Coal IPO Hikes Planned Sale (CLD, RTP, ACI)

It seems that there is no caution in all the pending Initial Public Offerings coming to market.  Cloud Peak Energy, Inc. is raising the amount targeted for its capital raise of up to $650 million from an initial target of $500 million when the filing was first made in August 2009.  This one will trade on the New York Stock Exchange under the symbol “CLD”  and the listed underwriters in the amended prospectus are Credit Suisse, Morgan Stanley, and RBC Capital Markets.

Cloud Peak noted in its filing that the company is the third largest producer of coal in the U.S. and in the Powder River Basin, based on 2008 coal production.  It also claims that it operates some of the safest mines in the industry with MSHA figures from 2008 showing the lowest employee all injury incident rate among the five largest U.S. coal-producing companies.

The company operates solely in the Powder River Basin, which it notes is the lowest cost coal-producing region in the United States.  It also operates two of the five largest coal mines in the region and in the U.S. and includes three wholly owned surface coal mines (two in Wyoming and one in Montana).  Cloud Peak also owns a 50% interest in a fourth surface coal mine in Montana.

It also produces sub-bituminous steam coal with low sulfur content and sells its coal to domestic electric utilities.  Its 2008 production generated about 4.4% of the electricity produced in the U.S.

After the IPO, CPE LLC will own Rio Tinto America’s western U.S. coal business, except for the Colowyo coal mine in Colorado. This is now under Rio Tinto plc (NYSE: RTP).  It will be a holding company that manages CPE LLC, and its only business and sole asset will be its managing member interest in CPE LLC. Following the completion of the transactions, Cloud Peak Energy Inc. will own an unstated percentage and Rio Tinto America indirectly will own an unstated percentage.

On October 1, 2009, CPE LLC (formerly known as Rio Tinto Sage LLC) sold the Jacobs Ranch mine to Arch Coal, Inc. (NYSE: ACI) and it did not keep the proceeds from that sale.  The Colowyo and Jacobs Ranch mines are reflected as discontinued operations in the consolidated financial statements of its predecessor.

For the year ended December 31, 2008 and the nine months ended September 30, 2009 the company generated the following:

• produced 97.1 million and 69.9 million tons of coal, respectively;
• generated revenues of $1.24 billion and $1.06 billion, respectively;
• had income from continuing operations of $88.3 million and $147.3 million, respectively.

The IPO proceeds are funding an acquisition.  The company notes in the amended filing that immediately prior to the completion of this offering, it will enter into an acquisition agreement with RTEA where it will acquire a portion of RTEA’s interest in Rio Tinto America’s western U.S. coal business (other than the Colowyo mine).

The structure on this one is one that we will not really pick apart until we get more specific terms with price ranges and share counts.

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JON C. OGG
NOVEMBER 2, 2009