Atlantic Coal (ATC.LN) Expects US Domestic Anthracite Prices to Head North as Ukraine Coalfield Crisis Now Confirmed & Exports Stop

For some time I have been reporting about the potential impact of the conflict underway in eastern Ukraine on the anthracite coal market. From reports that are now emerging, it's becoming clearer that rebel separatist forces are now firmly in control of Ukraine's eastern coalfields and indeed their anthracite production. The major player in the anthracite market in Ukraine is DTEK (http://www.dtek.com/en/home) which is a parastatal integrated anthracite mining and power generation company. DTEK have reportedly been importing anthracite from as far afield as South Africa. Ukraine's power stations are configured to use anthracite and with lack of supply, there is a real danger that the country could suffer power outages as winter approaches.

http://www.reuters.com/article/2014/11/26/us-ukraine-crisis-coal-idUSKCN0JA19T20141126

Unlike other forms of coals, anthracite prices are not quoted on a recognised price exchange and so pricing is not transparent. UK AIM Listed Atlantic Coal, one of a few public listed anthracite mining companies does via its requirements as a public company report on US prices, given its main and only production comes from its Pennsylvania located Stockton Mine. Prices in the US for domestic sales generally hover between $130 to $160 per ton and where pricing is often negotiated based on market feel, rather than from a quoted index, however, anthracite has historically traded at a premium to the private price exchange company and port quotes such as FOB Richards Bay, FOB Rotterdam etc obtained and published by Global Coal, IHS McCloskey, International Energy Agency , London Commodity Brokers Ltd, Marex Spectron, Platts, Argus Media & Wood Mackenzie.

The historic price premium of anthracite lump over the price of other thermal lump coals has been circa $130 per ton. So by examining the Chicago Mercantile Exchange futures contracts for a Coal Futures Quote for January 2015, the price is $53.10 per ton. Essentially that would see US anthracite potentially trade at approximately $183 per ton. By no means is this pricing prediction for anthracite in the US an exact science. 

What we do know for certain is that Ukraine and Russian anthracite exports to the US have collapsed. Historically circa 160,000 to 170,000 tons of anthracite from Ukraine landed in the US each year. So far in 2014 up to July, Ukraine had shipped 83,466 tons of anthracite and astonishingly even with trade sanctions the Russian's had managed to land 25,000 tons into the US. We know for certain that these shipments have now stopped. The US market produces circa 1.9 million tons of saleable anthracite annually. The price of Ukraine anthracite landed in the US has typically been priced at around $85 per ton and had a pretty significant impact on driving and dampening prices of anthracite in the US market. Now that these shipments have stopped, which have accounted for approximately 9% of the total US production, it is fair to say that US anthracite prices should head north by 10% which makes my prediction of $183 per ton for US anthracite look very realistic.

For Atlantic Coal, this changing geo-political situation is working in their favour as it is with the rest of the US market. Atlantic Coal has been re-equipping its mine with new earthmoving equipment and with fuel, its biggest direct operational cost now coming down, the company is heading into 2015 in the best shape of its life. I would estimate that total cash costs per ton would be circa $100 so plenty of price margin with improving anthracite prices.

ATC shares are trading at 0.0013p and in my opinion are incredibly cheap given the lower idiosyncratic risks the company faces and the improving price market for anthracite.