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Signature Sponsor
By Alexis Tate
August 29, 2017 - Cloud Peak Energy (CLD) is a thermal coal producer headquartered in Gillette, Wyoming. The company is one of the largest thermal coal producers in the US and was formed on July 31, 2008, as a corporate spin-off from Rio Tinto Energy America. It’s the only pure-play PRB (Powder River Basin) coal company and owns and operates mines in Wyoming as well as in Montana.
A Brief History of Cloud Peak Energy
Rio Tinto Energy America
Kennecott Energy and Coal was a part of the Rio Tinto Group and was formed in 1993. It included the Spring Creek coal mine, Antelope coal mine, Cordero Mining, the Colowyo Coal, the Jacobs Ranch coal mine, and 50% of the Decker coal mine. Kennecott Energy and Coal was renamed Rio Tinto Energy America or RTEA in 2006.
In December 2008, RTEA’s Western US coal business, which included the Spring Creek coal mine, the Antelope coal mine, Cordero Mining, and 50% of the Decker coal mine, was transferred to Cloud Peak Energy.
Cloud Peak’s IPO
Cloud Peak Energy filed for an IPO (initial public offering) with 30.6 million shares at $15.0 per share and began trading on the NYSE (New York Stock Exchange) under the symbol CLD on November 25, 2009.
In this series, we’ll explore how CLD has expanded its business and evaluate its key operational metrics and financial position. After reading this series, you’ll understand what sets apart Cloud Peak Energy from competitors like CNX Coal Resources (CNXC), Alliance Resource Partners (ARLP), and Westmoreland Coal (WLB) in the coal (KOL) mining business.
We’ll wrap up the series with a company outlook, analyzing CLD’s current valuation and the factors that could drive its valuation multiples in the future.
Let’s start with the specific mines operated by CLD.
Cloud Peak Energy owns and operates three surface coal mines in the PRB (Powder River Basin), which is the lowest-cost major coal producing region in the US. CLD also owns rights to substantial undeveloped coal and complimentary surface assets in the northern PRB.
Peers Westmoreland Coal (WLB), Arch Coal (ARCH), and Peabody Energy (BTU) also mine coal in the Powder River Basin.
Cloud Peak Energy and Its Powder River Basin Mines
The Antelope mine is located at the southern end of the PRB. The mine produced and shipped 6.7 million tons of coal in 2Q17 and 29.8 million tons of coal in 2016, and this coal had a calorific value of 8.897 Btu (British thermal units) in 2016. The low sulfur coal is shipped primarily to electric utilities in the Midwest, Southwest, and the Southeast US.
The Cordero Rojo mine is also in Wyoming. Cloud Peak produced 18.3 million tons of 8.476 Btu coal from the mine in 2016. CLD also mined and shipped 4.2 million tons of low sulfur coal in 2Q17.
Coal from these mines sells for less than other PRB coal due to its lower heating value. Weak market demand, low coal prices, the high cost of removing the earth and rock above the coal seam at the mine, and increasing capital costs have all caused CLD to reduce production from the mine by 10 million tons per year since 2015.
CLD’s Spring Creek mine is in Montana. The mine produced 10.3 million tons of 9.283 Btu coal in 2016. Shipments in 2Q17 from the Spring Creek mine was 3.4 million tons of coal. In 2016, Cloud Peak Energy shipped ~58.5 million tons from its three mines.
Notably, investors can get exposure to this sector by investing in the VanEck Vectors ETF Trust (KOL).
Cloud Peak’s Logistics Business
In addition to coal mining, Cloud Peak Energy (CLD) runs a logistics business that provides export-related services to the company and other coal producers. In 2016, logistics-related activities contributed to 5.4% of CLD’s total revenues, compared with 16.5% in 2015. A large part of the revenues in the segment comes from exports to Asia, primarily through Westshore Terminals in Canada.
Inside Cloud Peak's Logistics Business and Development Projects
During 1H16, Cloud Peak witnessed an absence of exports primarily due to weak international prices for seaborne thermal coal. However, international thermal coal prices increased significantly in 2H16, when China increased imports to offset its declining domestic production levels. An increase in international prices helped CLD resume exports. Cloud Peak exported 0.4 million tons in 4Q16.
Cloud Peak exported 1.8 million tons to Asian customers in 1H17. Coal mined from CLD’s Spring Creek mine is the primary source of Asian exports, mainly due to Spring Creek’s proximity to West Coast export terminals, resulting in lower rail costs. CLD’s guidance for export is ~4.5 million tons during 2017 assuming continued demand and price support.
Other coal producers (KOL) exporting to Asia include Peabody Energy (BTU), CONSOL Energy (CNX), and Arch Coal (ARCH).
Cloud Peak’s Development Projects
As of December 31, 2016, CLD operates two development projects: Youngs Creek Project and Big Metal Project. Both are located in the northern PRB (Powder River Basin).
Big Metal Project was formed as a result of CLD’s contract with the Crow Indians in Montana to mine 20 million tons of coal annually on their reservation for shipment by rail to coal terminals in the Pacific Northwest for export to Asia. The project is named after a legendary Crow chief, and the facilities of Cloud Peak’s Spring Creek mine are located to the east of the reservation and will be available for use by Big Metal. |
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