<

Why Peabody Energy fell despite higher-than-expected sales

Why Peabody Energy fell despite higher-than-expected sales (Part 1 of 5)

Must-know: An overview of Peabody Energy

Peabody Energy

Self-described as the world’s largest private-sector coal company, Peabody Energy (BTU) runs coal operations in the United States and Australia that serve customers in 25 countries. As of December 31, 2013, Peabody controls over 8.3 billion tons of coal reserves, of which ~7.3 billion tons of thermal-grade coal reserves are located in the United States. The company sold 251.7 million tons of coal generating $7 billion in revenues in 2013. It’s important to note that all of the coal Peabody Energy produces within the United States is thermal coal.

US operationsEnlarge Graph

Mining operations

The company’s U.S. mines are located primarily in the western and Midwest region. Most of the company’s mines in the western region, the Powder River Basin, are surface mines with only one underground mine operating in the region. The company’s operations in the Midwest include both surface and underground mines. Since surface mining is cost competitive compared to underground mining, the western operations of the company have a relatively better cost structure compared to the Midwest operations. The western region accounts for over half of the company’s total sales in terms of volume. In 2Q14, the company generated earnings before interest, taxes, depreciation, and amortization (or EBITDA) of $291 million from U.S. operations and $12 million from Australian operations.

The company also has operations in Australia where it produces both thermal and metallurgical coal. The Australian mining operations focus on exporting to developing Asian countries like India and China.

6% of Market Vectors Coal ETF’s (KOL) holdings are in Peabody Energy (BTU). Other KOL holdings include Consol Energy (CNX), Joy Global (JOY), and Alliance Resource Partners LP (ARLP).

In the following sections in this series, we’ll decode the company’s second quarter results that were published yesterday.

The Realist Discussions