As coal miners around the world deal with lower commodity prices, Peabody Energy (OTC:BTU) has an ace up its sleeve that's helping it get to the other side of this supply/demand reboot in better shape than many of its peers.
Benefiting from a fall
In its second quarter conference call, Peabody management stated that "...for the first time in a number of years, we would note that the Australian dollar is also providing some relief to our cost position." That's because coal is priced in U.S. dollars but Peabody's costs in its Australian division, which accounts for nearly half of revenues, are in Australian dollars.
So, as the Australian dollar falls versus the U.S. dollar, Peabody's Australian costs go down as a percentage of sales. In fact, one of the company's key cost reduction initiatives is "Capitalizing on lower Australian dollar exchange rates." At the start of the year, every U.S. dollar the company made from its Australian operations was worth just $0.95 or so Australian. That makes it more costly to produce out of Australia, where all of the company's costs (labor, transportation, etc.) are paid in Australian dollars.
At the start of of September, however, every U.S. dollar of sales out of Australian was worth about $1.10 Australian. So, costs as a percentage of Australian sales have been heading lower. This has allowed Peabody to keep its costs low, and production and sales up despite weaker prices.
The impact in dollar and cents
Interestingly, Peabody's U.S. operations sold about six million tons less coal in the first half of the year versus the comparable period in 2012. It's Australian operations, however, sold about two million tons more coal. And, costs "down under" fell from around $81 per ton to $75. That said, a steep drop in coal prices took revenues per ton from about $117 in the first half of 2012 to $87 this year.
Although this means the company is on track to make less money from its Australian business in 2013, it is still making money in the region. So it's keeping its mines open and its customer relationships alive. When supply and demand start to stabilize, this will provide Peabody with a competitive edge.
U.S. miners haven't been as lucky. For example, Walter Energy (OTC:WLTGQ) is a U.S. coal miner focused on metallurgical coal. While coal used for power is predominantly a domestic business in the United States, met coal is far more international in scope. Walter was able to reduce costs from $102 per ton in the second quarter of 2012 to about $78.50 this year.
Although that drop is larger than the one at Peabody, Walter's sales in the second quarter fell to about 2.4 million tons from 2.8 million tons last year. That, coupled with lower met coal prices, led to a $0.55 a share loss in the second quarter. Even if met coal prices pick up through the end of the year, Walter is on track to lose money in 2013. And, it is ceding market share.
Another one to benefit
BHP Billiton (NYSE:BHP) is another miner benefiting from the falling Australian dollar. In June, the company reported that it sold 37.7 tonnes of met coal in fiscal 2013 versus 33.2 tonnes sold in fiscal 2012. Thermal coal sales were up slightly, too. As long as the Australian dollar remains lower than the U.S. dollar, BHP will continue to benefit. Of course coal is only one of the many things that BHP pulls out of the ground, so this trend in coal sales will have a lesser impact on the company's overall results than it will on Peabody's performance.
That said, because of its Australian operations, BHP is also taking market share from companies like Walter that have had to pull back. Clearly, the Australian dollar isn't the sole reason for this, since operating so close to Asia also confers benefits over U.S. based mines.
Getting to the other side
The coal miners are in a tough place right now and keeping costs low is a key focus throughout the industry. BHP, Peabody, and Walter have all been working toward the same goal of making it through the current ebb in the cycle to benefit when prices and demand pick up. Peabody, and to a lesser extend BHP, are both benefiting from an extra cost advantage because of the falling Australian dollar. That should give them an edge when coal picks up again.