Wednesday, August 24, 2022

Peabody Energy Corp. - Q2 2022 Results ($BTU)

We have written about Peabody Energy many times over the years - mostly as a short idea. In July 2015, their subordinated debt was trading for around 10 cents on the dollar. For the third quarter of 2015, Peabody lost $350 million, had $9 billion of net debt, and a de minimis market capitalization.

The situation is quite a bit different now. For the second quarter of 2022, Peabody earned $410 million on $1.3 billion of revenue and had free cash flow of $420 million. Net liabilities are now only $700 million and the market capitalization is $4 billion, for an enterprise value of $4.7 billion. So we are talking 2.5x annualized earnings and a 36% annualized FCF/EV yield.

As of the end of 2021, Peabody had 2.1 billion tons of proven coal reserves and 374 million tons probable. The proved reserves were comprised of 100 million tons seaborne thermal, 100 million seaborne met coal, 1.8 billion in the powder river basin, and 150 million tons of other U.S. thermal coal. One calculation that you could make is that the enterprise value is under $2 per ton of proved and probable reserves.

So far this year, seaborne thermal has been selling for $78 per ton with a $43 cost per ton; seaborne met coal for $300 per ton with a $131 cost per ton; PRB coal for $12 per ton with a $12 cost per ton (i.e. breakeven); and other U.S. thermal coal for $50 per ton with a $37 cost per ton.

Seaborne met coal has been the most profitable segment, earning $481 million the first half of this year. Seaborne thermal has earned $267 million. The PRB earned only $6 million, and other U.S. thermal has earned $112 million. 

As we've noted in the past, Powder River basin coal trades at a huge discount because it has a lower heat content than Appalachian coal and it is further from customers. The best Appalachian coal sells for 10x more per ton than PRB coal. Peabody's largest segment (by coal tons in reserve) is operating at breakeven profitability.

Something that has been troubling me about names like Peabody and U.S. Steel is that, while they are making tons of money right now, they do not have a history of consistent profitability. Peabody obviously went bankrupt, and U.S. Steel lurches from boom to bust.

These cheap cyclicals are printing money, but we can't help but wonder whether they are too junky, and a distraction from what we really want to own. Recall what Dantes says in the Count of Monte Cristo:

"I make three assortments in fortunes — first-rate, second-rate, and third-rate fortunes. I call those first-rate which are composed of treasures one possesses under one’s hand, such as mines, lands, and funded property, in such states as France, Austria, and England, provided these treasures and property form a total of about a hundred millions; I call those second-rate fortunes, gained by manufacturing enterprises, joint-stock companies, viceroyalties, and principalities, not drawing more than 1,500,000 francs, the whole forming a capital of about fifty millions; finally, I call those third-rate fortunes, composed of a fluctuating capital, dependent upon the will of others, or upon chances which a bankruptcy involves or a false telegraph shakes, such as banks, speculations of the day—in fact, all operations under the influence of greater or less mischances, the whole bringing in a real or fictitious capital of about fifteen millions."

We are really interested in finding royalties and tollbooth businesses that we can hold through a significant coming inflation. An operation under the influence of greater or less mischances is something that we may be forced to sell because of poor capital allocation by or other disagreements with management. That would expose us to loss or to paying taxes on partly illusory (nominal) capital gains.

We should do better over time with investments that have lower volatility of operating profits and the highest percentage of revenue returned to shareholders, provided that we buy them at attractive prices. Remember our discussion of hydrocarbon royalties and pipelines? Profits that fluctuate into the red are signs of weak business models and poor competitive position.

Royalty trusts never lose money, by definition. Pipelines basically never lose money. The cigarette companies may have to take a non-cash writeoff of a stupid acquisition, but their operations are always profitable.

Public sector employees (university professors with tenure, as an example) do very well for themselves, when you consider that they are paid public sector wages and are selected for a lack of interest in wealth creation. This may be because of the lack of volatility in their earnings - they are never unemployed. 

This is a theme worth exploring further - slow, boring consistency as a path to long-term survival.


Allan Folz said...

It would be an interesting and instructive blog post to go through companies and sectors and judge them to be first, second, third rate with slightly updated standards for contemporary times.

First rate are easy enough to identify. And you've written a fair amount on them already... tobacco and energy royalties. Midstream could be first rate, but debt levels (and often empire-building managements) make them not entirely masters of their own destiny.

Second rate are industrials with a moat, almost always regulatory. One just needs to watch the water level in the moat.

I think near-royalties like oil sands fall here and not in the first-rate category because if the western world had its act together oil could easily be 50% cheaper. Ironically, it also makes refineries and fertilizer companies second rate instead of third rate, if they aren't under-capitalized. We can't build new refineries in the West and for last 10 years have only mothballed them. (Note, they are bringing new refineries online in the Middle East and China, so in another 5 years refineries will probably go back to being third rate. Again, watch the moat.)

