I’ve followed Cloud Peak Energy (CLD) since 2011. While at M*, I learnt that CLD was one of the few companies which are worth a moat rating, in this case a Narrow moat. CLD was spun off from Rio Tinto with 50% in 2009 and and the remaining in 2010. It’s mines are all in the Powder River Basin (PRB) where extraction costs are the lowest. The PRB has thick and uniform coal beds which allow miners to use massive trucks and draglines, making PRB operations low cost and efficient. The downside to the PRB is that it is far from where coal is used, whether in the domestic USA or for export purposes. A very approximate estimate of CLD’s cost per ton of coal is USD10/ton ($9.14 based on the Q315 earnings call). In fact, CLD is the lowest cost producer of coal in the lowest cost coal-producing region of the USA. CLD regularly sells its production with forward contracts, which allow visiblity on its projected earnings. CLD has low leverage and has spent most of its free cash flow paying down debt.
With this information, I have in the past bought CLD stock at the $15-$17.5 range and then selling it above $20. I felt that CLD was an opportunity since its stock price was being dragged down by the broader weakness in coal stocks. This proved correct and CLD was basically rangebound in ithe levels that I bought and sold.
In mid 2013, I had already exited my position in CLD and felt that coal was becoming a really messy industry to be invested in. I also feared that coal was losing out to natural gas in power generation. However, in end 2013 and early 2014, coal stocks boomed due to a really cold winter in the USA, causing energy demand to spike. At this point, I started thinking that coal stocks need not be in a continuous downtrend since they could spike every winter. How wrong I proved to be! In mid 2014, I started accumulating CLD stock again after its price had dropped back to normalized levels. Unfortunately, that was in fact the start of a downtrend and CLD stock has gone all the way down to the $2-$3 range, losing easily more than 70% of its price.
Fearing catching a falling knife, I’ve basically not averaged down for the past 6 months. However, coal could be turning a corner. Details of uncertain EPA regulation on coal-fired power plants in the USA has been released. Of the 5 major US-focused thermal coal players, Alpha Natura Resources and Walter Energy have declared bankruptcy and Arch Coal is on the verge of bankruptcy. Peabody Energy (BTU) has very high debt levels but CLD’s stock price has fallen by just about the same as BTU’s. This makes me feel that CLD has been unfairly punished. After releasing stellar Q315 earnings, I’m starting to think that CLD could be turning a corner.
By any valuation ratio, CLD stock is undervalued. It is also rated 5 stars by Morningstar. The key though is always timing. Since I already have a large position in CLD at relatively high prices, I believe it could be prudent to start averaging down again.