Cloud Peak cuts 2013 coal sales forecast, makes less money in Q3 2013

Cloud Peak Energy (NYSE:CLD), one of the largest U.S. coal producers and the only pure-play Powder River Basin (PRB) coal company, said Oct. 29 that its third quarter 2013 net income was $18m, against $85.3m in the year-ago quarter.

Shipments of 23.1 million tons for the third quarter of 2013 from its three operated mines compared to 24.4 million tons for the third quarter of 2012.

Average cost per ton sold for the third quarter of 2013 decreased to $9.78 per ton from $10.81 per ton in the second quarter of 2013.

Asian exports were 1.3 million tons in the third quarter of 2013 compared to 1.5 million tons in the third quarter of 2012. For the full year, Cloud Peak continues to expect Asian exports of approximately 5 million tons.

Colin Marshall, President and CEO, said: “As expected, shipments increased in the third quarter as customers took their contracted tons. Our mines responded well during a wet quarter, increasing production while staying focused on cost control and achieving cost per ton of $9.78. We see domestic market fundamentals are continuing to improve with higher natural gas prices, decreasing stockpiles of PRB coal, and continued strong burn rates.”

In the first nine months of this year, Cloud Peak sold 66.4 million tons of coal, down from 68.7 million tons in the year-ago nine-month period.

Out of the 23.1 million tons sold in the third quarter of this year, the average realized sales price was $13.03/ton, against 24.4 million tons of sales at $13.28/ton in the third quarter of 2012.

Realized prices per ton were slightly lower than 2012 due to the impact of consistently low prices since late 2011 and indexed tons that settled relative to current low OTC prices. Sequentially, average cost per ton declined $1.03 to $9.78 in the third quarter as compared to the previous quarter, a decrease of nearly 10%. Compared to the prior year, cost per ton increased due to increases in strip ratios and haul distances, and the impact of fixed costs on fewer tons in 2013. In addition, higher natural gas prices have contributed to increased explosives costs.

Third quarter total tons delivered from the Logistics and Related Activities segment decreased due to timing and scheduling of vessels. Cloud Peak continues to expect to deliver about 5 million tons for the full year. Revenue decreased as a result of lower prices on the Asian deliveries related to low Newcastle benchmark prices. The company’s international coal forward financial contracts program mitigated some of this impact with a realized gain of $3.7m in the quarter.

During the third quarter of 2013, the Newcastle benchmark price averaged about $73/tonne for 2013 deliveries down from $90/tonne at this time last year. Based on the comparative quality and transport costs, Cloud Peak’s delivered sales are generally priced between 60% and 70% of the forward Newcastle price.

Sale of 50% of the Decker mine to Ambre still on the shelf

On Aug. 28, Cloud Peak Energy and Australia-based Ambre Energy announced that Ambre’s purchase of Cloud Peak’s 50% interest in the Decker strip mine in the Montana PRB was not expected to be completed for the foreseeable future and that the companies were in discussions and had agreed to jointly dismiss the Decker litigation without prejudice.

“We are hopeful that when international coal prices improve, Ambre will be positioned to purchase our 50% interest in the Decker Mine,” Cloud Peak said in the Oct. 29 earning statement. “Completion of any future transaction would be subject to future negotiations between our companies. In the meantime, we have been working with Ambre to optimize the Decker Mine’s operations in light of the current domestic market. Through our participation in the Alliance for Northwest Jobs and Exports, we are continuing to work with Ambre to promote the proposed Millennium Bulk Terminal export facility.”

During the third quarter 2013, Cloud Peak decided not to bid at the U.S. Bureau of Land Management for lease on the Maysdorf II North lease tract and to retain that cash on its balance sheet. The decision not to invest in additional 8,400 Btu/lb coal was made in light of market conditions, access issues to the coal and other factors. This decision followed a second quarter 2013 earnings announcement that the company is evaluating reducing shipments at its 8,400 Btu/lb Cordero Rojo Mine by around 10 million tons per year starting in 2015.

“We have adjusted our forward sales strategy for Cordero Rojo to reflect this reduction in 2015 and are continuing to evaluate how to optimize the operation in light of prevailing market conditions,” Cloud Peak noted. “Regarding the Maysdorf II South LBA, we understand that the Bureau of Land Management is expecting to delay any future lease sales for that LBA for up to two years due to current weak markets.”

Cloud Peak’s Forward Outlook:

“Customers are continuing to take their contracted coal and are burning down their coal inventories as a result of higher natural gas prices and steady coal burn,” the company said. “We expect U.S. total coal demand for the full year 2013 to increase by around 50 million tons compared to 2012. This rebound in demand has reduced inventories of PRB coal stockpiles to 71 million tons at the end of September, down from 92 million tons at the same time last year. We continue to be optimistic that the steady coal burn and continued reduction in PRB inventories will lead to prices moving higher.”

Due to the weather-related operational interruptions during the summer and the heavy snow storm that hit the PRB in the first week of October, Cloud Peak is reducing the midpoint of its 2013 shipment guidance to 88 million tons from the old figure of 90 million tons and the midpoint of its Adjusted EBITDA guidance to $220m, down from $230m. The impact of lower shipments has been partially offset by good cost control across all the operations.

For 2014, the company has committed to sell 79 million tons from its three company-operated mines. Of this committed production, 69 million tons are under fixed-price contracts with a weighted-average price of $13.24 per ton.

During the third quarter, Cloud Peak only contracted approximately 5 million tons across its mix of 8,400, 8,800, and 9,350 Btu coal for 2014 deliveries with contracts at an average price of about $11.60 per ton. A small increase in its net 2014 contracted position reflects a goal of only contracting the minimum levels it is comfortable with to allow the mines to run efficiently when prices are low.

For 2015, Cloud Peak is currently committed to sell 42 million tons from the three company-operated mines. Of this, 28 million tons are under fixed-price contracts with a weighted-average price of $13.68 per ton.

Cloud Peak is forecasting export shipments through Westshore to be about 5 million tons from its Logistics and Related Activities segment in 2013. Demand from international customers continues to be strong, and it continues to seek to fill all available capacity at Westshore.

“Our third quarter results demonstrate our ability to increase production while maintaining an excellent focus on cost control and efficiency through the business. We see the outlook as positive and will work to maximize our opportunity while carefully investing capital. We believe both domestic and international coal pricing will recover, and that Cloud Peak Energy is well placed to capitalize when that occurs,” commented Marshall.

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.