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Collection: Coal Exports: Caveat Investor

Ridley’s Coal Exports: A Terminal Illness?

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The Ridley coal export terminal in Northern BC, which has been suffering through a dismal year of collapsing exports in the face of weak international prices, recently published its 2014 annual report on its website.

And it’s a doozy.

Annual reports usually are written with a hint of sunny can-do optimism. They trumpet every shred of good news, present even the direst challenges as golden opportunities, and paint a vision of a bright and profitable corporate future.

But Ridley’s 2014 annual report is written differently. There’s no sunny optimism, just a litany of woes. You can’t read it without thinking that the authors are as depressed as the coal markets that are dragging down their business.

The sense of doom starts from the top.

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Feds to Investigate Coal Mine Cleanup Program

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Big Coal’s finances are in shambles. Stock prices have tanked. Wall Street has downgraded major coal company debt to junk status. And with both domestic and international coal sales slumping, the specter of a wave of major coal industry bankruptcies looms ever nearer.

Still, state regulators have allowed the nation’s two largest coal companies by sales volume, Peabody Energy and Arch Coal, to continue qualifying for a preferential mine cleanup insurance program that’s reserved for the most financially healthy institutions.

The program is known as “self-bonding.” And as a bombshell of a Reuters investigation shows, it’s now under intense scrutiny by US mine regulators.

Here’s how self-bonding works—and how it’s become such an egregious loophole.

Under federal surface mining law, US coal companies must post bonds to guarantee that they’ll have the financial wherewithal to clean up or “reclaim” their mines. For the most part, these reclamation bonds are backed up by cash, collateral, or financial guarantees known as sureties. Even if a coal company goes belly up, the state can use those bonds to restore land ravaged by mining.

Bonding can be costly to coal companies, because it either ties up collateral that they’d rather use for some other purpose, or it forces them to purchase private surety bonds that can cost them tens of millions of dollars per year.

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Cloud Peak Posts Its Biggest Coal Export Loss Ever

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It’s earnings season on Wall Street, and Cloud Peak Energy—one of the biggest coal producers in the Powder River Basin—just released its first-quarter results. By coal industry standards, it was good news. Stock analysts had expected the company to lose 12 cents per share for the quarter, but the company’s financial statements revealed losses of only 5 cents per share, which led to a modest rally in Cloud Peak’s otherwise disappointing stock prices.

You know things are bad for the coal industry when a multi-million dollar loss counts as a positive development.

But Cloud Peak’s financial statements also show a trend that must be troubling to the company’s investors: the firm’s coal exports to Asia are hemorrhaging red ink.

Cloud Peak Logistics - redux 050115 - 150ppi

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More Headwinds for Coal Exports

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Coal
Coal by Kentucky Photo File used under CC BY-NC-ND 2.0

It’s been a fast and furious few months on the Northwest coal export front—and almost all of the news has been bad for the coal industry’s hopes to ship coal from the Northwest to Asia:

