Rhino Resource Partners LP, a Lexington-based coal firm with operations in the Deane area of Letcher County, has announced the acquisition of Elk Horn Coal Company for approximately $120 million in cash with no assumption of debt.
Elk Horn, which has a long history in Letcher County, is a coal leasing company with approximately 156,000 acres of mineral owned in eastern Kentucky, some of it in the Neon area. Elk Horn Coal was incorporated in 1915, and coal has been mined from its properties for almost 100 years. The company built the Letcher County towns of Fleming, Hemphill and Haymond where it operated large underground mines in the Elkhorn No. 3 seam.
Rhino says the acquisition of Elk Horn will broaden its sources of income by providing a stream of royalty income without the assumption of additional operating risk.
Elk Horn has a large reserve base. As of December 31, 2010, Elk Horn reported an estimated 128 million tons of proven and probable reserves and 157 million tons of non reserve coal deposits. These estimates were based on a 2008 independent reserve study updated by Elk Horn’s management based on Security and Exchange Commission guidelines. As of December 31, Elk Horn had leased to third parties approximately 65 million tons of proven and probable coal reserves and approximately 55 million tons of non reserve coal deposits. Major lessees include James River, Blackhawk, Revelation, and US Coal.
The Elk Horn coal is high quality. A portion is expected to meet the standards for PCI (pulverized coal injection), and the steam coal is generally high BTU with mid sulfur content .
Rhino said in a release announcing the sale that it believes there is substantial upside provided by Elk Horn’s unleased reserves in southern Floyd County, where a significant portion of the coal is expected to meet the standards for PCI. The estimated proven and probable reserves in the southern Floyd area are approximately 40 million tons, based on the independent reserve study mentioned above. Southern Floyd includes several developed deep mines, a prep plant site, and a permitted refuse area.
Because a large portion of Elk Horn’s property is contiguous with Rhino’s Deane property in Letcher and Knott counties, Rhino says it expects there to be “synergies” between the two operations. Infrastructure which facilitates the increase of southern Floyd production will help accelerate development of Rhino’s contiguous northern Deane complex properties, the company said.
Over the last five years, annual production from Elk Horn’s properties has ranged from approximately 1.6 million to 4.9 million tons, and has averaged 3.2 million tons per year.
Elk Horn is projecting solid production growth in 2011 as properties that had been leased to financially weak operators have been replaced by more experienced and better capitalized companies.
The Elk Horn acquisition will initially be funded from the Rhino’s existing borrowing capacity under its credit facility. Rhino intends to ultimately finance the acquisition with approximately 50 percent debt and 50 percent equity.
Rhino Resources’ general partner, Rhino GP LLC, is an affiliate of Wexford Capital LP. In addition to its operations in Central Appalachia, Rhino Resources also mines coal in Northern Appalachia, the Illinois Basin and the Western Bituminous region.
Wexford Capital is an SEC registered investment advisor with over $7 billion of assets under management. Formed in 1994, Wexford manages a series of private equity and hedge funds.
According to published histories, Elk Horn Coal Corporation was incorporated on November 18, 1915, after the merger of three firms — Elk Horn Fuel, Elk Horn Mining and Mineral Fuel Company — and took its name from the “true Elkhorn” vein of coal discovered in 1883 by prospector Richard Broas at Joe’s Branch of Elkhorn Creek near what is now Jenkins.
Elk Horn Coal Coporation also built the Floyd County towns of Wheelwright, Weeksbury, Wayland and Garrett.
Elk Horn has been in the coal leasing business since the last of its mines closed in the 1950s.