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Coal Trains

Rail cars are loaded with an average of 121 tons of coal each and sprayed with a topper agent to suppress dust during transportation from Cloud Peak Energy’s Antelope Mine north of Douglas. Coal is expected to outcompete natural gas this winter.

In a sign of improving coal conditions, Gillette-based coal company Cloud Peak Energy will soon resume exports to Asia despite suffering losses in the third quarter.

The company is also projected to replace all of its self-bonds by January of 2017.

After a year of bankruptcies, falling production and the lowest prices in three decades, the coal market has experienced signs of revival.

A warm summer helped draw down the overstock of coal, increasing shipments and lowering costs, the company said in a statement. Meanwhile, an uptick in international demand and higher prices offer better margins than before.

“The last few months has been very positive for Cloud Peak Energy and certainly a big improvement from the first half of the year,” said President Colin Marshall in a call with analysts. “At the same time, the recent dramatic improvement in international thermal coal prices has allowed us to contract to export approximately one million tons between November and February next year.”

Cloud Peak operates the Cordero Rojo and Antelope mines south of Gillette and the Spring Creek mine in Montana. It posted a $1.6 million loss in the third quarter, compared with an almost $9 million gain in the third quarter of 2015.

The total volume of third-quarter mining was down 21 percent compared with last year, said Chief Financial Officer Heath Hill in the earnings call.

However, the company ended the third quarter with $90.3 million in cash, a $26 million increase from the end of the second quarter.

Income before taxes and depreciation was $40.6 million.

The company has also made gains in regard to self-bonding, the highly criticized practice of guaranteeing cleanup costs on the strength of a company’s balance sheet.

Companies like Alpha Natural Resources and Arch Coal were pressured away from the practice during bankruptcy proceedings. Cloud Peak voluntarily announced that it would end the practice, replacing its self-bonds with more traditional insurance.

After amending some of its reclamation obligations, the company will only have $10 million left in self-bonds and expects to replace all self-bonds by early next year.

The gains are reflective of a strengthening market, and hopes are high for continued growth and a cold enough winter to burn more coal.

Internationally the outlook is positive, Marshall told analysts Thursday.

“Demand growth in South Korea, Vietnam, and Taiwan continues its forecast, giving an overall positive outlook,” he said. “At the same time supply from Indonesia and Australia appears to be constrained due to low capital spending in recent years.”

In addition to the news of resumed exports and an uptick in Asian demand, the company has $45 million tons in fixed price contracts next year, at an average price of $12.34 per ton.

Health and safety reports were also noted in the earnings call Thursday.

Out of 1,200 workers, there were no reportable injuries at Cloud Peak mines in the third quarter, Marshall said.

There were four federal inspections on site during the quarter, with no significant citations, he added.

“There were no environmental citations at any of our sites during the quarter,” he said. “It is now over two years since our last environmental citation.”

Cloud Peak has weathered the last year better than some of its competitors.

Coal giants Peabody Energy, Arch Coal and Alpha Natural Resources filed for Chapter 11 during coal’s staggering losses in the last year.

What saved Cloud Peak from the same fate was its lack of investment in what had been a booming metallurgical coal market. Cloud Peak is purely a Powder River Basin player, focused on thermal coal. When the metallurgical market tanked, it left Peabody, Arch and Alpha saddled with billions of dollars in debt.

However, Cloud Peak was not invincible in the face of the storm. The thermal market slumped under the pressure of cheap natural gas competition and decreased investment in coal due to anticipated federal environmental regulations.

The second quarter of 2016 would have been a loss for Cloud Peak, but the company posted modest gains thanks to customer buyouts of contracts amounting to $18.8 million, or 97 percent of its adjusted earnings. It was a dire reflection of the market conditions – that in a take-or-pay contract, it was cheaper for utilities to pay Cloud Peak not to give them coal.

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Follow energy reporter Heather Richards on Twitter @hroxaner

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