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Peabody not banking on its US thermal coal volumes to bounce back after 2020 hit

Peabody Energy Corp. struggled through 2020 as it drastically reduced coal production volumes and its workforce while undertaking a comprehensive refinancing transaction in the face of liquidity challenges.

With the global shock of the COVID-19 pandemic exacerbating a structural decline in demand for U.S. thermal coal, Peabody reported a net loss of $1.87 billion for 2020. While the company was optimistic about improvements in global markets, its outlook for U.S. thermal coal did not include an anticipated rebound in 2021.

Peabody produces a substantial volume of the coal mined in the U.S. The company produced 136.0 million tons of thermal coal in the U.S. in 2019, or about 19.3% of the total reported annual U.S. coal production for that year, according to U.S. Energy Information Administration data.

In addition to the effects of the pandemic, the company noted that its U.S. thermal coal operations continued to be pressured by low natural gas prices, growth in renewable generation and unfavorable weather.

"Although recent conditions are favorable, we had a relatively warm start to winter, and utilities had accessed adequate coal stockpiles, both of which are expected to impact first-quarter 2021 shipments," Peabody Energy Executive Vice President and CFO Mark Spurbeck said on the company's Feb. 4 earnings call.

While the EIA recently projected U.S. coal production to bounce back by 12% in 2021 from record lows in 2020, Peabody projected that its Powder River Basin volumes will "largely be in line with 2020 shipments." The company's outlook included a modest decline in its other U.S. thermal coal segment, which includes operations in the Western and Midwestern U.S. Peabody's reported U.S. thermal coal sales of 105.5 million tons in 2020 is down 30.5 million tons, or 22.4%, compared to 2019 sales.

"There is no question that U.S. thermal coal is a challenged market and one that is in secular decline," Peabody President and CEO Glenn Kellow said on the earnings call. "However, I stand by our U.S. thermal assets. We have the lowest cost assets in the most competitive basin and demonstrated meaningful cost improvements year over year within our other U.S. thermal segment."

In response to reduced demand, Peabody has been slashing expenses across the organization. The company lowered costs per ton in three of its four segments and idled nine individual mines in 2020 for periods ranging from one week to multiple months, according to its Feb. 4 earnings release. It also reduced 1,850 operational positions. In total, the company cut its workforce by about 30% in 2020.

"Indeed, 2020 has been an extremely challenging year," Spurbeck said. "Those challenges were met with decisive action. And while we still have our fair share of headwinds, we remain laser-focused on further reducing costs and improving cash flow to best position the company for success in all market cycles."

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The coal producer noted signs of improvement in the seaborne thermal coal market, with forward prices moving higher in 2021 due to colder-than-expected weather across Asia and Europe. At the same time, the supply of seaborne thermal coal has been affected by weather-related issues in Indonesia, pandemic-related disruptions in China and labor issues in Colombia. Seaborne metallurgical coal prices have improved from 2020 lows, but prices remain volatile, Peabody noted in its earnings release.

"China's limits on Australian coal imports as well as the scope and scale of a steel market recovery in traditional markets continue to impact the seaborne met market," Kellow said. "Given this backdrop, we remain cautious as we consider bringing on any additional supply, including resuming production at our currently suspended mines."

The Missouri-based coal producer recently completed a refinancing transaction that extended its debt maturities, preserved liquidity and eliminated a net leverage ratio requirement.

Peabody reported a net loss of $129.2 million for the fourth quarter of 2020. Revenue in the quarter totaled $737.2 million, dropping from $1.12 billion year over year. Peabody has projected lower results in the first quarter of 2021 due to decreased customer demand and reduced volumes across all segments.