Peabody Energy Has Foot in China's Door

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Let's face it, Fools. With or without a bailout, we're looking at some contraction among Western economies for a spell. With the Dow off nearly 300 points today, it's all too tempting to presume there's no growth to be found.

With the quiet swipe of a pen on paper, though, the world's largest coal miner is trying to cheer you up by whispering that growth in China will not be erased entirely. Peabody Energy (NYSE: BTU) has signed an agreement with officials from China's Inner Mongolia region that clears the way for development of a very large surface coal mining project and accompanying coal gasification facility.

With an estimated resource of 3 billion metric tons of coal, pending confirmation, the project would represent a major growth spurt beyond the company's existing total reserve base of 9 billion tons. What's more, the move is a major step toward the company's stated objective of promoting global markets for BTU conversion.

Peabody sees the processing of coal into gas and liquid forms as a cornerstone of coal's future, with end-products that can include methanol and other chemical feedstocks for use in plastics, paints, construction materials, and fuel products. After spinning off several U.S. mines with the creation of Patriot Coal (NYSE: PCX) in 2007, Peabody has focused its efforts on expanding into Australia and leading a global charge into BTU conversion. As the only foreign company included in China's "GreenGen" carbon initiative, Peabody appears to have a colossal foot in China's door.

What's inside China's door? Over the past two years alone, China has built coal-generated electricity plants equal to half of the entire capacity of U.S. coal-fired plants. Some 70% of China's electricity is produced from coal. While I agree that China's growth rate could slow substantially as a result of global financial turmoil, I don't think they'll be shutting the lights off.

I know it's hard to get excited about coal companies when Peabody and Yazhou Coal Mining (NYSE: YZC) are posting fresh 52-week lows. Massey Energy (NYSE: MEE), facing some legal entanglements, is off more than 16% intraday. With a forward P/E of near 4, Teck Cominco (NYSE: TCK) is getting no love for its purchase of Fording. With a panicky assumption that growth the world over will disappear, I believe the markets have completely overlooked the fundamental indicators for coal, and in particular the likelihood of continued Chinese demand.

Further Foolishness:

• Who wants to catch a correcting commodity?
• There's a reason for the consolidation.
• Diana's been dumped, but the coal has to move.