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Leverage and Liquidity Concern the Coal Mining Industry


Dec. 20 2016, Updated 9:05 a.m. ET


Coal mining is a capital-intensive business. A huge amount of capital is required in acquiring leasing rights, leasing or purchasing mining equipment, and complying with mine closures and various environmental regulations. As a result, incumbent coal players depend on external debt apart from their operating income to fund their growth.

Among the major coal mining companies, Peabody Energy (BTUUQ) has the highest level of debt on its books. On September 30, 2016, Peabody Energy had ~$8 billion in the form of consolidated debt.

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However, the company recorded ~$7.6 billion under liabilities subject to compromise. Liabilities subject to compromise include unsecured and undersecured liabilities prior to the bankruptcy petition date. These are expected to be resolved through Chapter 11 cases and are subject to future adjustments.

BTUUQ is followed by Arch Coal’s (ARCH) ~$5.1 billion in consolidated debt. Out of ~$5.1 billion, ARCH listed ~$5.0 billion as liabilities subject to compromise.

High leveraged position on the backdrop of weak global demand for coal (KOL) resulted in a Chapter 11 bankruptcy filing by Peabody Energy and Arch Coal.

At the end of 3Q16, Westmoreland Coal (WLB) had about ~$1.2 billion as consolidated debt on its books. Alliance Resource Partners (ARLP) reported ~$0.77 billion in long-term debt.

Cloud Peak Energy (CLD) stands out among its peers with a lowest long-term debt of $0.41 billion on September 30, 2016.

Interest coverage ratio

Interest coverage ratio represents the number of times interest expenses can be paid with earnings. At the end of 3Q16, ARLP had the highest interest coverage ratio of ~12.4x, which was followed by Cloud Peak’s interest coverage ratio of ~1.2x. Westmoreland Coal and Arch Coal had an interest coverage ratios that were less than 1x.

Current ratio

Current ratio (current assets divided by current liabilities) is a liquidity ratio that measures a company’s ability to pay off its short-term liabilities with its current assets. At the end of 3Q16, Arch Coal had a current ratio of ~3.1x, which was followed by Peabody Energy’s ~1.7x and Cloud Peak Energy’s ~1.6x. Westmoreland Coal and Alliance Resource Partners had a current ratio of less than 1x.

Next, we’ll learn about the relative valuations of the major coal mining companies after their 3Q16 earning results.


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