The Value of Coal

Coal Industry

The primary use for coal is to fuel electric power generation. A major contributor to the world energy supply, coal’s share of global energy consumption in 2009 was the highest since 1970 according to British Petroleum’s 2010 Statistical Review of World Energy. Although global coal consumption was stagnant in 2009, significant growth continued from the Asia-Pacific region. Chinese coal consumption rose by 9.6%. Indian consumption rose by 6.8% (Source: British Petroleum’s 2010 Statistical Review of World Energy). In 2009, coal-fired plants generated 44.6% of the electricity produced in the United States, according to the U.S. Energy Information Administration (the “EIA”) (Source). The United States produces almost 16% of the world’s coal and is the second largest coal producer in the world, exceeded only by China (Source). The coal reserves of the United States are larger than those of any country in the world (Source).

Lipari operates in the Central Appalachian region. This region contains coalfields in eastern Kentucky, Tennessee, Alabama, South-western Virginia and Central and Southern West Virginia. Production in Appalachia decreased from approximately 461 million tons in 1996 to approximately 339 million tons in 2009 according to the EIA (Source: EIA U.S. Coal Supply & Demand 2009 Review). The coal of Central/Southern Appalachia has an average heat content of 12,500 BTU per pound and generally has low sulfur content.

Demand for U.S. Coal Production

Coal produced in the United States is used primarily by utilities to generate electricity, by steel companies to produce coke for use in blast furnaces and by a variety of industrial users to heat and power foundries, cement plants, paper mills, chemical plants and other manufacturing and processing facilities. Significant quantities of coal are also exported from both East and West coast terminals. According to the EIA, almost all of the coal consumed in the United States in 2009 was from domestic production sources, given that imports represent approximately 2.3% of total domestic consumption (Source as of September 30, 2010). Coal produced in the United States is also exported, primarily from east coast terminals. The breakdown of 2009 U.S. coal consumption by sector, according to the EIA, is as follows:

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Coal has long been favoured as an electricity generating fuel by regulated utilities because of its basic economic advantage. The largest cost component in electricity generation is fuel. According to the National Mining Association, coal is the cheapest source of power fuel per million BTUs. The breakdown of U.S. electricity generation by fuel source from 2000 to 2008, as estimated by the EIA, is as follows:

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The EIA projects that generators of electricity will by and large maintain their demand for coal for the foreseeable future. Coal is forecast to continue to provide the largest share of energy for U.S. electricity generation, with only a modest decrease from 45% in 2009 to 44% in 2035, according to the most recent EIA data (Source) as of September 30, 2010). Total electricity generation at coal-fired power plants in 2035 is expected to be 42% higher than the 2009 total (Source as of September 30, 2010). Growth in coal-fired generating capacity is expected to be limited by concerns about greenhouse gas emissions and the potential for mandated limits, but existing plants continue to be used intensively. Because coal-fired generation is used in most cases to meet base load requirements, coal consumption has generally grown at the pace of electricity demand growth. Demand for electricity has historically grown in proportion to U.S. economic growth as measured by gross domestic product.

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The other major market for coal is the steel industry. The type of coal used in steel making is referred to as metallurgical coal (or “met” coal) and is distinguished by special quality characteristics that include high carbon content, low expansion pressure and various other chemical attributes. Metallurgical coal is also high in heat content (as measured in BTUs), and therefore is desirable to utilities as fuel for electricity generation. Consequently, metallurgical coal producers have the ongoing opportunity to select the market that provides maximum revenue. The premium price offered by steel makers for the metallurgical quality attributes is typically higher than the price offered by utility coal buyers that value only the heat content.

When some types of coal are super-heated in the absence of oxygen, they form a hard, dry, caking form of coal called “coke.” Steel production uses coke as a fuel and reducing agent to smelt iron ore in a blast furnace. Most of the coking coal in the United States comes from coal found in Northern and Central Appalachia.

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U.S. Coal Production & Distribution

In 2009, total coal production as estimated by the EIA was 1.07 billion short tons. The primary producing regions in the United States are Appalachia (31.6%), which includes West Virginia, Eastern Kentucky, Tennessee, Alabama, Virginia and Pennsylvania; Interior (13.7%), which includes Illinois, Indiana and Western Kentucky; and Western (54.5%), which includes Wyoming, Montana, Utah and Colorado. All of Lipari’s coal production comes from the Central Appalachian region. In 2009, approximately 69.1% of U.S. coal was produced by surface mining methods. The remaining 30.9% was produced by underground mining methods that include room and pillar mining and longwall mining (Source as of September 30, 2010).

