Cloud Peak: Coal market picks up in Q3 2016, but market still a challenge

Powder River Basin coal producer Cloud Peak Energy (NYSE: CLD) said Oct. 27 that in the third quarter it completed dragline relocation from the Cordero Mine to the Antelope Mine in Wyoming, which is now operating as planned, and completed an $11.5 million land purchase transaction to support future operations near the Antelope Mine.

Colin Marshall, President and Chief Executive Officer, said: “This was a very good quarter for Cloud Peak Energy. The warm summer led to increased shipments that resulted in lower per ton costs and strong Adjusted EBITDA. The mines ran very well with great cost control and no safety or environmental incidents.”

He added: “Recently, we have been able to capitalize on improved international thermal coal prices by contracting approximately one million tons to be shipped between November 2016 and February 2017. We are optimistic that we will be able to ship additional export tons in 2017. Domestic prices are improving and customers are looking to contract further for 2017 and beyond, but I would like to see domestic prices rise further. In addition, we completed several financial transactions that strengthened our balance sheet and improved our financial flexibility. While there has been a meaningful improvement in our business outlook in the last three months, we expect another challenging year in 2017.”

The company sold 17 million tons of coal in the third quarter, down from 20.8 million tons in the year-ago quarter.

Strong summer electricity demand and increased natural gas prices caused many of the company’s customers to operate their coal units at full capacity. This increase in consumption resulted in customers drawing down their inventories and focusing on taking their contracted coal this year.

Shipments improved during the third quarter, as expected, with Cloud Peak’s shipments being 44% higher than the prior quarter. However, year-to-date shipments through the third quarter remain 26% lower than 2015 due to the very slow first half of 2016.

Preliminary data from MSHA indicates that the third quarter and year-to-date coal production in the U.S. was down 19% and 24%, respectively, compared to the same periods in 2015. Through July 2016, electric generation was down 1.6% year-over-year but has steadily increased during the third quarter of 2016.

Cost per ton decreased to $8.95 for the third quarter of 2016 compared to $9.15 in the third quarter of 2015. Total cost of product sold decreased approximately 21% in the third quarter of 2016 compared to the same period in 2015 in line with shipments, which were down over 18%.

Revenue and cost of product sold decreased for the third quarter of 2016 compared to the same period in 2015 due to the absence of international shipments, which resulted from continued weak international prices for seaborne thermal coal through the first half of this year. Domestic deliveries also decreased in the third quarter of 2016 compared to the same period in 2015.

The recent increase of seaborne thermal coal pricing has enabled the company to begin contracting export shipments. It has scheduled approximately one million tons of exports for delivery between November 2016 and February 2017. Shipments will directly offset amended take-or-pay obligations on a ton-for-ton basis and are expected to produce a small operating margin.

Domestic Outlook

Shipments increased during the quarter to average 5.7 million tons per month, which is a significant improvement over the first half of the year where shipments averaged about 4.1 million tons per month. For the fourth quarter, the company expects shipments to remain comparable to the third quarter.

With natural gas prices moving above the $3.00/MMBtu range at times, some utilities are operating their coal units during the normal fall maintenance window. The company expects that with these additional operating units and stabilized shipments in the fourth quarter, coal inventories will continue to be drawn down.

During September, Cloud Peak started receiving an increase in requests for proposals with customers looking to contract for more of their future requirements. There has been an increase in PRB pricing and the company is optimistic this trend will continue as coal demand recovers from the very low levels experienced in the first half of 2016.

During the third quarter of 2016, minimal volumes were sold. For 2016, the company is currently committed to sell 61 million tons of coal from its three mines. Nearly all of this volume is committed under fixed-price contracts with a weighted-average price of $12.41 per ton.

For 2017, there are currently 47 million tons committed to sell from the three mines. Of this committed production, 45 million tons are under fixed-price contracts with a weighted-average price of $12.34 per ton. For 2018, there are currently 24 million tons committed to sell from the three mines. Of this committed production, 22 million tons are under fixed-price contracts with a weighted-average price of $12.60 per ton. While domestic pricing and demand are improving, the company said it currently expects another “challenging year” in 2017.

International Outlook

The company sold approximately one million tons for delivery to its Asian customers between November 2016 and February 2017. It is currently looking to contract additional 2017 export sales. The primary drivers for the improving international prices are increasing import demand into China as it closes unprofitable mines and a reduction in supply from Indonesia and Australia. While it is too early to be sure these trends will continue, other Asian countries such as Vietnam, South Korea, Japan and Taiwan continue to add new coal-fired generation and steadily increase demand.

Concluding Remarks

Marshall said: “This has been a very good quarter for Cloud Peak Energy after a tough first half of the year. The turnaround in international thermal coal pricing has been significant. If prices are sustained, we expect to be able to export additional tonnage next year. I am also looking for the recent increase in domestic prices and RFPs issued by customers to continue so we can layer in profitable sales for next year and beyond. At the same time, the financial transactions we have completed improve our balance sheet and financial flexibility. I would like to thank all our employees who have worked so hard to ensure our business is well placed to take advantage of improving demand and pricing.”

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.