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Most coal miners were under pressure this year, and Peabody Energy (NYSE: BTU ) was not an exception. However, there is one thing that distinguishes Peabody Energy from the rest of the pack: The company was profitable last year on an adjusted earnings basis. Will Peabody Energy manage to outperform this year as the pricing environment remains challenging?
Met coal mines in Australia are an advantage for Peabody
Peabody produces most of its thermal coal in the U.S., while all of its met coal is produced at Australian mines. Fueled by growing production from BHP Billiton (NYSE: BHP ) , the output from Australia is one of the main sources of met coal price softness. The reason why BHP Billiton continues to play the dangerous game of flooding the market with additional met coal is simple. BHP Billiton can afford it because Australian production has lower costs.
The same is true for Peabody' Australian mines. While met coal miners like Walter Energy (NASDAQOTH: WLT ) struggled to make ends meet with their higher-cost U.S. and Canadian mines, Peabody maintained positive margins at its Australian operations last year. Yes, the margins were very thin, but it was difficult to expect more given the current met coal prices.
Just like BHP Billiton, Peabody Energy is set to benefit when weaker players leave the met coal market due to cost inefficiency. Until then, Peabody could afford to run its met coal operations without the need to subsidize them.
Lower debt burden and improved thermal coal outlook
Peabody has amassed a substantial $6 billion debt position. However, its debt burden is not a major challenge. The company maintained meaningful operational cash flow throughout 2013, and it is likely to repeat this performance in 2014. In comparison, Walter Energy had negative operational cash flow last year, and Arch Coal (NYSE: ACI ) swung into negative cash flow territory in the fourth quarter.
Debt is the factor that limits Arch Coal's upside. While the company has $5.1 billion of debt, its revenue is more than twice lower than Peabody's. The less revenue you generate, the bigger the margins you will need to successfully deal with the debt. Arch Coal's margins deserved to be better last year, but this year there are signs that thermal coal-heavy producers will feel some improvement.
CONSOL Energy (NYSE: CNX ) has recently stated that thermal coal demand was strong in the first quarter. As a result, CONSOL Energy raised its annual coal production guidance from 30.1-32.1 million tons to 31-33 million tons. This is a positive comment for thermal coal producers like Peabody Energy and Arch Coal. While the analyst consensus is that Peabody's earnings will be around zero in the first quarter, there is a chance that the company will be able to demonstrate positive earnings numbers.
Peabody Energy is in a better position than most other coal miners. The company's met coal production is low-cost, which allows it to weather the price storm. Peabody's heavy exposure to thermal coal market could bring positive surprises when the company releases its first quarter results amid signs of improved demand. What's more, Peabody pays a meaningful dividend that yields just under 2%. All in all, Peabody's position looks different in comparison to other coal miners.
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