More Bad News for Ambre Energy

Financing failure at Montana mine suggests a cloudy future for coal exports.
This post is 10 in the series: Coal Exports: Caveat Investor

The financial woes of would-be coal exporter Ambre Energy continue.

Yesterday, in a blandly worded press release, the company made a bombshell announcement: Ambre had failed to secure financing to settle its lawsuit with its rival/partner Cloud Peak Energy, with which it co-owns the struggling Decker mine in southern Montana. That means that the two companies will now have to limp along, managing the mine in tandem—even though their last attempt at co-management led to a serious dispute and a pair of lawsuits a mere seven months after the two companies started working together.

The initial lawsuit, filed by Cloud Peak just over a year ago, centered on Ambre’s management decisions at Decker. Cloud Peak wanted to move forward with long-standing plans to shut down the mine, since it was losing money and costs were on the rise. Ambre wanted to keep Decker going, in part (as Ambre’s counter-suit revealed) because shutting the mine down would be even more expensive than keeping it running.

Last December, both parties agreed to a tentative settlement to the two lawsuits: Ambre would buy Cloud Peak’s interest in the mine, and run it as it saw fit. But to finalize the settlement, Ambre would need to replace a $71 million “reclamation” (i.e., cleanup) bond that Cloud Peak had already put up, and also pay somewhere between $57 million and $64 million for the mine itself.  Once Ambre came up with the money, the lawsuit would be officially settled.

Well, the first settlement deadline came and went, and Ambre didn’t come up with the money. The court set a new deadline—and Ambre fumbled again. Ultimately, the presiding judge set a firm cutoff date of August 30: if Ambre didn’t fulfill the settlement terms, the lawsuit would proceed, and the two parties would have to start duking things out in court.

Yesterday, with the clock ticking down, both parties announced that they were voluntarily dropping their lawsuits. The reason: Ambre simply has no hope of raising the money it needs to buy Decker.

From the press release.

Ambre Energy’s purchase of Cloud Peak Energy’s 50% interest in the Decker Mine in Montana is not expected to be completed for the foreseeable future.

That’s right, the two parties don’t see any realistic possibility, any time in the foreseeable future, for Ambre to raise the money to buy Decker. Cloud Peak’s stock took a hit today, but it was a fairly small drop, amounting to about $20 million in market capitalization—suggesting that most investors had already decided that the odds were against Ambre ever raising the $130 million it needed to buy Cloud Peak’s interest in Decker.

In part, this news suggests that financial markets have given a no-confidence vote to Ambre—a company whose dismal finances and shaky export plans have already been widely covered in the press.

But it’s also a vote of no confidence for coal exports in general. Ambre spearheads two of the three remaining coal export projects in Washington and Oregon. If financial markets thought that these projects were worthwhile, wouldn’t some deep-pocketed investor be willing to front them some more cash?

And Ambre’s financing woes are especially telling, given a curious fact about Decker: although the mine is performing terribly in the domestic coal market, Decker coal is actually fairly well situated for the export market. Compared with most other Powder River Basin coals, Decker coal has a shorter rail trip to West Coast ports—which could trim several dollars per ton off transportation costs. Decker also produces the Powder River Basin’s most energy-dense coal, meaning that it would receive premium prices in Asia, compared with other PRB coals.  By my estimates, these factors work in favor of the mine: Decker likely ranks second best among all US thermal coal mines for export to Asia. (I expect to write more about this shortly.)

If I’m right about this, then yesterday’s news has huge implications for coal export proposals in general. If there are no bidders for even the second-best export coal in the Powder River Basin, perhaps the markets are deciding that the Asian coal bubble has deflated, and there’s not a lot of money to be made in coal exports after all.

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Comments

  1. Ellen Pfister says:

    While Decker’s coal has good BTU’s, it has a high sodium problem, as does Spring Creek coal. The sodium problem is a disadvantage because it must be burned in a specially designed generator with larger throats. The PRB coal in Wyoming does not have the sodium problem, which increases its usability without specialized equipment. There are usually more subtle problems as to why a seemingly good product is not flying out of the mine.

    • Clark Williams-Derry says:

      Excellent point, Ellen. And it raises a huge question about Decker’s future. If I’m not mistaken, their contract with Detroit Edison ends this year. If DetEd doesn’t renew that contract, it’s not clear who, if anyone, will buy Decker coal in bulk. (I believe that DetEd had specially designed boilers at their St. Clair and Belle River power plants to handle coal from Spring Creek and Decker.)

      Ambre may be able to sell Decker coal for blending with lower-sodium coals. But if they don’t have a steady contract, I believe that they’re cooked. And the thing is, they have to sell their coal at a significant premium to other coals, since it’s so much more expensive to produce than their competitors. The market price for coal right now doesn’t cover Decker’s mining costs.

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