I Mining Business Review I

“Whilst 2020 was a year unlike any other with COVID impacting all facets of our business – from the customers we serve to the communities in which we operate – the Peabody team worked hard to position against these challenges and we look forward to driving continued improvements in 2021.”

Glenn Kellow,

President and CEO,

Peabody.

| Photo Credit: Peabody.

Peabody recently announced its fourth quarter 2020 operating results, including revenues of $737.2 million; loss from continuing operations, net of income taxes of $120.4 million, which included $69.3 million of non-cash asset impairments; net loss attributable to common stockholders of $129.2 million; diluted loss per share from continuing operations of $1.25; and Adjusted EBITDA of $103.2 million

Wilpinjong | Photo Credit: Peabody.

“Whilst 2020 was a year unlike any other with COVID impacting all facets of our business – from the customers we serve to the communities in which we operate – the Peabody team worked hard to position against these challenges and we look forward to driving continued improvements in 2021,” said Peabody President and CEO Glenn Kellow.  “We had a number of accomplishments in 2020, including lowering costs per ton in three out of four segments while responding to difficult demand conditions, as well as creating a leaner corporate structure.  We also undertook a comprehensive refinancing transaction that extended debt maturities, eliminated our net leverage ratio covenant and preserved operating liquidity.”

General Business Update

Throughout 2020, the COVID-19 pandemic severely impacted the global economy, which in turn impacted Peabody’s operations and customers.  Along with the pandemic came lower electricity generation and steel production, depressed natural gas prices, lower global energy prices and the disruption of certain markets across the globe, creating significant financial challenges for Peabody.

Metropolitan | Photo Credit: Peabody.

 Against this backdrop, Peabody reached a comprehensive agreement with its 2022 bondholders, revolving credit lenders and surety bond providers to extend most of the company’s near-term debt maturities to December 2024 and stabilize collateral requirements for the company’s existing surety bond portfolio. 

In addition, Peabody pursued cost reductions across each of its mines as well as corporate and support functions.  In large part due to these actions, full year SG&A decreased 31 percent compared to the prior year and operating costs per ton improved.  Despite volume reductions across the business in 2020, three out of four of the company’s operating segments lowered costs per ton compared to the prior year.

North Goonyella | Photo Credit: Peabody.

Seaborne thermal coal markets have recently shown signs of improvement with Newcastle forward prices averaging over $80 per tonne in 2021.  Colder than expected weather across Asia and Europe has resulted in record high power generation in key markets, driving global LNG prices significantly higher and supporting increased seaborne thermal coal demand.  In addition, seaborne thermal supply has been impacted by severe wet weather in Indonesia as well as COVID-related production disruptions in China and labor issues in Colombia.  While global thermal coal demand will ultimately be dependent on the timing and scale of a COVID recovery, Peabody’s seaborne thermal segment is well positioned to serve that demand.  Over the past five years, the company’s seaborne thermal segment has averaged costs per ton of approximately $31, remaining competitive in nearly any pricing environment. 

While seaborne met coal pricing has improved from 2020 lows, disrupted metallurgical trade flows have contributed to short term pricing volatility.  In addition, limitations on Australian imports into China as well as the scope and scale of a steel recovery in traditional regions continue to weigh on markets.  China has continued to not import Australian coals even as the spread between Australian and non-Australian premium hard coking coals reached an all-time high in January, resulting in China paying a significant premium for non-Australian met coal.  However, outside of China, demand has started to pick up in the traditional markets of Japan and Korea as well as India.  Peabody remains focused on improving its seaborne met segment cost profile, particularly at Shoal Creek and Metropolitan, and will continue to be cautious and deliberate in its actions to resume production at currently idled operations.

Coppabella | Photo Credit: Peabody.

U.S. thermal coal markets continue to be heavily influenced by natural gas prices, growth in renewable generation and weather.  In 2020, coal’s share of the generation mix declined to 19 percent from 23 percent in the prior year, while natural gas’ share rose to 40 percent as prompt natural gas prices averaged $2.13 per mmBtu.  While current natural gas forward prices are above a key competitive mark of $2.50 per mmBtu, coal demand continues to be impacted by secular decline.  Peabody remains committed to continuing to serve its customers from its low-cost operations, which have reduced full year costs per ton by 12 percent compared to the prior year, despite lower shipments.          

