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Collection: Coal Exports: Caveat Investor

The Money Behind Northwest Coal Exports

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If you’ve been following the Northwest coal export debate, you’ve probably heard of Ambre Energy—the struggling Australian firm that’s behind two of the three remaining coal terminal proposals in Washington and Oregon. Ambre made headlines back in August, when the state of Oregon denied a key permit for the company’s proposed Morrow Pacific coal terminal project on the Columbia River.

But even if you’ve heard of Ambre, you may not have heard of the company’s main financial backer: a tight-lipped private equity firm called Resource Capital Funds (RCF). Focused on minerals investments, RCF has a truly global reach: it’s registered in the Cayman Islands; maintains offices in Denver, New York, Toronto, and Perth, Australia; and invests in mining and minerals projects all over the world. With more than $100 million at stake with its investment in Ambre, RCF has become the chief financial backer of Northwest coal exports.

And while you might think that having the backing of a global investment firm like RCF would be a sign that Ambre is a solid company with strong financial prospects, you’d actually be mistaken. A review of the firm’s past investments shows that RCF actively seeks out risky projects with a high potential for failure.

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Prediction: Cloud Peak’s Coal Export Division Will Start Losing Money in 2015

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Cloud Peak Energy—a major coal producer in the Powder River Basin, and one of the top coal exporters in the western US—will release its third quarter financials in a few weeks. And even though international coal prices have been in free-fall for almost three years, I expect that Cloud Peak’s financial reports will show that the company’s export (or “logistics”) division made money from June through September 2014.

Yet I also expect that, just beneath the surface, the firm’s financials will show that Cloud Peak lost money exporting coal to Asia, just as it has for the last four consecutive quarters.

[prettyquote align=”right”]Just beneath the surface, Cloud Peak’s financials will show that the firm lost money exporting coal to Asia—just as it has for the last four consecutive quarters.[/prettyquote]

So how is it possible for a coal company to report profits from its export division, but losses from actual export sales? The answer: even though Cloud Peak’s coal export sales are bleeding red ink, the company is still benefiting from big bets that the company made years ago on the coal futures market.

But I believe that those lucky bets are poised to run out, starting in 2015.

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Ambre Energy’s Troubled History: Greatest Hits Edition!

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In case you missed the news on Monday, the Oregon Department of State Lands denied a crucial permit for Ambre Energy’s plans to build a coal export terminal along the Columbia River capable of shipping 8.8 million tons per year.

It’s hard to overstate the significance of this ruling. It’s the first major regulatory decision on any coal terminal permit in the Northwest states. It was an unambiguous victory for opponents of coal export terminals, particularly the tribes that have been so vocally opposed to coal export facilities on the Columbia. And it foreshadows the likely outcomes for the much larger, more complex, and higher-impact projects that are still in the early stages of the permitting process.

Though the company may appeal the decision, the odds are stacked against Ambre: the path forward is unclear and likely lengthy; the company is struggling to raise sufficient additional financing; international coal prices are low; and recent developments in Asia show uncertain demand for US exports.

Of course, none of this is news to Sightline readers. You’ve been reading about Ambre’s shaky finances since late 2012, and the news has only gotten worse. It’s been a long road, but with this happy event, we can’t help but take a fond look back (and yes, feel free to crank up some victory tunes) at some of the research that helped get us here:

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Pacific Rim Coal Prices Continue to Tumble

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Newcastle coal futures prices, August 2014 contract.
Newcastle coal futures prices, August 2014 contract.

In case you don’t check the coal futures markets every day, you may have missed the news that international coal prices recently reached a multi-year low. To understand just how dramatic the decline has been, all you need to do is look at the chart of futures prices for coal at Newcastle, Australia, one of the key pricing points for Pacific Rim coal markets.

If you’re a coal buyer in Korea or Japan you’re probably applauding the ongoing price collapse, because it means that you can buy a ton of coal for a lot less than you used to. But if you’re in the business of selling coal on the seaborne coal markets, the trends have been nothing short of a financial catastrophe.

When Pacific Rim coal prices shot up in 2009 through 2011, mining firms throughout the Pacific Rim invested tens of billions of dollars in new mines and export facilities, expecting a sure payoff. China’s demand looked like it was skyrocketing, and many market observers were convinced that prices would stay high indefinitely—leading many coal companies to lock themselves into long-term contracts with rail and port companies that required them to export coal, or else pay a stiff penalty.

Those long-term coal contracts turned out to be the financial equivalent of a poison pill. The flood of new coal throughout the Pacific Rim sent prices tumbling, even as China started to tap the brakes on its coal consumption, driven by high prices, a cooling economy, and terrible urban air quality.

Yet even though Pacific coal prices have fallen through the floor, those long term export contracts force many coal companies to keep selling coal at a loss. Sure, they’re losing money shipping coal overseas, but if they stopped exporting, they’d lose even more money from the contractual penalties with port and rail operators. This dynamic helps keep the coal flowing, driving prices lower and lower.

