Cloud Peak Energy (NYSE: CLD) and the Crow Tribe of Indians announced July 23 that they have reached tentative agreements regarding exploration rights and exclusive options to lease and develop up to an estimated 1.4 billion tons of in-place Northern Powder River Basin coal on the Crow Indian Reservation in southeast Montana.
This property is near Cloud Peak Energy’s long-existing Spring Creek strip mine, and also the recently-acquired Youngs Creek Mining Co. LLC and CX Ranch properties. Those properties were recently bought from Chevron (NYSE: CVX) and CONSOL Energy (NYSE: CNX).
The agreements are being submitted to the Crow Tribal Legislature for review, which is anticipated during August. If approved by the Legislature, the agreements would be executed by the Tribal Chairman and Cloud Peak Energy and then submitted to the U.S. Department of the Interior for review and requested approval.
Cloud Peak Energy would pay the tribe $2.25m upon tribal approval and execution of the agreements, $1.5m upon approval by the Department of the Interior, and additional annual payments thereafter through the initial option period, to a cumulative total of up to $10m. Additional option payments would be made through any extension periods. If the agreements are approved, Cloud Peak Energy anticipates conducting exploration during the initial option period to complete delineation of the potentially economic coal tonnages subject to the options.
The tentative agreements provide for exploration and three exclusive options to lease three separate coal deposits on the Crow reservation over an initial five-year term, with two extension periods through 2035 if certain conditions are met. Upon exercise of an option(s) to lease, Cloud Peak Energy would pay the tribe an amount equal to $0.08 per ton to $0.15 per ton, depending on the lease and coal deposit and subject to adjustment for inflation. There are also adjustable royalty rates, ranging from 7.5% to 15%, and standard coal production taxes amounting to a nominal 20% of FOB mine gross proceeds to be paid to the tribe. Cloud Peak Energy would also provide preferential hiring, training, and promotion for qualified Indians, funding of $50,000 per year for scholarships for qualified tribal members, and support for Indian-certified contractors, among other things.
“If approved, these exploration and option agreements with the Crow Tribe would allow us to access up to 1.4 billion tons of coal to further build our Northern Powder River Basin position,” said Colin Marshall, Cloud Peak Energy President and CEO. “The location of the coal next to our Spring Creek mine and the recently acquired Youngs Creek project and CX Ranch lands will let us optimize our mine development. We are comfortable that the option structure, and variable royalty rates, will enhance the potential development of mining operations on the Crow Reservation. We look forward to working with the Crow Tribe in what we see as a long-term partnership that will hopefully bring jobs and economic development on the Reservation.”
Cedric Black Eagle, Chairman of the Crow Tribal Executive Branch, said, “The Cloud Peak Energy agreements we are presenting to the Tribal Legislature for approval are the result of extensive negotiations, and we believe that they offer the best potential for developing the Crow Tribe’s coal resources in the southeastern part of the Reservation. Partnering with Cloud Peak Energy will help diversify the Tribe’s long-term coal revenue, provide good jobs and potential access to export markets for Tribal coal, and Cloud Peak Energy’s recent acquisition of the CX Ranch lands provides surface access for mining and shipping Crow coal through the existing Spring Creek mine train load-out facilities.”
Cloud Peak Energy is headquartered in Wyoming and is one of the largest U.S. coal producers and the only pure-play PRB coal company. The company owns and operates three surface coal mines in the PRB, the lowest cost major coal producing region in the nation. The Antelope and Cordero Rojo mines are located in Wyoming and the Spring Creek mine is located near Decker, Mont.
This new deal adds to another recent acquisition for Cloud Peak
Cloud Peak Energy said July 2 that it had acquired the Youngs Creek Mining joint venture and other related coal and surface assets from Chevron U.S.A. Inc. and CONSOL Energy for $300m. Of this purchase price, $195m is allocated to the lease of approximately 450 million tons of in-place coal and $105m to the purchase and lease of 38,800 acres of land. The coal and land are well suited to support potential increased exports through the Pacific Northwest, Cloud Peak noted.
Youngs Creek is a permitted but undeveloped surface mine project in the Northern PRB located 13 miles north of Sheridan, Wyo. It is seven miles south of Cloud Peak Energy’s Spring Creek mine and seven miles from the BNSF mainline railroad.
“The significant coal and surface assets we acquired position Cloud Peak Energy well for future growth in our Asian exports as additional terminal capacity becomes available,” said Marshall in the July 2 announcement. “The location of the coal and surface lands close to the Spring Creek mine and its rail spur should reduce development costs and allow future operating synergies to be realized. The quality of the coal is similar to that of our Spring Creek mine and offers lower sodium levels to further meet the needs of our customers.” Sodium has always been an issue for PRB mines in Montana, causing boiler and coal ash problems.
Of the approximately 450 million tons of in-place coal, the undeveloped Youngs Creek mine permits cover 291 million recoverable tons of low sulfur, high Btu subbituminous coal. The 38,800 acres of land includes Youngs Creek surface to the south and extends to the border with the Spring Creek mine to the north. The property also extends onto the Crow Indian Reservation to the west and abuts the Decker mine, of which Cloud Peak Energy owns 50%, to the east.
Notable is that Cloud Peak on July 9 sued the other 50% owner of Decker, Australia’s Ambre Energy, in federal court. Cloud Peak indicated that the existing plan has been to shut Decker at the end of 2013 and that Ambre Energy has unilaterally acted to extend the mine’s life without Cloud Peak’s permission. A life-extended Decker mine would be competing with any new Cloud Peak Energy production plans in the region.