In the face of recent operational setbacks and troubling global economic indicators, Peabody Energy Corp. told investors it is focusing on "value over volume" with sharp reductions in U.S. thermal coal production but increased attention to its metallurgical coal operations in the U.S. and Australia, as well as the country's thermal mines.
Peabody, the largest coal company based in the U.S., is cutting back on coal production from several of its U.S. thermal coal mines, including its flagship Powder River Basin mine, as it focuses on a new metallurgical coal acquisition in Alabama. The company reiterated that it continues to favor share buybacks over expanding volumes, although it is deploying significant capital, particularly for certain Australia mines and its U.S. metallurgical coal operation.
"While there certainly are macro concerns creating cost precautions, including slowing global GDP growth, trade issues and easing commodity prices, underlying seaborne met and thermal conditions remain quite positive," Peabody CFO Amy Schwetz said on the company's quarterly earnings call. "And in the U.S., the pace of coal retirement is expected to substantially ease in 2019."
Peabody announced in its Feb. 6 earnings release that it is reducing the target volume for 2019 coal production from its North Antelope Rochelle mine by 10 million tons compared to 2018 levels. The mine is the largest in the U.S. and produces thermal coal for the shrinking domestic coal-fired electricity generation market. The mine produced 98.3 million tons of coal in 2018 from the Powder River Basin and accounted for about 13.1% of all U.S. coal production in 2017.
"At current market levels, we're not generating margins we find acceptable for our investors," Peabody President and CEO Glenn Kellow said of some of the higher cost coal coming out of North Antelope.
Peabody has been directing much its cash flow to shareholder value programs, including $1.14 billion in buybacks over the past 18 months, which is equal to more than a quarter of the company's total market capitalization. With $400 million remaining under its current share repurchase authorization program, management said they expect to continue to execute buybacks in 2019.
"Peabody Energy generated significant free cash flow on strong pricing in the seaborne markets and deployed nearly $1 billion to share repurchases in 2018," said Benjamin Nelson, senior credit officer and lead coal analyst at Moody's Investors Service. "While strong export markets and fewer retirements of coal-fired power plants should help Peabody generate meaningful free cash flow again in 2019, we expect the company will continue to divert much of it to shareholders, rather than expand capacity amid long term secular decline in the demand for thermal coal in the United States and competitive issues in the Powder River Basin."
The company also said it is "easing production across several complexes" in the Midwest due to unsatisfactory margins on coal sales, while its Western segment volumes are expected to decline year over year due to the announced closure of the Navajo Generating Station. The company's base case assumes the associated Kayenta mine serving the power plant will cease production and sales in the third quarter.
Meanwhile, the company said it continues to pursue life extension projects to maintain its export thermal coal volumes out of Australia through its Wambo and Wilpinjong mines. Peabody expects it will invest $100 million over each of the next two years to advance projects related to the two mines.
Peabody's Goonyella mine, a metallurgical coal operation in Australia, was shut down after a mine fire interrupted operations in late 2018. Limited continuous miner volumes are being targeted in 2019 and longwall production is expected to ramp up in early 2020 to about two million tons of coal, the company reported. The Millennium mine in Australia, which shipped 2.4 million tons of metallurgical coal in 2018, will deliver just over a half million tons as the reserves are expected to deplete in 2019.
Some of Peabody's lost metallurgical coal production capacity will be offset with its recently acquired Shoal Creek mine in Alabama. Peabody purchased the mine for $387 million in December 2018. The company expects to sell 2.5 million tons of coal from the mine in 2019. Peabody is projecting it will spend $20 million and $10 million in 2019 and 2020, respectively, on capital investments in Shoal Creek.
"We expect it will quickly position itself as one of the companies top adjusted EBITDA contributors," Kellow said.