Mining Flash Alert - January 2015

Inventory (Coal):

The last two years have been a period of consolidation and reorganization in the coal industry. James River Coal went bankrupt and its assets were sold to smaller mining companies. Large mining companies like Arch Coal and Consol Energy sold mines in certain areas in an effort to consolidate. In the face of lower market prices and decreased demand, coal mining companies have included asset based lending for machinery, equipment and inventory to diversify their funding options.

Domestic pricing for thermal coal, which represents more than 90% of total coal consumption, continued to decline due to competition from low-cost natural gas, governmental action to restrict coal-burning power plants, and supply in excess of current demand. Market Pricing for Appalachian thermal coal decreased from approximately $63 per ton in December 2013 to $56 per ton in November 2014 as shown in the chart below.

US Thermal Coal Prices

Market prices for the higher-value metallurgical coal have been negatively affected by reduced demand worldwide, and in particular, decreased demand from Chinese steelmakers. Reduced Chinese demand led to oversupply and increased competition among international suppliers. Recent U.S. prices are shown in the chart below.

Coal differs from other inventory types and the liquidation strategy for coal may include significant additional cost for “washing” raw coal at preparation plants, transport of clean coal to barge or rail loadouts, and other trans-loading fees and expenses. Additionally, coal typically has significant selling cost including royalties, state, federal taxes and other taxes and fees typically incurred at the time of sale; in-depth understanding of the industry is crucial for accurate inventory valuations.

US Quarterly Metallurgical Coal Prices

In 2013 and 2014, Hilco appraisals helped facilitate most major consolidations and divestitures in the coal industry and in 2014 performed inventory appraisals for some of the country’s largest coal mining companies with more than $5 billion in combined sales representing more than 100 million tons of coal.

Machinery & Equipment (Mining):

Mining Equipment has seen a pivotal shift in geographical and market segments during 2014. Manufacturers of new equipment report extremely sluggish sales due to declining prices for coal, copper, gold, iron, silver and other minerals. Competition from foreign markets and a firm stance on the environmental impact on mining in the U.S. still creates large obstacles for both large and small companies to compete in a global market. Likewise, foreign markets have suffered from the same circumstances and countries such as China, where regulations on mining are almost nonexistent, can mine minerals very inexpensively.

The copper industry reports a down turn of nearly 50% from 2Q to 3Q even though the segment was least affected during the previous months compared to other mineral categories. Coal, both metallurgical and utility, has been hit the hardest during this latest down turn. Optimistically many think we have already hit the bottom and a slow shift the other way may be occurring.

Equipment sales of both new and used have been very flat during 2014. However one demographic shows a slight upturn of approximately 12% in 2Q over the previous two and half years; though that increase on a value-weighted is less than half a percent.

Used equipment has not been selling well in the very large categories (front shovels, haul trucks, walking draglines, large crawler tractors) as reported by dealers and auction companies. The market may have become overwhelmed with older, high hour units that have exceeded their useful life. Economics forces miners to either rebuild existing units over and over or replace the units with newer ones. Long term Lease to Own vs. Rental Purchase options has given some companies a better option to operate new equipment without the immediate responsibility of a large purchase for one unit.

The current glut of used equipment is based on supply and demand. Simply put, there is no demand for equipment at this time thus driving sales downward. The used equipment on the market is also becoming obsolete due to technology, better engineering designs, and more cost effective units. While some will argue those pre-emissions and less expensive parts are factors in purchasing used iron, others will seek bigger and faster equipment.

It is important that banks and financial institutions increase their collateral monitoring of their customer's assets for the foreseeable future.