Cloud Peak cautiously optimistic about rebounding coal market

Powder River Basin coal producer Cloud Peak Energy (NYSE: CLD) said the hot summer increased coal burn and natural gas prices, which led to stronger coal shipments in the third quarter and reductions in stockpiles of coal held by utilities.

“Stockpiles, while still high, are estimated to be within the five-year average,” the company said in its Oct. 25 quarterly earnings statement. “Stockpiles of PRB coal as of the end of August 2012 were at approximately 90 million tons, which is around 26 million tons above the same time last year when they were at a five-year low. The outlook for coal demand for the rest of the year will depend on the intensity and timing of the winter season and the price of natural gas.”

Cloud Peak recorded Adjusted EBITDA of $108.4m in the third quarter of 2012 compared with $87.9m in the third quarter of 2011. The Adjusted EBITDA in the first nine months of this year of $249.8m compares with $258.8m for the first nine months of 2011.

Shipments from the company’s three owned and operated mines – Antelope, Cordero Rojo (both in Wyoming) and Spring Creek in Montana – in the third quarter were 24.4 million tons, level with the third quarter of 2011. For the first nine months, shipments were 67 million tons compared to 70.5 million tons in the same period of 2011. Asian exports were up about 7.5% in the third quarter of 2012 to 1.5 million tons from 1.4 million tons in 2011.

“After a slower second quarter for shipments, we were pleased that the hot summer and rising natural gas prices led to stronger shipments to our customers in the third quarter,” said Colin Marshall, President and CEO. “Our realized average price of $13.28 per ton was well above spot prices and continues to support our strategy of selling forward our production. In combination with good operational cost controls at the mines, this generated a record Adjusted EBITDA for the quarter of $108 million. Nevertheless, current forward prices for 2013 and 2014 domestic deliveries are low, and we are managing the business accordingly. In addition, current Newcastle prices for 2013 are below 2012 levels, which will reduce our 2013 export margins.”

Average realized prices tick up a bit in latest quarter

In the third quarter, 24.4 million tons of coal sales brought an average realized price of $13.28/ton, against 24.4 million tons of coal sales in the year-ago quarter at $12.91/ton. The average cost of coal sold was $9.14/ton in the third quarter of this year, and $9.17/ton in the year-ago quarter. These figures are only for the three company-owned mines, not the half owned and barely operational Decker mine in Montana.

The third quarter sales of 24.4 million tons was significantly higher than second quarter 2012 shipments of 20.1 million tons. “The increase in shipments was due to increased demand as customers caught up on their committed deliveries after a strong summer burn,” Cloud Peak noted. “We shipped 1.5 million tons to our Asian customers as the Westshore Terminal operated well and the demand from our Asian utility customers remains resilient.” Westshore is a British Columbia coal export terminal that is used because of a lack of coal export facilities along the U.S. West Coast.

Cloud Peak continues to expect to export about 4.3 million tons for the full year 2012, 4 million tons of which will go through Westshore. During the third quarter, Cloud Peak shipped about 1.5 million tons to Asian customers, bringing the nine-month total to 3.5 million tons. Westshore is undergoing the second phase of a current expansion, which will increase its annual capacity from about 32 million tons to 36 million tons. Cloud Peak plans to increase its 2013 shipments in proportion to the expanded capacity to around 4.5 million tons through Westshore.

Cloud Peak ups Adjusted EBITDA guidance for 2012

Given the strong operating performance of the business year to date, including domestic and export shipments, and effective cost controls, Cloud Peak is raising its guidance for Adjusted EBITDA for 2012. It now anticipates that Adjusted EBITDA will be $310m to $340m, up from a previous range of $300m to $330m.

For 2012, Cloud Peak has committed 92.4 million tons, of which 92 million tons are under fixed-price agreements with a weighted-average price of $13.23 per ton. Assuming current low OTC prices for committed but unpriced 2012 tons, the weighted-average price would be $13.20 per ton for the full year 2012.

“We are not expecting to make any significant additional sales for delivery in 2012 and are focusing on working with our customers to ensure delivery of their committed tonnages,” the company added. “During the third quarter of 2012, our committed position for 2013 increased by only 3.4 million tons to 84.6 million tons due to limited activity in the markets. Of this committed 2013 production, 74.6 million tons are under fixed-price commitments with a weighted-average price of $13.58 per ton. For 2014, we currently have 54.7 million tons committed of which 43.3 million tons are under fixed-price commitments with a weighted-average price of $14.49. If the current weak pricing environment persists through the balance of this year, the expected average realized prices for 2013 are likely to be similar to 2012.”

The current Newcastle forward prices out of Australia, used as an international steam coal benchmark, for 2013 are below 2012 levels, which will reduce the company’s 2013 export margins. “Consequently, we have not yet committed pricing on our export tons beyond the first quarter of 2013, and we will expect to lock in further pricing in the coming quarters when we are hopeful prices will rise from their current low levels,” the company said. “Our Newcastle hedging is providing some protection against the current low prices.”

Marshall concluded: “We are encouraged that domestic customers are now taking their committed coal, and we are receiving fewer requests for tonnage deferrals. The hot summer and the rebound in the price of natural gas have resulted in utilities sending their trains and burning their contracted coal. We are anticipating a normal winter which should continue to draw down the stockpiles of coal and move natural gas consumption to domestic and commercial heating. Given this scenario, it is still likely that it will take until at least mid-2013 for the impact of last winter on PRB prices to be worked though so we can return to a more favorable pricing environment. However, 2012 is going well and after a record third quarter, we are raising our guidance to reflect these improvements.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.