Cloud Peak Energy (CLD) has just filed its annual report, and it contains plenty of negative information including doubts about the ability of continuing as a going concern. Cloud Peak Energy has been previously exploring strategic alternatives, and its shares trade firmly below $0.50, so perspectives of the upcoming restructuring are nothing new to the market, but still the annual report is very surprising as the situation is just very bad. Here are the key developments:
- Antelope Mine had operational issues, again. This will lead to increased projected costs in 2019, further pressuring the company’s liquidity situation (more on this later).
- Logistics pricing went down in the fourth quarter which led to a loss in this segment.
- Liquidity situation is simply catastrophic. Cash balance decreased from $109.5 million in the third quarter to $91.2 million in the fourth quarter. As most reading these lines are well aware, the company lost its credit line late last year, so its available liquidity consists solely of the cash on the balance sheet. The first quarter started with a major decrease in cash. As per the annual report, total available liquidity was just $65.5 million on March 8, 2019. The company expects to continue using cash which will further reduce liquidity.
- Demand for 8400 Btu coal from Cordero Rojo is shrinking. The mine is uneconomic. The company took an impairment of $372.4 million on Cordero Rojo.
- Development projects don’t look good either, triggering an impairment of $309.2 million.
- Surety bond underwriters demand increased collateral on reclamation bonds. Timing of this demand could not be worse.
As a result of these developments, the company decided to skip an interest payment of $1.8 million on 2024 notes. It now has a 30-day grace period to determine its future actions. The interest payment on 2021 notes is due on May 1 and is $17.4 million. Cloud Peak Energy commented: “Our forecasted cash from operations alone is insufficient to fund cash interest and capital expenditures. This has resulted in our conclusion that there is substantial doubt about our ability to continue as a going concern.”
The situation is simple. All stars have aligned against Cloud Peak Energy, and it needs a comprehensive restructuring. Impairments of Cordero Rojo and development projects’ values, as well as continued problems at Antelope, show why Cloud Peak Energy failed to attract interest for asset sales during the strategic review.
The major cash burn at bare-bones capex levels highlights the need to materially reduce interest payments or eliminate them for at least a couple of years. This means that a substantial part of the current indebtedness needs to be equitized. In light of all the negative factors, both well-known and new ones that were presented in the annual report, I see no chance for the common equity to get any recovery.
At this point, Cloud Peak Energy equity is de-facto worthless and, therefore, a sell. I will remind readers that an absolute majority of pre-bankruptcy stocks hold some value up until the very last day of trading and even experience pre-bankruptcy rallies on rumors or hopes, so be careful with shorts (assuming you can find shares to short at reasonable margin requirements).
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may trade any of the above-mentioned stocks.