June 25, 2015 Read More →

Seeing Through Peabody’s Attack-the-Messenger Strategy

What Must Investors Think When a Company Spins the Truth So Hard?

Peabody Energy has been on the receiving end of some brutal but deserved press over the past month or so.

It has made headlines because its stock has hit new lows and it has garnered attention for a potentially costly federal investigation into its compliance with self-bonding rules that are supposed to protect taxpayers. Recent articles have detailed employee lawsuits over investment advice related to their IRAs and stories have appeared chronicling how corporate headquarters has been wracked by recent layoffs.

None of the news can be classified as fiction, but that’s how the company has responded. In an item posted on SeekingAlpha.com, for instance, blogger Alex Pitti asked Vic Svec, Peabody senior vice president of global investor and corporate relations, about the federal program that lets coal mining companies avoid buying insurance on costly cleanup liabilities.

Here’s how their exchange went:

Pitti: My first question is about the self-bonding program … explain why Peabody still qualifies for the program.

Svec: Well Peabody’s applicable subsidiaries are in full compliance with both federal and state requirements regarding self-bonding.

Pitti: So why do you think there is so much investor angst about it?

Svec: Well I think there’s been some confusion and in some cases some intentional confusion that’s been spread by misinformed stories that have been out there. Misinformed or perhaps agenda-driven stories by those who those who may wish the industry ill. You also saw, I believe, a competitor who does not qualify for self-bonding, and I think that created it.

By implying that the self-bonding issue is silly, Svec is taking on Reuters, which reported extensively on the problem. He is also challenging Doyle Trading Consultants, a leading coal-market analyst that has raised questions about the risks the issue presents to investors, not to mention Fitch Ratings, which has a similar bone to pick with the industry, and regulators with the state of Wyoming and the federal government.

It seems a misguided approach to suggest ulterior motives guide enforcement of laws that have been on the books since the 1970s.

Is it smart, really, for Peabody to adopt an attack-the-messenger strategy in hopes of improving its standing?

MEANWHILE, PEABODY IS LOOKING TO GET RID OF ITS SIZEABLE AUSTRALIAN HOLDINGS, as reported in an article published the other day by the Australian Financial Review. That development is notable in part because Peabody talks up how demand from China will help improve its fortunes.

Here’s another exchange from that SeekingAlpha item:

Pitti: The Chinese economy isn’t looking too great. What are you predicting?

Svec: Well we see China longer term. China has clearly had some slack in what has otherwise been an economic juggernaut in recent years. There’s no doubt that there’s been some slack in the system there. Having said that, we think China continues to have tens or maybe hundreds of millions of people move to cities, move to the middle class in coming decades and they’re being joined by the ASEAN countries in Southeast Asia, by India itself, which has passed up China as the largest, fastest-growing coal-importing nation. You continue to have hundreds of millions and billions of people that lack basic access to electricity, and coal-field electricity is a major part of that. I would also add that metallurgical coal, which is a fundamental staple of steel making in the world, certainly remains essential and will also help Peabody over time.

This is the part where Peabody appears to spin its own original fiction. If China truly offers a way forward for Peabody and company, why sell off Australian assets that could be developed to meet this purported demand?

And what must investors think of such spin at a time when clarity is needed?

SVEC ALSO REPEATS THE TIRED ASSERTION THAT COAL IS THE FASTEST-GROWING ENERGY RESOURCE IN THE WORLD, which—like most of what he says—was true once but is no longer so today. BP reported this week that renewable energy increased 12 percent year over year in 2014 while coal demand was up only 0.4 percent. Last year, by all accounts, renewables were the fastest-growing energy resource in the world.

The Peabody take on changing energy markets, as summed up by Svec:

“The concept that we could somehow do without fossil fuels would be laughable were it not for the earnestness of some of the people who advocate this. They’re small, but they’re very vocal. Unfortunately what they’ve proposed is serious and would be extremely damaging to the economy, to jobs, and to individuals.”

Yet the markets have spoken, and have said something else. The Dow Jones Industrial Average is up by over 70 percent of the past five years; Peabody’s stock has lost 94 percent of value.

In a very real sense, the economy seems to be recovering even as coal markets continue to collapse. Indeed the coal industry itself is hurting local economies and driving job losses in regions where the cult of coal has kept the development of other industries at bay. Peabody, sadly, is a prime example of such economic fecklessness, having abandoned Central Appalachia in the mid-2000s and left communities there in the lurch.

The question is not whether there will be demand for coal. The question is whether the industry has a viable business model going forward. It’s not the “anti-coal media” that makes Peabody uncompetitive. It’s rising competition from a new energy world.

If Peabody’s senior vice president of global investor and corporate relations is to be believed, the company lacks a clear grasp of the problems it faces.

Tom Sanzillo is IEEFA’s director of finance.