Analyst: Peabody’s Financial Outlook Points to Exit From Wyo Coal

NARM - courtesy Peabody
Heavy equipment operates at Peabody Energy's North Antelope Rochelle mine in Wyoming's Powder River Basin. (Courtesy Peabody Energy)

By Dustin BleizefferWyoFile

Despite a permanently shrinking U.S. thermal coal market, Peabody Energy plans to secure its position in Wyoming as the largest, lowest-cost producer, it says. That message comes as the state’s second largest coal producer, Arch Resources, plans its exit.

However, Peabody faces significant financial headwinds — including a surety market that’s increasingly nervous about covering obligations to eventually close and reclaim struggling U.S. mines.

Creditors are lining up to ask Peabody for more collateral, University of Wyoming energy economist Rob Godby said. Since the long-term prospects for the U.S. thermal coal market continue to dim, Peabody might also unofficially be planning its own exit from the Powder River Basin rather than hanging on for the next five to 10 years, according to Godby.

“I don’t think they’re going to hang around that long,” Godby said. “The question is just timing: What’s the best time to divest? You don’t want to look like a motivated seller. And this is the Powder River Basin today.”

Peabody’s precarious position was outlined in its third quarter report on Monday morning. The global mining giant posted a 39% decline in revenue from July through September, a loss of $67.2 million to common stockholders, according to its Q3 investor report. Peabody stock (NYSE: BTU) on Monday wallowed at just $1.22 after two years of decline from the mid-$40s in 2018.

Revenues from its U.S. thermal operations — which are mostly in Wyoming — declined more than $215 million during Peabody’s third quarter this year. Although its Powder River Basin shipments declined by 22%, company officials said Peabody reduced its production costs in the basin, partly by deferring spending on maintenance.

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That’s a disconcerting practice that only produces short-term cash gains while risking higher costs of maintenance down the road, Godby said. “It’s like skipping oil changes on your car.”

In Wyoming, Peabody owns the North Antelope Rochelle, Caballo and Rawhide mines, all located in Campbell County. It employs about 988 miners at the sprawling North Antelope Rochelle mine, which produced 85 million tons in 2019. Its Caballo and Rawhide mines collectively employ about 300 miners.

In April, Peabody laid off 170 miners at North Antelope Rochelle.

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Peabody Energy’s North Antelope Rochelle mine encompasses thousands of acres near Wright, about 65 miles south of Gillette. It is the largest coal mine in America, according to Peabody Energy. Miners have extracted more than 1.8 billion tons of coal from the mine since it opened in 1983. (Powder River Basin Resource Council)

A quickly deteriorating PRB

Last month, Wyoming’s second largest coal producer, Arch Resources, announced it will prepare its remaining Powder River Basin mines for closure as it also seeks a buyer — a major shift after a court ruling upheld the Federal Trade Commission’s opposition to merging Arch and Peabody operations in the West.

Arch’s Black Thunder mine and Peabody’s adjacent North Antelope Rochelle mine are the two largest coal mines in the nation and account for two-thirds of production in the Powder River Basin.

“We are, of course, deeply disappointed with that [denied merger] decision and its impact on our portfolio objectives,” Peabody CEO Glenn Kellow said on a press call Monday. “That said, our PRB operations have done a remarkable job in responding to this challenging market … We plan on continuing to adjust to changing demand profiles and enhance our competitiveness against natural gas by serving as the low-cost PRB producer.”

Both Arch and Peabody have much better prospects than their Powder River Basin assets in their business portfolios, Godby said. Arch is shifting focus to its metallurgic coal mines that serve the steelmaking industry, and Peabody has global operations that play to a more lucrative seaborne market, Godby noted.

“That means that the two largest companies in the Powder River Basin are planning exit strategies,” Godby said. “I’m speculating. It may be that Peabody is playing a waiting game and hopes to be the last mine [operator] standing. I just don’t see it.”

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Reclamation

One major victory for Peabody in its Q3 report was a “standstill” agreement with companies that back its surety bonds — surety companies guarantee money to pay for closing and reclaiming mine lands, which is a huge financial obligation.

This summer, Argonaut Insurance Co. filed a lawsuit against Peabody asking for more than $120 million in collateral, concerned that Peabody might eventually rely on its insurance company to pay for reclamation rather than paying for it with its own cash flow.

But Peabody has since reached an agreement with its surety companies, posting collateral and second liens to cover some $275 million in obligations. Peabody will provide another $25 million in collateral each year through 2025 to entice surety providers to continue to insure its reclamation liabilities.

Yet, Peabody’s financial position represents a growing risk to its bondholders and insurance backers, Godby said. That’s because its assets don’t look to measure favorably against its liabilities going forward, he said.

 

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