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Cloud Peak (NYSE:CLD) would really benefit from adding coking coal to its existing 100% thermal mix. Arguably, CLD would benefit from adding anything outside of the Powder River basin to its mix. Now is a great time to do it. Cloud is sitting on a mountain of cash and it just so happens that a Canadian-domiciled company named Cline Mining (OTCPK:CLNMF) has 619 million tons of measured and indicated resources, located in southern Colorado, that's classified as "Hi-vol" B quality coking coal.

619 million tons is a lot of coking coal. The quality is middle of the road, but in a stronger market, Cline's coal is a winner, and in a hot coking coal market like that of a year ago, it's a home run. Cloud could buy Cline Mining for as little as $400 million, or about $0.65 per measured and indicated resource ton. Even at $500 million, Cloud Peak could swing it using half cash and a combination of debt and equity for the other half.

Before going any further, there's a lot of controversy surrounding Cline Mining. Some question the company's true coal quality, and many believe that management is in over their heads. Production ramped up very slowly, even after having been delayed for about a year. Liquidity is a looming problem, so the coal mine is essentially on hot idle. The coal marketing is under scrutiny because the company has yet to sell its first vessel of coking coal. (A sales contract could be announced any day.)

All of the above could be resolved if a company like Cloud Peak were to buy Cline. Cloud would instantly answer the liquidity problem. Cloud could install new management if deemed necessary. Cloud's purchase of Cline would add credibility to the marketing effort by validating the coal quality. Importantly, Cline's mine and 619 million tons of resource is worth considerably more to an established coal producer than as a standalone asset.

As part of a larger organization, Cline's mine would diversify Cloud's existing thermal coal franchise. Cloud would benefit from enhanced logistics, being able to export Cline's coking coal through the Gulf, (Cline has a 2 million ton allocation at the port of Corpus Christie, TX). Cloud could expedite Cline's proposed long wall project, which could double the mine's annual production by 2015-2016. CLD would go from a single basin thermal coal producer to a 2 basin thermal and coking coal producer.

On an NPV basis, Cline's resources and production could be worth a tremendous amount to Cloud. With a lower cost of capital and more certainty with regard to ramping up production, Cloud could be the proud owner of one of the larger Hi-vol B mines in the country, 6 to 7 million tons with a long wall operation.

In the end, it's likely that Cline Mining will be acquired by someone. If Cloud doesn't buy it, then Peabody Energy (NYSE:BTU) or Alpha Natural Resources (NYSE:ANR) should kick the tires. However, Cloud would benefit the most given its perceived shortfalls, its lack of coking coal and poor regional diversity.

Source: Cloud Peak Needs Coking Coal; Colorado's Cline Mining Has It