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How Long Can the Coal Last?

http://www.fool.com/investing/general/2013/10/06/how-long-can-the-coal-last.aspx

Reuben Brewer
October 6, 2013

Although how much coal a miner like Peabody Energy (NYSE: BTU) pulls out of the ground each year is the big headline, its future success is actually more dependent on how much coal it has left in the ground. That coal, known as proved and probable reserves, represents the company's future earnings power. You should get to know it well.

That's a big... number
In 2012, Peabody pulled around 250 million tons of coal out of the ground. That's a huge amount of coal, considering that competitor Arch Coal (NYSE: ACI), another industry giant, mined "only" about 135 million tons.

Looking at proven and probable reserves, however, makes the size of these two industry players even more disparate. At the start of the year, Peabody had 9.3 billion (with a b) tons of coal that it had yet to pull from the ground. Arch started the year with about 2.1 billion tons. This provides a sense of Peabody's scale.

What is proved and probable?
Although there are explicit regulations around the terms proved and probable, suffice it to say that this is the amount of coal that a miner believes can be profitably mined. The number changes. For example, buying or selling coal lands and mines would clearly impact the number. However, the price of coal is also a factor: "Only coal reserves expected to be mined economically are included in our reserve estimates," explains Peabody.

So the reserve number is always a work in progress. What isn't up for debate, however, is how much coal gets mined. With 9.3 billion in reserve coal at the start of 2013 and using first half production as an average run rate, Peabody has around 35 years of coal left to mine, often called reserve life.

Dividing Arch's coal in the ground by what it's been mining shows that the company has less than half that at 15 years. Metallurgical coal focused Walter Energy (NYSE: WLT), meanwhile, has reserves of 400 million tons and, based on its recent mining rate, has around 30 years of reserves.

Why care?
Proven and probable reserves aren't usually headline grabbing numbers and they don't really need to be. However, they are worth looking for at least once a year. Over short periods, a falling reserve number isn't the end of the world, but longer term it has significant implications. For example, if Arch did nothing but mine its current coal it would go out of business in 15 years or so, well before Peabody or Walter.

Looking at the oil sector can give a different perspective on how important this is. French energy giant Total (NYSE: TOT), for example, only found enough new oil to cover 75% of what it sold between 2007 and 2009. Looked at in another way, its reserves fell by 25% of its annual production in those years. It was pleased