Hallador Energy Co (HNRG)

A. Company Overview

Hallador Energy Company (the "Company" or "Hallador") is an energy company operating in the state of Indiana. The company primarily focuses on coal mining through its subsidiary, Sunrise Coal, LLC, which serves the electric power generation industry. Recently, Hallador expanded its operations with the acquisition of the Merom Generating Station and the establishment of Hallador Power Company, LLC, which now operates alongside Sunrise Coal, LLC.

Segments

As a result of the Merom acquisition, Hallador now operates in two segments: coal operations and electric operations. Sunrise Coal, LLC handles the coal operations, while Hallador Power Company, LLC is responsible for the electric operations. The remainder of the company's operations are categorized as "Corporate and Other" and encompass unallocated corporate costs, a 50% interest in Sunrise Energy, LLC (a gas exploration company), and Summit Terminal LLC (a logistics transport facility).

Fiscal Year 2022

Fiscal year 2022 was a transitional year for Hallador. The market price for coal reached all-time highs, leading to the signing of 2.2 million tons of new coal sales contracts. These contracts were secured at an average price of approximately $125 per ton, with most deliveries scheduled for 2023. To meet these obligations, Hallador invested significantly in expanding its coal production capacity from approximately 6 million tons annually to around 7.5 million tons in 2023.

Expansion of Coal Production Capacity

Aside from the Merom acquisition, Hallador expanded its coal production capacity in various ways. This included adding new production units at the Oaktown Mining Complex, establishing a small surface mine near Freelandville, Indiana (Freelandville), and relocating the Ace in the Hole production to another small surface mine near Petersburg, Indiana (Prosperity). Production at Freelandville and Prosperity began in Q3 2022. However, volumes from these new pits are projected to be higher cost, and it is important to evaluate their productivity based on market conditions in order to determine the appropriate operational balance.

Issuance of Convertible Notes and Debt Reduction

To finance the expansion of its mine production and improve liquidity, Hallador issued $29 million in convertible notes in 2022. Of this amount, $10 million was issued in Q2 2022 and has already been converted into the company's common stock. If the additional notes issued in Q3 2022 are also converted, the outstanding share count will increase to approximately 36.1 million shares, representing an approximate 17% increase. In addition, the company reduced its bank debt by $26.5 million during the year, bringing the balance owed to $85.2 million by the end of fiscal 2022.

Mining Properties

Hallador's mining properties are evaluated based on geologic data, coal ownership information, and operating plans. Internal qualified individuals estimate the company's mineral reserves and resources, with periodic updates made to reflect changes in mine plans, exploration data, production depletion, acquisitions or dispositions, and other pertinent factors. The estimates of mineral reserves are proven and probable reserves that are economically and legally extractable, considering all material modifying factors. The John T. Boyd Company, a qualified firm, has assessed Hallador's estimates of mineral reserves and resources and provided modifications where necessary.