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.