The nation’s largest coal producer, St. Louis-based Peabody Energy (NYSE: BTU), on Oct. 17 reported third quarter 2013 revenues of $1.8bn leading to adjusted EBITDA of $312m.
“Peabody’s third quarter results were led by significant cost reductions across all regions and higher Australian volumes,” said Peabody Energy Chairman and CEO Gregory Boyce. “The Peabody team continues to drive operational excellence, structural cost improvements and capital discipline, and our well-positioned portfolio gives us substantial upside as markets improve.”
Third quarter revenues totaled $1.8bn compared to $2.06bn in the prior year on lower realized pricing in the U.S. and Australia. U.S. volumes were in line with the prior year, resulting in lower revenues due to decreased realized pricing.
U.S. mining adjusted EBITDA totaled $305.9m compared with $347.4m in the prior-year period, reflecting effects of lower realized pricing that were partly mitigated by a 3% decline in average unit costs due to ongoing cost containment efforts.
Income from continuing operations totaled $24m compared with $122.9m in the prior year. Results were affected by lower gross margins and higher depreciation, depletion and amortization expenses that were partially offset by lower income taxes compared to last year.
“Australia continues to widen its competitive advantage in the seaborne coal markets as inflation and exchange rates moderate, and a new government fosters policies to improve the competitive position of the resource sector,” said Boyce. “Metallurgical coal fundamentals are improving and continued build out of new generation is driving record thermal coal demand. Supply rationalization is continuing as higher cost mines in the U.S. and China close, and other exporting nations face increased domestic demand and rising costs.”
International markets show some positive signs
Within global coal markets:
- The fourth quarter metallurgical coal price benchmark for high-quality low-vol hard coking coal settled at $152 per tonne with benchmark low-vol PCI pricing settling at $120.50 per tonne;
- Global met coal imports are expected to rise nearly 20 million tonnes in 2013 on growing steel demand, led by China’s 8% increase in steel production through August. China’s met coal imports have risen nearly 40% this year, while India and Japan imports are up 12% and 6% respectively;
- China’s coal generation rose 20% in August on strengthening industrial demand and weather, supporting an increase in thermal coal imports;
- India’s coal generation increased 9% through September, leading to a nearly 40% increase in thermal coal imports as domestic production continues to lag;
- Japan’s coal generation increased 13% through August, to record levels, on strong demand and the addition of new coal generation, resulting in continued strong coal imports; and
- The seaborne coal market remains well supplied despite strong met and thermal demand.
Production cutbacks are continuing, with Chinese and U.S. production down 3% and 2%, respectively, as marginal production is closed. Australian and Indonesian coal export growth is slowing, with further increases expected to be muted due to limited investments in new projects. Mongolian coal exports have declined 35%, Colombia exports have fallen 9% on labor unrest, and U.S. met coal exports declined 16% in the third quarter as legacy contracts continue to expire.
Peabody expects approximately 75 GW of new coal-fired generation to come on line in 2013, requiring about 50 million tonnes of additional global seaborne thermal coal. Longer term, annual world coal demand is estimated to rise about 1.2 billion tonnes by 2017, driven by an expected 400 GW of new coal generation, along with rising global steel production. Steel production is estimated to grow 15% during this period, requiring an additional 150 million tonnes per year of metallurgical coal.
Peabody expects to settle the majority of its Australian met coal production in line with quarterly or monthly benchmarks, with about 40% sold on a shorter-term basis. Peabody is targeting total 2013 Australian sales of 34 million to 36 million tons, including 15 million to 16 million tons of met coal and 11 million to 12 million tons of export thermal coal.
As U.S. production falls, markets show signs of life
In the U.S, coal demand has increased 35 million tons through September as a result of rising U.S. coal fleet utilization and gas-to-coal switching. Despite a mild summer, inventories continue to improve on high generation levels and lower production, with Southern Powder River Basin inventory levels now 30% below the 2012 peak.
Within U.S. coal markets:
- Peabody projects 2013 U.S. coal demand will rebound 45 million to 55 million tons over 2012 levels on higher natural gas prices, which have resulted in natural gas generation declining 14% year to date;
- Coal shipments have fallen 20 million tons through September, with further production cuts expected as contracts expire;
- Stockpiles have declined faster than average on high generation levels and lower production, leading to an expected 30 million ton coal stock drawdown in 2013. Southern Powder River Basin inventory levels at utilities are now about 60 days use; and
- The Southern Powder River and Illinois basins are expected to continue to benefit from rising demand, growing an estimated 135 million tons by 2017 on basin switching and higher utilization within the existing coal fleet.
Peabody’s projected 2013 U.S. production is fully priced, with 2014 sales 75% to 85% priced and 2015 sales 40% to 50% priced based on targeted 2013 production levels.
Peabody is targeting full year 2013 adjusted EBITDA of $1.070bn to $1.150bn and adjusted diluted earnings per share of $0.27 to $0.45. Financial targets exclude any impact from the tentative settlement agreement with Patriot Coal and the United Mine Workers of America over certain legacy union costs held by Peabody for Patriot Coal, which it spun off in an IPO in 2007.
Additional full-year 2013 targets include:
- Total sales of 245 million to 255 million tons, including U.S. sales of 185 million to 190 million tons, Australian sales of 34 million to 36 million tons, and the remainder from Trading and Brokerage activities;
- Expected U.S. revenues per ton 5% to 10% below 2012 levels;
- Australia cost targets in the low-to-mid $70 per ton range with U.S. costs per ton expected to be 2% to 3% lower than 2012; and
- Full-year depreciation, depletion and amortization levels about 10% higher than 2012 levels.
Peabody sold 6.9 million tons in the third quarter out of its Illinois Basin operations, against 7 million tons in the year-ago quarter. It sold 19.9 million tons out of those operations in the first nine months of this year, against 20.5 million tons in the first nine months of 2012.
Out of the western U.S. operations, Peabody sold 42.7 million tons in the third quarter, against 44 million tons in the year-ago quarter. In the first nine months of this year, the company sold 117.9 million tons of western coal, compared to 124.4 million tons in the same period of 2012.