Third rate are industrials without a moat. Good for a trade, but never a hodl.

In retrospect, my sh*tco refiner failed the under-capitalized test and is proving to be a third rate investment. Peabody is third-rate because they fail the capitalization test, being forced to sell their biggest reserve for cost.

Tankers, of course, have no moat, but they are long-lead time to build, so good for a trade. You could maybe argue the IMO reg's and long-lead times make them 2nd rate for the time-being, until 2030 or so, but you'd be wrong. With their history they don't get a benefit of the doubt. Also, if one has to constantly watch the order book, it's not a second rate investment.

Steel producers have no moat because too many sh*thole gov's will dump product on the world market for their own political expediency, especially the biggest sh*thole of them all: China.

Finally, EV's have no moat. Of course. Battery tech is not their own and there's nothing proprietary about an electric motor. Again, you've spilled a lot of ink on EV's already, but it's always good to remind people every chance one gets.

CP said...

BTU Q3 results:

CP said...

Just an update -

The market capitalization is down to $3.75 billion versus $4 billion when this post was written last August.

Current liabilities plus long term debt less cash was $740 million at the end of Q2 2022, but has fallen to negative $68 million.

The company had enough cash on hand at the end of the year to pay off all debt and accounts payable.

That means that the enterprise value has fallen from $4.7 billion to $3.75 billion!

For the fourth quarter, adjusted EBITDA was $500 million. That puts EV/EBITDA (annualized) at under 2x. Adjusted EBITDA for the year 2022 was $1.8 billion versus $916 million the year prior. That's a 48% EV/EBITDA yield. (That's like what Conrad Industries was back in 2010.)

As of the end of 2022, Peabody had 2.1 billion tons of proven coal reserves and 379 million tons probable. The proved reserves were comprised of 94 million tons seaborne thermal, 102 million seaborne met coal, 1.7 billion tons in the powder river basin, and 155 million tons of other U.S. thermal coal. One calculation that you could make is that the enterprise value is about $1.50 per ton of proved and probable reserves.

During the fourth quarter, seaborne thermal sold for $94 per ton with a $43 cost per ton; seaborne met coal for $220 per ton with a $128 cost per ton; PRB coal for $14 per ton with a $13 cost per ton; and other U.S. thermal coal for $52 per ton with a $41 cost per ton.

Seaborne *thermal* coal was the most profitable segment in Q4, earning $209 million, with seaborne met right behind, earning $189 million. U.S. thermal coal (PRB & other) earned $83 million for the quarter.

CP said...

Q4 2022 earnings release

10-K 2022

10-Q June 2022

CP said...

BTU is arguably too cheap to ignore now - no debt!

That's a lot of hydrocarbons, too. If you ignore the PRB coal entirely, the enterprise value is $11 per ton for 351 million tons of higher quality coal.

CP said...

From Q4 conference call:

Lucas Pipes
Jim, it sounds like -- first, congratulations on the good work. And it sounds like you are really close to a capital return announcement. And I wondered if you've given some thought as to what the structure could look like across the industry we've seen frameworks where almost all of the free cash flow is paid out. You've seen others where 35%, 35% to 50% is paid out and kind of the payout ratio stepped up as balance sheet milestones are reached. How do you think about the magnitude of capital returns once you have to.

Mark Spurbeck
As we mentioned at Investor Day, any shareholder return program that we're looking at is certainly going to be proportional to free cash flow and it's going to be flexible to return cash to shareholders through both buybacks and dividends. When we look at a broad spectrum of companies with shareholder returns programs, those companies that return the most and utilize both dividends and buybacks have performed best over time. So that's not lost on us. Closer to home, we like what we've seen from some in our industry, and we have a few good templates to use and improve upon. As Jim mentioned, we're not ready to share any more details with you today, but expect more in the near future.

CP said...

Alpha Metallurgical Resources, Inc. (AMR)

Market capitalization is $2.4 billion. As of year-end 2022, they had current liabilities plus long term debt less cash of $63 million.

They have 323 million tons of met coal reserves, all in West Virginia and Virginia, and they account for 21% of U.S. met coal production. That's an enterprise value of $7.60 per ton of *met* coal.

Adjusted EBITDA last year was $1.7 billion, which is an EV/EBITDA of 71%.

They spent $451 million repaying debt (there is none left to repay), $13 million of dividends, and $522 million repurchasing stock.

Capital expenditures were $164 million compared to $108 million of depreciation.

CP said...

AMR 10-K 2022:

AMR proxy statement:

AMR investor presentation:

CP said...

Something interesting about AMR: Blackrock owns 9.7%, Vanguard owns 9.2%, State Street owns 5.8%, and the directors and officers own 15%.

CP said...

At BTU, Elliott owns 14.6%, Vanguard owns 8%, and BlackRock owns 5.6%.

