Daily Stock Watch: Coal Stock BTU Cancels Merger Plans

By Kirsteen Mackay


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Volatile coal stock Peabody Energy Corp (NYSE: BTU) rose 11% yesterday as merger talks were canceled. Is BTU a stock to buy?

Why is BTU Stock Rising?

Coal prices remain at levels that result in a favorable outlook for each of our operating segments. – Peabody Energy Corp (BTU)

Peabody Energy Corporation (NYSE: BTU) jointly agreed with Coronado Global Resources (ASX: CRN) to cease merger discussions. BTU stock rose 11% on the news, while CRN fell 3.8%. 

BTU reported its quarterly earnings on November 3, beating analyst estimates. FactSet analyst estimates provided an EPS consensus of $1.79, while actual EPS came in at $2.34. Meanwhile, a sales consensus of $1.26bn was beaten by actual sales of $1.34bn.

What Does Peabody Energy Corp Do?

US-based leading coal producer Peabody Energy Corporation mines and markets low-sulfur coal, primarily for electric utilities. The company also trades coal and emission allowances. Peabody provides essential products for producing affordable, reliable energy and steel. 

The company owns and operates mines in Arizona, Colorado, New Mexico, Wyoming, Illinois, Indiana, and Australia.

Peabody's commitment to sustainability underpins everything it does and shapes its forward-looking strategy.

Peabody Energy Corp BTU Merger

Last month, Coronado Global Resources Inc., a coal producer focused on coal used for steel-based products, confirmed media reports it was talking about a potential merger with Peabody Energy Corp.

At the time, Jim Grech, Peabody CEO, said:

We would look at any type of opportunity that would make sense to us, 

But he declined to comment specifically on a Coronado amalgamation. Yesterday, Coronado Global Resources said the companies have mutually agreed to end their discussions.

Coronado's metallurgical coal portfolio is used in steelmaking, including renewable energy infrastructure.

North Goonyella Mine

Peabody is in the early stages of redeveloping its North Goonyella mine in Queensland, Australia. North Goonyella is a premium hard-coking coal longwall operation with more than 70 million tonnes of reserves.

The company has approved an initial $140m redevelopment capital expenditure. This will be put towards further ventilation, equipment, conveyors, and infrastructure updates in anticipation of reaching the development of coal in Q1 2024.

Reporting on Q3, Peabody stated that the North Goonyella project would benefit from substantial infrastructure and equipment in place at the mine. This will include a new 300-meter longwall system, a proven coal handling preparation plant (CHPP), a dedicated rail loop for transport to the Dalrymple Bay Coal Terminal (DBCT), and an accommodation village with housing and service amenities for more than 400 workers.

As the company strengthens its balance sheet, cash flows from operations will fund all redevelopment costs.

Jim Grech, Peabody President and CEO, said:

We are pleased to be moving forward with redevelopment of the North Goonyella southern reserves to unlock the value of this strategic asset as we continue to strengthen our balance sheet.

Mark Spurbeck, Peabody Executive VP and CFO, said:

Peabody's diversified product segments continue to generate substantial Free Cash Flow, which allows us to invest in a financially attractive project to enhance our metallurgical coal portfolio while continuing to strengthen our balance sheet,

Q3 Highlights

  • Tons sold: 32.7 million tons (up by more than 4 million tons Q/Q)

  • Adjusted EBITDA: $439m (up 50% Y/Y)

  • Free Cash Flow: $461m (the best result in 18 quarters)

  • Cash and cash equivalents: nearly $1.4bn

  • Commenced redevelopment at North Goonyella

  • Strengthened the balance sheet with $186m of additionally secured debt retirements and $143m of Wilpinjong 10% secured debt repurchase offers are outstanding.

  • Increased 2023 Powder River Basin priced tons to 82 million at an average price of $13.25 per ton

  • Peabody continues to reduce its debt.

The cash margin posted associated with the company's coal hedging activities decreased by $78m in Q3 to approximately $466m on September 30, 2022. 

Forward Guidance

In Q4, Peabody's Seaborne Thermal coal export volume is expected to drop to 2.4 million tons. The drop is due to lower production from its 50% ownership of the Wambo Open-cut joint venture caused by heavy rains in October. 

Heavy rains have also impacted Seaborne Metallurgical coal production, with export volume now expected to reach 2 million tons. 

US Thermal coal production at Powder River Basin is expected to achieve approximately 23 million tons at an average price of $13.50 per ton and cost of $11.50 per ton.

Other US Thermal volume is expected to be approximately 4.7 million tons at an average price of $49 per ton and cost of $40 per ton as both sales volume and costs are pressured by poor rail performance.

Peabody's full-year capital guidance has been raised to $210m primarily due to its North Goonyella redevelopment and deposits for longwall equipment at Shoal Creek. 

BTU Stock Financial Metrics

BTU stock is a $4.3bn company with a price-to-earnings ratio (P/E) of 6.12, and its price-to-book-value (P/BV) is 1.92. Peabody does not offer a shareholder dividend. 

Over the past year, BTU stock has traded between $8.58 and $33.29. Today it trades at around $30.01.

Year-to-date, the Peabody Energy Corporation stock price is up 164.64%, while the S&P 500 is down -20.63% over the same period.

Analyst Ratings

FactSet analysts have a consensus Overweight rating on BTU stock with a target share price of $30.

Peabody Energy Corp Growth Potential and Risks

Coal is deemed the dirtiest energy source and one we really want to avoid as we strive to save the planet from the devastating effects of climate change. This makes BTU a controversial stock to invest in.

Nevertheless, with the world facing an unprecedented energy crisis, coal is still essential to industry and commerce.

With continued investment in developing its North Goonyella project, Peabody president Jim Grech said this is expected to reweigh the company's long-term production and revenue toward metallurgical coal (key in steel production) and to generate attractive returns at historical long-term metallurgical prices.

Going by analyst share price targets, BTU stock would appear to be fairly valued at today's price, which means there's little room for upside growth. But if it starts rewarding shareholders with dividends and share buybacks, analysts may adjust their targets upwards.

The company's Q3 results were encouraging, and it clawed back $78m in cash margin, a trend that should continue and help it pay down debt.

Activist investor Elliott Management remains a top investor in BTU stock with a 17.97% stake. This should be seen as a positive for shareholders.

The overall trend in thermal coal demand is decreasing as coal traded volumes decline, and prices are pressured. Inflationary forces and rate rises are weighing on finished steel sales, which kept raw material prices from rising in October.

So, while coal is still needed and very much in demand, it is in a period of structural decline.

Is BTU Stock a Good Investment?

The energy crisis, increased demand for coal and thus the soaring BTU share price prove that investors opting for sin stocks can still cash in. However, coal prices are volatile, and the potential for increased regulation is ever-present. 

Peabody Energy remains a speculative investment, but it does not appear to be overvalued. Once the company has paid down debt, it would make sense for it to focus on shareholder returns.

BTU has an investor day scheduled this month, which could provide more color on its future growth trajectory and reasons to invest.

If you enjoyed our Peabody Energy Corp coverage, you might be interested in our coverage of lithium stock Albemarle.

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This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Kirsteen Mackay does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Kirsteen Mackay has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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