Forget Crude Oil, Peabody Mines Its Own 'Black Gold'

Aug.22.11 | About: Peabody Energy (BTUUQ)

Peabody Energy (BTU) is the world's largest publicly traded coal company and controls 9 billion tons of coal reserves. According to S&P, Peabody's coal fuels about 10% of all electricity generated in the United States. If that statistic isn't impressive enough, consider this: 2% of the electricity generated in the entire world comes from the company's coal.

While demand for coal in the U.S. has fallen, (thanks in no small part to tougher emissions standards) worldwide, demand is growing substantially. According to the Wall Street Journal, "coal exports in the year ended March topped 90 million tons, up 42% and the highest since the mid-1990s." (Denning C26) One reason for the growing international demand for coal is China. China is the world's largest consumer of coal--it is also the worlds largest producer. Although China does produce a lot of coal domestically, the country's appetite for energy is virtually insatiable and, as a result, it cannot depend on domestic production to meet its coal demand. It is estimated that Chinese and Indian demand for coal will double by 2015 "as both hoover up supplies on international markets to feed rapidly growing power industries." (Kebede)
BTU is in a unique position to take advantage of growing demand in India and China. The company has significant assets in Australia which produced 26.7 million tons of coal in 2010. S&P believes that the company's Australian assets "strategically position it to benefit from expected long-term increases in demand from the Pacific Rim." (S&P Stock Report)
Despite its assets 'down-under', "almost 79% of the 245.9 million short tons the company sold last year" (Areddy) came from U.S. mines. Lately however, Peabody has diversified in a major way. Recently, the company secured a 24% stake in Mongolia's Tavan Tolgoi coal mine, "one of the world's largest unexplored reserves of coking coal." (Venkat) Perhaps more significantly, Peabody has announced that it "will pursue a giant coal-mine project in China's western Xinjiang region...[that is expected to] produce some 50 million metric tons of coal annually...[roughly] half the 105.8 million short tons that Peabody last year sold from its flagship North Antelope Rochelle thermal-coal mine in Wyoming." (Areddy)
All this is in addition to an ongoing bid by Peabody and Arcelor-Mittal (NYSE:MT) for Australian miner Macarthur Coal Ltd (OTC:MACDF) which, if completed, would significantly expand Peabody's Australian operations. The company is also valued attractively. At a recent price of $42.91, BTU is trading at just 9.62 times analysts' estimate of $4.46 per share in 2011. Like most stocks, Peabody has taken a beating in the past month and the shares look extremely cheap at current levels.
Works Cited:
  • Areddy, James T. and Simon Hall. "Peabody Goes Deep in China." The Wall Street Journal. 15, July 2011
  • Denning, Liam. "Tapping Into America's Newfound Energy." The Wall Street Journal. 6 July, 2011: C26.
  • Kebede, Rebekah and Michael Taylor. (2011, May 30). China Coal Imports to Double in 2015, India Close Behind. Retrieved July 16, 2011.
  • Venkat, P.R. and Gurdeep Singh. "Mongolia Taps U.S. Miner." The Wall Street Journal. 6 July, 2011: B3.
  • S&P Stock Reports: BTU

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.