Peabody cuts capital spend, sees some hope in U.S. coal market

Peabody Energy (NYSE: BTU) Chairman and CEO Gregory Boyce today said June 27 that the company is well positioned to navigate market challenges, capture opportunities and create value for shareholders in both the near term and long term.

He outlined the company’s position, both in offshore and domestic coal markets, at Peabody’s 2012 Analyst and Investor Forum in New York. Peabody is the largest U.S. coal producer, almost entirely of steam coal, and a major metallurgical coal producer in Australia.

“We have multiple opportunities in coming years across all key levers of value creation: production growth, price upside, cost containment and valuation expansion,” said Boyce. “There are bright spots amid recent market headwinds, including the recent increase in quarterly seaborne metallurgical coal prices, accelerating China coal imports and signs of stabilizing U.S. coal supply-demand fundamentals. Longer term, rising electricity generation and steel production required to fuel growing economies of the Asia-Pacific region will continue to drive sustained increases in global coal demand.”

Boyce said that due to “macro concerns” with a currently weak coal market, however, Peabody is further reducing capital expenditures and extending the timing of selected mine projects. During the second quarter, it also took the opportunity to opportunistically repurchase more than $240m of bonds and repurchased $100m of Peabody shares. The St. Louis-based company now targets 2012 capex of $1.0bn to $1.2bn, down $200m from targets set at the beginning of the year. 

Boyce said that the company was completing a number of late-stage projects in Australia while re-evaluating the timing of select emerging projects. With the modified timeframes for mine development there, Peabody now targets Australian coal production of 45 million to 50 million tons by 2015 to 2017, up from 25 million tons in 2011.

“China’s coal imports are accelerating in recent months, and we project they will reach a record 285 million tonnes in 2012 as the country increasingly looks to the seaborne coal markets,” said Boyce. “We expect global metallurgical coal use to increase 25 percent by 2016, translating to an additional 250 million tonnes of demand growth, with the bulk of increases led by China and India.” 

The recent BP Statistical Review of World Energy reports that coal consumption grew by 5.4% in 2011 – the fastest-growing major fuel in the world. Coal now accounts for 30.3% of global energy consumption, the highest share since 1969.

Australia is expected to remain the dominant seaborne coal supplier, providing the majority of growth in global seaborne met coal, high-value pulverized coal injection (PCI) and high-calorific value thermal coal products. The integration of Peabody Energy Australia PCI (formerly Macarthur Coal) into the company’s global platform is progressing well, with operational improvements and synergy targets on track for the world’s largest seaborne supplier of low-vol PCI coal.

Peabody sees some signs of revival for U.S. steam coal 

Boyce said that while the U.S. coal market has been impacted by a weak economy and low natural gas prices, the outlook for coal has strengthened following the recent sharp declines in U.S. shipments, rise in gas prices and seasonal drawdowns in utility coal stockpiles. Peabody continues to project that U.S. coal demand will decline 100 million to 120 million tons in 2012.

Recent improvement in natural gas prices point to Powder River Basin and Illinois Basin products being the first to rebound for coal-fueled generation, Peabody noted. Peabody is the biggest U.S. producer of those types of coal, with 148 million tons of PRB sales in 2011 and 30 million tons of Illinois Basin sales.

Peabody said that as natural gas prices, which had been below $2/mmBtu lately, rise into the $2.50-$2.75 range, PRB coal becomes increasingly competitive, with Illinois Basin coal coming into the money at a natural gas price range of $3.25-$3.50/mmBtu and other Eastern U.S. coals needing natural gas prices of at least $4.50/mmBtu to be competitive.

Peabody noted that it is running hard its North Antelope Rochelle mine in the PRB, the biggest U.S. coal mine with production of 109 million tons. It is also developing the high-margin Wild Boar and Bear Run strip mines in Indiana and working on development of the new Gateway North deep mine in Illinois. Bear Run is expected to ship 8 million tons this year, its first-stage targeted production rate, with the possibility of further expansion to 12 million tons per year by 2016. At the current production rate, Bear Run is the largest coal strip mine in the eastern U.S. Gateway North will more than replace the reserve-depleted Gateway mine nearby, with targeted production for the new mine of 4.5 million tons per year.

Peabody also noted that it is working on the Twentymile Sage Creek extension in Colorado, which is essentially a new longwall mine located next to its existing, reserve-depleted Twentymile/Foidel Creek longwall mine. That project is backed by a new, 16-year contract to supply the Hayden power plant nearby. Development coal out of the new Sage Creek mine area was first produced in May, with a longwall start due in 2015.

“Coal supply-demand fundamentals appear to be coming back into balance, with May coal shipments down 145 million tons on an annualized pace and coal inventories beginning their seasonal drawdown,” said Boyce. “Peabody will continue to evaluate U.S. production levels as the year progresses. We are very well positioned in the United States, with 2012 production fully priced and nearly 70 percent of 2013 volumes priced based on current production levels.” 

Peabody continues to advance a number of U.S. export growth initiatives to meet the increasing global demand for seaborne coal. U.S. thermal exports could grow to between 150 million and 170 million tons within five years, and Peabody is developing a sustainable large-volume export business from the West, Gulf and East coasts to capture emerging opportunities. Peabody shipped U.S. exports of 6.6 million tons in 2011, and the company is targeting 10 million tons for 2012.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.