Eastern Kentucky-focused producer American Resources Corp., one of multiple coal growth stories emerging after a long down cycle in the industry, is aiming to be at the front of a shift in the sector toward efficient, no-frills operations.
"The new paradigm is that operators have to understand that cost structures need to come down and operate under a more moderate volume output/outlook with a lower cost structure," said Mark LaVerghetta, vice president of American Resources, which owns Quest Energy Corp. "That's really the name of the game and how you're going to survive here in the next phase."
American Resources President Tom Sauve said the company's goal was to "take on the coal industry from a different point of view." In an interview with S&P Global Market Intelligence, Sauve said the company is working with high-quality coal operations that were inefficiently run and cutting the fat until they have an asset that works regardless of the coal market.
Bloated corporate expenses are where many in the coal industry are going wrong, Sauve said — companies are touting lower costs out of their bankruptcies but still have not made the sort of cuts that would be needed.
"We've toured these mines before. They still have 15 people in an office doing what three people could," he said. "From our perspective, the number one thing we look for is, 'let's make sure we control costs.' Our goal is that no matter what the market is, we need to be producing and be profitable. We are incredibly cost-conscious. We don't have corporate offices. We don't have jets. We don't have corporate airplanes. Everyone drives down."
The company, which bills itself as an energy services provider and also does work in oil and gas, has scooped up assets from coal companies that went bankrupt. The McCoy Elkhorn complex, for example, was operated by James River Coal Co. The complex was bought by Fortress Resources, a company that quickly followed James River into bankruptcy. Now it is in the hands of American Resources.
"When you don't change anything at a bankruptcy company and it's a tough market, the ultimate result is you're going to go bankrupt again, which is what Fortress did," Sauve said.
American Resources streamlined operations at McCoy Elkhorn, shutting down an office with 20 people and putting a halt to trucks hauling "dirty coal" to a preparation plant 18 miles away. Instead, the company is focusing on higher-quality coal that it now produces at a lower cost.
The metallurgical and specialty coals-focused company has also scooped up assets from Rhino Resources Inc and Arch Coal Inc. and recently announced it was beginning production at its Carnegie mine in Kentucky.
American Resources produces about 50,000 tons of coal per month from its operations, though Sauve thinks that will rise to 80,000 to 100,000 tons per month in the next quarter as the company continues to look for opportunities to expand.
Sauve attributed the ramp-up in production not to recent political and regulatory changes, which he said do not affect the company's operating strategy, but to American Resources' confidence in the high-quality product it has found and its ability to mine the coal at a low cost.
With metallurgical coal supply still tight despite a recent upswing in prices, Sauve said the company continues to be "on the prowl" for "diamonds in the rough" — coal assets that have high-quality coal but are managed by producers with costs that are too high to sustain.