Cloud Peak IPO Piques Our Interest

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Includes: CLD, RIO
by: Stone Fox Capital

Cloud Peak Energy (NYSE:CLD) is an IPO spin off from Rio Tinto (RTP) that has huge potential. By all accounts, the deal will be cheap as evidently RTP needs the cash. The deal is expected to price in the $16-18 range giving it a7 PE multiple. Very odd considering the PE multiples in the 20s that most coal producers trade at currently.

CLD is completely focused on the Power River Basin (PRB) area in Wyoming and Montana. The surfice coal in the PRB is much easier to mine then the mountaintop mines in the East and especially in Central Appalachia. Also, the coal is 'cleaner' then the East because of lower sulfur amounts. Now honestly just about every other energy option is 'cleaner' then coal such as natural gas, solar, and wind. Unfortunately coal is the cheapest option and the US along with emerging economies like China and India are somewhat stuck using it so demand is expected to grow.

Another issue with the Central Appalachia is that it has declining reserves and faces regulatory issues. The government is currently suspending 79 mine applications to research environmental issues. The PRB is expected to fill the loss of production from this area going forward.

What we don't like about CLD is that it's completely tied to steam coal used for energy and lacking the much more attractive metallurgical coal used in making steel. This might somewhat impact the multiple comparisons.

Watch the roadshow presentation for all the details - Roadshow.

CLD expects to price on Thursday so anything close to the current price range is very attractive. It is hopefully being overlooked though Cramer has been pumping it all week so it seems unlikely that the market will ignore it.