The Once and Future King of Coal

Like that young man named Arthur who removed a sword from the stone, some are simply born to rule. Within the kingdom of coal, Peabody Energy (NYSE: BTU  ) remains the rightful ruler and promises to enjoy a long and prosperous reign.

Peabody turned in a terrific 61% surge in adjusted earnings per share atop a robust 21% revenue boost, reaching another new record mark of $2.01 billion for the second quarter. With prices for both thermal and metallurgical coal still hovering near record levels, Peabody logged its impressive profit expansion despite a slight dip in production volume from the prior-year period. I shudder to think how dramatically these metrics will improve once its exciting new pipeline of growth projects comes on-stream over the coming years.

The miner has put together quite an amazing string of announcements over recent weeks -- enough to require a quick review. A new agreement with China's Xinjiang provincial government brings a massive new mine with 50 million tons of annual thermal coal production capacity closer into view. That equates to 20% of the company's consolidated 2010 production volume! Earlier this month, the owner of Mongolia's world-class Tavan Tolgoi coal project selected Peabody Energy as a major stakeholder within a consortium of eager participants. In another important winning bid, Peabody acquired 220 million tons of reserves in the Powder River Basin that substantially enhances the profile of its existing Caballo mine.

And last, but not least, Peabody joined forces with steelmaker ArcelorMittal (NYSE: MT  ) to revive its longstanding effort to acquire Australia's highly strategic Macarthur Coal. Back in April 2010, I characterized Peabody's initial $3 billion offer for Macarthur as substantially underpriced, and note that the current joint-venture bid -- with Peabody slated to control 60% of the asset -- comes in two-thirds higher, at a $5 billion valuation. Since ArcelorMittal already owns 19.9% of Macarthur, I give the effort a high likelihood of success, even against potential resistance from major Macarthur stakeholder POSCO (NYSE: PKX  ) , or a potential competing bid from 24% stakeholder CITIC Resource Holdings.

In support of Peabody's ambitious growth profile, the company added further clarity and scope to its ongoing projections for a global supercycle for coal that remains in its early stages. The company's prior projections for the global coal industry were already plenty bullish for the industry's overall outlook, with expectations of 1.2 billion to 1.4 billion tons of incremental thermal coal demand, and 300 million tons of additional met coal demand over the next five years. Now, expanding that vision to a 10-year timeline, Peabody anticipates total growth in coal demand of 2 billion tons for thermal coal and 500 million tons for met coal. I am at a loss to convey the historic challenge that producers worldwide will encounter in meeting that incremental demand, or the enormousness of the resulting opportunity for long-term profit growth among the world's leading producers.

Less than one month ago, I added Arch Coal (NYSE: ACI  ) , Patriot Coal (NYSE: PCX  ) , and the Market Vectors Coal ETF (NYSE: KOL  ) to my silverminer CAPS portfolio after a sharp selloff affected the group. Although I recently closed those picks to lock in some strong near-term gains, I have placed them each on my watchlist with a view toward reinitiating those positions into weakness. I encourage Fools to join me in this exercise by following the links below to keep a closer eye on this promising corner of the mining industry.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets, and he owns shares of Peabody Energy. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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