US coal companies count cost of post-Sago safety

By Steve James

NEW YORK, July 27 (Reuters) - New federal mine safety rules, prompted by the death of 12 miners in a blast last year, could cost Massey Energy (MEE.N: Quote, Profile, Research, Stock Buzz) $24 million in the next two years, the coal producer's chief executive said on Friday.

Don Blankenship also said developing and installing new tougher mine seals and other safety equipment would drive up the cost per ton of its coal and some smaller Appalachian producers might not be able to comply.

"It may take a mine or two out because they can't get seals," Blankenship told Wall Street analysts.

The CEO of Massey rival, Consol Energy (CNX.N: Quote, Profile, Research, Stock Buzz), sounded the same warning on Thursday, saying some smaller producers may not survive the added cost of installing seals to hold back an explosion and prevent poisonous gases from entering a mine.

"There will be a cost to it and across the industry there could be a real impact," said Consol's Brett Harvey. "(Perhaps) a slowdown in some production."

Blankenship was asked about the impact on Massey's operations by the Mine Improvement and New Emergency Response (MINER) Act, which was signed into law last year after 12 miners were killed in an explosion at International Coal Group's (ICO.N: Quote, Profile, Research, Stock Buzz) Sago mine in West Virginia in January 2006.

"We will probably spend over $24 million over the next two years getting in compliance," Blankenship said on a conference call to discuss Massey's second-quarter financial results.

Although the exact costs have not been determined, he said Massey estimated it would probably add 50-75 cents to the per-ton cost of its coal. In the second quarter, Massey's average cost was $42.68 per ton out of an average revenue of $51.40 per ton.

Blankenship said Massey, which operates mines in the higher-cost Central Appalachian coalfields of Kentucky, Virginia and West Virginia, had probably already spent up to one-third of that $24 million getting into compliance. A significant portion of the 50-75 cents-per-ton cost increase had already been applied, he said.

Under the MINER Act, the Labor Department's Mine Safety and Health Administration (MSHA) has been implementing new safety provisions for U.S. mining companies.

One key standard is to increase the strength of seals in underground coal mines to 120 pounds per square inch (psi) and require environments behind current 50 psi seals to be monitored and maintained inert.

Other requirements include lifelines in all escape routes out of a mine, safety training on the use of self-contained self-rescuers at underground mines and mine-to-surface communications systems.

Blankenship said Richmond, Virginia-based Massey believed it was able to comply with the new standards both technically and from a resources perspective.

"But some (companies) will have trouble complying," he said, when asked about the effect of the MINER Act and the phasing-out of synthetic fuel tax credits, on central Appalachian coal producers.

Blankenship said improved worker productivity would be a major factor in mitigating the costs of compliance.