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Cloud Peak Energy (NYSE: CLD ) recently decided not to bid on a tract of coal land it had previously coveted. While the weak coal market is one reason, another is its recently approved deal with the Crow Tribe involving around 1.4 billion tons of coal. Now all Cloud Peak needs is someone to sell the coal to.
A big deal
Cloud Peak started 2013 with about 1.3 billion tons of coal reserves. That's a drop in the bucket compared to industry heavyweight Peabody Energy (NASDAQOTH: BTUUQ ) , which had reserves of around 9.3 billion tons. Alpha Natural Resources (NASDAQOTH: ANRZQ ) and Arch Coal (NASDAQOTH: ACIIQ ) , numbers two and three in the industry, had reserves of 4.6 billion tons and 2.1 billion tons, respectively.
The agreement with the Crow Tribe, assuming all 1.4 billion tons goes into the proved and probable category, more than doubles Cloud Peak's reserves and vaults it into third place on the reserve list. That said, all 2.7 billion tons of Cloud Peak's coal will be thermal; Alpha's thermal reserves account for just 3.1 billion of its total. Cloud Peak has clearly become a much heavier hitter in the thermal category.
But it still needs to be built
That said, the Crow land is far from developed. Bringing the mining operation up to speed could take several years. So the purchase is good longer term, but look for Cloud Peak's capital investments to be higher than they might have otherwise been for a few years. That's a negative aspect of this deal based on the current coal environment, since prices are depressed and cost cutting has been an industrywide focus.
On the bright side, the inherently delayed production from the Crow lands isn't such a bad thing. Cloud Peak expects to sell about the same volume of coal this year as it did last year. However, that will be about 5% below 2011 levels. The only silver lining is Cloud Peak's foreign sales, which it anticipates to be around 5.5% of the total this year.
Everyone is looking overseas
Foreign markets are where most domestic coal miners hope to find growth, so Cloud Peak isn't alone in this quest. Peabody, for example, gets about half of its top line from its Australian operations where much of the coal goes right to fast-growing Asian markets. Cloud Peak has a stronghold in South Korea from which it hopes to expand into countries like China and India, which are both still rapidly building coal-fired electric plants.
That said, Arch and Alpha both have more port access than Cloud Peak, and half of Peabody's operation is pretty much in the key foreign market. Right now, Cloud Peak's main export hub is Westshore Terminals' Canadian port. While Westshore has expansion projects under way, the additional tons of capacity added will be in the low single digits. That will be enough to keep the top and bottom line at Westshore on an upward track, but it won't do much for Cloud Peak's export plans.
The project the company is really waiting for is the expected 2018 opening of the Gateway Pacific Terminal. Cloud Peak has secured a third of that facility's 46 million ton coal capacity. Once this port is complete, the company could roughly quadruple its coal exports. And, the timing would coincide closely with when the Crow Tribe lands would be up and running at a decent capacity.
The future isn't now
Cloud Peak is working through a tough coal market and looking ahead to brighter days. The Crow Tribe deal has the potential to fuel material top-line growth, but much needs to be done before that happens. Investors should keep a close watch on this project and the Gateway Pacific Terminal since both must proceed smoothly if Cloud Peak's export dreams are to become a reality.
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