Investors have lost their shirts on Peabody; now taxpayers are in the line of fire

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The problems created by a global coal giant have become a public concern.

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IEEFA

Buckley-073015-444x300The U.S. coal sector is in financial distress, a fact that’s been apparent for some time now and is made more evident with this week’s second-quarter earnings report from Peabody Energy.

Peabody continues to tank for the main reasons many other major coal producers continue to tank: It made too many top-of-the-cycle, multibillion-dollar debt-funded acquisitions and its executives have continued to pretend that they can’t see the oversupply in a seaborne coal market that is in structural decline.

Meanwhile, Alpha Natural Resources has been delisted from the New York Stock Exchange, Arch Coal is fighting to stay in play, and Walter Energy filed for bankruptcy this month.

Some key detail from the latest numbers on Peabody, the biggest non-government-owned coal producer in the world:

  • A net second-quarter loss of $1.05 billion, total coal production down 8.5 and revenues down 15 percent year over year.
  • A $901 million writedown on its U.S. coal portfolio, delivering a net loss for the first half of the year $1.22 billion, an increase in net debt by $129 million since Jan. 1, and an additional 300 Australian job cuts following the termination of 250 U.S. corporate-office employees.

With coal falling and Peabody’s balance sheet still deteriorating, there’s little in the way of good news for investors.

DIG DEEPER INTO THE SECOND-QUARTER REPORT AND THE THEME REMAINS THE SAME. Peabody’s Australian operations report an 18 percent year-over-year decline (with its coal division reporting revenues down 20 percent), while the company’s U.S. operations saw prices drop 5 percent.

One wrinkle of note: The company adjusted the accounting definition of gross profit so that it could report a US$7/ton “positive margin.” But given that Peabody now calculates gross profit before deducting losses on currency hedging, selling, administration, restructuring costs, and so on—and given that it doesn’t include its mine-rehabilitation commitments in its calculations—no mere paper shuffling can hide the red ink.

The stock market currently values the company at about $350 million, a sliver of its $18 billion market capitalization five years ago; Peabody Energy’s stock price this year alone is down 84 percent.

Management has only itself to blame. As we noted earlier this week, Peabody—like certain other coal companies—has been buffeted by a litany of poor decisions from the top. Among its regrettable acquisitions: Excel Coal, Patriot Coal and Macarthur Coal—all acquired at the peak of the coal boom.

Investors have lost their shirts on Peabody Energy, and now taxpayers are at risk too.

Although U.S. regulators are finally reconsidering “self-bonding” deals by which companies like Peabody are allowed simply to promise they will pay for mine cleanup rather than buy real insurance at market rates, Peabody et al don’t look like they’re in any position to make good on those vows. Here in Australia, this should be ringing alarm bells in New South Wales and Queensland state government offices — as it is in Washington.

The reality on that front is that if Peabody is unable to cover the cost of its mine rehabilitation, that burden will be shifted to taxpayers.

Sound like an overly imaginative scenario? Australia, sad to say, has 52,000 examples of abandoned mines littered across its landscape that collectively show how that story ends.

Source: IEEFA. Reproduced with permission.

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14 Comments
  1. Douglas Hynd 4 years ago

    Where is the PM in this? surely he has bought some shares in coal as the fuel of the future?

    • Chris Fraser 4 years ago

      At the very least, tell us where the money from his Superannuation contribution goes !

    • Tim Buckley 4 years ago

      Lets hope the PM also read that Tourism overtook coal to become Australia’s second largest export revenue generator in absolute dollars in 2014/15, as per the AFR’s report earlier this week. The end of the mining boom means a permanently lower A$, and therefore provides an even greater opportunity for Australia’s agricultural, wine and tourism exports. With the Chinese economy boom evolving, these are industries of the future, while thermal coal exports are now clearly in structural decline. Time for our government to look forward, and work on a transition plan for the communities most affected by the end of coal.

    • Alan S 4 years ago

      He’s won more than two terms as an MP so his superannuation (old scheme) is akin to winning the lottery – thanks to us. He doesn’t need to worry about personal investments – unlike some…..

  2. Chris Fraser 4 years ago

    There is a good lesson in this process. And that is when you are dependent on taxpayer money, you can not lobby and obfuscate from within an industry in dire need of a reorganization. Ah, such hard lessons learned again and again …

  3. Craig Allen 4 years ago

    52,000 abandoned mines! Are you including all the opal mine shafts and pits in the inland opal regions in that? They’re a bloody discrace.

    • juxx0r 4 years ago

      I think they include bunny rabbit test pits.

    • Tim Buckley 4 years ago

      The figure of more than 50,000 abandoned mines around Australia comes from papers written by leading Australian experts in this field, one of which can be referenced at: https://www.ausimm.com.au/content/docs/policy/abandoned_mines_discussion_paper_June_2013.pdf

      • Steve159 4 years ago

        Thanks Tim — from the link you provided

        “With more than 50,000 abandoned mine records in Australia, effective management strategies are needed to prioritise and manage health, safety, environmental and socio-economic risks and opportunities.”

        “Abandoned mines are defined as: ‘…mines where mining leases or titles no longer exist, and responsibility for rehabilitation cannot be allocated to any individual, company or organisation responsible for the original mining activities’”

        The accompanying map of Australia is quite remarkable — basically all of Tasmania littered with abandoned mines, at least at the scale shown.

  4. Tim Forcey 4 years ago

    Coal “good for humanity”. For investors, not so much.

    • mick 4 years ago

      anyone who would invest in coal in this day and age has got it coming normal people have the opportunity to look at diverstment

  5. mick 4 years ago

    just a thought about pacific trade agreement eg incoming 2017 govt cans a couple of coalmines and gets sued by foreign govts for hurting the companies business such as phillip morris is trying,could this be why its a secret

  6. Miles Harding 4 years ago

    Attention fund managers: It pays to divest early and ignore captain Tony’s delusional rants.

    Cleaning up their messes have never been in resource company’s plans. After all, the good times will go on forever so there’s no need to fund an exit plan.

  7. Rob G 4 years ago

    Hunt will be happy to sign the clean-up cheque….

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