Power River Basin producers finding it more costly to get to coal reserves

Washington (Platts)--9 Aug 2013 414 pm EDT/2014 GMT

When Powder River Basin coal producer Cloud Peak Energy in late July said it might cut production at its Cordero Rojo mine in 2015, the decision was based in part on projected increases in capital expenditures.

And although the company's final decision will depend on whether coal prices rebound, the announcement highlights a growing issue for PRB miners -- as production moves westward, the coal dips deeper into the earth and becomes more expensive to get to.

The amount of rock and dirt that must be removed to access the coal is known as a strip ratio. A strip ratio of 1 to 1 means a cubic yard of rock and dirt must be removed to mine one cubic yard of coal.

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When PRB production began in the 1970s, it mostly started on the eastern edge of the lease tracts, where strip ratios were sometimes better than 1 to 1, as the basin's low-sulfur coal sat nearly exposed at the surface.

But as one moves west across the basin the coal seams dip further underground and the overburden -- the rock and dirt covering the coal -- increases.

Later this month, the lease for the Maysfield II North coal tract in Wyoming will be sold at auction by the US Bureau of Land Management. The lease tract is adjacent to the west end of Cordero Rojo and has a strip ratio of roughly 4.5 to 1, according to the BLM's sale notice.

To put that into perspective, the tract's coal seam is roughly 69 feet thick, but with overburden ranging in thickness from 266 to 397 feet, according to the BLM.

"There's very little low ratio coal out there anymore," said Al Elser, BLM's assistant district manager for solid minerals in Casper, Wyoming.

PRB production peaked in 2008 at 496 million st, according to MSHA data. In 2012, the basin produced 425 million st.

But by 2030, the BLM expects PRB coal production to range between 500 and 700 million st annually, according to its 2010 resource management plan, which is now being updated.

At the same time, the basin's productivity, based on tons per employee hour, is declining, according to MSHA data. Productivity peaked in 2001 at roughly 43 tons per employee-hour, but by 2012, the figure had dropped to roughly 28 tons.

According to Bob Burnham, president of Burnham Coal, a mine consulting group based in Arvada, Colorado, much of the decline is the result of higher strip ratios.

Bill Meister, a St. Louis-based mining consultant with Golder Associates, estimates the PRB strip ratio climbs by a tenth of a percent each year as production moves westward.

Incrementally, the increase is small, but it sooner or later it becomes an issue. "You have to add more equipment to add capacity," said Meister.

If there's a point where strip ratios are uneconomical, that remains to be seen, said Burnham. Technology changes could improve mining efficiencies, but it also depends a lot on the price of coal.

Brandon Blossman, a Houston-based coal equities analyst for Tudor Pickering Holt, said the challenges of higher strip ratios are well-known to the basin's producers.

Blossman believes higher strip ratios will push up costs and likely prices, but given the fact that prices of delivered PRB are already elevated given transportation charges, any increase from strip ratios is unlikely to matter much.

"Moving up a dollar or two doesn't really matter, except to the producers," said Blossman. "If it landed at $65 in China or South Korea from $63, it's not much of a percentage change."

An industry analyst, who asked that he not be identified to protect business relationships, said the larger challenge facing basin producers isn't higher costs, but low prices.

Producers might push for higher production to spread out mining costs, but more tons on the market means a drop in price.

He said a better move would be for everyone in the basin to pull back production.

"PRB doesn't have much of a cost curve," the analyst said. "You have this much dirt, to get to this seam, so in the absence of producer discipline, no one makes any money."

The analyst said he believes a 10% production cut in the basin could push up prices 15%.

"If everybody did that for 2015, you could see price increases," said the analyst. "I think Cloud Peak is doing themselves a favor by announcing it."

--Andrew Moore,
--Edited by Jeff Barber,

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