Cloud Peak sees hope for US coal

CLOUD Peak Energy believes the picture is getting better for coal, even on the US domestic scene, after flipping from a second-quarter loss last year to a positive result for Q2 2016.
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Courtesy Cloud Peak

Anthony Barich

The company reported Q2 income of $US35.3 million ($A47.02 million), including a non-cash accounting income of $37.3 million for asset retirement obligation remeasurements, compared to a net loss of $52.9 million for the year-ago period.

Cloud Peak president and CEO Colin Marshall said increasing natural gas prices and a warm start to the US summer was improving the overall outlook for the country’s embattled coal industry.

The industry has been beset by cheap gas from the US shale boom and President Barack Obama’s war against coal.

“After very low shipments in April and May, we started to see improved shipments in June and are optimistic that this trend will continue during the second half of the year,” Marshall said.

“Our financial performance during the quarter benefited from buyouts by three customers and the impact of reduced reclamation cost assumptions on our asset retirement obligations.

“Once again our sites did a very good job of controlling costs during the quarter as we reacted to very low shipments.”

Regardless, shipments were still low for much of the second quarter, sending Cloud Peak’s production 26% lower than the prior-year period.

Mine Safety and Health Administration data indicates Q2 and year-to-date coal production in the US was down 24% and 26% respectively from the same periods last year, while electric generation was down 3.9% through April 2016.

However, cost per ton dropped 2% to $US10.50 for Q2 despite fewer tons shipped, while total cost of product sold also decreased 26% compared to the same period in 2015 – and reduced revenue meant less production taxes and royalties.

The coal industry is not out of the woods yet, and despite the positive outlook Cloud Peak is still focusing on reducing costs as production volumes decline.

Labour, diesel, repair and maintenance costs dropped as a result of reduced equipment hours and the lower amount of material moved.

The company offered a severance incentive to all hourly employees, which resulted in 127 employees leaving in Q2, during which time 11 salaried positions were also eliminated.

These headcount reductions cost $3.3 million during the quarter, and the combined annual wages and benefits cost for these employees was $13 million.

Cloud Peak has also continued to cut overtime, reduce the use of contractors and scheduled work hours, and not fill vacant positions to manage labour costs and match capacity to shipment levels.

Another sign of the need for a still-cautious approach is the fact revenue dropped from $17.1 million for Q2 2015 to $11.6 million this time around, while cash flow totalled $12.2 million for the first six months of 2016 compared to $14.9 in 2015.

Management still expects stronger shipments in Q3 2016 as customers increase delivery of their contracted volumes and as the railroads bring equipment and crews back to meet these commitments.

Assuming normal summer cooling demand remains throughout the third quarter, Cloud Peak expects utility coal stockpiles to drop.

The company believes the price of natural gas and coal stockpile levels when electricity demand decreases in the fall will be “critical” to coal shipments for the full-year.

“It is encouraging to see natural gas prices currently above $2.50 MMBtu where PRB coal can better compete at many utilities,” it said.

“If summer burn is strong, utilities are expected to rebuild their stockpiles in anticipation of winter demand. This scenario creates the potential for strong shipments and increasing sales this fall.”