Cloud Peak, worried about coal market issues, fails to bid for new coal

Cloud Peak Energy (NYSE: CLD) said Aug. 21 that it did not submit a bid that day for the Maysdorf II North Tract Lease by Application (LBA), which covers a tract of coal next to the company’s Cordero Rojo strip mine in the Wyoming Powder River Basin.

The U.S. Bureau of Land Management held an auction on Aug. 21 at the request of Cloud Peak. This coal lease sale was being held in response to an LBA filed by Cordero Mining LLC. The coal resource offered consists of all reserves recoverable by surface mining methods in a 1,338.37-acre area.

Cloud Peak President and CEO Colin Marshall said: “We carefully evaluated the estimated economics of this LBA in light of current market conditions and the uncertainty caused by the current political and regulatory environment towards coal and coal-powered generation and ultimately decided it was prudent not to bid at this time. Due to the configuration of the North tract and surrounding land ownership positions, we believe a significant portion of the BLM’s estimated mineable tons would not be recoverable by us if we were to be the winning bidder in the BLM’s competitive process. In combination with prevailing 8400 Btu market prices and projected costs of mining the remaining coal, we were unable to construct an economic bid for this tract at this time. We will continue to evaluate any possible future lease sales by the BLM of these tons in the North tract as market conditions improve.”

This is a very unusual decision, for a company to not bid on a BLM tract that it asked to lease. It is a very real sign that coal companies are re-evaluating their commitments to long-term coal reserve positions at a time when dozens of coal-fired power plants around the nation have been or are about to be shut due to new environmental regulations.

U.S. Mine Safety and Health Administration data shows that the Cordero (also called the Cordero Rojo) mine of Cordero Mining produced 17.6 million tons in the first half of this year, and 39.2 million tons in all of 2012. Cloud Peak’s Feb. 14 annual Form 10-K report said that Cordero Rojo had 331 million tons of proven and probable reserves left to mine as of the end of 2012, so the mine has something less than 10 years of coal left based on the recent production pace.

U.S. Energy Information Administration data shows that Cordero Rojo’s customers earlier this year included the Limestone plant of NRG Texas Power, the Walter Scott Jr plant of MidAmerican Energy, the R S Nelson plant of Entergy, the North Omaha plant of the Omaha Public Power District and the Northeastern plant of Public Service Co. of Oklahoma.

The LBA tract that Cloud Peak didn’t lease is adjacent to a federal lease to the east controlled by the Cordero Rojo mine, to a federal lease to the north controlled by the Belle Ayr mine of Alpha Natural Resources (NYSE: ANR), and to the Maysdorf II South Coal Tract to the southeast, which is awaiting a future lease sale at the request of Cloud Peak.

The North LBA is adjacent to additional unleased federal coal to the west across State Highway 59. A qualified surface owner restricts leasing on the Maysdorf II North Tract toward the south. Most of the surface estate of the tract is owned by Alpha Coal West Inc., with a small portion in the southeast corner owned by Caballo Rojo Inc.

The LBA tract contains surface mineable coal reserves in the Wyodak Coal Zone currently being recovered in the adjacent, existing mines. Several beds are merged on the LBA tract into a single mineable seam. The average total coal thickness is about 69 feet and the range of overburden thickness is approximately 266 to 397 feet. The tract contains an estimated 148,565,000 tons of mineable coal. This estimate of mineable reserves includes the main seam but does not include any tonnage from localized seams or splits containing less than 5 feet of coal. The total mineable stripping ratio of the coal in bank cubic yards per ton is approximately 4.5:1.

Said Cloud Peak about this operation in the Form 10-K report: “The Cordero Rojo mine is located approximately 25 miles south of Gillette, Wyoming. The mine extracts thermal coal from the Wyodak Seam, which ranges from approximately 55 to 70 feet in thickness. We have nominated as an LBA a large coal tract adjacent to our existing operation. The BLM has divided this LBA into two tracts and is expected to schedule the separate tracts for lease sometime in late 2013 or early 2014. The BLM ultimately determines if the tract will be leased, and if so, the final boundaries of, and the coal tonnage for, this tract. Significant areas of unleased coal are potentially available for nomination by us or other mining operations or persons adjacent to our current operations. Based on the average sulfur content of 0.69 lbs SO2/mmBtu, the reserves at our Cordero Rojo mine are considered to be compliance coal under the Clean Air Act.”

Maysdorf II South, the second coal tract referred to by Cloud Peak in the Form 10-K, will likely be scheduled for auction in the next few months. It is 2,306 acres and 271 million in-place tons in size, so if Cloud Peak leases just that tract, that is several years worth of additional coal for Cordero Rojo.

Cloud Peak 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 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. Cloud Peak Energy also owns rights to substantial undeveloped coal and complementary surface assets in the Northern PRB, further building the company’s long-term position to serve Asian export and domestic customers.

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.