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Collection: Coal Exports: Caveat Investor

The Wall Street Consensus: Coal Exports Are Risky Business

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As Eric mentions below, Goldman Sachs just sold its interest in the Gateway Pacific coal export project to a Mexican billionaire. It’s far too soon to say what this development will mean for Gateway’s prospects. But when coupled with Ambre’s difficulties finding new financing, Goldman’s move underscores an important new reality: Wall Street now views Northwest coal exports as too risky to touch.

And for good reason. Pacific Rim coal prices have taken a severe beating over the past few years, with prices for benchmark Australian coal falling from more than $132/ton in early 2011 to less than $78/ton in September 2013. And after clawing back a few dollars late last fall, Pacific Rim coal has been caught in yet another sell-off over the past week, as shown in this chart of Indonesian sub-bituminous coal futures…

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So it could be that Goldman got out of the coal export business just in time. Of course, they had plenty of warning: Wall Street analysts have been issuing increasingly dire assessments of coal export prospects for more than a year. Take a look:

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Is the Smart Money Bailing on Northwest Coal Exports?

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The news is everywhere: finance titan Goldman Sachs is selling off its stake in SSA Marine, the would-be coal exporter of Whatcom County. (To be precise, Goldman Sachs Infrastructure Partners, a subsidiary of the big firm, is selling its stake in FRS Capital Corp and Carrix, the parent companies that house SSA.) Many see the move as a major bet against the economic viability of Northwest coal export schemes.

Though it is important to remember that SSA Marine is a big company with a range of port terminal holdings around the globe, there is evidence for believing that the sale is connected to worries about coal.

As usual, Crosscut’s Floyd McKay has some of the best coverage:

Goldman Sachs last July posted a warning for investors that coal exports would decline in future years. Tuesday’s announcement prompted a prominent coal opponent, Crina Hoyer of ReSources for Sustainable Communities, to say, “Goldman Sachs’ stepping away from coal export is yet another sign from Wall Street that coal export is a losing investment.”

Just as interesting as Goldman bailing out is that a billionaire Mexican investor, Fernando Chico Pardo, is stepping up to buy the 49 percent equity stake Goldman is unloading. Pardo is a longtime partner of oligarch Carlos Slim, one of the richest people on earth and the dominant player in numerous economic sectors of Mexico.

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Cloud Peak Lost Money Selling Coal to Asia

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If any company can profit from exporting Powder River Basin (PRB) coal to Asia, it’s Cloud Peak Energy. The company’s Spring Creek mine offers a shorter rail trip to West Coast ports than many other PRB mines, saving a few dollars on rail costs. And because its coal has a slightly higher energy content than most other PRB coals, it earns a premium in Asian coal markets. With those two advantages, Cloud Peak can earn money on Asian coal exports when its competitors are still racking up losses.

That makes Cloud Peak a bellwether for the financial prospects of Powder River Basin coal exports. When Cloud Peak isn’t making money on exports, nobody else in the PRB is either.

And that makes the company’s third quarter earnings announcement quite a shock: Cloud Peak’s management announced that the firm’s export arm is now losing money selling its coal to Asia.

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Peabody Would Lose Money on Coal Exports

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Today, Sightline is releasing a new report: Peabody Energy, Gateway Pacific, and the Asian Coal Bubble. The report shows that at today’s prices, there’s no way for Peabody to make money shipping coal to Asia. Peabody’s strategy is now to hope that the Asian coal bubble re-inflates—which is an increasingly risky bet, given the collapse of Asian coal prices, recent steps by China to curb coal demand, and the oversupply of coal from other Pacific Rim exporters.

In case you don’t happen to check the price of Australian coal every day, you might not have noticed that the price of coal in the Pacific Rim export markets has collapsed over the past year or so. In fact, it’s looking very much as if the meteoric rise in coal prices that enticed so many companies to enter the Northwest coal export game was simply a bubble.coal_prices_redux-092013-150ppiC

And perhaps no Powder River Basin coal company has more at risk from this collapse than Peabody Energy.

Peabody has plans to export up to 24 million metric tons of coal each year through the proposed Gateway Pacific terminal in northwest Washington. It announced those plans in February 2011—about two years after Pacific Rim coal prices started to spike but a month after they peaked.

Since Gateway Pacific was launched, Pacific Rim coal markets have fallen almost as quickly as they rose. At today’s prices, Peabody Energy would lose roughly $10 per ton selling coal through the Gateway Pacific terminal.

Sightline’s new report, Peabody Energy, Gateway Pacific, and the Asian Coal Bubble, tallies the costs for Peabody to ship its coal from the Powder River Basin to Asia—including the cash costs of mining coal, rail shipping fees, handling fees at coal terminals, shipping costs on ocean-going vessels, and adjustments for the low energy content of Peabody’s Powder River Basin coal.

The conclusion is clear: in today’s market, there is literally no chance for Peabody to make a profit on coal exports. 

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Millennium Backers In Dire Straits

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The last public “scoping hearing” on the proposed Millennium coal export terminal is tomorrow in Tacoma. But there’s a fascinating story that’s unfolded as these hearings have progressed: the companies promoting the Millennium project have found themselves in increasingly dire financial straits.

Let’s start with Arch Coal, which owns 38 percent of the Millennium project. Just last week, Moody’s, a bond rating agency, downgraded Arch’s debt—a move that is likely to increase Arch’s borrowing costs. Here’s what Moody said about the downgrade:

The rating action was prompted by recent deterioration in performance due to continuing weakness in the coal industry, and our expectation that…the potential for material recovery in demand and pricing is limited.

