Cloud Peak shares, profit margins and production continue to decline

So when Cloud Peak’s finances falter, it’s a safe bet that the coal industry as a whole, especially the part of the industry that sells coal to power plants, is in dire straits.

And that is exactly what is happening right now. Only the sunniest optimists could see good news in the company’s recent financial performance.

The best brass in the business recently admitted to serious operational challenges. Heavy spring rains have slowed production at the company’s largest mine for two consecutive quarters, slashing production, raising costs and forcing the company to lower its production and profit forecast for the year.

This is just the latest in a series of setbacks for a company that by virtually every indicator has been declining for years.

Declining production. In 2011, Cloud Peak produced 98.7 million tonnes of coal. By 2017, its production had fallen to 57.8 million tons. (Note that in the intervening years the company sold its share of a small mine to another company. See Chart 1 above, “Production from the Cloud Peak mines is in free fall.”) These Declines continued in 2018: Cloud Peak now predicts it will sell between 49 and 51 million tonnes in calendar year 2018, about half of what it sold at its peak.

Declining profit margins. In early 2012, Cloud Peak sold its coal at an average price of $ 13.31 per tonne. By September, the price had fallen to $ 12.16 per tonne. Adjusted for inflation, this was down almost 20 percent. Meanwhile, mining costs have risen and the toxic combination of falling revenues and cost inflation has squeezed profit margins to the bone. Subtracting total mining costs from total coal sales revenue – a simplistic measure of profit margins – reveals steadily declining profitability at the company’s mines. (See Chart 2 above, “Cloud Peak mining profits shrink.”)

Fall in stock prices. The Cloud Peak share price peaked in 2011 at $ 24. But starting in 2014, the company’s shares fell. At the closing bell on Monday, November 12, the stock was trading for just $ 1.44. The election of Donald Trump, who pledged to save the coal industry, did nothing to save Cloud Peak’s stock prices. The day after the 2016 election, the stock was at $ 7.47 per share, meaning the company has lost over 80% of its value in just two years, at a time when federal policymakers were posting a resolutely pro-coal bias. (See Chart 3 above, “Cloud Peak’s share price collapsed.”)

Credit crunch. Cloud Peak owes bondholders $ 290 million within three years. But the company only generated $ 9 million in cash over the past year, making it unlikely that the company will be able to repay this amount. If not, Cloud Peak will either have to refinance its debt or file for bankruptcy. Refinancing is a possibility, but this would likely result in higher interest charges as interest rates are upper now that when the company first issued the bonds.

Cloud Peak’s bonds aren’t its only credit crunch. The company also maintains a credit agreement, similar to a business credit card, to cover its short-term spending needs. But the company’s creditors reduced the spending limit on the credit card. $ 400 million up to one miserable $ 16 million. As a result, Cloud Peak will have to keep its limited cash flow just to pay its daily bills, which could make it all the more difficult for the company to pay off its bondholders.

Obviously, things seem to come and go for Cloud Peak. But that’s true for just about any business that sells coal to power plants. The industry has gone through a large series of bankruptcies in 2015 and 2016, and bankruptcies continued throughout the latest of them years, but at a slower pace. Meanwhile, renewables (as well as fracking gas) continue to erode coal’s market share in the U.S. electricity mix, even as the cost of renewable energy keep falling to new lows.

So, as bad as things are for Cloud Peak, I suspect they’re going to be even worse in quite a short time.


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