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Investors must have their head in the clouds to shun this IPO.
Global mining giant Rio Tinto (NYSE: RTP ) continues to raise capital to reduce the daunting debt burden left over from that ill-timed Alcan acquisition, and the result is a new investment vehicle for coal that has been ruthlessly spurned by an increasingly cautious market.
Cloud Peak Energy (NYSE: CLD ) may have spooked some would-be investors with the hasty issuance of $600 million in new debt, but the lackluster reception of the shares offered through the IPO raises this Fool's value-focused eyebrows. With shares representing a 52% stake in the company garnering less than $459 million, and roughly half the proceeds of the senior note offerings going back to Rio Tinto, the implied enterprise value for the new entity comes in at around $1.2 billion. Relating that valuation back to the underlying coal assets, I detect the scent of Foolish opportunity.
Looking to comparable sales
Like house hunters scrutinizing comparable sales, we have a telling transaction from the recent past to shed light upon the present valuation of these new Cloud Peak shares. Back in March, Rio Tinto managed to sell its Jacob's Ranch coal mine to Arch Coal (NYSE: ACI ) for $761 million. At the time, I pointed out that the transaction valued the coal assets in the ground at about $2 per ton. Since all three of the coal mines comprising Cloud Peak Energy's assets are located in the same Powder River Basin (PRB) region of Wyoming and Montana as the mine that Arch Coal purchased, and given the comparable ore quality among all of these mines, it would seem that investors have an opportunity to outperform Arch Coal's cost basis for similar assets.
Looking to Rio Tinto's ore reserves as of December 31, 2008, we find that the three mines in the Cloud Peak portfolio boasted combined proven and probable reserves of 948 million tons. Essentially, Rio Tinto has just sold a 52% stake in producing PRB coal mines to you -- the public -- for about a third less than Arch Coal paid for similar assets earlier in the year. The results of the IPO value the assets at about $1.27 per ton. These mines produced a combined 94 million tons of coal in 2008, which represents only about 78% of total permitted capacity.
Although Peabody Energy (NYSE: BTU ) recently noted persistent weakness in domestic demand, rival Arch Coal has noted the emergence of export demand for PRB thermal coal emanating from Asia. If this matures into a trend, it could provide a boost to railroads like Union Pacific (NYSE: UNP ) and Berkshire Hathaway's (NYSE: BRK-A ) Burlington Northern Santa Fe (NYSE: BNI ) that haul the stuff, but I believe that the biggest boost for investors could come to those with their heads in the cloud.