By Gerges Scott, Agenda Global
Lost in all the 2019 news headlines surrounding the nation’s coal industry was the purchase of three thermal coal mines in the Powder River Basin by a Native American tribe. From the East Coast to the West Coast, it was a tumultuous year for America’s coal industry and the mineral-rich basin that stretches from Montana to Wyoming was no exception. Bankruptcy news filled the news pages from West Virginia to Wyoming.
However, industry watchers were taken by surprise in late August when the Navajo Transitional Energy Company (NTEC) secured the winning bid for all the assets of Cloud Peak Energy, a public company that had filed for bankruptcy. In announcing the acquisition, NTEC Management Committee Chair Tim McLaughlin stated, â€œThis purchase is both exciting and historic. Indian tribes have long had a deep connection to the earth, and for the first time, a tribal company will now lead thoughtful and diligent energy development on a national level. Since NTEC was created, we have shown that we can not only improve operations, become financially successful and support job growth but also balance economic development and environmental protection. NTEC is able to do this because our decisions are based on more than just our bottom line. They are based on the people and land that we are connected to.”
As a quick introduction and history lesson, NTEC is 100 percent owned by the Navajo Nation and its people. The company was formed to purchase the Navajo Mine located south of Fruitland, New Mexico. In 2012, Arizona Public Service, operator of the Four Corners Generating Station, and BHP Billiton, the coal supplier, could not reach terms on a new coal sales agreement from the mine. The Navajo Nation stepped up and opted to purchase Navajo Mine. The move was made to secure Navajo jobs and revenue to the Navajo Nation from Navajo Mine operations. The Navajo Nation created Navajo Transitional Energy Company to purchase the mine, which is on the reservation, in 2013.
In late 2015, NTEC announced that a contract miner was selected to operate the Navajo Mine on NTEC’s behalf. Bisti Fuels, a subsidiary of North American Coal Company, began its tenure as mine operator in 2017.
For local Navajo communities, the mine has always been a source of secure, well-paying jobs in an area where unemployment surpasses 50 percent at any given time. To date, the mine has more than 350 employees, not counting contractors. Some employees are fourth-generation Native American miners working at Navajo Mine. The mine provides quality coal to the Four Corners plant, where an additional workforce includes nearly 350 people, many of whom are also Navajo workers.
Navajo Mine is located on the Navajo Nation, a vast Indian reservation that spans three states (northwestern New Mexico, northeastern Arizona and southeastern Utah) and has boundaries that encompass over 27,000 square miles of traditional Navajo homelands. To put it into context, the Navajo Nation is larger than West Virginia with a population of roughly 350,000.
A coal sales agreement between NTEC and the Four Corners Generating Station ensures the mine is operational through 2031, thus providing secure jobs allowing many families to continue to prosper and increase their quality of life for years to come.
The mission of NTEC is to be a reliable, safe producer of coal while diversifying the Navajo Nation’s energy resources to create economic sustainability for the Nation and the Navajo people.
Cloud Peak Acquisition
This brings us back to the present day and the significant acquisition of the Cloud Peak assets, allowing NTEC to expand its operations outside the Navajo Nation and hopefully paving the way for other Native American tribes to follow in its conscientious energy development footsteps. The primary assets are three coal mines located in the Powder River Basin of Wyoming and Montana: Antelope, Spring Creek and Cordero Rojo. The properties include surface and mineral rights to approximately 97,000 acres of land.
Cloud Peak Energy had suffered in recent years due to very high levels of debt created by borrowing to finance certain acquisitions. Despite solid performance at the mines themselves, the company was unable to sustain the finance costs associated with this debt. By making the purchase through the bankruptcy process, NTEC acquired the assets free and clear of this debt burden. NTEC intends to re-focus operations on diligent mining and marketing fundamentals to achieve the same levels of operational and financial success it has accomplished at the Navajo Mine.
