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Cloud Peak On Brink Of Collapse After Bad Coal Bet

Cloud Peak Energy made a bet a little more than a decade ago that the U.S. power sector was still going to see coal as indispensable. That failed bet has now pushed the company to the brink of collapse, according to a new Bloomberg article

Betting everything on Wyoming and Montana strip mines, the company gambled that easy-to-access coal for electricity plants would secure its future for years to come. At first, the bet panned out - the company grew into the third largest U.S. miner at one point, while its competitors went bankrupt due to overleveraging themselves. But now, as coal power plants continue to fade away, Cloud Peak is doing the same.

On Friday the company warned that it may be filing for Chapter 11 in weeks - becoming an unfortunate example of an industry that has declined precipitously. Coal has been displaced by natural gas and renewable energy in recent years, despite the Trump administration rolling back environmental regulations to try and help the industry. 

Jeremy Sussman, an analyst with Clarksons Platou Securities, said of Cloud Peak: "This is not a problem with a fix." 

Cloud Peak was formerly a spinoff of Rio Tinto Group more than a decade ago. The industry today is extremely different. Production and consumption in the coal industry are both down more than a third since then and the "fuel that made up almost half of the U.S. power mix at the time is expected to supply less than 25 percent this year", according to the U.S. Energy Information Administration.

Cloud Peak stayed focused on thermal coal for power plants while rivals took on debt to try and expand production of metallurgical coal, which is used in steelmaking - a niche of the industry Cloud Peak never took hold of. Despite competitors Peabody and Arch filing for bankruptcy in 2016 while Cloud Peak reported a $21.8 million profit, the tables have now turned. Related: Oil Slips As Alberta Relaxes Oil Production Cuts

Since Chapter 11, both Peabody and Arch have kept their balance sheets clean and are posting good results. The demand for metallurgical coal has caused its price to double since 2016. It remains a great source of revenue for miners - except Cloud Peak.

Cloud Peak has also missed out on exports, which were up 91% last year from 2016. Exports have helped miners in the Appalachians and the Illinois Basin, but with Cloud Peak located in the plains of Wyoming and Montana, it's hardly a help for them. The company does ship some coal from Vancouver, however, and exported about 11% of its third quarter output.

However, states like Washington and Oregon have blocked efforts to ship coal from the U.S. west coast, which has limited the company's options. The company posted a $718 million loss for 2018 on Friday, compared to just a $6.6 million loss in 2017. Tons sold was down by 14%. 

Lucas Pipes, an analyst with B. Riley FBR Inc. said that the company could have broadened its strategy by expanding into met coal, but that window, now, has obviously closed. 

He said: “I don’t fault them for not succeeding with U.S. West Coast terminal. I fault them for not thinking out of the box.”

By Zerohedge.com

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