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Lipari operates in Central and Southern Appalachia. Central and Southern Appalachia, which includes Eastern Kentucky, Virginia, Tennessee and Southern West Virginia, as well as Alabama, produced 20% of the total U.S. coal production in 2009. Lipari believes coal mined from these regions generally has a high heat content (of between 12,000 and 14,000 BTUs per pound) and a low sulphur content (ranging from 0.7% to less than 2.0%). From 2000 to 2009 according to the EIA, the Appalachian region experienced a decline in annual production from 419 million tons to 339 million tons, or a 23.6% decline, primarily as a result of the depletion of economically attractive reserves, permitting issues and increasing costs of production (Source as of September 30, 2010).

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Coal Characteristics

Heat Value. The heat value of coal is commonly measured in BTU per pound of coal. Coal found in the Eastern and mid-Western regions of the United States, including Central and Southern Appalachia, tends to have a heat content ranging from 10,000 to 15,000 BTU per pound. Most coal found in the Western United States ranges from 8,000 to 10,000 BTU per pound. The weight of moisture in coal, as sold, is included in references to BTU per pound of coal, unless otherwise indicated.

Sulfur Content. Sulfur content can vary from seam to seam and sometimes within each seam. Coal combustion produces sulfur dioxide, the amount of which varies depending on the chemical composition and the concentration of sulfur in the coal. Low sulfur coal has a variety of definitions, and in using this term, Lipari refers to coal with sulfur content of 2.0% or less by weight. “Compliance” coal refers to coal with a sulfur content of less than 1.2 pounds of sulfur dioxide per million BTU. The strict emissions standards of the Clean Air Act have increased demand for low sulfur coal. Lipari expects continued high demand for low sulfur coal as electric generators meet the current Phase II requirements of the Clean Air Act (1.2 pounds or less of sulfur dioxide per million BTU).

Sub-bituminous coal typically has lower sulfur content than bituminous coal, but some bituminous coal in Colorado, Eastern Kentucky, Tennessee, Southern West Virginia and Utah also has low sulfur content.

Other. Ash is the inorganic residue remaining after the combustion of coal. As with sulfur content, ash content varies from seam to seam. Ash content is an important characteristic of coal for electric generating plants as it affects combustion performance and utilities must handle and dispose of ash following combustion.

Coal Mining Techniques

Coal mining operations can be divided into surface and underground mining methods. The most appropriate mining technique is determined by coal seam characteristics such as location and recoverable reserve base. Drill-hole data are used initially to define the size, depth and quality of the coal reserve area before committing to a specific extraction technique. All coal mining techniques rely heavily on technology, improvements to which have resulted in increased productivity. The five most common mining techniques are continuous mining, longwall mining, truck-and-shovel mining, dragline mining, and highwall mining, the newest technique. Lipari utilizes surface mining, highwall mining, and underground mining.

Surface Mining. It is easier and cheaper to mine coal seams that are thick and located close to the surface than it is to mine thin underground seams. Typically, coal-mining operations will begin at the part of the coal seam that is closest to the surface and most economical to mine. As the seam is mined, it becomes more difficult and expensive to mine because the seam either becomes thinner or protrudes more deeply into the earth, requiring removal of more material over the seam, known as “overburden.” As the amount of overburden increases the cost to mine coal increases. Many seams of coal in Central Appalachia are between one to ten feet thick and located hundreds of feet below the surface in contrast to seams in the Powder River Basin of Wyoming which may be eighty feet thick and located only 100 feet below the surface.

Surface mining uses draglines, large electric-powered shovels, hydraulic excavators, or front-end loaders (“loaders”) or large dozers to remove the earth or overburden that covers the coal. The overburden is loaded onto large off-road trucks by shovels, excavators and loaders, cast by draglines, or pushed by dozers. The overburden is then used to reclaim the mine site after coal removal. Loaders load coal into coal trucks for transportation to the preparation plant or rail load-out. Seam recovery using the surface mining method is typically 90%. Productivity depends on size of equipment, geological composition and the ratio of overburden to coal. Productivity varies between 250 to 400 tons per miner shift in the Powder River Basin where the overburden ratio is approximately 4 to 1, versus 30 to 80 tons per miner shift in Central Appalachia where the overburden ratio is approximately 20 to 1.

Highwall Mining. Highwall mining is a mining method in which a continuous mining machine is driven by remote control into the seam exposed by previous open cut operations, or “highwall”, which was the result of surface mining operations. A continuous haulage system carries the coal from the digging face to the surface for stockpiling and transport. This process forms a series of parallel, unsupported cuts along the highwall. It is vital that the coal pillars remaining between adjacent drives are capable of supporting the overburden structure.

