Peabody Energy’s recent sale of some of its U.S. mines to Bowie Resource Partners will generate some cash early next year, if the deal happens. The company will need a lot more than a few distressed asset sales to turn the ship around, however.
Peabody is selling three mines—El Segundo and Lee Ranch in New Mexico and Twentymile in Colorado—to Bowie Resource Partners, in a deal announced Nov. 20. In announcing the sale, Peabody said it wants to concentrate on its “core operations” in the Powder River and Illinois Basins. If the deal closes as planned at the end of the first quarter of 2016, Peabody will have only one mine in the Western region of the U.S.—the Kayenta mine in New Mexico.
Peabody will reportedly reap $358 million in cash from this sale to Bowie—which according to Morgan Stanley prices the assets at the low end of their coal-based valuation—but will also be unloading its considerable reclamation obligations for these mines.
Peabody knows that both the New Mexico and Colorado mines are selling less coal than they used to and are likely to sell even less in the future. The company’s website reports aggregate reserves of 348 million tons for the three mines combined. El Segundo holds 167 million tons with contracts from Arizona coal plants. Lee Ranch coal reserves are listed at 144 million tons but the has produced very little coal over the last three years, and Twentymile has only a few years worth of coal left.
Whoever owns the mines will face important strategic investment decisions in an economic climate in which there are no market signals on the value of new coal reserves. With this move—somewhat reminiscent of its departure from Central Appalachia—Peabody apparently has decided it is better to sell while someone is still willing to buy.
It makes sense on some level, maybe, but what Peabody lacks, and needs very badly, is a clearly stated strategy that speaks to investors.
FOR THE SAKE OF ARGUMENT, LET’S ASSUME THIS TRANSACTION ACTUALLY CLOSES AND AT THE PRICES PUBLISHED, KEEPING IN MIND the recent debacle in Peabody’s sale this summer of the Wilkie Creek mine in Australia, which went on the market for $500 million but sold for only $20 million.
There’s no need to mince words: Peabody is in trouble. It has $6 billion in debt obligations (mostly from its ill-timed and disastrous acquisition MacArthur Coal of Australia in 2011), significant asset-retirement obligations, impending interest payments and federal lease obligations. A simple and logical long-term strategic choice would be to take the $358 million from the sale to Bowie and put it toward reducing that $6 billlion debt.
But $358 million, once spent, will be gone forever. And by selling the mines during the first quarter of 2016, the company is losing out on three quarters of about $500 million in annual revenues it would have received from those mines. Peabody’s margins in its Western coal holdings have been stressed, but nevertheless are getting above $10 per ton. While the company continues to boast of coal revenues and margins in the Powder River Basin that are stronger than its competitors, it also faces the risk there of price and financial erosion in 2016, if not beyond.
In coal industry circles, in the meantime, there is now a prayer for higher natural gas prices in 2016, but unless gas prices really go significantly higher for a long period of time—an unlikely scenario—coal will not be able to compete. So the industry is still facing hard realities that include date and cost certainty of interest payments, debt maturities looming with no cash spikes on the horizon, and the potential for coal revenues to be affected as contracts roll off.
Peabody has decided apparently that shrinking the company might save it, and that’s why it is unloading assets, which include—by the way—its $250 million interest in the Prairie State Energy Campus in Illinois. This is a non-mining, non-core asset Peabody could sell if it received permission from the remaining owners of the plant, a consortium of some 200 Midwest communities. The poorly performing Prairie State plant, which Peabody conceived of as a way to sell the otherwise unmarketable coal from its Lively Grove coal mine next door, has produced losses for Peabody since it went online in 2012.
Peabody’s stock price a year ago was $130. Its price at the beginning of November was $13.68. Today it stands at less than $10 a share.
One-time revenues from asset sales can serve as a financial bridge to a turnaround, but it can’t be a bridge to nowhere. Peabody needs to articulate where this bridge is going.
Tom Sanzillo is IEEFA’s financial director.