If you’re wondering whether these trends spell bad news for coal exports from the Pacific Northwest, the answer is simple: YES.

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Coal Exports: Unfair Market Value

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Today, Sightline is releasing a new report on the US Bureau of Land Management’s coal leasing programs: Unfair Market Value: By Ignoring Exports, BLM Underprices Federal Coal. As the report documents, coal companies operating in the western United States are buying coal from the American public with the explicit goal of shipping that coal overseas…yet the BLM is ignoring the potential profits from coal exports when setting its prices. As a result, the agency is giving away publicly owned coal for a song—boosting coal company profits, while denying the American public of millions of dollars of revenue each year. For details, read on…

Perhaps you may have seen some of the mile-long coal trains that are now plying the rails in the Pacific Northwest, carrying coal to export terminals to be shipped to Asia. And perhaps you’ve even paused to wonder how those companies got hold of all of that exportable coal in the first place.

As it turns out, there’s a simple answer to that: if you’re a US citizen, they got that coal from you.

The American public, you see, owns vast deposits of coal throughout the western United States. Most of the coal in the Powder River Basin, for example, is owned in common by all Americans. The same is true for major coal deposits in Colorado, Utah, New Mexico, and other states. The coal companies don’t own it: you do.

If coal companies want to mine that coal, they’ve got to go through the US Bureau of Land Management’s (BLM) coal “leasing” program, which gives private companies access to public coal in exchange for leasing payments, royalty payments, and compliance with some basic environmental requirements.

But here’s the thing: the BLM gives away federal coal for a song—sometimes just pennies per ton. And what’s worse—as documented by Sightline’s latest report, Unfair Market Value—BLM almost completely ignores the potential profits from coal exports when deciding on the minimum price it will accept for federal coal.

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PRB Coal Exports Through Mexico?

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According to an article in a coal trade publication last week, a private firm has announced plans to open a coal export terminal in Guaymas, Mexico. The project aims to ship 30 million tons of coal per year to Asia, sourced from the Powder River Basin and other mining regions in the western US.

I have three words to describe the Guaymas coal export plan: high risk gamble.

In today’s market, coal companies simply can’t ship PRB coal to Asia through Guaymas without losing their shirts. The transportation costs are too high, and the prices that PRB coal would receive in Asia are too low.

There are three key reasons that the Guaymas port represents such a poor option for exporting Powder River Basin coal:

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Cloud Peak Is Losing Money on Coal Exports

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Executives of Cloud Peak Energy recently admitted something that once seemed impossible: Cloud Peak has been losing money on coal exports for most of the past year. Worse, the company has locked itself into long-term export commitments—which means that Cloud Peak has essentially no choice but to continue losing money on coal exports.

Cloud Peak’s most recent financial filings, along with the associated conference call with investors, offer four key data points showing how and why the company is losing money selling coal to Asia:

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Has Wyoming Passed Peak Coal?

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Wyoming coal production

If you’re a coal junkie, you’ve probably read quite a few press accounts touting the bright future for Powder River Basin coal. This story from Gilette, Wyoming, for example, predicts a resurgence in demand for the low-rank coal produced in the region. This one argues that coal is making a comeback, after years of losing ground to natural gas. This one forecasts “tremendous” demand for the region’s dirtiest fuel. I could go on and on.

Articles of this ilk generally offer breathless quotes from coal industry executives, and point to a few factors, such as rising natural gas prices or the cold winter, that make a rapid rise in coal demand seem plausible.

But what these articles don’t do is provide much supporting data. And when you look at the actual production figures from Western coal country, a very different story emerges. After peaking in 2008, coal production in Wyoming has fallen by 17 percent.

And if I’m right, those trends won’t be reversing themselves any time soon.

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Arch Coal’s Export Disappointment

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It’s spring on Wall Street, the time when publicly traded companies announce their first quarter results. Just a few years back, coal companies loved the ritual: a bubble in international coal prices had industry execs crowing, their spirits bouyed by the bright prospects for coal exports.

But the coal industry reports today are much bleaker. International coal prices are in the dumps, profits are thin, companies are scaling back…and all those bold projections for a thriving US coal export business are looking more and more like foolish optimism.

For an example one need look no farther than Arch Coal, which runs the Black Thunder mine in Wyoming’s Powder River Basin—the second largest coal mine in North America. Arch’s earnings conference call last week mostly reconfirmed what its stock price already shows so clearly: as international coal prices tumbled, so did the company’s prospects.

But the earnings call did contain one genuinely new revelation: Arch execs admitted that the company will lose tens of millions of dollars this year on its coal export strategy.

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New Video: The Pacific Rim Coal Bubble

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Hey, kids!  Check out our new video explaining why coal exports in the Pacific Northwest have become such a huge financial risk—with many blue-chip investors abandoning the space, leaving the field to risk-hungry, high-flying international speculators.

For those of you who don’t have the patience for a 3 minute video, here’s the short version:

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