Peabody Energy’s 3Q14 cost-saving measures

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Cost per ton

Peabody Energy Corporation (BTU) reported a 2.5% increase in U.S. operating-cost per ton, up to $15.40 in 3Q 2014 compared to $15.03 in 3Q 2013. The increase was primarily on account of fixed costs being divided among fewer tons. The tonnage was impacted primarily due to rail issues. The quarter’s highlight was a cost reduction in Australia.

part 7 cost per ton

Cost-reduction efforts

Like other coal producers (KOL) including Alpha Natural Resources, Inc. (ANR), Arch Coal Inc (ACI) and Walter Energy, Inc. (WLT), Peabody Energy’s also making efforts to drive down costs and stay afloat. Cost per ton for Australian operations dropped by 5.6% to $65.7 in 3Q 2014, down from $69.6 in 3Q 2013. This was better than expected.

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The company restructured four longwall mines to improve productivity. Longwall is a form of underground mining in which a long wall of coal is sliced from the coal seam. Peabody Energy also increased production at its low-cost mines. The selling, general, and administrative expenses were also lower as a result of the company’s cost-management program.

Short-term outlook on costs

While Peabody Energy’s 3Q 2014 cost performance came in better than expected, the company expects the full-year cost per ton from Australian operations to be around $70. The company benefitted short-term from an owner-operator program in which the company took the management of owned mines into its own hands to save costs. However, now that 95% of the company’s Australian mines are operated in-house, the cost benefit won’t be significant going forward. Having said that, running the cost-saving programs at other mines it now operates could be of some added benefit.

Costs may see an uptick as efforts are stepped up to extract coal from increasing coal seam depths. Also, the company has mine lease payments scheduled in 4Q 2014 that will add to the cost per ton in the U.S.

How did its cost performance affect the company’s profitability and cash flows? We’ll find out, next.

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