What happened
Shares of Peabody Energy (BTU -1.21%), one of the largest coal miners in the world, fell as much as 17% this week, according to data from S&P Global Market Intelligence. At the start of trading on Friday, March 11, the stock is still off by around 10.5% for the week. It all ties back to a "financing" news announcement the company released at the start of the week.
So what
The word financing is in quotes above because the $150 million unsecured multiple-draw credit facility Peabody inked with Goldman Sachs was really only the tip of the iceberg. It was the reason the coal miner needed that money that is far more important. A little background is necessary.
Image source: Getty Images.
Peabody Energy mines for coal, a commodity whose price can move around quite a bit, just like most commodities. To deal with this, Peabody sometimes hedges against price moves when it signs long-term supply contracts. This is pretty common in the commodity space, and it protects a company from the inherent volatility of commodity prices by effectively locking in the contract price of the coal.
That said, the company has to put up collateral, in the form of cash, to back the hedges it makes. The price of the type of coal Peabody is hedging, however, has skyrocketed of late, largely thanks to geopolitical tensions. That resulted in Peabody being forced to put up more cash collateral. The current financing from Goldman Sachs has been put in place just in case coal prices keep going higher and Peabody is asked to provide even more collateral.
Now what
Sometimes you do the right thing but the outcome is bad. It's just how the world works, and it's basically what has happened to Peabody Energy because of the extreme price move in the coal market. Notably, the company highlighted that, as of March 4, the price for the coal in question here was up nearly 250% from its closing price at the end of 2021. It would have been difficult to predict such a massive change over such a short period of time.
All in, Peabody made a completely reasonable business decision, and an exogenous shock turned it into a financial trouble spot. Given the uncertainty in the market right now, it's not surprising that investors are worried about Peabody's hedging mishap, but it's really hard to judge management harshly on this one. Hedging is a normal part of business in the commodity space, even though it sometimes works against the company that is trying to protect itself.
