IB Net Payout Yields Model

Cloud Peak Energy Surges on Contract Cancellation

That might sound counter intuitive especially considering that the utility canceling the contract was just about all of the 2011 and 2012 production for the Decker Coal partnership. As I'm writing this, Cloud Peak Energy (CLD) is up 6% to a a new high of $16+. Stone Fox Capital was very bullish on this IPO even after it cratered into the $13s from a original expected range of $16-18. [Buy Cloud Peak Energy as it Trades in the Valley] This was mainly due to this expected contract cancellation with an eastern utility company.

Of course on face value it seems bad that the only customer of this partnership would cancel services (ok its a buyout), but in reality in the commodities sector its all about the resources and not the contracts. In fact, the lack of a contract can be beneficial as prices continue to soar and your able to sell into the spot market. Coal might not have a big spot market, but places like China are cutting electricity use due to a lack of coal supplies. You telling me CLD coal couldn't end up in China or at least won't benefit from this development?

The sell off post IPO was just absurd. CLD is one of the best run coal companies in the US if not the world. Anybody that has a commodity will undoubtedly find a buyer and in most cases for more then what they would get from a contract. Get in today and you'll still buy CLD for less then the original IPO range.

By the way, the Decker Coal partnership is just a small percentage of the CLD revenue in the first place (I'd look it up but it doesn't matter as I'm sure they'll sell this coal for more then the original contracted amount).

  • announced an agreement that Decker Coal Company, in which Cloud Peak Energy is a 50% partner, has accepted a buy-out offer from an eastern utility company for a coal supply contract originally scheduled through 2012.
  • The customer’s contract accounted for approximately 30 percent of production for 2010 and the majority of the production for 2011 and 2012. The arrangement is mutually beneficial to both the utility and the Decker Joint Venture as it allows the utility to avoid purchasing coal it no longer requires, and Decker to pursue more favorable sales opportunities. Decker Coal Company currently holds no firm sales contracts beyond 2011, but continues to seek market opportunities for the approximately 42 million tons of non-reserve coal held by the Company.

China Daily article on the lack of coal causing power outages. CLD is going to be just fine without this contract.
  • With people turning up the heat indoors to fight the extreme cold across the country, many provinces are reducing electricity supply due to the shortage of coal.

    Since December, power has been cut or reduced to more than 2,000 factories in Wuhan, Hubei province, to ensure supply for household use, while most parts of the south face electricity shortages, Han Xiaoping, an energy analyst, said yesterday.

    With power demand surging this winter, coal stocks in 349 power plants across the nation have decreased to around 27 million tons, or barely enough for 12 days of generation, while stocks in the north have declined to less than a week, the Shanghai Securities News reported last month.

    Generally, coal stocks should be enough for at least 20 days, Han said.

    But in Hubei province, things are much worse. The local electricity supplier faces a shortage of 760,000 tons of coal before March this year, Yang Yong, assistant chief engineer at Hubei Electric Power Company, told China Business News yesterday.


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