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Must-know: The future for Peabody Energy

Mayur Sontakke

Why Peabody Energy fell despite higher-than-expected sales (Part 5 of 5)

(Continued from Part 4)

Future for Peabody Energy

While Peabody’s (BTU) second quarter results were close to or better than analyst estimates on some counts, the company has painted a grim picture for the third quarter with expectation of losses widening to $104–$144 million, that is $0.40–$0.53 per share. The loss guidance was way above analyst consensus of $98.3 million—$0.335 per share. The company expects earnings before interest, taxes, depreciation, and amortization (or EBITDA) to be in the range of $140–$190 million for the third quarter. The company has stated that it’s expecting weaker results for the third quarter primarily because of lower prices in Australia and the western portion of the U.S. Peabody’s expected production in 2014 is fully priced and 70%–80% of the same. 2015 is also priced through long-term contracts. For the full year, the company expects to sell 245–260 million tons of coal—185–190 million tons through U.S. operations.

The lower-than-expected guidance for the third quarter prompted sell-off which resulted in a 1.9% drop in Peabody’s stock price on the day of release.

Market Realist’s take

Peabody Energy (BTU) operates only thermal coal mines in the U.S. The majority of the company’s U.S. operation are in the low-cost Powder River Basin. This gives BTU an advantage over peers like Alpha Natural Resources (ANR) and Arch Coal (ACI). Both ANR and ACI generate significant share of their revenues from selling metallurgical coal. The current outlook for metallurgical coals isn’t very encouraging. Also, these companies operate in the high-cost mining region of the Appalachians which makes it difficult to break-even in the current low price regime. This has prompted these companies to suspend operations of some mines in order to save costs. Cloud Peak Energy (CLD) is the only other major coal producer (KOL) that only has presence in the steam coal business in U.S.

BTU also mines metallurgical coal in Australia which gives it an advantage over its U.S. peers. It’s more cost-effective for developing countries in Asia to import coal from Australia than from the U.S. to meet their need for steel for infrastructure building.

As a result, Peabody Energy (BTU), along with Cloud Peak Energy (CLD), is in a stronger position relative to its peers to make it through the difficult times.

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