Colorado’s biggest and smallest coal mines

Coal production has been declining in Colorado and across the United States. So what do we make of these mines, both of them named Elk. They both reported increased production in 2022.

Editor’s note: This story was posted on Feb. 18. Three days later, Allegiance Coal, the owner of the New Elk Mine west of Trinidad, filed for Chapter 11 bankruptcy protection for its U.S. assets.

 

by Allen Best

Two coal mines in Colorado, both with Elk in their names, one the state’s largest and the other the smallest, both reported increased production in 2022.

But how long will this resurgence last?

New Elk, located near the headwaters of the Purgatory River west of Trinidad, expanded production in 2022 after reopening in 2021 with the declared goal of delivering metallurgical coal to Asian markets.

West Elk, located near Paonia and along the flanks of the eponymously named mountain range, had new production as prices for coal burned in power plants rose—even as its owner continued to insist that it would not continue coal mining in Colorado and Wyoming indefinitely.

Colorado’s coal mining will almost certainly decline as the state’s coal plants close. Already, coal production has declined from 39.9 million tons in 2003 to 12.3 million tons last year. Of that production in 2022, 61% occurred at four mines in northwest Colorado, nearly all of it for combustion by power plants in Hayden, Craig, and across the state line at Bonanza, Utah.

For now, though, the state’s two Elk mines continue to produce – if nagged by various problems.

New Elk, the smallest, can be reached by driving 30 miles west of Trinidad on a twisting, narrow highway. The peaks of the Sangre de Cristo constantly beguile the eyes. The setting is one of the more remote and beautiful in a state rich in both dimensions.

The coal in that valley is part of the Raton Basin, which has an abundance of low-sulfur coal that has been mined for 150 years.

A 2019 feasibility report conducted by Stantec, an engineering consultancy, noted that that the basin has “mid to high volatile hard-coking coals” with properties important in the blending of coking coals needed for blast furnace steel production.

Metallurgical coal, also known as coking coal, is used to produce coke, the primary source of carbon used in making steel. It has higher value than coal used for producing heat to boil water, as in the power plants. New Elk’s website further notes that it takes 1,700 pounds of coal to make one ton of steel, the amount needed for a typical mid-sized car.

For a deeper dive on this, go to “What you should know about metallurgical coal” at ThoughtCo.

Allegiance Coal, the parent company for the New Elk Coal Co., debuted on the Australian Security Exchange in November 2011. Its business operation is premised on exporting coking coal from low-risk places—and the United States qualifies—to Asian markets. Allegiance explained that it wanted to offer Asian steel mills alternatives to the world’s four big companies selling coking coal. The company also has coal mines in Alabama and British Columbia.

The plans didn’t entirely work out in 2022. Instead of shipping coal to China, the company was forced to look for other markets, selling the coal for power plants.

Production from this particular mine, first named Allen, began in 1951. The coal was shipped by rail down the valley and then north 85 miles from Trinidad to the blast furnaces at the Colorado Fuel and Iron steel mill in Pueblo. That ended in the late 1970s when the steel mill transitioned from coal to electric arc furnaces. Hard coking coal was no longer needed.

The mine continued operating until 1989 to supply local utilities. It was reopened in 2011 by Cline Mining, which upgraded the mine infrastructure with the goal of shipping it to overseas steel mills from the Port of Corpus Christi. The revival was short lived. As prices dropped, the mine closed a year later and the company filed for bankruptcy.

The Australian firm had much the same game plan. The 2019 feasibility study said New Elk coal for the first two years would be transported by truck to a Burlington Northern-Santa Fe railway siding near Trinidad for shipment to Mobile, Ala., and then shipment overseas.

Other reports mention Houston, but the 2019 report by Stantec said the company was considering shipping the coal from the port at Long Beach, Calif., or from Guaymas, Baja Mexico—longer distance by rail but shorter overall transit to Asian markets, giving New Elk coking coal a “competitive advantage from East Coast U.S. hard-coking coals.”

The mine shipped its first coal in August 2021, and it was hailed by the trade press.

“The state of Colorado… is really committed to closing down coal mines, so we’re opening one up,” Mark Gray, then the managing director of Allegiance Coal, told Mining People Magazine. “We bucked the trend and raised some eyebrows in government circles.”

Gray in November left the company to return to his native New Zealand.

Before he did, Gray shared with the magazine these assumptions:

“The decarbonization of the steel industry—that’s the movement away from iron ore and metallurgical coal to hydrogen, which is the current technology to replace blast furnaces and electric arc furnaces—is six decades away,” he said.

Good coal man that he was, Gray then trotted out the figures for coal consumed in the production of the steel used in wind turbines: 213 tons of coking coal to generate one megawatt of wind turbine power. “If you want wind turbines, you need coking coal.”

What about the steel mill in Pueblo, which famously now has a 300-megawatt solar farm to supply most of its needs? Ah, but there could be a difference. The Pueblo mill melts scrap steel to reconfigure into other products. The new mill now being constructed (but with a hiatus, as Evraz, the owner, has parted company with the contractor) will produce the quarter-mile rails that BNSF and other railroads now demand.

