Peabody Gets Self-Bonding Nod; No Respite to Share Fall

St. Louis, MS based Peabody Energy Corporation BTU received the much needed confirmation from Wyoming officials that its mines in Wyoming are still eligible for "self-bonding". This affirmation will undoubtedly ease some of the financial stress that was building on this coal company.

What is Self-Bonding?

Self-bonding is a government program that allows producers of coal to economically insure their clean-up costs in case of a bankruptcy. To become eligible for this self-bonding program, the miners should fulfill certain financial conditions on a regular basis and a have a strong credit rating for bond issuances.

Where does Peabody Stand?

The continuous decline in coal demand and the fall in selling price per ton are taking a toll on the coal companies. Peabody Energy has reported in the red for the last five quarters. The company also lost nearly 76.8% of its value to close at $1.79 on Jul 7. This positive news did not alter the freefall in the stock as it shed nearly 9.5% yesterday to close at $1.62.

Though Peabody Energy's financial strength enabled it to receive the much needed nod from the Wyoming Department of Environmental Quality's Land Quality Division ("LQD"), investors were left largely unconvinced. The giddy fall in its share prices may be blamed on a very uncertain global economy. Particularly, the Chinese stock bubble will have a deleterious effect on the domestic economy, which will in its turn reduce the demand for commodities like coal. Coal prices, particularly for seaborne coal, will be put under even more pressure.

As it is, Peabody's coal revenues per ton from its Australian platform had dropped almost 16% in the first quarter of 2015. Seaborne thermal coal from Australia generally feeds the developing Asian markets. Any fall in demand will further affect prices and have a dire impact on Peabody's financials.     

Did Other Coal Players Get the Nod

In May, Alpha Natural Resources ANR, a Zacks Rank #4 stock, was informed by the Wyoming Department of Environmental Quality's LQD that the company no longer qualifies for the self-bonding program in the state.

The LQD is still reviewing 2014 financial data from Arch Coal Inc. ACI, a Zacks Rank 3 (Hold) stock, to see whether it qualifies for the self-bonding program.  

The failure to pass the self-bonding test will further increase the operating costs of the loss making U.S. coal miners. The coal players are presently idling mines and trimming their workforce to control costs. They are also selling mines. Peabody Energy has decided to sell its Wilkie Creek Mine in Australia to a subsidiary of Exergen Pty, Ltd. for an aggregate value of $75 million.

Zacks Rank

Peabody currently has a Zacks Rank #4 (Sell). A better-ranked stock in the same space is Rhino Resource Partners LP RNO with a Zacks Rank #1 (Strong Buy).

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