Peabody Energy's earnings in the first quarter were much lower than
expectation. Despite selling higher volumes of coal in the reported
quarter, lower realized prices of the product sold adversely
impacted the performance of the company in the reported quarter.
Peabody expects a revival of metallurgical and thermal coal demand
globally, led by continuous urbanization and industrialization in
China and India. However, the present supply glut in the global
market is putting downward pressure on coal prices, despite an
increase in coal demand globally. Peabody felt the brunt of lower
prices in the reported quarter. Hence, we have retained our Neutral
recommendation on the stock.
St. Louis, MS. based Peabody Energy Corporation is the world's
largest private sector coal mining company, owning majority
interests in 27 mines in the U.S. and Australia and a 50% equity
interest in the Middlemount Mine in Australia. As of Dec 31, 2013,
Peabody had proven and probable coal reserves of 8.3 billion tons,
of which 7.3 billion tons were in the U.S. and the rest in
Peabody conducts its business through four principal operating
segments: Western U.S. Mining, Midwestern U.S. Mining, Australian
Mining and Trading & Brokerage. The principal business of the
Western U.S. Mining segment is surface mining and sale of low
sulfur, low British thermal unit (Btu), bituminous and
sub-bituminous coal to electric utilities. Western coal requires
higher transportation costs due to longer shipping distances,
though several railroads have announced multi-million dollar
capital programs to bring improved transportation to the area. The
Midwestern U.S. Mining segment extracts bituminous coal deposits
primarily from underground mines in the Illinois Basin that produce
high-sulfur, high-Btu coal. Australian Mining operations are
characterized by both surface and underground extraction processes,
mining primarily low-sulfur and high-Btu thermal and metallurgical
coal that is primarily sold to an international customer base. The
Trading & Brokerage segment engages in brokerage operations for
and on behalf of other coal producers and the trading of coal,
freight and freight-related contracts.
Peabody's fifth segment, Corporate and Other, includes mining
and export/transportation joint ventures, energy-related commercial
activities, as well as the management of vast coal reserve and real
In 2013, mining operations accounted for about 98% of the
company's revenues. Peabody's Western U.S. Mining operations form
the lion's share of its reserve base and yearly sales (63% of 2013
sales). The Australian Mining segment is the most profitable
division of the company due to its favorable geological
characteristics and proximity to high demand regions. In 2013,
Peabody sold 251.7 million tons of coal, with total revenue coming
in at $7.01 billion.
REASON TO BUY
Peabody Energy has a competitive advantage due to its Australian
platform, which offers greater access to emerging Asian economies
such as China and India. In addition, Japan and South Korea import
a substantial volume of Peabody's coal. Australia, by virtue of its
location, is uniquely positioned to service Asian coal demand.
Aiming to capture the growing coal demand in the Asian markets,
Peabody further expanded its footprint in Australia through the
acquisition of the Macarthur coal mines. This acquisition enhances
Peabody's presence in the highest-growth coal markets in the
Pacific basin with quality metallurgical coal from the acquired
mines. Leveraging these assets, the company is aiming for higher
shipments from Australia and targets metallurgical coal sales of 16
to 17 million tons and seaborne thermal coal sales of 11 to 12
million tons in 2014. Total Australian coal sales are expected to
range from 35 million to 37 million tons in 2014. Peabody expects
2014 sales to be in the range of 245 million to 265 million tons,
with 185 million to 195 million tons coming from U.S. sales.
The International Energy Agency ("IEA") estimates that worldwide
electricity demand will increase by two-thirds between 2011 and
2035. As per IEA, coal will continue to have the largest share in
the global power generation mix albeit falling to 33% in 2035 from
41% in 2011. Coal will continue to command the largest fuel share
in worldwide electric power production China and India are expected
to account for 75% of the rise in demand for coal in the
aforementioned period. Japan is also importing a large volume of
thermal coal to compensate for the loss in power production from
nuclear sources. In spite of a preference for renewables, the
demand for coal in the period 2009-2035 would still far exceed
other sources of power generation. China is planning to shut down
over 1,700 smaller mines with nearly 120 million tonnes of capacity
in 2014 to phase out low-quality coal production from its system.
This will create new avenues for Peabody's coal export. Moreover,
as per a report from World Steel Association, global steel usage is
expected to increase by 3.1% in 2014 from 2013 levels. Since
metallurgical coal plays a vital role in steel generation, the
demand for met coal is also expected to increase. The projected
increase in demand for both thermal and met coal in the global
markets will benefit the company, as it currently supplies coal to
more than 25 countries in 6 continents.
In the U.S., Peabody Energy has a large production and reserve
position in the two fastest growing coal markets: the Powder River
Basin (PRB) and Illinois Basin. It also has leading positions in
Colorado and the southwest United States. Going forward, Peabody
expects to benefit from its PRB and Illinois Basin assets, which
are safe, low-cost regions that will continue to penetrate the
Eastern U.S. markets. Typically, around 93% of the coal generated
in the U.S. is used for power generation. As per U.S. Energy
Information Administration (EIA) coal will hold a share of over 40%
of U.S. electric power generation in 2014. Per an EIA report, U.S.
coal production in 2014 will increase by 4.4% year over year to
1,028 million short tons (MMst). EIA projects 2014 coal consumption
to reach 971 MMst, reflecting 5% growth from 2013 levels. The
projected increase in coal usage in the U.S. is attributable to
higher demand for electricity and the rising cost of natural gas.
Peabody with its presence in these two coal markets is set to
benefit from the increase in coal demand.
Strong cost containment efforts and capital discipline are
helping the company amid the prevailing supply glut in the majority
of global coal markets. Financial discipline allowed the company to
exit first quarter 2014 with $508.1 million of cash in hand.
Peabody refinanced its credit facility taking advantage of the
prevailing market conditions. The refinancing included a five-year
revolver, which expanded to $1.65 billion and a seven-year $1.2
billion term loan. The refinancing replaced the company's $1.5
billion revolver and $1.2 billion of term loans, which were due in
2015 and 2016 respectively. The increased financial flexibility
will allow the company to utilize the funds in new business
Peabody's growing presence in Indonesia and Mongolia will allow
it to cater to the increasing demand in the Asia Pacific region.
Mongolia is touted to have one of the best untapped coal resources
in the world, which will benefit from Peabody s coal mining
expertise. Peabody Energy recently entered into an agreement with
China s Shenhua Group to create Sino-Pacific Coal Trading
Corporation Pte. Ltd. The primary objective of this Singapore based
corporation will be to meet Shenhua s coal demand from Peabody's
global coal production platform. The company will most likely
leverage its existing platform in these regions to cater to most of
Shenhua Group's demand.
Peabody Energy Corporation (BTU): Read the Full
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