And yesterday, Morgan Stanley piled on, downgrading Arch stock on concerns about the domestic coal market. The move prompted a sell-off in which Arch lost between 5 and 6 percent of its market capitalization.

As tough as things are for Arch, Ambre Energy—the owner of the remaining 62 percent of Millennium—has it much, much worse. I reported yesterday that Ambre has filed its financial statements in Australia, but hasn’t made the document available on its website. Well, surprise, surprise: a faxed copy of Ambre’s financial statement landed in my inbox last night.

The following chart summarizes the news for Ambre: the company is now paying 16 percent interest on some of its loans.  Sixteen percent. That’s over two and a half times worse than “junk” bonds.

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What’s Hiding in Ambre’s Financials?

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It’s hard to imagine a company with a greater need for financial transparency than Ambre Energy.

In the midst of a global downturn in coal markets, the firm is trying to move forward with two controversial coal export projects in Oregon and Washington, for which it will have to raise about a billion dollars in start-up capital from increasingly skittish investors. The company is also hoping to win the public’s confidence and support for its export plans—an especially critical need, given that the company misled the public about the scale of their export ambitions in their initial permit filings. After that kind of start, the company just can’t afford to look like it’s hiding something now.

Yet for the past year, Ambre has been remarkably secretive about its financial situation. A few weeks ago, a reporter from The Australian uncovered evidence that Ambre had failed to disclose its 2012 year-end financial results. This may have put the company in violation of Australian securities law, which requires unlisted public companies, such as Ambre, to publish their financials within four months of the end of the fiscal year. For Ambre, that meant that they’ve been in violation of the disclosure rules since May 1.

But the website of the the Australian securities regulatory agency shows that Ambre has finally submitted its financial report for the 2012 fiscal year. Better late than never, right?

Well, sort of.

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The Hidden Export Bombshell in Cloud Peak’s Financials

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Powder River Basin coal train

Cloud Peak Energy, one of the major coal producers in the Powder River Basin, is doing its very best to sound upbeat about coal exports. In an investor conference call this past July, the company declared that, even though falling international coal prices had eaten into their earnings, their exports were “still profitable overall.”

But a close look at Cloud Peak’s second quarter financial statements suggests a far stranger story: the company’s export division actually made most of its profits from derivatives trading rather than coal. Stripping away the financial-speak, the implications are striking: Cloud Peak’s export arm made at least 10 times more money betting against coal than it did selling coal.

For those who are interested, here are the details…

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More Bad News for Ambre Energy

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The financial woes of would-be coal exporter Ambre Energy continue.

Yesterday, in a blandly worded press release, the company made a bombshell announcement: Ambre had failed to secure financing to settle its lawsuit with its rival/partner Cloud Peak Energy, with which it co-owns the struggling Decker mine in southern Montana. That means that the two companies will now have to limp along, managing the mine in tandem—even though their last attempt at co-management led to a serious dispute and a pair of lawsuits a mere seven months after the two companies started working together.

The initial lawsuit, filed by Cloud Peak just over a year ago, centered on Ambre’s management decisions at Decker. Cloud Peak wanted to move forward with long-standing plans to shut down the mine, since it was losing money and costs were on the rise. Ambre wanted to keep Decker going, in part (as Ambre’s counter-suit revealed) because shutting the mine down would be even more expensive than keeping it running.

Last December, both parties agreed to a tentative settlement to the two lawsuits: Ambre would buy Cloud Peak’s interest in the mine, and run it as it saw fit. But to finalize the settlement, Ambre would need to replace a $71 million “reclamation” (i.e., cleanup) bond that Cloud Peak had already put up, and also pay somewhere between $57 million and $64 million for the mine itself.  Once Ambre came up with the money, the lawsuit would be officially settled.

Well, the first settlement deadline came and went, and Ambre didn’t come up with the money. The court set a new deadline—and Ambre fumbled again. Ultimately, the presiding judge set a firm cutoff date of August 30: if Ambre didn’t fulfill the settlement terms, the lawsuit would proceed, and the two parties would have to start duking things out in court.

Yesterday, with the clock ticking down, both parties announced that they were voluntarily dropping their lawsuits. The reason: Ambre simply has no hope of raising the money it needs to buy Decker.

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The Coal Export Bubble

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There’s been so much news on the coal export front of late—the massive scope of the proposed Gateway-Pacific terminal’s Environmental Impact Statement; the Lummi Nation’s unequivocal opposition to a coal terminal at Cherry Point; and recent revelations about the ongoing financial woes of coal terminal developer Ambre Energy—that it’s hard not to sense that Northwest coal export projects are on the ropes.

But perhaps the most important coal export story has gotten surprisingly little attention—the collapse of Pacific Rim coal prices. With the latest price decline, I think we can definitively call the hype over Northwest coal export projects for what it always was: a bubble.

But to see why the inflated hopes for Northwest coal exports were the product of a bubble mentality, you have to look at the long-term price trends.

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Still More Bad News for Ambre

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Zepeda found guilty necessity defense Washington

The bad news for Australian coal miner Ambre Energy has been flying fast and furious for the past few weeks.

Back in late June came the revelation that the company’s Morrow Pacific coal export project faces high costs and dim financial prospects—which was inadvertently confirmed by the company’s North American CEO.

Then, at the very end of last week came news that the company is running out of time to settle its ongoing lawsuit with rival Cloud Peak, with whom Ambre co-owns the struggling Decker coal mine in southestern Montana. Worse, Ambre is clearly having trouble coming up with cash for the settlement.  From Matt Brown at the Associated Press:

More signs of problems have emerged with an Australian company’s bid to take over a Montana coal mine, as court documents reveal Ambre Energy has been unable to come up with more than $70 million in cash to close on the deal…

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