Cloud Peak Energy (CLD +0.00%) is one of the rare coal miners that actually made money last year. The start of this year was worse, and the company swung to a loss in the first quarter as coal sales decreased because of weather-related transportation problems. However, the company looks set to outperform its peers for the remainder of the year.
Cost-competitive
Cloud Peak Energy's cost performance remains very strong. The company's costs in the Powder River Basin (PRB), the sole basin where it currently operates, were $10.63 per ton. In comparison, Peabody Energy (BTU +0.00%) reported that costs for its Western U.S. operations, which mostly consist of PRB mines, were $12.23 per ton.
Cloud Peak Energy stated that it sold out all its production volume for 2014. This means that the company will not be exposed to thermal coal price changes this year. Given the harsh winter weather and the related problems with rail transportation, the company lowered its production guidance to 86 million-90 million tons. Most of this volume will be shipped to domestic customers, and just 4 million-4.5 million tons are expected to go to Asian customers.
It's worth noting that the company expects to produce 10 million tons less coal in 2015. So far, these plans have not scared investors, as shares are up 9% year to date. As coal markets remain soft, profitability is much more important than production growth.
Successful refinancing highlights strength
The debt markets also highlight Cloud Peak Energy's relative strength. The company was recently able to successfully refinance its debt. Cloud Peak Energy issued $200 million worth of 10-year 6.38% notes and used the proceeds together with cash on the balance sheet to repay $300 million of 8.25% notes.
In comparison, Alpha Natural Resources (NYSE: ANR), which got 50% of its 2013 revenue from thermal coal, got a 4.875% interest rate for its convertible senior notes due 2020. As the notes could be converted to Alpha Natural Resources shares, the interest rate is significantly lower than it would have been if the company used ordinary senior notes.
With less than $500 million in senior notes, Cloud Peak Energy remains in a comfortable debt position. Just like other coal miners, the company is cutting its capital spending. Cloud Peak Energy guided that it will dedicate $40 million-$60 million to capital expenditures this year. The first quarter figure of $4.5 million gives way to optimism that full-year capital spending will be at the low end of the guidance range or even lower. However, it's worth noting that most of the spending will likely take place in the summer months, when the weather is more favorable for work.
Bottom line
Cloud Peak Energy remains one of the strongest coal miners. Despite its loss in the first quarter, the company is expected to finish the year profitably. Cloud Peak Energy trades at 39 times future earnings, which might seem too high for some investors; but many other coal miners are not expected to make a profit in the near future at all. Among the coal miners that could operate profitably, Peabody Energy trades at 56 times its future earnings.
All in all, Cloud Peak Energy is a solid performer with a healthy balance sheet. Investors should temper their expectations for share performance, as coal markets remain under pressure, but more upside is still possible.