Each of the three mines acquired by NTEC has different markets based on the quality and nature of the coal produced and each mine has reliable access to the markets they serve. In 2018, Cloud Peak Energy sold approximately 50 million tons from its three mines to customers located throughout the U.S. and around the world. The Antelope mine produces 23 million tons of low sulfur, 8,800 Btu coal, Cordero Rojo mines 12.6 million tons of low sulfur, 8400 Btu coal, and Spring Creek mines 13.8 million tons of low sulfur, 9,350 Btu coal each year. In 2018, Cloud Peak Energy supplied fuel to over 58 power plants, generating revenue of $832 million.
“With this purchase, NTEC becomes the third largest coal producer in the United States. This growth will allow NTEC to support the Navajo Nation and its members as well as other local economies throughout the West. NTEC will continue its efforts to lead conscientious energy development while striving to balance job growth and protecting the environment for future generations,” said Clark Moseley, NTEC CEO. “We have proven by our extremely successful management of the Navajo Mine that we know the business and are capable of returning the Cloud Peak mines to stable and profitable operations while maintaining their excellent safety performance and reclamation efforts.”
NTEC’s annual revenue from all four mines (including Navajo) is projected to increase to over $1 billion, providing more financial resources to the Navajo Nation and its members through increased tax revenue. “With the acquisition, NTEC will be much better positioned for transitioning to and investing in other forms of energy and thoughtful development of energy resources,” said Moseley.
A Prudent Investment
We’re talking about the coal industry, which means not everybody is excited about NTEC’s acquisition. There are critics, very vocal critics. There is concern that the investment is too risky for the tribal enterprise, especially during a period when demand for Powder River Basin coal is declining.
However, NTEC is confident the purchase will generate millions of dollars in revenue for the Navajo Nation. The company points to a study: “Cloud Peak is a Prudent Investment for NTEC and the Navajo Nation”, prepared by Energy Ventures Analysis, which lists several factors that indicate how the Cloud Peak asset acquisition is a sound investment for NTEC.
“During the Due Diligence process, we identified the positive aspects of the acquisition of Cloud Peak Energy’s assets. This is a good investment for NTEC for several reasons and this study supports that premise,” said Moseley.
The study says NTEC purchased the mines at a “very low cost”. NTEC paid $15.7 million for the assets through the federal bankruptcy court. The purchase includes nearly one billion tons of leased coal reserves, almost 100,000 acres of owned surface lands, and all the equipment at Spring Creek, Cordero Rojo and Antelope mines. In addition, NTEC also has a seller note for $40 million that will be paid over time. To be clear, NTEC will not assume any of Cloud Peak’s $350 million debt, the study stated.
The study also notes that while domestic coal demand will decrease in the future, demand for domestic high-quality coal will still exceed 250 million tons a year. NTEC also has opportunities to develop international coal sales. “The export markets have high upside potential for Spring Creek’s sales,” the study stated.
“We expect this acquisition will sustain long-term success for NTEC, allowing NTEC to continue to invest in other forms of energy. As a Navajo-owned company, we are expanding our reach internationally. The demand for clean high-quality coal will continue for the foreseeable years, making the Cloud Peak asset acquisition a sound investment for NTEC and the country as we will help fuel a reliable, cost-effective and environmentally conscious foundation of all energy development,” Moseley said.
Future Looks Bright
In February 2020, NTEC and the state of Wyoming agreed to a limited waiver of sovereign immunity to ensure the state’s ability to regulate NTEC’s activities at the Antelope and Cordero Rojo mines. This is an important step forward; as a Navajo-owned company, NTEC has sovereign immunity. The company is currently in discussions with the state of Montana to reach a similar agreement.
NTEC is now working to replace the Cloud Peak reclamation bonds. Once they do, the permits will go through the transfer process.
Similar to other coal companies, NTEC is adjusting to the challenges from the tough economic conditions and declining demand for coal during the COVID-19 crisis. However, NTEC’s management is confident in their projections for future sales.
Gerges Scott is the senior vice president of Agenda Global, consultant to the Navajo Transitional Energy Company.