Peabody Energy Corp. (US), the world’s largest private pure play coal mining company, reported a net loss of US$151m in the last three months, taking year-to-date net loss to US$272m. This follows a net loss of US$955m in 2013 and a net loss of US$432m in 2012.

Tim Buckley, Director of Energy Finance Studies, Australasia, for the Institute for Energy Economics and Financial Analysis (IEEFA) says the loss demonstrates Peabody is a company in with financial risk.

“Despite spurious claims coal is good for humanity, coal mining is proving disastrous for its shareholders. Peabody shares are down 62% over the last two years relative to the S&P500, which is up more than 30% in this same period,” Mr Buckley said.

“This is not healthy company: on a five year time frame, Peabody is down 75%, while the S&P500 index is up 80%. These losses are partly due to falling revenue from Peabody’s Australian coal business, reflecting stalling global demand and an increasingly dim investment outlook for fossil fuels.

“Peabody is carrying major financial liabilities. Against a current equity market capitalisation of US$2.8bn, it has close to USD$3.7Billion of take or pay liabilities, US$5.5bn of net debt, plus US$0.7bn of unfunded mine rehabilitation provisions and a further US$0.7bn of accrued but unfunded post retirement pension liabilities.

Despite a production rate of 36-38Mtpa providing huge scale, Peabody’s Australian business has seen gross earnings year-to-date down 89% year-on-year to only US$31m. This gives Peabody an Australian gross profit margin of less than 2%, a fraction of the 13% reported in the previous corresponding period. This reflects average realised selling prices down 15% year-on-year to US$71/t (US$67/t in the latest quarter) while operating costs have only been reduced by 4% to US$70/t.

“Having massively overinvested at the peak of the coal cycle in buying Macarthur Coal in late 2011, Peabody has now cut all discretionary capital expenditure. All new growth initiatives have been shelved and maintenance expenditure has been reduced to only a third of the annual US$650m depreciation and depletion charge,” Mr Buckley said.

“Despite management commentary referring to strong underlying demand, the Energy Information Administration reports US domestic coal consumption is down year on year to date in 2014, and down 21% from its peak in 2007. Likewise through the first eight months of this year, US coal exports are down 16% compared to the year-ago period to 61Mt,” Mr Buckley said.

“If operating losses at the current rate continue, Peabody will increasingly find debt refinancing harder to complete, and pension and mine remediation liabilities are unfunded and hence exposed.”

Tim Buckley is the Director of Energy Finance Studies, Australasia for the Institute for Energy Economics and Financial Analysis. He has 25 years of financial markets experience, including 17 years with Citigroup culminating in his role as Managing Director and Head of Australasian Equity Research. Mr Buckley has spent the past five years investigating trends in global renewable energy.