Peabody's Improbable History Peers at Peabody Energy

A timeout from the Rocky and Bullwinkle Show: That brainy canine Mr. Peabody would like a moment to introduce us to the king of coal.

You see, Sherman, it all started back in 1883 when a certain Francis Peabody set out to sell coal to Chicago homes with $100 in start-up capital and a mule-drawn wagon. From those humble roots Peabody Energy (NYSE: BTU  ) has grown into the world's largest coal company with 9.3 billion tons of coal reserves.

Adapting quickly to rising coal demand from the Pacific Rim region -- especially China -- Peabody Energy has transformed itself once again to start the 21st century. Peabody has moved into Australia in a major way, and is still ramping-up toward full production capacity; targeted for 2010. With five distinct rail links connecting mines to as many port terminals along Australia's eastern shoreline, the company is well situated to service Asia's surging demand for both thermal and metallurgical coal.

This past spring, production disruptions in Australia, China, and the flood-ravaged midwest U.S. made it clear just how tight the global coal market is. Prices skyrocketed, and the mining equities soared accordingly. Between mid-March and late June, shares of both Peabody and CONSOL Energy (NYSE: CNX  ) were up more than 80%, while Massey Energy (NYSE: MEE  ) gained 190% and Peabody spin-off Patriot Coal (NYSE: PCX  ) abruptly tripled.

Then along came the monster commodity correction of 2008. Although spot prices for coal have declined somewhat from their summer peaks, coal continues to exchange hands at the prices negotiated annually for the April 1 start of each coal year. Peabody priced 11 million tons of Australian coal production through March 2009 near the benchmark rates of $300 per ton for metallurgical coal, and $125 per ton for Newcastle thermal coal. Because of the way coal prices are negotiated each spring, short-term volatility in spot prices may have little impact on miners' bottom lines.

Mining equipment maker Joy Global (Nasdaq: JOYG  ) recently corroborated Peabody's observation from July that China's coal stockpiles represent only a three-day supply. As Beijing looks to stock up on Australian imports, the remaining transportation bottlenecks down under represent about the only visible obstacles standing in the company's way. Thanks to this coal correction, the shares are trading at an 18% discount to enterprise value, and carry a 2009 P/E of just 7.49. 

Even Bullwinkle would be bullish at these levels.

Further Foolishness:

The "Coal" tag within the Motley Fool CAPS community lists 21 coal companies. Find out what other investors are saying about the stocks you're watching, or share your Foolish thoughts with us. CAPS is free and fun!

Fool contributor Christopher Barker captains yachts and writes about stocks. He can also be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Massey Energy and Peabody Energy. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 12, 2008, at 3:39 AM, Brettze wrote:

    I predict that the world coal consumption will plummet this year as practically everyone will flip down switches and start wearing thermal underwears and sweaters to keep warm through this winter... The demand will fall really hard on coal production. We had witnessed the sudden fall in oil prices recently as it is still contniuing on the downward. Coal is a big source of global warming and the world population is mobilizing fast to save our planet. We can easily cut down all energy consumption by 50% practically overnight.. There will be rapdily grwoing pressure on coal to keep air clean with clean coal technology like pumping carbon dioxide back into the ground. There had been post[ponements on developing the first clean coal model here. I have yet to hear more about it .

  • Report this Comment On September 12, 2008, at 12:29 PM, Brettze wrote:

    Ice is breaking loose from both South Pole and North Pole and investors are still hot about coal?? I dont think so... As tempting as it is, I see more and more people deciding to go the alternate route. or not consuming as much electricity as before. I predict at least 10% decline in world consumption of electricity this year. There is definitely no growth prospects for coal as far as I see down the road.. We will be starting prioriziting the uses of coal .

  • Report this Comment On September 12, 2008, at 12:30 PM, Brettze wrote:

    It is so amazing that we are still so blind to the dirty air overhead everyday ...

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