Cloud Peak Energy Hopes Investors Will Warm to IPO

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Includes: CLD, RIO
by: Abbi Adest

Cloud Peak Energy (NYSE:CLD), a carve-out of Rio Tinto (RTP) and the third largest coal producer in the U.S., is expected to go public this week. Reuters reports that "analysts cautioned that demand for the offering could be tepid. The IPO is priced at a premium compared with competitors."

Business Overview (from prospectus)

We are the third largest producer of coal in the U.S. and in the Powder River Basin, or PRB, based on 2008 coal production. We operate some of the safest mines in the industry. According to data from the Mine Safety and Health Administration, or MSHA, in 2008 we had the lowest employee all injury incident rate among the five largest U.S. coal producing companies. We operate solely in the PRB, the lowest cost coal producing region of the major coal producing regions in the U.S., and operate two of the five largest coal mines in the region and in the U.S. Our operations include three wholly-owned surface coal mines, two of which are in Wyoming and one in Montana. We also own a 50% interest in a fourth surface coal mine in Montana. We produce sub-bituminous steam coal with low sulfur content and sell our coal primarily to domestic electric utilities. Steam coal is primarily consumed by electric utilities and industrial customers as fuel for electricity generation. In 2008, the coal we produced generated approximately 4.4% of the electricity produced in the U.S.

Offering: 30.6 million shares at $16 - $18 per share. Net proceeds of approximately $491.6 million will be used to complete the separation of the company from its parent, Rio Tinto, for working capital and for general corporate purposes.

Lead Underwriters: Credit Suisse (NYSE:CS), Morgan Stanley (NYSE:MS), RBC Capital Markets

Financial Highlights:

Revenues were $904.6 million for the nine months ended September 30, 2008, compared to $1,061.3 million for the nine months ended September 30, 2009, a $156.7 million or 17.3% increase... Cost of product sold was $653.6 million for the nine months ended September 30, 2008, compared to $702.5 million for the nine months ended September 30, 2009, a $48.9 million or 7.5% increase... Selling, general and administrative expenses were $50.8 million for the nine months ended September 30, 2008 compared to $49.1 million for the nine months ended September 30, 2009, a $1.7 million, or 3.5% decrease.

Competition:

Because most of the coal in the vicinity of our mines is owned by the U.S. federal government, we compete with other coal producers operating in the PRB for additional coal through the LBA process. This process is competitive and we expect the competition for LBAs to remain strong.

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