This Human Risk Could Slow Coal's Rebound

This Human Risk Could Slow Coal's Rebound

Coal miners have been faced with serious headwinds over the past couple of years, leaving little choice but to pull in the horns, cut operations, and fire people. Only it can be easier to fire up idled machines than find the skilled workers needed to run them.

For example, met coal focused Walter Energy believes it can produce 15 million tons a year. However, it's only going to end 2013 with production of about 11 million. While some of the potential production will come from currently operating mines, almost two million tons of annual production is at the company's shuttered Willow Creek mine.

Willow Creek has been closed since April, with 250 of the mines 350 employees being "affected." Those people are out of work and it will only be just so long before some of them look for new jobs. And Willow Creek is only one of several mines the company has shut down. When the time comes to open the mines, it may be harder than the company hopes to fill the job openings.

A huge layoff
James River Coal (NASDAQ: JRCC) just announced plans to "idle" a number of its facilities, leading to 550 employees being "furloughed." At the end of 2012, the company had nearly 2,200 employees. In other words, it just fired a quarter of its workforce. Even when the market improves, the company will be expanding its workforce by a third just to get back to prior levels.

To be fair, this isn't uncommon in the coal industry, with furloughed employees often being brought back when industry conditions improve. But growing your headcount by 33% is huge no matter how you cut it.

Arch Coal has taken a similar approach, closing two contract mines on the met side of its business. Because these were contract mines, it hasn't actually reduced its direct workforce. That's good news, but it doesn't change the fact that those mines will have to be staffed up if they are ever opened again. Arch will be directly affected by any issues that arise from the effort.

A heavyweight
Cloud Peak Energy , meanwhile, is talking about cutting 10 million tons of production a year from its Cordero Rojo Mine because of weak demand. Although that curtailment won't happen until 2015, it's a very public overhang on all of that mine's employees. Anyone concerned about their job will likely start looking now, with the highest quality employees the most likely to get the first job offers. So while Cloud Peak may be making the right business decision, the implications for its underlying business aren't as clean cut.

Not all bad news
Peabody Energy , looking to cut costs in its Australian operations, took to cutting the number of contractors it uses. That plus direct employee layoffs has led to a 20% reduction in the company's Aussie workforce. Increased productivity drove the terminations, however, so the company was able to increase first half production by nearly 15% even with a smaller headcount.

Clearly, that's the exception and not the rule, since the above mine closures are a long way away from increasing workforce productivity.

This guy's got skills
While it may sound like pulling rocks out of the ground is an easy job, it isn't. Many coal laborers are highly skilled with years of valuable experience. Once that experience is lost, it isn't easy to get back. Companies like James River, Walter, and Arch are making the right financial decisions today, but the choices will have an impact on performance tomorrow. It's a hidden recovery risk that shouldn't be overlooked.

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