Donald Trump’s victory has given coal stocks like Peabody Energy Corp (OTCMKTS:BTUUQ) a huge shot in the arm. Hillary Clinton had said that she was “going to put a lot of coal miners out of business” while Trump embraced the coal mining industry. Throughout the coal belt, miners and company executives like Robert Murray were 100% behind Trump. Trump has promised to rollback the regulations Obama and the Democrats have put on the coal companies. Doing so would make coal much more competitive to natural gas. Trump will also most likely end subsidies to solar companies and other alternative energy players that have impacted coal miners.
Peabody Energy is obviously a prime beneficiary of a President Trump as the world’s largest private-sector coal company. It serves metallurgical and thermal coal customers in 25 countries on six continents. As of December 31, 2015, the company had 6.3 billion tons of proven and probable coal reserves and owned interests in 26 active coal mining operations located in the United States and Australia. The company operates through Powder River Basin Mining, Midwestern U.S. Mining, Western U.S. Mining, Australian Metallurgical Mining, Australian Thermal Mining, Trading and Brokerage, and Corporate and Other segments.
On April 13, 2016, Peabody Energy Corporation along with its affiliates filed a voluntary petition for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the Eastern District of Missouri. The company is seeking to reorganize U.S. operations in federal court in its hometown of St. Louis, reducing an estimated $10.1 billion in debt, according to court filings. Peabody, which had revenue of $5.6 billion in 2015 and about 7,100 employees globally, filed for bankruptcy in the U.S. allowing Peabody to leave its Australian assets out of the filing. Peabody spent $4 billion in 2011 to acquire Australia’s MacArthur Coal Ltd. MacArthur is one of the leading producers of metallurgical coal, which is used to produce steel. The problem for Peabody is that the company used debt to buy MacArthur and the price of metallurgical coal has tumbled since its 2011 peak.
Earlier this month, Peabody Energy agreed to sell its Metropolitan coking coal mine in Australia plus its associated 16.67% interest in the Port Kembla Coal Terminal for $200M to Australia’s South32 (OTCMKTS:SOUHY), which was spun out from BHP Billiton (NYSE:BHP) last year. Metropolitan has the capacity to produce ~2.3M metric tons/year of coal. The operation is not far from South32’s Illawarra operation and is immediately adjacent to a 71M metric ton undeveloped coal resource held by South32. Terms of the sale will also allow Peabody to potentially share in revenues for 12 months depending on prices for metallurgical coal. CEO Glenn Kellow said:
“This sale supports our actions to strengthen the Australian portfolio, which remains core to Peabody, and is consistent with the strategy outlined in our business plan. We expect the transaction to be accretive to the value reflected in the business plan, generate meaningful proceeds for the Australian business, decrease future capital expenditure needs, and reduce risk to the Australian platform as we pursue a smaller but more profitable portfolio going forward.”
Currently trading with a market cap of $230 million, Peabody Energy said at the end of the latest press release that “it is uncertain at this stage of our Chapter 11 Cases if any proposed plan of reorganization would allow for distributions with respect to our equity or other securities, although it is likely that our equity securities will be cancelled and extinguished upon confirmation of a plan of reorganization by the bankruptcy court, and that the holders thereof would not be entitled to receive, and would not receive or retain, any property or interest in property on account of such equity interests.”
As we said in our last article, “At last count there were around 24 million shares short. We think around two thirds of these have had the chance to cover, max. That’s still another 8 million sweating it out, all of which will likely be forced to cover if another catalyst (read: an equity committee instating) kick starts another run. The company is still a risky play, but there are going to be plenty more opportunities to profit from the waves of volume trading in and out as the restructuring takes hold.”
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Disclosure: We have no position in BTUUQ and have not been compensated for this article.