The King of Coal Strikes Again

Cozy in its throne as the Western world's king of coal, Peabody Energy (NYSE: BTU  ) is poised for a long and prosperous reign. The miner grew attributable net income by a whopping 128%, driving home $210 million for the fourth quarter of 2010. Despite the worst flooding to hit Australia in decades -- and a resulting $85 million blow to after-tax earnings -- Peabody turned in a record revenue mark of $6.86 billion for 2010, alongside only a slight increase in consolidated production.

Boosted by China's 41% increase in total imported coal volumes over record 2009 levels, Peabody enjoyed a healthy 82% surge in gross margin for its growing Australian operations. The company raised Australian output by 21%, to 27 million tons, including 9.8 million tons of coveted metallurgical coal. With Australian production contributing 36.7% of 2010 revenue on merely 11% of total coal volumes sold, it's no wonder the company is allocating 70% of 2011 growth and expansion capital to Australian projects.

While a glimpse of the suddenly more cautious sentiment toward commodities impacting the markets just now might have some Fools second-guessing their exposures to raw materials production, Peabody serves a timely reminder that the outlook for long-term demand growth from China, India, and emerging markets remains 100% intact.

For all the buzz surrounding China's attempts to dial back its growth rate and keep inflation under control, Peabody continues to expect the country to experience at least 8% GDP growth in 2011. India is seen growing at a similar rate. The company reiterated its expectations for 30% growth in global steel production over the next five years, which could require 300 million tons of new annual met coal supply to keep up with demand. On the thermal side, Peabody is modeling for 1.2 billion tons of fresh annual coal demand arising over the next five years, to supply 390 megawatts of new coal-fired generation capacity.

The Foolish takeaway here is that the broader secular bull market for commodities marches onward, and momentary reversals of sentiment signal buying opportunities rather than alarm bells. Cliffs Natural Resources (NYSE: CLF  ) is structuring its future around long-term Asian demand for iron ore, while steelmaker ArcelorMittal (NYSE: MT  ) continues to secure its own supply with moves like its $593 million bid for Baffinland Iron Mines. Rio Tinto (NYSE: RIO  ) will expend about $11 billion in 2011 on growth projects like its effort to expand Western Australia iron ore production by 50% over the next five years. U.S. met-coal giant Massey Energy (NYSE: MEE  ) is still expected to see a takeout bid forthcoming, and in the copper world, HudBay Minerals (NYSE: HBM  ) is gunning for growth in Peru.

When I placed Peabody Energy atop my list of the top five coal stocks to hold for 20 years, I had conviction in the resilience and magnitude of this long-term supercycle for coal. By the time 2030 rolls around, I hope the supercycle will have served you well.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Peabody Energy and Rio Tinto. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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