Australia Is the Thorn in This Coal Miner's Side

Peabody Energy just came out with its fourth quarter results, announcing falling Australian margins. This paints a challenging 2014 for the coal industry.

Feb 3, 2014 at 2:06PM

Peabody Energy's (NYSE:BTU) earnings just came in, and 2013 was a downer. The coal miner ended up posting a loss from continued operations net of income taxes of $286 million. The good news is that Peabody's 2013 volumes actually increased 1% over its 2012 volumes. The bad news is that its Australian per-ton gross margin fell from $18.74 in Q4 2012 to $3.22 in Q4 2013. Australia is a critical part of the company's long-term growth strategy, but the next couple years will be very challenging.

What's going on with Australia?
The Australian met coal market looks oversupplied and it may be a some time before miners can regain their pricing power. The met market is important for Peabody. In 2013 Peabody's Australian operations sold 15.9 million tons of met coal and 11.4 million tons of seaborne thermal coal.

BHP Billiton (NYSE:BHP) projects that the global met coal seaborne supply CAGR between 2010 and 2015 will be 7.9%, 4.1% from 2015 to 2020 before falling to 1.4% from 2025 and 0.4% from 2025 to 2030. The problem is that it sees overall demand growth growing at a CAGR of just 1.5% from 2010 to 2030. The company does see demand continually increasing from 2010 to 2025, but the near term is still challenging.

The met coal market is a semi-important issue for BHP Billiton. For the fiscal year ending June 30, 2013 coal's $9.9 billion revenue was 15% of the company's total revenue. It is an important segment for the firm, even if it isn't the biggest contributor to its bottom line.

With new mines like Daunia opening up, BHP Billiton increased the number of met coal tons sold by 30% between the quarter ending in December 2013 and the quarter ending in December 2012. Such big supply increases are putting downward pressure on met coal prices for the entire industry.

Thermal coal is a different story
While the met coal market is suffering the thermal coal market had a better 2013. Henry Hub natural gas prices were above their 2012 levels, pushing more U.S. utilities into coal. The international thermal coal market is also progressing nicely. India alone saw its thermal coal imports rise 23% in 2013. This is in addition to strong demand from Japan and Germany. While Australian thermal coal prices suffered in the first half of 2013 China's push to decrease dirty domestic coal production helped to push up prices in the second half of the year.

What to expect in 2014
Peabody expects that its U.S. thermal per-ton revenues will probably fall 5% to 8%, but management hopes that it can boost the total number of coal tons sold by as much as 5.3% over 2013 levels. It has been facing some problems in its Australian North Goonyella Mine and has been forced to delay its longwall commission, but it is hopeful that all of the kinks will be worked out by the end of Q2 2014.

The end result is that Peabody's 2014 is not looking amazing, but it has little choice but to wait out the challenges in Australia. In the long run Australia is still a good market to be in as it gives Peabody great access to India, China and the rest of Asia. 

The good news for BHP Billiton is that coal only plays a limited role in the company, allowing it to grow even in midst of coal's difficulties. Thanks to its conglomerate model analysts expect that in the fiscal year ending in June 2014 its profit will grow 28%.

A soft met coal market will mean pain on both sides of the Pacific. Teck Resources' (NYSE:TCK) Q3 2013 results show that met margin compression is not limited to Australia. Between Q3 2012 and Q3 2013 the average realized price per ton of met coal fell from $193 to $139. Seeing as met coal contributed 43% of its Q3 2013 revenue Teck's profits will be under some pressure in 2014. 

To Teck's advantage is that its copper and zinc operations will provide some relief. Also, its total debt-to-equity ratio of 0.4 is low enough that it is not in any immediate balance sheet danger.

Focused U.S. coal miners are not any better
Alpha Natural Resources (NYSE:ANR) doesn't have any Australian operations, but the company is suffering right along with Peabody. Pressure in the global met coal market helped decrease its met coal per-ton revenue by 27% in Q3 2013 relative to Q3 2012.

2014 doesn't look much better. Alpha Natural Resources' U.S. eastern thermal operations face long-term challenges from the many coal power plants scheduled to be taken offline in the coming decade. With analysts expecting a 2014 loss around $2.00 per share it is best to avoid this company.

Final thoughts
Coal mining is not for the faint of heart, but coal miners are a critical part of the world's energy system. Peabody's U.S. operations helped to maintain its overall earnings in 2013. In 2014 Peabody should continue to be one of the better miners in a tough market. While Alpha Natural Resources expects to see another big loss in 2014 Peabody expects at least some profits. In 2014 more diversified miners like Teck and BHP Billiton will be able to use their conglomerate model to out preform the most disadvantaged coal miners like Alpha Natural Resources.

Discover our top stock pick for 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

 

Joshua Bondy has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers