Peabody - Is There A Light At The End Of The Tunnel?

| About: Peabody Energy (BTUUQ)

Summary

April 14 - the grace period for the payment of coupons on the $71 million will expire.

April 15 - deadline for the closing of the transaction for the sale of coal assets.

Currently, Peabody has $900 million in cash.

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Source: Peabody Energy presentation

Peabody Energy (NYSE:BTU) is the world's largest private-sector coal company.

The company has elected to exercise a 30-day grace period related to interest payments that were due on March 15. So, April 14th is the last day for coupon payment.

Expiration dates of the transaction with Bowie were disclosed in the report 8-K.

Peabody Energy (seller) can waive until 11:59:59 p.m., New York time, on April 7, 2016.

Bowie (buyer) can waive until 11:59:59 p.m., New York time, on April 15, 2016.

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After the news about the exercising grace period, shares fell from $6.5 to $2.

At this level, shares are traded in expectation of the end of the grace period. Thus, we can assume that if the coupon will be paid and the transaction for the sale of coal assets will be closed, then the shares could rise back up to $6.

But will this deal save Peabody Energy from bankruptcy?

In my opinion, the sale of coal assets only gives time to wait for the situation on coal markets to improve or to restructure the debt.

Then the next question. How long can the company survive?

Coupon payments in 2016.

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Source: Peabody 10-K report, author calculation

The next coupon payment will be in May in the amount of $97 million. Total in 2016 is about $400 million. Payments in May, more than in March, but the sale of coal assets of $358 million will allow it to pay coupons to the end of 2016.

Also, Peabody had approximately $900 million of available liquidity as of March 11, 2016.

The management's outlook 2016 on financial and operational metrics.

Source: Peabody Energy press-release

Using the management's expectations for 2016, I have built Peabody's financial model.

$ millions

2014

2015

2016

2017

Mining EBITDA

1 153

1 057

909

756

Total - U.S.

1 083

935

780

628

Powder River Basin

509

483

437

356

Midwestern U.S.

307

269

201

160

Western U.S.

267

182

142

112

Total - Australia

70

122

129

129

Australian Metallurgical

-185

-23

-61

-61

Australian Thermal

254

146

189

189

SGA

-227

-176

-150

-145

Interest Expense

-414

-465

-407

-407

Hedge

-50

-437

-330

-270

Capex

-170

-145

-130

-130

LBA payment

-277

-277

-285

0

FCF

15

-444

-394

-196

Cash

900

500

305

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Source: Peabody Energy press-release, 10-K report, author calculation

The negative cash flow will continue in 2016-2017, leading to a reduction in the liquidity reserve.

2016 mining EBITDA will decline to $909 million, primarily due to volume and prices decrease.

Peabody's existing currency and fuel hedges decline in 2016 and expire by the end of 2017. As these positions expire, the company expects progressively lower cash settlements in 2016 and 2017 relative to realized 2015 hedge losses of $440 million.

By early 2017, Peabody expects to realize an improvement in annual cash outlays as a result of $285 million in lower cash payments related to PRB reserve installments.

Interest expense will be about $400 million in 2016-2017.

Looking at the table, we can see that EBITDA is sufficient to cover the operating expenses (SG&A), maintenance CAPEX and mandatory license fees, but not enough to cover interest payments and hedge. As a result, the company spends cash liquidity.

In 2016, FCF will be -$394 million and at the end of the year, liquidity remains $500 million.

Despite the decrease in EBITDA due to lower coal prices, in 2017, there will be no payments on the LBA and the costs of the hedge will decrease. And in 2017, we will see that EBITDA is sufficient to cover the operating expenses, maintenance CAPEX, but not enough to cover interest payments and hedge.

In 2017, FCF will be-$196 million and at the end of the year, liquidity remains $300 million.

Australian coal segment

In the second quarter of 2016, for the first time since 2013, contract prices for Hard Coking Coal rose. And in the second quarter of 2016, they were $84 per ton. Currently, spot price for HCC is $87/ton and exceed the contract by $3/ton. Excess spot prices over the contract may mean shortage of coal. What gives hope for further price growth?

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Source: Source: Bloomberg, author calculation

Peabody produces semi-hard coking coal and LV PCI coal for sale into seaborne coal. Such types of metallurgical coal have a discount to the benchmark Hard Coking Coal.

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Source: Peabody 10-K report, Bloomberg, author calculation

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Source: Peabody 10-K report, Bloomberg, author calculation

Source: Peabody 10-K report, Bloomberg, author calculation

Thermal coal prices also grew in the second quarter of 2016 to $42/ton compared to $40/ton in Q4 2015.

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Source: Peabody 10-K report, Bloomberg, author calculation

As a result, gross margin per ton thermal coal will increase to $13 per ton in 2016.

Rising prices for thermal and metallurgical coals will improve the financial performance of the Australian segment in 2016 compared to 2014 and 2015.

Conclusion

- If Peabody sells coal assets to Bowie Resource Partners, LLC for $358 million in cash, it can increase lifetime before bankruptcy.

- Rising prices for thermal and metallurgical coals will improve the financial performance of the Australian segment in 2016.

- It looks like that by the end of 2017 it can carry out operations and service interest payments. That is, no earlier than 2018 will be the announcement of bankruptcy.

Disclosure: I am/we are long BTU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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