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Shifting economics reduced minable coal reserve estimates of large US producers


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Spotify’s Direct Listing Gamble Pays Off

Shifting economics reduced minable coal reserve estimates of large US producers

In the past few years, some of the largest U.S. public coal companies vastly reduced the amount of their coal reserves that they expect will be financially feasible to mine.

While total reserves can shift with asset buys or sales, most of the largest U.S. coal companies have seen total recoverable reserve estimates either remain relatively flat or sharply decline in recent years. Ongoing pressure on price and the prospect of a reduced customer base could lead some companies to reevaluate just how much of the coal they own can be reasonably expected to be mined.

Peabody Energy Corp., the largest private sector coal mining company in the world, revised the amount of proven and probable reserves on its books from 7.6 billion tons to 5.2 billion tons between 2014 and 2017. Arch Coal Inc., which operates both thermal and metallurgical coal operations in the U.S., dropped proven and probable reserve estimates from 5.1 billion tons to 2.5 billion tons between 2014 and 2015 and later revised even lower. Illinois Basin coal miner Foresight Energy LP slashed estimates of proven and probable coal reserves by around one-third over the previous year when it released 2016 estimates.

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Combined, proven and probable reserves are a measure of coal in the ground that can be economically and legally extracted. Proven reserve estimates are more certain due to a larger sample of data used compared to methods used to determine probable reserves. Peabody reports its estimates of proven and probable reserves are generally with 10% of actual coal recovery.

The amount of coal technically accessible — minus coal that has been mined between estimates — often does not change between reporting periods. What does change is whether or not coal pricing will justify mining costs for the company.

This calculation changes from mine-to-mine. Coal mining companies must consider geologic conditions, current and future market prices, contracts, taxes, technological developments and other factors to make a determination. A trend of coal plant retirements in the U.S. and anticipated competition from natural gas has some companies reconsidering how much of their coal can be mined.

Alan Stagg, president of Stagg Resource Consultants Inc., said forecasting demand is one challenge with assessing a reserve, particularly for an industry that until a few years ago could use relatively stable historical trends to estimate the future value of mining a reserve.

"The problem becomes, given what's happened in the last decade, you don't even feel comfortable doing that because the trend lines behind you are so erratic and have been through so many profound changes that there are no expectations those changes will influence things going forward," Stagg said.

When a short-term price dip begins to look more like a longer-term decline, companies may impair those assets to reflect the lowered value of that property. Peabody reported low coal prices drove it to recognize separate impairment charges of $230.5 million and $144.5 million in 2015 on Australian metallurgical coal assets. Low thermal coal prices and a lack of buyers also drove the company to take on impairment charges related to its Midwestern United States coal assets in the same year.

Foresight Energy dropped the proven and probable reserve estimate of its Macoupin mining complex from 455.1 million tons in its 2015 annual report to just 64.4 million tons in its 2016 report. The company's Hillsboro complex, which has been idle since March 2015 due to a combustion event at the mine, lowered proven and probable reserves from 867.4 million tons to 322.1 million tons in the same period.

In 2015, low coal prices led Arch to record a $2.6 billion asset impairment charge. The company also recorded an impairment for coal reserves and surface land in Kentucky, where operations were idled by another mining company in 2016.

Each mine faces its own set of circumstances determining whether the reserve can be recovered economically. In the Northern Appalachia region, Stagg said, there are blocks of coal where it is "pretty much a given" that if there is a reasonable market for thermal coal, those assets will be economic to mine. On the other hand, in Central Appalachia, many producers are doing impairment testing and "taking a hit on their books and realizing these blocks of coal will never be produced."

The location of the mine's customers also plays a significant role in valuing a reserve.

"There are certain locations where coal-fired power stations have a solid competitive foot in the pecking order," said John Weiss, vice president of John T. Boyd Co., a mining and geological consultant that conducts reserve estimates. "They are not going to get displaced and there's every reason to believe they are going to continue."

Reserve advantages may also be quickly lost when the market shifts.

Peabody, for example, reports its Kayenta mine has access to about 196 million tons of proven and probable reserves. However, owners of the mine's sole customer have announced plans to retire the plant. If Peabody is unable to find a solution to keep the plant operating, the coal mined at Kayenta would likely be uneconomic to sell elsewhere and removed from Peabody's reserve estimates.

Weiss cautions investors looking at reserve estimates to understand they have only just begun the process of evaluating a mining company's future.

"There is a perception that reserves equal value, that all reserves are created equal and everybody's reserves are equal," Weiss said. "That is a perception and it is absolutely a fallacy."

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Technology, Media & Telecommunications
Spotify’s Direct Listing Gamble Pays Off


Spotify Technology SA shares rose 13% above its $132.00 reference price to close at $149.01 the day of the company’s IPO April 3, resulting in a public market valuation of 4.0x estimated 2018 revenue of €5.22 billion and 16.5x gross profit of €1.28 billion.

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Spotify Technology SA shares rose 13% above its $132.00 reference price to close at $149.01 the day of the company’s IPO April 3, resulting in a public market valuation of 4.0x estimated 2018 revenue of €5.22 billion and 16.5x gross profit of €1.28 billion. That compares to a trading multiple of just 1.0x revenue for Pandora as of the same date, but Spotify’s higher trading multiple is justified by its higher proportion of paying subscribers among its listeners and its growth outside the U.S.

Spotify Technology is the parent of Spotify AB, the Swedish operator of the popular Spotify streaming service.

Company guidance for full year 2018, provided in Spotify's March 26 8-K filing, is revenue of €4.9 billion to €5.3 billion, up 20% to 30% year over year, and a gross profit margin of 23% to 25%, with an operating loss of €230 million to €330 million including an estimated total cost for the direct listing of roughly €35 million to €40 million in the second quarter.

Spotify Technology S.A. share price and market capitalization

The 8-K also shows Spotify has ambitious monthly active user, or MAU, and premium subscriber growth targets for 2018, with MAUs projected to increase by 26% to 32% year-over-year to 198 million to 208 million and total premium subs growing 30% to 36% to a range of 92 million to 96 million.

At the end of 2017, Spotify had reported 157 million MAUs and 71 million premium subs. Apple Music came in second place with a reported 36 million subs as of February 2018; based on reports from the Wall Street Journal, the company is growing at a monthly rate of 5% compared to 2% at Spotify. According to a Forbes article on April 4, Apple Music just reached 40 million paid subscribers. Inc. has indicated it is the third-largest on-demand streaming music company behind Spotify and Apple Inc.'s Apple Music with a reported 16 million subscribers between Prime Music and Amazon Music Unlimited. That leaves Pandora Media Inc. in fourth place with 5.5 million paid subscribers, although it has a larger ad-supported user base with 74.1 million MAUs reported at the end of 2017.

Based on reports by Music Business Worldwide on April 4, Sony Corp.'s Sony Music, which had owned 5.71% of Spotify shares prior to the first day of trading, sold 17.2% of its stake in the company, representing a little less than a 1% total share, for over $250 million based on the April 3 closing price of $149.01.

In Spotify's prospectus filed April 3, Sony Music, before the April 3 shares sale in the first day of Spotify trading, was the fifth-largest shareholder behind Spotify co-founders Daniel Ek (27.1%) and Martin Lorentzon (13.1%), followed by Tencent Holdings Ltd. (9.1%) and Tiger Global (7.2%).

As reported by Music Business Worldwide, according to a memo released by Sony, the company projects that the unrealized valuation gain and the proceeds from the sale of Spotify shares will amount to roughly 105 billion Japanese yen, approximately US$1 billion, for the first quarter of the fiscal year ending March 31, 2019.