CLD.AA - Cloud Peak Energy 8.5% 2019

[jimjam]

All kinds of negatives for coal, but the question is whether the company can survive to Dec 15 2019 without going bankrupt?

 

Debt is currently priced at about 37c on the dollar.

 

CUSIP: 18911MAD3

 

Link to the full bond prospectus: http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C531825

 

Long thesis I found (dated from June 2015): http://ibd.morningstar.com/article/article.asp?id=701455&CN=brf295,http://ibd.morningstar.com/archive/archive.asp?inputs=days=14;frmtId=12,%20brf295

 

Obvious negatives:

 

- Coal competes with natural gas and gas is cheap

 

- US and Chinese demand is down

 

- Coal is dirty and environmental legislation is tightening

 

- Major coal companies are going bankrupt (Arch already, Peabody quite possibly) -- though it's not clear if this is truly a negative for Cloud Peak

 

- Long term volume contracts with the railroads might be expensive to renegotiate

 

But...

 

- Cloud Peak is focussed on the Powder River Basin which is low sulphur and low cost

 

- Oil is cheap which reduces the cost of mining

 

- The amount of debt ($300M due in Dec 2019, $200M in Dec 2024) is more reasonable than for their competitors (e.g. BTU) but the bonds are being priced as if bankruptcy is probable

 

- They have an untapped $500M revolver:

http://investor.cloudpeakenergy.com/sites/cldpk.investorhq.businesswire.com/files/doc_library/file/Q315_Investor_Presentation_FINAL.pdf

 

 

Questions

 

- They will surely have to write down asset values. Will this trigger any debt covenants on the bonds or the revolver?

 

- Are they free to use the revolver to retire any of the present bonds?

 

- Will they survive?

 

Thoughts? Please kill this idea!

 

Cheers

 

[Guest roark33]

Two words: debt exchange.  There you go, idea dead.  When the debt trades down to 15 cents, there will be a debt exchange for longer-dated debt worth potentially 30 cents that will immediately be marked down after the exchange is complete.  So, yes, the idea can make money if you buy right before they do the debt exchange, but you could see the current debt trade down 50% before that happens. 

 

To be fair, I have only briefly looked at CLD, but the interest in debt of commodity companies is highly misplaced.  Much better to buy those when the companies actually go bankrupt....it messy then, but there isn't a clear path to value until that happens.  Right now, you are still just betting on commodity prices turning around before the ch. 11 filing.

[Picasso]

Why the 2019's versus the 2024's at around $20?  If it does take three years for a debt swap or other bad things to happen you'll at least recover your basis.  The shorter duration notes will probably get impaired pretty bad and less of a chance to fully recover.

[jimjam]

Thx.

 

picasso: you're right. Even though the coupon on the 2024 bonds is lower, it would only take 3 1/2 years of payments to recover your initial investment vs 4 1/2 years for the 2019 bonds.

 

roark33: yes, management can always threaten bankruptcy to force a debt exchange, but that's always the case. How likely is a credible BK specifically for Cloud Peak?

 

Cheers

[wjsco]

I don't think they'll go bankrupt...their core coal operations generate >$150 m ebitda/yr, but consolidated ebitda is depressed by losses on their logistics business. Thankfully, they restructured some of those take or pay contracts with BNSF and the port.

 

One thing to keep in mind - yes, PRB is low cost and low sulfur. Low sulfur = good, no matter how you cut it. Low cost, though...here's the thing. Utilities don't care about mine mouth coal costs. They care about delivered costs, which includes transportation. As the price of coal drops, transportation becomes a larger portion of delivered cost to utilities. To give you an idea, transport costs for PRB coal can amount to 3-4x the mine mouth cost. In this respect, CLD is hugely disadvantaged. The Murray coal guy actually recognized this a while ago (that PRB coal was at a major transport cost disadvantage), and spent years collecting geographically advantageous coal deposits.

 

Now, on to their mines. CLD's highest BTU asset is really levered to export from the West Coast, and infrastructure isn't designed to deliver that coal elsewhere (though, this is their smallest asset. I'm also not positive about this point, but i think im right). Their 2nd largest mine, while low sulfur, also has really low BTU (8000). 8000 BTU coal has been on a major downtrend for about 8 years now, and volumes continue to decline at that mine.

 

My point is just that it doesn't matter that they have the lowest mine mouth cost and lowest sulfur content in their coal. Also have to consider transportation costs and BTU content.

 

[Picasso]

wjsco, what do you think of Murray and Foresight?  I have some interest there since they're a counter party to my largest holding SXC.

[rukawa]

A different thesis but same security was posted on VIC:

https://www.valueinvestorsclub.com/idea/CLOUD_PEAK_ENERGY_INC/139103

[mcliu]

These are trading at 96 now. Wow.

[rukawa]

I've been trying to find the price for this. Do you have a link?

[jimjam]

Rukawa,

 

Go to

 

http://finra-markets.morningstar.com/BondCenter/Default.jsp

 

Click on "Search".

 

In the "Issuer Name" box, type in "Cloud Peak" (without the quotes).

 

Click on "Show results".

 

You then can see all of Cloud Peak's bonds.

 

Click on any bond you're interested in for pricing, history, and prospectus documents.

 

(Despite the skepticism from the board here, I did go long the bonds just after I wrote the original post --- resulting in a double plus some interest. Got out too early, though...)