Slumped demand cuts into Peabody profits

DWINDLING US thermal coal demand stung Peabody Energy in the June quarter, but the coal giant was able to hold some hope in strengthening Pacific coal markets for its Australian output.
Slumped demand cuts into Peabody profits Slumped demand cuts into Peabody profits Slumped demand cuts into Peabody profits Slumped demand cuts into Peabody profits Slumped demand cuts into Peabody profits

A train carrying Peabody Energy's North Antelope Rochelle Mine product in the Powder River Basin.

Angie Tomlinson

The largest coal producer in the US posted net income of $US79 million, down from $233 million in the June 2008 quarter, and below analyst expectations.

June quarter earnings before interest, taxes, depreciation and amortisation was $323.6 million, down from $446.9 million last year. Income from continuing operations was $87.7 million, while quarterly revenues were $1.34 billion.

Second quarter sales of 59.5 million tons were on par with the year-ago quarter despite production declining as cuts in the Powder River Basin took effect.

US revenues per ton, however, were able to nudge up 4% year-on-year thanks to higher-priced Midwestern contracts and a change in mix toward higher-priced Western coal products.

Australian production totalled 5.1Mt, up 600,000t from the last quarter but down 400,000t from last year.

Australian metallurgical coal sales were down due to softer demand and protracted price negotiations, with total sales for the year to date reaching 1.9Mt.

Revenues per ton also slipped as lower pricing kicked in from April 1.

Peabody president Richard Navarre was upbeat on demand for Australian coal but could not summon the same enthusiasm for the US market.

“The Pacific markets continue to strengthen, with record net coal imports flowing into China and low stockpiles in India,” Navarre said.

“Global met coal prices have strengthened and the steep forward curve for thermal coal prices implies strong future markets. As a result of higher inventories, US markets will take a longer time to rebound.”

Peabody chief executive Gregory Boyce said, based on Pacific market trends, he expected Australian metallurgical and thermal coal sales to increase in 2010 using the company’s existing capacity.

Peabody has now priced 90% of its Australian metallurgical coal for 2009, with prices ranging from $129 per tonne for high-quality hard coking coal to the high $80s for pulverised coal injection coal and above $100/t for semi-hard coals.

It said negotiations were still occurring with some customers on 2009 volumes and treatment of 2008 carryover commitments. Peabody said it expected more than $100 million in EBITDA related to carryover contracts would be recovered between 2010 and 2012.

During the quarter, Peabody also priced 3.8Mt of export thermal coal for 2009 from Australian operations in line with benchmark pricing.

In the US market, Peabody said coal demand would be 115-125Mt below last year.

Peabody’s US coal production fell nearly 25Mt during the second quarter.

Despite subdued demand, Peabody continued to target a 2009 spend of $400-450 million.

Of that expenditure, $100 million will be spent this year on the 8Mt per annum Bear Run mine. The surface mine is already under construction and will ramp up in 2010.

Peabody said the project was supported by long-term contracts, which represented almost $6 billion in revenue.

Looking ahead, Peabody anticipates 2009 EBITDA of $1-1.2 billion on production of 185-190Mt in the US and 20-23Mt in Australia.

The company said its results would be affected by actual deliveries of metallurgical coal from Australia, steam coal deliveries in the US, coal chain logistics and exchange rates.

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