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US coal companies reduced estimated asset value by at least $1.80B in Q2


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Six trends shaping the industries and sectors we cover in 2021

US coal companies reduced estimated asset value by at least $1.80B in Q2

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Peabody Energy's North Antelope Rochelle mine is the largest coal mine in the U.S. The company recently took a $1.42 billion asset impairment charge on the value of the mine based on lowered expectations for demand in a declining market for coal.
Source: Peabody Energy Corp.

Accountants at publicly traded U.S. coal companies are bringing company books in line with the declining market for the once-dominant fuel, with four U.S. coal companies reporting about $1.80 billion in asset impairments during the second quarter alone.

The companies booking impairments pointed to lower long-term expectations for some coal assets as the sector also deals with the near-term impacts of the COVID-19 pandemic. The bulk of the impairments comprised a $1.42 billion reduction in the value of a Powder River Basin mine owned by Peabody Energy Corp., the largest coal miner in the U.S.

"What's happening here is you have accounting estimates catching up to the things that we've discussed for a year or more," Benjamin Nelson, senior credit officer and lead coal analyst at Moody's Investors Service, said in an interview. "What it's telling you is that industry conditions in the coal industry are not going to reverse, at least in our view."

According to an S&P Global Market Intelligence review of securities filings, at least four publicly traded U.S. coal companies reduced the book value of their assets when they released second-quarter results. In the past few years, coal companies have reduced the book value of coal assets and lowered estimates of the coal reserves that can be mined economically.

There is often a grace period early in a declining market when companies can be more cheerful about outlook, according to Alan Stagg, president and principal economic geologist of Stagg Resource Consultants Inc. However, with the list of U.S. coal company bankruptcies growing as pressure mounts to act swiftly on climate change, Stagg said it is getting harder to get away with an optimistic view on future pricing or demand for the carbon-intensive fuel.

"Politicians can say what they want; coal associations can say what they want. Coal people know what the answers are, and most investors are sophisticated enough to know what the answers are now," Stagg said. "It's becoming pretty damn obvious you got to start taking some of these impairments right now."

Peabody wrote in a quarterly filing that the outlook for its North Antelope Rochelle mine in Wyoming was negatively impacted by reductions and retirements of coal plants, low natural gas prices, and increased renewable energy usage.

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The reported asset value of all of Peabody's U.S. thermal coal mining assets declined from $3.04 billion at the end of 2019 to just $1.47 billion at the end of the second quarter of 2020. The company's total asset value was $6.54 billion at the end of 2019, including its Australian operations, corporate assets and other property. Peabody booked an attributable net loss of $1.54 billion for the second quarter, swinging year on year from a profit of $37.1 million.

With the new impairment, the company's total asset value fell by 24.4% to $4.95 billion at the end of the second quarter. As of 2:45 p.m. ET on Sept. 10, Peabody's market capitalization was much lower at $278.2 million.

"Peabody's North Antelope Rochelle write-down is simply a reflection of the new reality in U.S. coal mining that has been evident almost since the moment the company came out of bankruptcy," Institute for Energy Economics and Financial Analysis data analyst Seth Feaster wrote in a recent commentary. "The industry continues to be battered by rapid structural decline driven by low gas prices, the low and falling cost of building wind and solar power generation, and sweeping initiatives by utilities and corporations to cut emissions."

Peabody Energy Executive Vice President and CFO Mark Spurbeck said on an Aug. 5 earnings call that the impairment occurred despite North Antelope "being a fabulous asset."

"While we still believe coal is essential to a reliable energy grid and that our [Powder River Basin] assets are best positioned to serve that demand ... we do expect coal's long-term share of the U.S. generation mix to remain below prior-year levels," Spurbeck said.

Contura Energy Inc. recorded a noncash impairment charge of $161.7 million in the second quarter, as it works on a broader pivot to focus on metallurgical coal markets. In June, the company idled the Kielty mine in West Virginia and reduced the expected mine life of its Cumberland operation in Pennsylvania with a decision not to pursue a $60 million refuse impoundment.

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"I mean, that's a mine that just doesn't work anymore," Nelson said of the Cumberland mine, which supplied coal to power generators. Contura also recently separated itself from its sizable thermal coal assets in the Powder River Basin.

"We believe this direction with Cumberland makes the most sense for Contura, both from a short-term cost perspective and a longer-term strategic standpoint," Contura Chairman and CEO David Stetson said on an Aug. 7 earnings call.

Natural Resource Partners LP recorded a second-quarter impairment of $132.3 million based primarily on weakened coal markets. Metallurgical coal producer Coronado Global Resources Inc. determined the carrying value of its recently idled Greenbrier mining asset exceeded its fair value and recorded a $63.1 million impairment charge for the quarter. The move reduced the value of Greenbrier's long-lived assets to approximately $50.0 million as of the end of the second quarter.

Nelson said that, as Moody's looks out and tries to figure out which mines are going to be running in 2021, he sees some operations running "on fumes, to some extent."

"There's a little bit of a zombie element to the market right now because you have producers that have contracts from better times, or they have inventories and a need for cash, so they're doing some stuff from a sales perspective that's not sustainable to raise cash," Nelson said. "Unless we get upside on factors — which we're not building into our base case today — we do see some reckoning coming."