CP said...

Warrior Met Coal, Inc. (HCC) market cap is $1.9 billion. As of year-end 2022, they had current liabilities plus long term debt less cash of negative $382 million, making the enterprise value only $1.3 billion.

Last year's adjusted EBITDA was $994 million, making the EV/EBITDA 76%.

CP said...

From the HCC 2022 annual report (

Our underground mining operations are headquartered in Brookwood, Alabama and as of December 31, 2022, based on a reserve report prepared by Marshall Miller, were estimated to have approximately 89.0 million metric tons of recoverable reserves located in west central Alabama between the cities of Birmingham and Tuscaloosa. Operating at approximately 2,000 feet below the surface, the Mines No. 4 and No. 7 are two of the deepest underground coal mines in North America. The met coal is mined using longwall extraction technology with development support from continuous miners.

Our two operating mines and Blue Creek are located approximately 300 miles from our export terminal at the Port of Mobile in Alabama, which we believe to be the shortest mine-to-port distance of any U.S.-based met coal producer. Our low and variable cost structure, and our flexible and efficient rail and barge network underpins our cost advantage and dependable access to the seaborne markets. We sell our coal to a diversified customer base of blast furnace steel producers, primarily located in Europe, South America and Asia. We enjoy a shipping time and distance advantage serving our customers throughout the Atlantic Basin relative to competitors located in Australia and Western Canada.

We also have 68.2 million metric tons of recoverable reserves and 39.2 million metric tons of coal resources exclusive of reserves, which total 107.4 million metric tons, at Blue Creek located to the northwest of Mine No. 4, based on a reserve report prepared by Marshall Miller. We have the ability to acquire adjacent reserves that would increase total reserves to 144 million metric tons at Blue Creek. According to our third-party reserve report, the met coal reserve base of Blue Creek is a high-quality High Vol A coal that is characterized by low-sulfur and high CSR.

Our two operating mines have demonstrated an ability to produce an average run rate of 7.0 million metric tons of HCC and 7.5 million metric tons of HCC when operating at full capacity. As of December 31, 2022, our operations were producing below this capacity primarily due to the United Mine Workers of America (“UMWA”) strike. Our operations have continued throughout the period of the strike, and have generated strong net income of $641.3 million and record Adjusted EBITDA of $994.2 million during the year ended December 31, 2022.

We have the ability to acquire adjacent properties that could increase the total recoverable reserves to approximately 104.0 million metric tons with a mine life of approximately 30 years assuming a single longwall operation. Further, we believe that we have the potential to elevate resources exclusive of reserves to recoverable reserves contingent upon favorable results from future exploration campaigns and property acquisitions, which we believe could increase the total reserve tons by up to 40.0 million metric tons for a total of 144.0 million metric tons with a mine life of 40 plus years.

Met coal reserves for $9 per ton.

Cash cost of production was $138 per ton last year, and they were selling for $335 per ton. They sold 5 million tons.

CP said...



CP said...

Good morning, time for more coal research.

Arch Resources, Inc. (ARCH)

Market capitalization is $2.3 billion. As of year-end 2022, they had current liabilities plus long term debt less cash of $270 million.

Adjusted EBITDA last year was $1.26 billion, which is an EV/EBITDA of 49%.

They spent $493 million repaying debt, $456 million of dividends, and $157 million repurchasing stock.

Capital expenditures were $173 million compared to $133 million of depreciation.

Total estimated coal reserves are 225 million tons met coal and 703 million tons thermal.

CP said...

ARCH 10-K:

CP said...

Natural Resource Partners L.P. (NRP)

Market capitalization of $660 million. Total liabilities net of current assets and deferred revenue are $100 million. The outstanding liquidation of the convertible preferred is $200 million, so the enterprise value is $960 million.

In the fourth quarter, adjusted EBITDA was $75 million and for the full year it was $317 million. So, EV/EBITDA was 33% on last year's numbers.

"Early in 2023, one of the preferred holders exercised their right to convert $47.5 million of the preferred units into NRP common units. After considering our financial position, liquidity, and comparing the market value of NRP's common units to our estimate of intrinsic value, we elected to redeem the units with the payment of $47.5 million of cash instead of issuing NRP common units. After this transaction, the outstanding liquidation value of our convertible preferred units was reduced to $202.5 million."

"We remain focused on maximizing long-term free cash flow available to common unitholders and increasing our financial flexibility. We intend to achieve this by paying off all permanent debt, redeeming all preferred equity, and settling all remaining warrants. We also remain focused on becoming a key player in the transitional energy economy. During the year we made significant progress toward this goal with the execution of our first two subsurface carbon sequestration leases and our first geothermal energy lease, which have the potential to produce significant cash flow over the long term."

