Peabody belt-tightening not quite enough for 3Q

WHILE it made significant efforts during the quarter to keep costs at bay, it was weaker prices that had a hand in international producer Peabody Energy’s third quarter loss and revenue drop.

Donna Schmidt

For the period ended September 30, the Missouri-based miner reported the loss attributable to its common shareholders was $US26.1 ($A27.1) million, versus a net income of $US42.9 million during the same period last year.

Third-quarter revenues totaled $1.8 billion, compared year-on-year with $2.06 billion. Lower realised pricing in both the US and Australia were at the centre of the result, officials said.

However, Australian price drops were offset in part by a 6% rise in shipments to 9 million short tons, 4Mt met and 3.1Mt seaborne thermal. The same could not be said for US volumes, which were flat over 2012 and left the miner only with lower revenues from its decreased realised pricing.

Peabody’s income from continuing operations totaled $US24 million, down significantly from the $US122.9 million it reported during the same period last year. The results, officials said, were affected by lower gross margins and higher DDA expenses offset partially by lower 2012 income taxes.

Despite the somewhat gloomy results, company chairman and CEO Gregory Boyce took a positive stance.

“Peabody's third quarter results were led by significant cost reductions across all regions and higher Australian volumes,” he said.

“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.”

The company also responded to more favourable capital market conditions and the forthcoming maturity of an existing facility by wrapping up a secured credit facility during the period.

The set-up includes a five-year revolver expanded to $US1.65 billion and a seven-year, $US1.2 billion term loan. It replaces the $US1.5 billion revolver and $US1.2 billion of term loans it had, which were coming due in 2015 and 2016.

Peabody took a loss on early debt extinguishment of $11.5 million, but the facility increases its flexibility and liquidity to $US2.2 billion.

The company also had a brighter position on one of its two main areas of production, Australia.

“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," Boyce noted.

“Metallurgical coal fundamentals are improving and continued build out of new generation is driving record thermal coal demand.

“Supply rationalisation is continuing as higher cost mines in the US and China close, and other exporting nations face increased domestic demand and rising costs.”

On the US side, the producer noted domestic demand for coal rose 35Mt through September due to an increase in US coal fleet utilisation and gas-to-coal switching.

While the nation’s summer was more mild, inventories continued to improve on high generation levels and lower production, it said, and southern Powder River Basin inventory levels were 30% lower than their peak last year.

Overall, Peabody said it projected 2013 US coal demand would rebound 45-55Mt year-on-year from the return of high prices for natural gas. That sharp increase resulted in a decline of 14% year to date for the resource.

It also noted that its projected production in the US for the year was fully priced, and 2014 sales were 75-85% priced. The company’s 2015 sales are 40-50% priced based on targeted 2013 production levels.

In its efforts to contain costs, Peabody has benefitted both at the operational and corporate levels and from a worldwide perspective.

“The recent owner-operator conversions in Australia have resulted in a 30% cost improvement at those mines compared to the first quarter of 2013,” officials said.

“Continued capital discipline through the first nine months allows the company to further reduce full-year capital spending targets to $350 to $400 million, and is primarily focused on sustaining existing production levels.

“The company believes current sustaining capital levels can be maintained for several years, with project spending adjusted as market conditions warrant.”

Its priorities this year have included the owner-operator conversions in Australia, the Metropolitan mine modernisation project and the installation of longwall top coal caving technology at the North Goonyella operation.

Looking ahead to the remainder of the year, Peabody said it was targeting total sales of 245-255Mt. Of that, 185-190Mt will be US sales and Australian sales should total 34-36Mt, with the remainder from trading and brokerage efforts.

Additionally, the producer expects US revenues per ton to be 5-10% lower than last year, and Australian cost targets in the low-to-mid $US70/ton range. US costs per ton are projected to be 2-3% lower than 2012.