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Are Environmentalists Winning the Fight Over Coal Exports?

Cloud Peak Energy (NYSE: CLD  ) makes no bones about it, it wants to send more coal to Asia. The same is true of other miners, though companies like Alpha Natural Resources (NASDAQOTH: ANRZQ  ) are looking to Europe for export opportunities, too. Only coal is dirty and environmentalists are increasingly fighting to stop the construction of the shipping terminals needed to support additional coal exports. That's a long-term problem for U.S. coal.

Not in my backyard or yours...
When it comes to large scale construction projects there's almost always a 'not in my backyard' (NIMBY) backlash. It's easy to understand why you might not want a new coal export terminal mucking up your local landscape. And opponents of such projects will pull any lever necessary to stop construction before it starts.

One of the favorites is the environment -- be it tortoises holding up construction of the environmentally popular Ivanpah solar array or the risk of water pollution killing a seaport. However, when it comes to coal, the newest weapon is even more difficult to overcome. Port opponents are asking that the pollution in destination markets be taken into consideration.

(Source: Donar Reiskoffer, via Wikimedia Commons)

So if a coal port will be sending the fuel to China, the environmental cost of the new facility will include the impact of China's use of coal for electricity. If you're an environmentalist you think that's a great idea. If you're a coal miner you think it's the United States imposing its will on a sovereign nation. Like or dislike the tactic, it's gaining traction: Three of the six proposed terminals on the West Coast have been scuttled.

What's that mean for the miners?
The impact of not being able to build new export facilities is most apparent at Cloud Peak. Between 2012 and 2013, Asian exports were the only bright spot for the company. While domestic tons sold fell about 5.5% year over year last year, exports increased nearly 7%. That increase was from a very small base, but it highlights the opportunity.

In fact, Cloud Peak, already a notable player in South Korea, has been sending test coal to Japan. Only CEO Colin Marshall noted during his company's fourth quarter conference call that, "The test runs went well and could turn into long-term contracts when West Coast terminal capacity is built." I added the emphasis because he's basically saying that Japan could be a great opportunity, but we just can't do anything about it right now.

Even more frustrating is that Cloud Peak has a deal with the Crow Indians for access to coal reserves that could be used to meet foreign demand. The only piece it's missing to boost long-term growth prospects is export capacity. Exports are expected to be flat to lower this year.

A Russian opportunity
Alpha, with about 10% of its business from the Powder River Basin, would also like to see West Coast port expansion. However, the miner gets about 40% of its revenues from Eastern thermal coal. West Coast coal goes to Asia, East Coast coal goes to Europe -- it's simple logistics.

Right now, however, there's a window of opportunity with Russia locking horns with Ukraine. That's because Russia, in typical fashion, is threatening to withhold its energy riches from the world if it doesn't get its way. It's just more evidence that Russia isn't a reliable partner... like the United States could be.

(Source: U.S. State Department, via Wikimedia Commons)

Alpha has a new office in London and has already inked a four million ton European deal that will help keep its Eastern operations humming. But to really take advantage of this opportunity, it needs the ability to get more coal on the water. That means ports. The East Coast has been more successful at getting ports built, but there's little question that what works to stop a port on the West Coast will soon be brought back east. That could muck up Alpha's export plans.

Don't forget this issue
The domestic coal market is starting to firm after an extra cold winter. That's good news and will boost the fortunes of Cloud Peak and Alpha. However, the real long-term opportunity isn't domestic, so don't forget about the port issue if you're interested in coal.

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Reuben Brewer

Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

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9/2/2015 2:40 PM
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