Capital Structure Update

In January 2021, Peabody closed on its previously announced exchange transactions to extend its debt maturity profile, eliminate its net leverage ratio covenant and finalize the collateral standstill agreement with its surety providers, preserving operating liquidity and financial flexibility.  Peabody’s capital structure now includes approximately $1.5 billion of funded debt (with $60.3 million maturing prior to December 2024), a $324 million senior secured letter of credit facility and a $250 million accounts receivable securitization facility. 

“We sincerely appreciate the support provided by multiple stakeholders, including our revolving credit lenders, 2022 noteholders and surety bond providers, to enact a comprehensive solution that we believe will benefit all stakeholders,” said Peabody Executive Vice President and CFO Mark Spurbeck.  “Our new capital structure provides a foundation for future value creation and the time needed to continue to pursue cash flow improvements across our operations and capture seaborne market improvements.”

The surety agreement substantially reduces contingent liquidity risk by resolving outstanding collateral requests and limiting future collateral requirements related to the company’s $1.6 billion portfolio of reclamation and other surety bonds.  In accordance with the agreement, Peabody posted $75 million of letters of credit in December 2020 and will post an additional $25 million of collateral per year beginning in 2021 through 2024 for the benefit of the sureties.  Surety providers have agreed to not demand any additional collateral for existing bonds; draw on letters of credit posted for the benefit of themselves; or cancel any existing surety bond during the agreement period. 

Comprehensive Improvement Program Update

Peabody’s comprehensive improvement program, spanning operational and functional aspects of the business, included the following key actions and results in 2020, among other items: 

Millennium | Photo Credit: Peabody.
  • Idled 9 individual mines over the course of 2020 for periods ranging from one week to multiple months, adjusted shift schedules to match demand and reduced the number of production units in operation. In total, the company reduced operational positions by approximately 1,850 employees in 2020. Including non-operational positions, Peabody reduced its global headcount by about 2,000 employees, representing approximately 30 percent of its workforce.
  • Streamlined corporate and support areas of the business and eliminated other administrative costs, resulting in lower year over year SG&A expense of $45.5 million.
  • Reduced rail and port commitments for North Goonyella beginning mid-year 2020, lowering North Goonyella holding costs to approximately $5 million per quarter.

Peabody continues to take other actions to improve its competitive position, particularly within its seaborne met segment. Actions currently underway include the following:

  • Idled Shoal Creek in October 2020 to reset the cost structure of the mine amid weak pricing and demand. Discussions are ongoing with key stakeholders.
  • Idled Metropolitan in late December 2020. Discussions continue with Metropolitan’s customers and workforce that would enable the mine to resume operations. The workforce is targeted to return in May 2021.
  • Continuing the Moorvale South project, which will transition the mine from a greater mix of PCI production to semi-hard coking coal and extend the life of the mine. This project also allows for continued blending opportunities with Coppabella to further improve coal quality.
  • Commencing development of next longwall panel at Wambo Underground that will enable continued mining in the current district into 2022.

Segment Performance

During the fourth quarter, the seaborne thermal segment exported 3.2 million tons at an average realized price of $47.84 per ton with the remaining 2.0 million tons sold under a long-term domestic contract.  Fourth quarter seaborne thermal segment costs of $27.00 per ton decreased 12 percent compared to the prior year, primarily due to continued strong performance from the Wambo surface and Wilpinjong mines.  Despite weak seaborne thermal pricing, the segment delivered 24 percent Adjusted EBITDA margins, or $45.1 million of Adjusted EBITDA, in the fourth quarter. 

In the fourth quarter, Wilpinjong sold 3.6 million tons and contributed approximately $21 million to the seaborne thermal segment’s Adjusted EBITDA.  In addition, Wilpinjong had $5 million of capital expenditures in the fourth quarter. 

The seaborne met segment shipped 1.4 million tons at an average realized price of $83.94 per short ton in the fourth quarter.  Seaborne met costs of $107.30 per ton were impacted by the suspension of Shoal Creek, a longwall move at Metropolitan and mine sequencing at Coppabella and Moorvale.  As a result, the segment reported an Adjusted EBITDA loss of $34.1 million.

