Coal producer Peabody Energy Corp. (BTU) announced the completion of a new five-year senior unsecured credit facility, which includes a $1.5 billion revolver and $500 million term loan. The new facility will replace the company’s credit facility, which expires in September 2011.
As of March 31, 2010, Peabody’s balance sheet remained strong with liquidity of roughly $1.0 billion. We believe Peabody’s strong balance sheet gives it ample scope to explore earnings accretive investment opportunities in high-growth markets, particularly at a time when valuations are depressed.
Last week, Peabody held an analysts’ meeting that reviewed the company’s long-term projects and prospects. The company’s management stated that Peabody is strongly positioned to create significant growth and shareholder value against the backdrop of very favorable long-term supply and demand fundamentals for the global coal industry.
In the analysts’ meeting, the company reaffirmed its financial targets for 2010. The company retained its EBITDA guidance of $1.6 to $1.9 billion and adjusted earnings per share guidance of $2.45 to $3.15. Management expects the company’s 2010 results to challenge its record year of 2008.
Market Growth Outlook
Looking ahead, the company sees worldwide electricity generation capacity growing by more than 94 gigawatts in 2010, representing about 375 million tons of coal consumption per year. Also, the demand for steel is projected to rise 50% by 2020, with a similar increase of metallurgical coal needed as a basic feedstock.
As a result, Peabody estimates seaborne coal demand to expand by 300 to 400 million tons by 2015, with China and India representing half to two-thirds of this growth. However, the company believes that supply sources will be strained to match demand growth. Management believes that Peabody has the resources and capabilities to fill this demand-supply gap.
Peabody’s Project Highlights
We note that Peabody’s growth story continues to ride on the strong China-India-Australia connection. Going forward, the company expects to benefit from its operations in these regions. Additionally, the company has leading positions in the fastest growing regions in the United States. These markets are expected to be the demand drivers in both the near and long term.
In Australia, Peabody is advancing on projects that could double its metallurgical and thermal export coal platform by 2014. The company is targeting to reach production of roughly 35 to 40 million tons in Australia in the next four years. Peabody’s Australia platform is poised to supply increasing demand for coal throughout the Pacific Rim.
In the Asia-Pacific region, Peabody is developing a pipeline of projects and partnerships to expand its presence. The company is increasing its presence in China through a number of growth projects, such as joint ventures with potential partners, including utilities, steel companies and coal companies. In India, Peabody has been selected by Coal India to serve as a key partner for long-term supplies and other strategic ventures. Furthermore, the company is exploring opportunities for partnerships and joint ventures in Indonesia and Mongolia.
In the United States, Peabody has started operations at the new Bear Run Mine in Indiana, targeting 8 million tons of annual production by 2012. The company notes that this mine has the potential capacity to reach 12 million tons per year with additional investment. Additionally, the company expects robust production from its El Segundo mine in New Mexico and North Antelope Rochelle mine in the western United States. At North Antelope Rochelle, Peabody is on track to ship 100 million tons or more in 2010.
Maintain Neutral
On the back of Peabody’s strong pipeline of growth projects and solid balance sheet, accompanied by an improving market outlook, we believe its future prospects remain bright. However, we are staying on the sidelines due to the uncertainty surrounding the timing of the prevalent economic downturn. Although recent rhetoric may suggest a bottoming or stabilization of markets, definitive signs of recovery have yet to be seen. We maintain our Neutral recommendation on Peabody shares.
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