  • International coal prices remain near multi-year lows. After a slight uptick earlier in the year, benchmark thermal coal prices have fallen back to where they were in the depths of the global recession. Adjusted for inflation, they’re the lowest they’ve been since early 2007. And the future market holds out little hope for a rebound: prices for the Pacific Rim key coal market benchmark remain below $60 per ton through 2021.
  • Chinese coal demand continues to shrink. Five years ago, market analysts believed that China’s boundless coal demand would buoy coal prices for decades. But Chinese policymakers, increasingly concerned about air pollution and industrial overproduction, have enacted a variety of policies to curb coal consumption—from coal import tariffs to provincial coal reduction targets to a nascent cap-and-trade system. Those policies appear to be working: total coal consumption in China fell nearly 3 percent in 2014 compared with the prior year, and first quarter results from 2015 suggest a year-over-year sales decline of nearly 5 percent. Coal consumption in electric power plants fell 10 percent year-over-year in the first quarter of 2015, even as Beijing announced that it would be closing all of its major coal-fired power plants by the end of 2016.[prettyquote align = “right”]”90% of US #coal production is uneconomical at today’s prices”[/prettyquote]
  • Chinese coal imports are plummeting. A large share of the decline in China’s coal consumption comes from falling imports: total coal imports into the country fell 41.5 percent, year-over-year, in the first quarter of 2015. That’s roughly equal to all of South Korea’s coal demand simply disappearing from the Asian seaborne coal market.
  • A strong dollar hurts US exporters, but bolsters competitors. Long-term declines in the Indonesian rupiah, the Australian dollar, and the Russian ruble have bolstered the competitive financial position of key US coal export competitors.
  • Key US coal exporters are losing money on exports. Coal exporter Cloud Peak Energy—the Powder River Basin producer best situated to benefit from the coal trade—recently announced that it expected its export division to suffer $35 million in export losses in 2015. Last year, the company’s CEO said that it needs to see Newcastle prices in the $80-90/ton range to break even on exports. The combination of weak demand, oversupply, unfavorable policies, and a strong dollar have made it virtually impossible for US thermal coal producers to compete in Asian markets.
  • North American coal exporters are feeling the heat. Teck coal—a major metallurgical and thermal coal exporter operating in BC and Alberta—announced that it had missed earnings targets and is now trimming dividends to conserve cash. China’s sagging coal demand weighed heavily on Teck’s disappointing earnings. Meanwhile Arch Coal, co-owner of the Millennium Bulk Terminals export project in Longview, Washington, posted a $113 million loss for the first quarter, again weighed down by poor international prices—news that sent its shares tumbling.

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Washington Senate Endorses Socialism for Coal

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First Wyoming, now Washington: the state Senate has endorsed an $85 million handout to the coal industry, in the form of a rail project whose sole identifiable beneficiary is the proposed and highly controversial Millennium Bulk Terminals coal export project in Longview, Washington.

The rail crossing project, innocuously labeled in the legislative record as the “SR 432 Longview Grade Crossing,” would build a massive vehicle overpass over a rail line near the banks of the Columbia, just south of Longview, Washington. The project would lift the entire Oregon Way and Industrial Way intersection, including the rail crossings circled in red, to let trains pass underneath.

The county projects rapid growth in train traffic at these rail crossings through 2035. But nearly three quarters of that projected growth is for the Millennium terminal. The remaining quarter would go to Barlow Point to the west of Millennium—an undeveloped site that, at present, has no known prospects for a tenant.

That means that the only known project that could boost traffic delays at Oregon Way and Industrial Way is the Millennium Bulk Terminals, a project whose principal proponent is wholly owned by a private equity fund based in the Cayman Islands.

Ridley’s Coal Export Collapse Continues

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Take a look: coal exports through the Ridley terminal in northern British Columbia are in freefall:

Ridley_Coal--032515--150ppi
Data from Port of Prince Rupert

It’s almost funny. Just a few years back, Ridley was so confident about its prospects that it undertook an ambitious plan to boost its throughput capacity from 12 million tons per year all the way up to 24 million tons per year.

At the time, the plan seemed reasonable: Asian demand seemed strong, and at least two new mine projects were slated to use Ridley’s extra capacity.

But fast forward a few years, and both new mining projects appear to be on indefinite hold…even as many of the terminal’s potential customers have shuttered their mines because of the sustained price collapse in Asian coal markets. As a result, Ridley is now on track to ship less than 6 million tons of coal this year—and possibly less than 4 million.

Instead of doubling their capacity, Ridley could have cut it in half, and they still might have room to spare.

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Wyoming Legislature Embraces Socialism for Coal

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coal train in Wyoming

You can’t make this stuff up. The Wyoming state legislature—ostensibly one of the most conservative deliberative bodies in North America—has embraced full-on socialism for the coal industry. From The Branding Iron, the student paper at the University of Wyoming:

A budget amendment making its way through the Wyoming legislature could grant the Wyoming Infrastructure Authority (WIA) the power to pursue projects like coal ports in other states…The bill also provides $1 billion in bonds to the WIA for the express purpose of pursuing infrastructure projects, like coal ports.

