Peabody Energy Corp.'s stock price dropped sharply Sept. 5 after the company warned investors of a potential hit to third-quarter earnings results in an announcement about its new refinancing efforts.
Shares of the largest coal company in the United States opened at $18.71 per share on Sept. 5, but fell 11.5% to close at $16.56 per share by the time the market closed. Peabody announced it launched a process to refinance its term loan and revolver, but its released statement also included a warning that several factors were likely to impact results in the third quarter, including a June highwall failure and fatality at its Middlemount joint venture mine in Australia that is expected to reduce earnings from the venture by about $30 million to $35 million.
Seaport Global Securities LLC analyst Lucas Pipes said in a Sept. 6 note that Peabody's announcement does not materially change his long-term outlook for Peabody. Part of the company's statements focused on weakening global prospects for coal, but Pipes said he believes this was already priced into the company's stock. He maintained a "Buy" rating on the company but lowered his price target for the stock from $29 to $27.
"Demand-driven deferrals on seaborne met and thermal shipments are expected to result in overall volumes modestly below second-quarter levels," Pipes wrote. "Investors were intently focused on this commentary in Peabody's release."
Industry sources, Pipes said, have indicated import restrictions in China are increasing wait times at Chinese ports and resulting in a shortage of shipping vessels. That could be contributing to an increase in customer deferrals, he said.
"We believe that North American met coal producers should not be impacted by similar deferrals as they ship almost no tonnage to China," Pipes wrote. He added that a recent decline in spot benchmark quality metallurgical coal prices likely means some high-cost, low-quality producers are seeing prices get fairly close to their all-in cash costs to mine and ship the coal.
Moody's rates refinancing
Peabody launched the refinancing of its term loan and revolver in order to accommodate a recently announced joint venture with Arch Coal Inc., increase financial flexibility, extend debt maturities and increase pre-payable debt. On Sept. 5, Moody's Investors Service affirmed the company's Ba3 Corporate Family Rating. Moody's also assigned Ba3 ratings to the company's proposed $1.5 billion senior secured credit facilities and assigned a B2 rating to its proposed $500 million senior unsecured notes.
Benjamin Nelson, a senior credit officer and lead coal analyst with Moody's, said the debt-for-debt refinancing is "opportunistic" and that the rating outlook for the company is stable.
"The Ba3 CFR reflects a diverse platform of cost-competitive assets in Australia and the United States, balancing strong credit metrics and cash flow generation in recent quarters with the inherent volatility of the metallurgical and export thermal coal markets and ongoing secular decline in the U.S. thermal coal industry," the ratings action states. "Despite the diversity of the company's operations, a sharp and sustained decline in coal prices would have a meaningful impact on the company's earnings and cash flow, albeit with some lag based on contracted volumes. Like other rated coal producers, environmental and social factors have a material impact on the company's credit quality."