The PRB segment shipped 22.2 million tons at an average realized price of $11.41 per ton.  Despite a 20 percent reduction in volumes from the prior year and COVID-related challenges, the PRB costs per ton decreased to $9.08 primarily due to strong productivity and disciplined cost control.  The segment reported 20 percent Adjusted EBITDA margins and Adjusted EBITDA of $51.8 million.

The other U.S. thermal segment shipped 4.8 million tons at an average realized price of $38.88 per ton.  Cost per ton decreased 25 percent from the prior year primarily due to fourth quarter 2019 costs being elevated due to the Kayenta settlement (year over year impact of $7.43 per ton) as well as the benefits of cost management efforts, lower fuel prices and favorable mix.  The segment reported 25 percent Adjusted EBITDA margins and Adjusted EBITDA of $45.4 million.

Full-year 2020 consolidated Adjusted EBITDA totaled $258.8 million compared to $883.0 million in the prior year as demand and pricing were significantly pressured and the company closed mines that contributed approximately $195 million of Adjusted EBITDA in 2019.   

Outlook    

Based on current market conditions, Peabody anticipates the following results in 2021:

U.S. Thermal Operations: U.S. thermal coal deliveries are largely dependent on general economic conditions, weather, natural gas prices and utility inventory levels.  Peabody is planning for PRB volumes to largely be in line with 2020 shipments, with about 80 percent of 2021 tons currently priced at an average price of $10.82 per ton.  Other U.S. thermal shipments are planned to decline modestly from 2020 levels, with approximately 16 million tons priced at an average price of approximately $37.50 per ton. 

Based on expected production levels, Peabody anticipates PRB and other U.S. thermal costs per ton to be largely in line with 2020 levels. 

Seaborne Thermal: In December 2020, the United Wambo JV began joint production from the open-cut mine, enabling continued production of a high-quality seaborne thermal product.  2021 volumes are expected to be approximately 2 million tons in 2021 following this transition.  However, Peabody will benefit from lower strip ratios and access to otherwise stratified reserves.  Wilpinjong export volumes are expected to be largely in line with 2020 levels, while Wambo underground improves modestly. 

Peabody anticipates a slight increase in seaborne thermal costs from 2020 given lower volumes and higher expected royalties. 

Seaborne Met:  Prior 2021 seaborne met projections assumed Shoal Creek resumed production in early 2021 and that Metropolitan was fully operational in 2021.  Peabody continues to evaluate market conditions as well as ongoing discussions with key stakeholders at both mines.  2021 seaborne met shipments are expected to be modestly lower than 2020 volumes due to the timing of restarts, partly offset by slightly higher CMJV shipments.

Corporate and Other: In conjunction with Peabody’s commitment to lowering costs and streamlining activities, SG&A expense is expected to be further reduced to $90 million.  Capital expenditures are expected to be $225 million, including approximately $135 million on major project capital primarily for the seaborne thermal segment.  2021 interest expense is expected to be approximately $200 million, including $50 million of non-cash expense.  Peabody also anticipates the following cash impacts in 2021:

  • $60 million related to final reclamation activities
  • $45 million related to the refinancing transaction
  • $30 million related to postretirement benefits in excess of expense
  • $15 million related to final multi-employer pension plan (MEPP) payment

First quarter 2021 results are expected to be lower compared to the fourth quarter of 2020 given reduced volumes across all segments.  Lower customer demand, in part due to customers taking higher volumes in the fourth quarter to meet calendar based contractual commitments, is expected to result in lower U.S. thermal shipments.  Seaborne thermal shipments are expected to decline based on lower production volumes from the United Wambo JV.  Seaborne met shipments are also expected to be impacted by the actions undertaken at Shoal Creek and Metropolitan.  Fourth quarter 2020 shipments from Shoal Creek and Metropolitan totaled approximately 600,000 tons.

About Peabody

Peabody  is a leading coal producer, providing essential products to fuel baseload electricity for emerging and developed countries and create the steel needed to build foundational infrastructure.  The company has a commitment to sustainability underpinning its activities today to help shape its strategy for the future.  

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