So the allegedly die-hard conservatives in the Wyoming legislature want to commit a billion dollars in bonding authority, backed up by financial resources of the state government, specifically to build coal export facilities that the private sector itself won’t fund. And even though they residents of Wyoming would ultimately bear the risk from a failed infrastructure project, they even want to the bond money out of state, to build projects in Oregon or Washington.

If that isn’t a prime example of what conservatives profess to hate, I don’t know what is.

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Cloud Peak Projects Major Coal Export Losses

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Cloud Peak Energy—the third largest coal producer in the Powder River Basin, and one of the main proponents of coal export projects in Washington and Oregon—recently released its earnings statement for the fourth quarter of 2014. And as I read through the details of their earnings statement, I discovered that a prediction I made last fall was wrong.

I had anticipated that Cloud Peak would start reporting losses from its export division starting in 2015. But I was three months too late: Cloud Peak actually reported export losses in the fourth quarter of 2014.

But as bad as that revelation is for Cloud Peak’s export ambitions, the news gets much, much grimmer.

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Coal Export Markets in Freefall

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For more than two years, the US coal industry has predicted that international coal prices would soon rebound, breathing new life into coal export and mining proposals that are now languishing on financial life support. But despite the industry’s hopes, the bottom keeps falling out of the global coal market.

Market conditions for Pacific Rim coal exporters are now worse than they’ve been since the depths of the global recession. After peaking in early 2011 at more than $130 per ton, the price of benchmark Australian coal has fallen for nearly 4 consecutive years. In December, they reached a 5-year low of $62 in December, according to the World Bank.

But the futures market predicts that the worst is yet to come. The futures price for December delivery of Australian coal has fallen to $57 per ton, with the price collapse accelerating in recent months.

What Ambre Says About Its Financial Collapse

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In case you missed the news, Ambre Energy—the Australian firm behind two of the three remaining coal export projects in the Pacific Northwest—is selling its North American coal business to the company’s largest creditor, a risk-hungry private equity firm called Resource Capital Funds. Ambre will realize just $18 million from the sale, even though it claimed as recently as last fall that its North American coal assets were worth between $200 and 400 million.

Over the past several days, we’ve started to see Ambre Energy’s PR strategy emerge: the firm’s North American executives are now crowing with delight that their operations are being unloaded at fire sale prices! After all, they now say, handing your business over to your creditors is a sign of financial strength, not weakness. So a story in the Longview Daily News quotes Bill Chapman, CEO of Ambre’s Millennium Bulk Terminal project, spinning the sale by saying, “The news is all good,” and implying RCF’s purchase shows that investors remain excited about the financial prospects for coal exports. And Everett King, president and CEO of Ambre Energy North America, bragged: “Their interest is validation: RCF likes the projects.”

This raises a question: Is RCF’s purchase of Ambre’s coal operation really a sign of financial strength for the company’s coal export plans?

I think the best way to answer that question is simply to quote from Ambre’s own financial disclosures—which show that the firm was running out of money, laden with debt, and had no reasonable hope of raising capital before it defaulted on its loans from RCF. [prettyquote align=right]Ambre was running out of money, laden with debt, and had no reasonable hope of raising capital before it defaulted on its loans.[/prettyquote]

More importantly, the company had been trying since 2012 to raise money from anyone other than RCF. The company even tried to raise money by selling off individual assets. Yet Ambre found no audience for its overtures: no buyers, no lenders, and no new source of capital. Finally, this past July, RCF cut Ambre off, refusing to provide them with any more money…a move that set up Ambre for the financial crisis it now faces.

In short, Ambre is selling its North American operations because the firm is deep in debt and out of options, and is essentially handing over its assets to its chief creditor in lieu of declaring bankruptcy.

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