Cloud Peak Energy (NYSE: CLD) and Australia’s Ambre Energy said Dec. 5 that Ambre is buying Cloud Peak’s 50% share of the Decker strip mine in Montana, clearing away litigation between the companies over Decker operations and for Ambre to extend the life of this venerable Powder River Basin mine.
Also, an option has been granted to Cloud Peak for up to 5 million tonnes per year of Ambre Energy’s throughput capacity at Ambre’s co-owned (with Arch Coal (NYSE: ACI)) Millennium Bulk Terminals facility in the U.S. Pacific Northwest. The proposed new coal export facility at Millennium, which is owned 62% by Ambre Energy and 38% by Arch, is currently in the permitting phase. It is being developed in two stages. The first stage would have a capacity of 25 million tonnes per year with the second stage taking annual capacity to 44 million tonnes. Cloud Peak’s options cover up to 2 million tonnes per year of Ambre’s share of the first phase and 3 million tonnes per year of its share of the second phase. Cloud Peak’s throughput capacity would have an initial term of 10 years, with four renewal options for five-year renewal terms.
The parties have also agreed to mutual cooperation agreements between the adjacent Decker and Spring Creek mines covering overstrip land areas, air quality boundaries and water to facilitate each mine’s respective operations. Spring Creek is a Cloud Peak mine that the company would like to expand for the export markets.
The closing of the transaction is currently anticipated to occur during the first quarter of 2013 and is subject to the satisfaction of various terms and conditions, including Ambre Energy’s full replacement of Cloud Peak’s approximate $70.7m in outstanding reclamation and lease bonds for the Decker mine. This will give Ambre Energy 100% ownership of the Decker mine.
The purchase consideration for the Decker interests includes a cash component of A$57m, if paid by Ambre Energy by March 31, 2013. Alternatively, Ambre will issue a promissory note to Cloud Peak for A$64m payable at a later date.
In addition to the sales transaction, the companies worked out other agreements intended to facilitate mining and related activities at the Decker mine and at Cloud Peak’s adjacent Spring Creek mine and Youngs Creek development project. The mutual overstrip and ambient air quality cooperation agreements will facilitate each mine’s development of coal along the mines’ mutual boundaries. Overstrip lands allow each company to access their leased coal within designated areas for a variety of customary surface mining and incidental activities. Access for water pipelines and monitoring has also been agreed.
The sale also includes transfer of over 1,200 acres of land and grants of rail easements that will improve Cloud Peak Energy’s potential rail access to its newly-acquired Youngs Creek coal mining project, which is near Spring Creek and just across the state line in Wyoming. Remaining terms of these transactions were not disclosed.
Company officials say this is a good deal for both sides
Colin Marshall, Cloud Peak’s President and CEO, said: “We are pleased to have reached this mutually beneficial arrangement with Ambre Energy. This deal should position both our companies to meet anticipated future growth in Asian thermal coal demand. We look forward to completing the transaction over the coming months and, longer term, to shipping our low sulfur Spring Creek coal to Asian markets through the Millennium Bulk Terminals facility. We wish Ambre Energy every success with the development of the terminal and with their strategy to develop the Decker mine. ”
Edek Choros, Ambre Energy’s CEO, Managing Director and founder, said: “Decker Mine produces some of the highest energy coal in the PRB and has the benefit of extensive infrastructure, including two rail loadouts and rail connections to existing and proposed west coast export terminals.”
Choros added: “Taking full ownership of Decker Mine is another significant step for Ambre in developing coal exports through the U.S. Pacific Northwest. As well as building new port infrastructure, Ambre will now also be able to guarantee the supply of high quality U.S. coal to customers in Korea, Japan and the Asia Pacific region from its own mining operations.”
Ambre will also be aiming to strengthen its commitment to domestic U.S. power utilities who have enjoyed the benefits of Decker’s low sulfur high energy coal for over 40 years, and will be considering opportunities for coal-to-liquids processing at Decker, Choros added.
Ambre and Cloud Peak have indicated in filings at the U.S. District Court for the District of Montana that the last remaining customer for Decker is Detroit Edison. In this now-settled lawsuit, filed by Cloud Peak, Cloud Peak accused Ambre of taking unilateral actions to extend the life of Decker and to sell this coal on the export market, without the approval of Cloud Peak. Ambre accused Cloud Peak of wanting to shut Decker to clear away market competition for wholly-owned Spring Creek mine.
U.S. Mine Safety and Health Administration data shows that Decker produced 2.1 million tons of coal in the first nine months of this year and 3.1 million tons in all of 2011. The mine’s production has been sliding in recent years as it lost customers and was headed toward a permanent shutdown, with the 2000-2012 period peak annual production at 10 million tons in 2002.
The Decker mine’s production costs have been relatively high for years and it rarely attracted major new customers in the domestic market. But Ambre is pinning its hopes for the mine on growing demand for PRB coal on the export market, with the company indicating it has interested customers in South Korea. Montana PRB coal has a higher Btu content than the coals out of the more dominant Wyoming end of the PRB, and the Montana PRB coals have a shorter rail haul via BNSF Railway than the Wyoming coals to prospective export terminals in Washington and Oregon, and to existing export terminals in British Columbia, Canada.