Mills using virgin materials to make steel need the higher temperatures available with coal combustion. With recycled steel, the lower temperatures of electricity will do. That even includes solar-powered electricity – the premise for the new mill.

Gray also noted that the world’s four largest mining companies represent more than 90% of the supply of metallurgical coal to Asia.

“And Asia doesn’t like it… When it comes to annual quarterly price negotiations, they have very little negotiation leverage,” he told the magazine. “So, they’re looking for alternative sources of supply on the seaborne market.”

That’s where this Colorado mine comes in.

 

Colorado coal production

January-December 2022

Mine                                             Tons

1. West Elk, Paonia                4,395,403
2. Deserado, Rangely             2,597,403
3. Colowyo, Craig                   1,684,455
4. Foidel Creek, Hayden         1,536,078
5. Trapper Strip, Craig             1,430,739
6. King II, Durango                      471,934
7. New Elk, Trinidad                    217,680

Total:         12,333,692 

Location of mines described by closest incorporated municipality. Data comes from the Colorado Division of Reclamation, Mining and Safety.

       

Location of mines described by closest incorporated municipality. Data comes from the Colorado Division of Reclamation, Mining and Safety.

Location of mines described by closest incorporated municipality. Data comes from the Colorado Division of Reclamation, Mining and Safety.

Or maybe not. The Trinidad News-Chronicle has reported production below expectations.

The company struggled to retain skilled workers it has mostly imported from coal country in the East. The company attributed the difficulty in retaining a workforce to covid protocols but also to tight housing in the Trinidad area.

With the high turnover, the company said it was beginning to train unskilled workers. At that time in 2022, the mine had 100 employees. The company had said it would have 200 at peak production.

The company also saw a slackened demand for coking coal because of a slowdown in steel production in Asia amid fears of recession. Conversely, thermal coal prices rose.

“The increase in energy coal prices has been nothing short of meteoric,” Allegiance Coal Ltd. said in a release. “The war in Eastern Europe and associated sanctions have created a forecasted energy shortage in Europe and exacerbated concerns over thermal coal supplies in a market already in a tight balance. The analysts believe this is unlikely to change in the short to medium term.”

As for rail from Trinidad to the mine, it was yanked up in the 1980s. Allegiance planned to reinstall the line. It filed an application with the Colorado Public Utilities Commission to upgrade grade-crossings by the end of 2022. Instead, the company asked for—and in January received—an extension to bump the completion date to late 2024. This rail line is to connect the mine portal to the railway siding on the outskirts of Trinidad.

Near Paonia, the West Elk Mine reported increased production in response to rising prices: nearly 4.4 million tons in 2022 as compared to the 3.3 million tons reported to the Energy Information Administration in 2021.

A useful comparison, though is the 6.6 million tons the mine produced in 2002. For data, see this Energy Information site.

What is the future of the mine? In the short term, it looks like the coal trains rolling downhill from the Moffat Tunnel and through my neighborhood toward the trainyards in Denver will continue. The longer term? Likely not.

The owner, Arch Resources (until recently Arch Coal), has said repeatedly that it intends to get out of Western coal mines for thermal production, i.e. for power plants. It just isn’t sure when that will happen.

For now, there’s money to be made in coal. It’s just not reinvesting, the company has said, citing the declining market for coal used in power plants.

The United States consumed 1.1 billion tons of “thermal” coal in 2008. That had fallen to about 490 million tons in 2022.

“We’ll continue to generate cash out of these assets, but we’re simply not going to put any more cash into them,” said Paul Lang, the chief executive of the St. Louis-based company during an investor earnings call on April 26, 2022.

“We’ll do what we have to, to feed them and keep them going, but any thought of increasing production, beyond what we have the ability to do with the equipment on hand is completely out the door. I just can’t see it. It’s not what our shareholders want, and I don’t think it’s a good investment for us.”

In an earnings call in October, he said essentially the same thing: “We can all argue the public policy side of this, but I look at it from a pretty pragmatic point of view. (The last) coal-powered power plant was built 10 years ago in the United States. And the average age is creeping up to 47-48 years. I think we’ll see slowdowns and retirements over the next two or three years. This thing is heading toward a pretty fast decline rate. And, I think as we look at what we’re doing, we’re taking into account that ultimate glide path on thermal coal consumption in the U.S., and we’re tailoring our Black Thunder operation toward it,” he said, referring to the giant surface coal mine in Wyoming.

“And I think we can have in the industry on the thermal side, a very profitable period of time where this coal is going to be needed and will do very well. But what we’re not going to do is invest anything to increase production. If anything, we’re just going to continue to follow the market. And I think the industry will do well, if that’s kind of the path that’s taken.”

Arch in October projected it would sell 3.5 million tons from its two Western mines into the export market (as distinguished from the domestic market) in 2023.

In that same October 27 earnings call, John Drexler, the chief operating officer, said that about 90% of the production from the Powder River Mines was spoken for.

“In addition, our West Elk operation is essentially sold out for next year at a capacity of 4.5 million tons.”

During recent earning calls, mention was rarely made of West Elk, a puny operation at 4.5 million tons compared to Black Thunder’s 60 million tons of production in 2021—which was down from 100 million tons a decade before.

