By Matt Kennard and Ajay Makan in New York
Vernon Haltom used to live in Naoma, a small picturesque village in West Virginia. With just 500 people it was a close-knit community, a good place, he thought, to bring up his youngest daughter.

But he left with his family in 2009. The village was at the bottom of a mountain with no peak after it had been blown off by a coal company that built a mine in its place, one of many in the state. It was making life impossible.
“One of the things you really notice is the blasting,” says Mr Haltom. “It feels like an earthquake every day.” He also remembers the dust the blasting sent down on the communities at the bottom.

Because of the impact on local communities and the Appalachian landscape, mountain top removal mining has become one of the most controversial methods of mineral extraction in the US, competing with hydraulic fracturing for the status of US environmentalists’ current bĂȘte noire .

And according to sector analysts and coal companies, some of which recently posted disappointing third-quarter earnings, the backlash from local activists and the Environmental Protection Agency has now made the method economically unviable due to onerous regulations and increasing costs.

In 2010, the EPA angered coal companies and some local politicians when it tightened its guidance on the criteria for granting permits for MTM sites. It followed a move by the regulator to set aside 80 proposed mining projects for “enhanced review”.

At the same time coal companies have been hit by the increasing cost of extracting the coal, a point highlighted by John Bridges, US coal analyst at JPMorgan. “We now have a situation where the easy opportunities have been mined and costs are going up,” he says. “And the environmental lobby is opposed to the method, so permits are much harder to come by.”

The most public face-off between the coal companies and the EPA came in 2009 when Arch Coal, the second-largest coal producer by volume in the US, had the permit for its Spruce mine revoked by the regulator.

The EPA, using the Clean Water Act, ruled the new project, which was to be the largest mountain top extraction operation in West Virginia’s history, “may result in unacceptable adverse impacts to fish and wildlife resources”, adding that “the damage from this project would be irreversible”. Arch is now fighting the permit removal in court.

Deck Slone, vice-president of government and investor affairs, says: “The EPA has blocked our ability to create hundreds of new jobs at the proposed Spruce mine for nearly four years now, and the agency seems intent on shutting down other mines in the region as well.”

The US still has 28 per cent of the world’s identified coal reserves, but from 2008 to 2009, coal production in the country dropped 8.3 per cent, with China overtook the US as the world’s leading coal producer in 2001, and is now responsible for almost half of all global production.

“The regulatory environment is very uncertain now. The EPA has created an untenable situation,” says Carol Raulston, of the National Mining Association, an advocacy group. “It’s gotten worse in the past year or so. We have the EPA in court right now; we believe their new guidance is acting in lieu of a regulation. We’re hopeful it will be struck down.”

She adds that companies may have no choice “but to give up on this type of extraction”. MTM production fell in West Virginia by 13.1 per cent from 2008 to 2009

One of the biggest Appalachian coal miners, Alpha Natural Resources, has seen its market capitalisation halved since July, wiping out more than $5bn in equity.

The decline was driven in part by the falling price of high quality coking coal, used in the manufacture of steel, and over fears of reduced Chinese demand. But analysts also point to the acquisition in June of Massey Energy, an Appalachian miner, with higher extraction costs.

Alpha’s third-quarter results, which came out last Thursday, underlined the importance of the mines it has acquired from Massey. Operations at legacy Massey mines contributed nearly 35 per cent of Alpha’s total coal revenue in the quarter, helping the company more than double revenue compared with the third quarter of 2010 to $2.3bn. But increased output came at a high cost: legacy Massey mines accounted for 45 per cent of Alpha’s extraction spending.

Analysts have also noted a marked decline in investor questions about MTM during this round of quarterly results.

“MTM was a big topic of discussion among coal investors just a year ago,” says Lucas Pipes, coal analyst at Brean, Murray, Carret and Company. “But investors are now a lot less concerned about whether more licenses will be issued, because its not that profitable.”

Surface mines, like those created by MTM, tend to yield thermal coal, which is used in US power stations, rather than finer metallurgical coal, which is used in the steel manufacturing process. Alpha Natural Resources expect thermal coal to sell at mines for $67 a tonne next year, much less than the $162 a ton met coal will yield.

Mining companies have also made it harder to calculate the profitability of open top mining, by ending the practice of breaking down revenue and costs by mine.

“It really is very difficult to know how much open top mining costs anymore, because there are no markers out there,” said Mr Pipes.

A growing body of scientific studies have outlined the health impact on communities in the areas where MTM is being carried out.

In July, the peer-reviewed Journal of Community Health published a study which posited that among the 1.2m people living in central Appalachian communities affected by MTM, there were an additional 60,000 cases of cancer directly related to the practice.

In the previous month, a study by researchers at West Virginia University found higher rates of birth defects in Appalachian areas with MTM compared with non-mining areas. These include central nervous system and gastrointestinal defects.

Lenny Kohm, campaign director at Appalachian Voices, one of the many grassroots organizations that has sprung up to oppose MTM, says activism has worked.

“Without question it has had an effect,” he says. “It used to be until several years ago that that industry had carte blanche. If they applied for permit it was automatically granted ... Now major permits have been denied.”

He adds: “I would bet that within the next five years mountain top removal doesn’t exist at all.”