NRP continues to make great strides in de-levering and de-risking the partnership. In 2022, NRP fully retired its outstanding $300 million 9.125% Senior Notes due 2025, aiding in the sharp decrease in NRP's consolidated leverage ratio to 0.5x at December 31, 2022 from 2.7x at December 31, 2021.


Q4 earnings release:

CP said...


For 2022, mineral rights (mostly met coal royalties) accounted for $294 million of adjusted EBITDA and soda ash (via the 49% stake in Sisecam Wyoming) accounted for $45 million of adjusted EBITDA. Corporate overhead was $22 million for a net $317 million of adjusted EBITDA.

CP said...

NRP comments on most recent conference call:

I would like to begin by thanking our employees for their outstanding contributions, executing our strategy to delever and derisk the partnership. I'd also like to thank our equity investors, bondholders and banks for your enduring support. And a special word of appreciation is owed to our Board of Directors for its wise guidance and counsel.

When we embarked on our new strategy 7 years ago, the partnership was in a precarious financial position, with almost $1.5 billion of debt, representing more than 2/3 of our capital structure. Our bonds were trading at $0.65 on the dollar, and our free cash flow was negative. Our future looked bleak.

We responded by exercising extraordinary financial discipline to aggressively cut costs, eliminate capital expenditures and sell off underperforming assets with an incessant focus on delevering and derisking the capital structure. Today, I'm proud to say that the partnership is dramatically healthier and financially stronger than it was 7 years ago.

We have rightsized the business from 4 business segments down to 2. Both of which now earn returns on capital well in excess of their cost of capital. Our operating and interest expenses are each more than 70% lower than they were when we began. And our free cash flow, which had been negative, exceeded $0.25 billion in 2022, a record for the partnership.

Our debt, which has been almost $1.5 billion, had declined more than 80% to $169 million at year-end. The financial profile of today's NRP is so remarkably improved from that of 7 years ago that it would be hardly recognizable to anyone who hadn't followed the transformation.

I am especially proud that these results have been achieved without the use of sly legal maneuvers, debt forgiveness or bankruptcy. Let it be known that NRP keeps its promises, pays its debts and does exactly what it says it will do.

We have come a long way, but there's still more work to be done. Our goal remains to retire all permanent debt, redeem all of our 12% convertible preferred equity and eliminate all outstanding warrants. Taken together, these commitments currently total approximately $465 million.

If our business continues to generate free cash flow at the current run rate, I hope to reach this goal within 2 to 2.5 years. Once these obligations are eliminated, Free cash flow available for common unitholders will increase, most likely in a dramatic fashion.

CP said...

Metallurgical coal prices reached historical highs and were the primary driver of strong segment performance. Numerous factors continue to provide support from net pricing as the post-COVID recovery continues.

Supply chain disruptions, labor shortages and years of underinvestment in new coal production capacity continue to undermine producers' ability to bring new production online to meet demand. While met prices have pulled back from the peaks reached last year, we continue to believe met prices will remain well supported for the foreseeable future.

Thermal coal prices also reached record highs in 2022, but have declined significantly in recent months due to usually warm weather in Europe and North America. Thermal prices traded at a premium to met for much of last year, even pulling lower quality met coal into thermal markets at times. That situation no longer exists as thermal coal now sells at significant discounts to met.

While we do not see thermal prices rebounding to last year's record levels, many of the factors that provide support to prices over the last year still exists. Boycotts of Russian coal continue to force European buyers to source coal from other regions, including the U.S. Operators will continue to be burdened by labor shortages, pressure from governments, regulators, activists and capital providers, which will limit ability to increase thermal production to meet demand.

CP said...

Btw - no questions on the NRP conference call. For a company that is trading at 3x EBITDA, has a royalty business model, and is committed to shareholder returns!

And with that, I'll turn the call back over to the operator for questions.


(Operator Instructions) It appears that we have no questions. I'll turn it over to Craig Nunez for any closing comments.

CP said...

20 comments later - coal is mindblowingly cheap.

It's going to be tough to hold on to any tobacco stocks given this.

Also makes something like Royal Gold seem expensive.

CP said...

Markets that aren't talking to each other -

Natural resources are priced for a depression. But what about NASDAQ stocks?

Peloton still has a $4 billion market cap even though they don't make money (EBITDA of negative $122 million in Q4).

Zoom has a market cap of $22 billion and made $100 million last year.

Apple has a market cap of $2.6 trillion; trades at 26 times earnings.

What if in a depression, Apple earnings fell 20% and the stock rerated to 22x earnings? Shares would fall by 1/3rd.

That would be a share price of $110. An AAPL December 2025 $140/$110 put spread would cost about $7 but have >4x upside in that event. An AAPL December 2024 $150/$110 put spread would cost $10 but have 4x upside.

CP said...

P.S.: met coal futures prices are over $200 per ton out to 2027:*0/futures-prices