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Cloud Peak Energy: “All in” for coal exports from the West Coast

Posted by Ross Macfarlane at Feb 19, 2013 11:35 AM |

Recent developments make clear that Cloud Peak Energy is fully committed to coal exports from Washington terminals.

Cloud Peak Energy: “All in” for coal exports from the West Coast

Ross Macfarlane, Sr. Advisor, Business Partnerships

There’s an old joke that explains the difference between being “involved” and being “committed.”  Think of a ham and eggs breakfast. The hen is involved, the pig is committed.

Recent developments make clear that Cloud Peak Energy is fully committed to coal exports from Washington terminals.

That is the inescapable conclusion from reading Cloud Peak Energy’s recent earnings call with investors and its announcement that it had signed an option agreement for up to 16 million tons metric tons per year (mmty) of coal export capacity with the Gateway Pacific Terminal, the proposed coal port at Cherry Point, Washington. This deal adds to the option for up to  5 mmty that Cloud Peak obtained for the Millenium Bulk Terminal in Longveiw, as part of a legal settlement with Ambre Energy.

For Gateway Pacific, the announcement confirms that they are immediately planning to go the full planned capacity of 48 mmty, with the all of the trains, ships, and pollution that goes with it. Gateway Pacific has been taking the line with the community that it may only build the first phase of 24 mmty and that full expansion could be many years off, if ever. This deal puts that story to rest. Since Peabody Coal has already contracted for 24 mmty at Cherry Point, the Cloud Peak contract will obligate Gateway Pacific to immediately ship at least 40 mmty and to commence operations of the full project including the second rail loop. That is assuming of course, that the permitting agencies ignore the unprecedented outpouring of community opposition and concerns and ever allow this project to move forward.

For Cloud Peak, these documents show that their current plans and future prospects are completely linked to the fate of the coal export from the Pacific Northwest. Cloud Peak proudly calls itself the only “pure-play” Powder River Basin coal company. In translation, this means it is the only publicly traded company that derives all of its revenues from mining and selling coal from that region in Wyoming and Montana. So Cloud Peak is a perfect petri dish to test whether accessing the export markets is important to the future of mining in this region.  For years, the attorneys and PR flaks for the US coal companies have said there is no linkage. They have claimed that their efforts to permit new mines or build critical infrastructure, such as the proposed Tongue River Railroad, have nothing to do with coal exports. “Don’t look at the export markets,” they claim, “we plan to mine this coal regardless of whether those ports get built.”  This narrative is important to their efforts to keep the environmental review limited and to avoid anyone connecting the dots between mining, rail infrastructure and terminal development.

Cloud Peak is telling a very different story to its investors.  In the earnings call, Cloud Peak executives revealed that “a large majority” of its earnings for 2012 had resulted from the 4.4 mmt that it had been able to sell through the Westshore and Port Ridley terminals in British Columbia. Like Arch Coal and other major US coal companies, it has been forced to sell PRB coal at a loss domestically, due to the rapidly collapsing demand from utilities and power plants.

Even the export markets are far from rosy for Cloud Peak and other miners. The executives conceded that they had been able to make some profits on these export sales only because they had locked in prices in late 2011 and early 2012, when prices were much higher than today. They said that they would continue to sell in export markets even at a loss to maintain contracts and relationships with foreign buyers and to maintain contracts with the current export terminals where they have “take or pay” contracts.

While Cloud Peak is currently making its only profits from Canadian ports, the call made it clear that there is no room for expansion there. It said that it cancelled its contract to ship a small amount of coal (around .3 mmty) through the Ridley Terminal in the far north of British Columbia because of the excessive shipping costs. And Cloud Peak clearly confirmed that there was no additional capacity at its other Canadian partner, the Westshore Terminal just north of the US border, or out of any other BC ports.

So Cloud Peak only sells PRB coal; only makes money from when it sells it overseas (in good years) and can’t get more capacity in Canada.  This puts all of Cloud Peak’s strategic focus back on the two largest coal export terminals proposed for the Pacific Northwest, Gateway Pacific and Millenium, where it has secured option agreements. Cloud Peak spent a lot of time in the call briefing investors about the prospects for these terminals and its growing efforts “to promote the benefits increased coal exports would bring to Washington, Montana and Wyoming.” It acknowledged that the company is spending millions on public relations, advertising and attorneys to influence public opinion and regulators and trumpeted the results of biased “push-polls” that purport to show broad public support for coal export (somehow, it failed to acknowledge the 124,000 public comments that agencies received on the Gateway Pacific Project–overwhelmingly opposed –or the other signs of unprecedent public opposition and concern that the projects are generating). When asked about areas where the company is likely to increase expenditures significantly in the coming year, Colin Marshall, Cloud Peak’s CEO said: “I suppose what I can see is an awful lot of work to try and support the terminal project development, which is already underway.”Good news, I guess, for the lawyers, PR flaks and other consultants who happily billing $millions to the company to help get the permitting and environmental review process back on track; not so good news for those of us hoping for a fair and unbiased public discussion.

Equally significant, Cloud Peak confirmed that its mine expansion plans are inextricably tied to the approval of the two Washington coal terminals. Cloud Peak told investors about three planned projects: expanding its existing Spring Creek mine into new deposits and developing new mines in the Youngs Creek area and on the Crow Indian Reservation (the Crow deal alone could represent as much as 1.4 billion metric tons of coal).  CEO Marshall told investors that they planned to begin work on engineering and permitting for these massive expansions, but would defer any major capital expenditures until they had confirmed that the Washington terminals were going to go forward. He closed by stating: “The moves we have made to grow our export business have gone very well with the Youngs Creek and Crow agreements which will allow us to build an export-focused mine complex around our existing Spring Creek operations, and the Millennium and Gateway Pacific Terminal agreement which will give us options over significant capacity at the two major Washington projects to add to our Westshore position.” Responding to questions, Marshall stated that the planned timing for these mining projects “actually does mesh with the potential timing for the ports,” which he hoped would be completed and operating by 2018. Not if any of us have a say in it.

Again, mining and selling Powder River Basin coal is Cloud Peak’s only business. These statements make it crystal clear that Cloud Peak only sees a path to stay in that business if it can build a coal chute to Asia through Northwest communities. As we pointed out last week in a post on the shaky Australian coal startup–Ambre Energy–coal export proposals carry such enormous risks that “that the biggest players are either desperate, because they have no strategic options, or are highly speculative gambles, like Ambre”.  Cloud Peak seems to fall in that first category–getting its coal to Asia is its only viable choice for long-term survival. It might be a “Hail Mary” pass, but that is the only play left in its book.   

So Cloud Peak is fully committed–all in–on these terminals. And the fat is beginning to sizzle.

Time to turn up the heat?

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