Total Pageviews

Friday, December 31, 2010

Recent upgrades on Cloud Peak Energy (CLD)

As I write this, CLD has broken past the $23 resistance - next resistance at $23.56 or 52 week high.  The recent upgrades are most likely due to recent developments relating to items that have plagued the stock over the past 12 months.

CLD has LBA's (lease by agreement) with the federal government relating to its PRB (powder river basin) coal.  Estimated payments through 2014 are estimated at almost $1 billion, causing potential liquidity issues in upcoming years.  Several things have happened to improve this outlook.  One, PRB coal prices have significantly increased over the past twelve months.  Second, several LBA's have been blocked by environmentalists and have been delayed due to litigation.

CLD's major shareholder, Rio Tinto Ltd, owned 48% of the company and was locked up until mid 2010.  In mid December, an offering for for approx. 26M shares at $19.50 solved this problem.  Investors were looking for Rio to liquidate their investment after the lock up period and feared what the selling would do to the stock price.  Now that this is behind the company, it puts a nice floor in the stock price at the $19.50 offer price.

Other key notes supporting this investment thesis -

- 85% of CLD's 2011 production volume has already been priced - less exposure to future volatility in PRB coal prices

- Management has recently stated utility inventories are at low points and are asking for Q4 2010 delivery of 2011 orders

- Management has recently stated several utilities have sent out RFP's for PRB & Illinois coal that typically burn Central Appalachia coal

- CLD currently trades at a discount to its peers and almost 13% of the float is short - provides for a nice short squeeze

If you are looking for a 100% thermal coal play with some legs, look no further and watch for that break of $23.56 with volume to get long.

No comments:

Post a Comment