 

 

\West Elk has proven reserves of almost 47 million tons and 5 million tons of probable coal, according to a fiscal year 2021 filing with the  U.S. Securities  and Exchange Commission.

That coal has two qualities that must be noted. First, it’s a high-energy coal, superior to that of the Powder River Basin coals. That could conceivably make a coal of value in the coking market for steel. Arch has been making a run at that market.

“Our expanded and graded coking coal portfolio continues to generate robust levels of cash,” Lang said in October.

Clark Williams-Derry is skeptical. He’s an energy finance analyst with the Energy Institute for Economics and Financial Analysis, a non-profit that delivers research showing how the rise of the new energy economy makes sense for investors, governments, and ratepayers.

“I think there’s very little chance that West Elk will be used as a metallurgical coal,” says Williams-Derry. “Metallurgical coal has fairly distinct chemical and physical properties, and you can’t just use non-met coal for steelmaking. Also, I’ve never seen any mention of West Elk being used for met coal. That said, the world has a way of surprising me!!”

But citing company documents, he points out that metallurgical coal is very profitable for Arch, but that coal for thermal purposes less so.

“In 2021, approximately 90% of our coal sales volume was sold as a thermal product with the remaining 10% sold as metallurgical. However, due to the significantly higher value and selling price of our metallurgical coals compared to thermal coals, our metallurgical segment contributed around 52% of our sales revenue in 2021,” the company said.

This helps explain why Arch has divested itself of all but three Western coal mines. It also has four mining complexes devoted to metallurgical coal in West Virginia.

Williams-Derry cautions that he has switched his focus from coal to oil-and-gas operations, relying on what he calls “legacy knowledge about Western coal.” That said, he sees the key issue regarding West Elk being the finite amount of coal. The reserves have liken fallen to 48 million tons at the end of 2022. “So it’s got perhaps 10 to 12 years left at the current rate (of production),” he told Big Pivots in an e-mail.

However, the mining rate may slow as the mine reaches the end of its life.

What if Arch hangs on to West Elk?

“It stays on a bump plateau of 2.5 to 4.5 million tons per year, depending upon market conditions. Or the company ramps down output to 1 to 3 million tons per year, keeps the mine operating at a modest level for longer and delays the outlays necessary for cleanup.”

What if it instead sells the operation?

“It kind of depends on what the buyer’s financial strategy is,” says Williams-Derry. Sell lots of coal quickly by ramping up production quickly. In this scenario, he sees a new operator potentially declaring bankruptcy after harvesting profits.

“Another strategy is to slash costs by trimming the workforce and keep a trickle of coal production, waiting for a coal ‘resurgence’ or a bigger sucker to buy the mine. Either strategy has a finite lifespan, because there’s only so much coal left to mine.”

Environmental groups in Colorado have been nipping at the heels of West Elk since 2000 and for a variety of reasons. One concern is about potential expansion, which would cause intrusions into a roadless area on the edge of the West Elk Wilderness. Arch wants to build roads to drill holes in order to vent the methane and other gases from the expanded mine. A 2012 agreement reached by the Obama administration will permit the incursion into the roadless area.

“It’s a huge methane emitter,” says Ted Zukowski, a staff attorney at the Center for Biological Diversity.

An Environmental Protection Agency database shows the West Elk mining operation emitting 254,413 metric tons of equivalent greenhouse gas emissions in 2021, mostly methane from the mine itself. That ranks 29^th in emissions among the nation’s coal mines. Since 2011, though, it has always emitted far more, up to 1.2 million metric tons.

“Even though it’s an underground mine, there are miles and miles and miles and hundreds of drill pads that have to be scraped to get the methane (out of the mine),” says Zukoski.

He visited the mine in September 2001, four days after the terrorist attacks on Washington D.C. and New York City. “It was really a balm for the soul to be in a beautiful forest, surrounded by golden aspen, bugling elk, huge conifers, and magnificent views of Mount Gunnison.”

Lately, four environmental groups have been closely watching the Colorado Department of Public Health. Arch Coal had applied for an air pollution permit in 2020. The deadline for Colorado—as the enforcer of the federal law—to act on that permit was September 2021. It has not. The environmental groups filed the lawsuit last July, and the state at that time explained that staff members were working on processing Arch’s permit application. The state attributed the laggardly response to a major backlog of permits. It said that it could not issue a draft permit any earlier than June 1, 2023.

WildEarth Guardians, the Sierra Club, and several allied groups won a small victory in December. In Gunnison County, where the mine is located, District Judge J. Steven Patrick agreed that the state agency had to share what work remains to be done, the “nature of the applicant’s uncooperativeness; and what the state has done to overcome that uncooperativeness.”

At issue very fundamentally are those emissions: 274 tons of volatile organic compounds per year and 13.6 tons of n-hexane, which falls into the hazardous air pollutant category.

Jeremy Nichols, the climate and energy program director for the Denver office of WildEarth Guardians, readily admits that he wants to see the mine close, repeatedly saying that “It’s time to put an end to Arch Coal’s free pass to pollute.”

“We think this mine has outlived its usefulness,” he told Big Pivots.