Underground Mining. Those seams that are too deep to surface mine can be economically mined with specialized equipment matched to the thickness of the coal seam. Underground mining methods consist of “room and pillar” and “longwall mining.” Room and pillar mining typically requires using a continuous miner to cut a system of entries into the coal, leaving pillars to support the strata above the coal. Shuttle cars then transport the coal from the digging face to a conveyor belt for transport to the surface. This method is often used to mine thin seams, and seam recovery is typically 50% or less. Most underground mining in the U.S. is performed using continuous miners.

Thin Seam Underground Mining. Most underground coal mining equipment is sized to operate in coal seams greater than 40 inches thick. Operating in seams less than 40 inches thick requires either cutting more rock so the larger equipment can operate or buying mining equipment designed to more efficiently operate in thinner underground coal seams. This equipment is quite similar to equipment for thick seams, but is reduced in size so it can mine the coal from thinner seams without cutting as much rock. The result is lower costs and better coal quality. Coal operators must purchase an entirely new fleet of smaller sized equipment to operate in thinner seams. The capital costs for this new fleet are nearly identical to the costs for larger mining equipment. With the appropriately sized equipment and proper management, thinner seams can efficiently cut more coal with less rock contamination and maintain lower mining costs.

Once the raw coal is mined, it is often crushed, sized and washed in preparation plants where the product consistency and heat content are improved. This process involves crushing the coal to the required size, removing impurities and, where necessary, blending it with other coal to match customer specifications.


Coal mining technology is continually evolving and improving, among other things, by the use of underground mining systems and larger earth-moving equipment for surface mines, as well as highwall mining equipment. For example, longwall mining technology has increased the average recovery of coal from large blocks of underground coal from 50% to 70%. At larger surface mines, haul trucks have capacities of up to 400 tons, which is nearly double the maximum capacity of the largest haul trucks used a decade ago. This increase in capacity, along with larger excavating equipment, has increased overall mine productivity. Lipari does not have any licenses, patents, or trademarks and does not depend on licensed technology to conduct its operations.

General Stratigraphy

A generalized stratigraphic column of interest to the properties, illustrated in Table 5, includes the following rock units, listed in descending stratigraphic sequence:

  • Quaternary surficial deposits

  • Pennsylvanian Age Princess Formation

  • Pennsylvanian Age Four Corners Formation

  • Pennsylvanian Age Hyden Formation

  • Pennsylvanian Age Pikeville Formation

  • Pennsylvanian Age Grundy Formation.

Quaternary Surficial Deposits: These surficial deposits, primarily alluvium, consist of poorly sorted gravels, sand, silt and clays. These deposits typically are very thin or missing, and where present they lie discordantly on older units.

Princess Formation: The Princess Formation consists of interbedded sandstone, siltstone, shale and coal with minor thin shale limestone. These lithologic units are typical of fluvial and deltaic with some marine environments. The basal Stoney Fork Member is marine shale that contains fossils and in some areas has a limestone layer at its base. This formation includes the Hazard 10 Coal Seam.

Four Corners Formation: The Four Corners Formation has similar lithology to the Princess Formation. These lithology are typical of fluvial and deltaic environments that intertongue with marine environments. The base of the Four Corners Formation is the marine Magoffin Shale Member. Coal seams of interest included in this formation, from top to bottom, are the Hazard 9, 8, 7, 6 (Haddix), and 5A.

Hyden Formation: Interbedded sandstone, siltstone, shale and coal with minor thin shale limestone units are typical of fluvial and deltaic environments that along with some marine units make up the Hyden Formation. The Kendrick Shale Member, a marine shale, marks the base of the Hyden Formation. Included in this formation are the Hazard 4 (Fireclay) and the Whitesburg Seams.

Pikeville Formation: Lithologies of the Pikeville Formation are consistent with the other formations of the Breathitt Group and are indicative of fluvial and deltaic environments that overlap with marine environments. The Amburgy Rider, Upper Amburgy, Lower Amburgy, Amburgy Leader and Elkhorn 3 Coal Seams are included in this formation.

Grundy Formation: Lithologies of the Grundy Formation are similar to the formations of the Breathitt Group and are consistent with deposition in fluvial and deltaic environments that intertongue with shallow marine environments. The Horse Creek (Manchester) Seam lies within this formation.


Coal Seams of Interest

Within the B & W properties there are approximately 15 coal seams of interest. These seams are the Hazard 10, 9 (Hindman), 8, 7, 6 (Haddix), 5A, 4 Rider, 4 (Fireclay), Whitesburg, Amburgy Rider, Upper Amburgy, Lower Amburgy, Amburgy Leader, Elkhorn 3 and the Horse Creek  (Manchester) Coal Seams. Some of these seams have multiple benches, and in some areas these benches have been identified separately.