Friday, November 20, 2009

Buying Cloud Peak While it Trades in the Valley

The Cloud Peak Energy IPO (CLD) priced last night at $15 which was below the original range of $16-18. Very perplexing considering the commodities sector and especially coal stocks have been very hot of late. Then Reuters published some analyst comments that made us more bullish. Basically the analysts are concerned that the proceeds are going back to Rio Tinto (RTP) and that the deal was overpriced and coal demand is uncertain. Huh? Are they serious? Why has Peabody Energy (BTU) and Massey Energy (MEE) rallied so hard lately?

This really seems like Wall St playing games with a forced seller. RTP needs the money to reduce it's debt load. CLD is clearly not overvalued as both BTU and MEE sport PEs in the 20s while CLD starts in the 7-8 range. If anything CLD is extremely undervalued.

Gillette, Wyoming-based Cloud Peak raised about $459 million but almost all of the proceeds will go to Rio Tinto, which will retain a 48.3 percent stake in Cloud Peak.

Rio Tinto is saddled with debt stemming from its 2007 acquisition of Canadian aluminum maker Alcan.

"There's investor push-back because it's (money) not going back to the company and it's not for growth. It's just a Rio Tinto bailout," said IPOdesktop.com president Francis Gaskins.

Analysts expressed concerns last week that Cloud Peak's IPO was overpriced relative to its peers' stocks and that it could face uncertain demand for coal.

Cloud Peak is the third largest U.S. producer of coal and owns surface mines in Wyoming and Montana.

The disappointing pricing sent Rio Tinto shares down about 1.9 percent in early trading in Australia.

Jim Cramer came out earlier this week pushing the IPO which we thought might juice the stock and force us to sit out this deal. Oddly though, maybe the 4 day delay from his show on the 16th to the opening today was enough for this fickle market to forget. A lot of people don't like Cramer, but he seems to have more sound analysis then the average analyst. Take it from him in the below clip that CLD is cheap. Oh, and don't forget Uncle Buffet just bought Burlington Northern Railroad (BNI) which happens to get a large percentage of revenue from the Powder River Basin where CLD operates.












Remember you want to buy an IPO where the seller is distressed and not where the seller is cashing out. The analysts are confused on this matter thinking they are cashing out. RTP is keeping roughly 48% of the outstanding shares to profit from any gains.


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