoman Marcia Westkott said in a press release. "Just last year, the Wyoming Department of Environmental Quality renewed Coal Creek's permit without requiring an updated, realistic reclamation plan in light of the mine's declining production, and now we are faced with its closure in the next 18 months."
Westkott said the situation shows a larger potential across the PRB for companies to not have adequate reclamation coverage.
"Coal Creek is jut one more indication that coal mines throughout the Powder River Basin are facing significant losses, so it's high time that bonds and sureties are reviewed — and secured — so Wyoming taxpayers are not left paying the cost for inevitable reclamation. This closure also heightens the longstanding need to develop a plan to ensure mine workers receive the assistance needed to transition to new careers."
Ramping down its legacy Powder River Basin operations is part of an overall company shift into producing only coking coal used for making steel. The global metallurgical market is much more profitable and stable than thermal, Lang said.
Especially now as the world emerges from the COVID-19 pandemic, industries are going to be increasing their production again, which means more demand for steel.
“The global economy has been shifting into high gear … over prior months,” Lang said.
He noted that global steel production was up 6% in December and for the year, despite extended shutdowns, was only down 1% for the year. Looking forward, he said steel production is expected to bounce by about 150% this year.
“As the world transitions to a post-pandemic future, we believe Arch is well-positioned,” Lang said. “Our optimism and enthusiasm continues to build.
“We are driving ahead with our strategic pivot with a strong sense of urgency. Our objective is to continue to harvest value and cash from our legacy thermal assets, even as we execute on reducing our long-term closure obligations in a measured, systematic and sustained way.”