IEEFA Colorado: Arch Coal Request for State Royalty Relief on Mine Would Cost $12 Million-$14 Million

Aug. 22, 2017 (IEEFA.org) — The Institute for Energy Economics and Financial Analysis today urged Colorado Gov. John Hickenlooper not to grant Arch Coal a reduction in the state royalties it pays on its West Elk mine in Gunnison County.

“Arch’s request would cost the State of Colorado as much as $12-16 million and it would not stimulate coal production,” IEEFA Director of Finance Tom Sanzillo wrote Hickenlooper in a letter sent today. “Arch Coal in effect is asking you to forego state revenues for a financially marginal company in a declining industry with a bleak outlook.”

Arch is asking the state to reduce the company’s West Elk royalty rate to 5 percent from 8 percent for five years and to make the reduction retroactive to February 2015.

“Arch justifies its request by saying that it is incurring rising costs at the mine due to the increased complexity of mining coal at West Elk as the property reaches maturity,” Sanzillo wrote.

But Sanzillo said IEEFA sees no economic justification for the request, citing several common-sense arguments against granting it:

1. Arch Coal “in fact it does not need the money” that it would keep from the proposed royalty reduction, as the company has recently emerged from bankruptcy virtually debt-free and the profit margin on its western coal operations now stands at $11.65 per ton, up from an average of $5.00 per ton over the past several years.
2. Generous lease and royalty policies nationally already “encourage coal mining in an oversupplied market … Coal production in the U.S. has declined by 37 percent since 2008. This overall downturn has affected every mine and every coal producer in the country. Private capital is supporting new natural gas, solar and wind projects. As demand dwindles, there are no market signals to support new mine development.”
3. “Reducing the royalty payments at West Elk will not improve the future of the mine or bring in more sales to generate more royalty revenues for the state. The principal customers for thermal coal like that mined at West Elk are utilities across the U.S., which are moving away from coal-fired power and toward power fueled by natural gas and renewable energy.”

“Coal mining and coal-fired electricity have made significant contributions to the economy of Colorado,” Sanzillo wrote. “However, time and change have now rendered coal less competitive. It is a hard but true reality that many mines, including West Elk, need to close. Their customer base is shrinking, and many analysts and even some coal company CEOs know the industry must go through a period of consolidation before it can recover.”

“Rather than reducing royalties paid by Arch Coal, Colorado should maintain them at the current level and use the income to support fiscal and economic needs that feed the economic growth and quality of life in Colorado. Royalty income to the state might be best used at this time to assist with a rational plan for the phase-out of coal mining in Colorado.”

“Plans need to be formulated to assist employees, maintain tax bases and grow the economy with companies and industries that have solid business models, are growing and for which the outlook is positive.”

Full letter to Gov. John Hickenlooper

Media contact: Karl Cates, [email protected], 917.439.8225

About IEEFA

The Cleveland-based Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy.