St. Louis-based coal miner Peabody Energy Corporation’s (BTU) third quarter 2011 earnings of 87 cents per share missed the Zacks Consensus Estimate of 89 cents. The company’s profits for the quarter also dipped 12% from last year’s earnings of 99 cents, reflecting expenses related to the purchase of Macarthur Coal.
Revenue
Peabody’s quarterly revenue, at $2.04 billion, increased 9% year-over-year on the back of higher coal prices across the board and higher U.S. volumes. The company’s revenue for the quarter was slightly below the Zacks Consensus Estimate of $2.07 billion.
Peabody’s U.S. operations posted a revenue increase of 11.6% year over year in the third quarter, mainly driven by robust volumes growth as well as better pricing compared to last year. Australian revenues in the quarter rose 3.3% driven by better realized prices, which were offset by poor sales volumes.
Operating Results
Third quarter of 2011 saw Peabody’s total sales volumes 0.4 million tons from prior-year levels to 64.0 million tons. The decline in sales volumes came largely from the lower volumes sold in Australian (down 10.8%) and the Trading and Brokerage Operations (down 26.7%) segments.
However, an 8.3% increase in coal shipments from the Midwestern U.S. mining operations and a 4.3% increase from the Western U.S. mining operations largely offset the decline witnessed in the other two segments.
Though the volumes performance in the quarter failed to impress, better prices realized for the coal shipped in the quarter made up for the overall increase in Peabody’s revenues. Revenue per ton, in the U.S., increased 6.5% year over year to $22.21, while revenues per ton in Australia rose 15%.
Peabody’s earnings before interest, tax, depreciation and amortization (EBITDA) in the third quarter were $504.4 million, declining 11.7% from $571.3 million in third quarter 2010. Total operating profit in the quarter dipped 15.5% to $375.7 million from $444.7 million in the year-ago quarter.
Financials
As of September 30, 2011, Peabody had $1.4 billion in cash and $351.9 million in short inventories. Long term debt at the end of the third quarter was $2.46 billion.
Despite a dip in operating profits, operating cash flows in the third quarter rose 34% to $574.9 million led by higher revenues.
Acquisition Update
Yesterday, PEAMCoal, the Peabody-ArcelorMittal (MT) joint venture gained more than 60% interest (majority) in Macarthur Coal, the world’s largest seaborne low-vol PCI supplier. This action made the offer unconditional. The offer price for all shareholders will increase from A$16.00 to A$16.25 per share if PEAMCoal acquires relevant interests in at least 90% of Macarthur shares by 7 p.m. (Brisbane time) on November 11, 2011.
Also, at the same time, ArcelorMittal announced its intention to sell its interest to Peabody, in lieu of proceeding with the joint venture. As a result, Peabody will own 100% of PEAMCoal and become the sole acquirer of Macarthur under the takeover offer.
The Macarthur acquisition will expand Peabody’s presence in the highest-growth coal markets with a quality metallurgical coal product. It will provide the company with a large resource base, significant potential synergies and a major growth pipeline.
To finance the Macarthur acquisition, Peabody is obtaining a new senior unsecured term loan of up to $1 billion, and intends to fund its requirements related to the acquisition with cash and debt.
Guidance
Going forward, Peabody expects the fourth quarter to benefit from higher volumes in the U.S. and Australia, partly offset by effects related to the resumption of production and recovery of shipments at the North Goonyella Mine as well as any industry-wide impacts due to weather and transportation challenges.
Peabody now expects full-year 2011 EBITDA to come in the range of $2.125 – $2.325 billion, with adjusted earnings per share of $3.70 to $4.15. Full-year sales are now expected to be within the 245 – 255 million tons range, including 27 to 29 million tons from Australia, 200 to 205 million tons from the United States and the remainder from Trading and Brokerage activities.
We note that Peabody continues to advance multiple organic growth projects in Australia and the United States to to satisfy the rising demand in emerging markets. The company continues to anticipate full-year capital expenditures of $900 – $950 million, with the majority targeted at growth and expansion projects.
Our Take
Looking ahead, Peabody remains well positioned in the U.S. with strong committed sales and low-cost production. The company continues to grow its global footprint serving the increasing Asia-Pacific demand by expanding its existing mines and completing the Macarthur acquisition.
Peabody’s closest peer Arch Coal Inc. (ACI) is expected release its third quarter results on October 28, 2011. The Zacks Consensus Estimate for the third quarter is 15 cents per share.
Peabody Energy currently retains a Zacks #3 Rank (short-term Hold rating). We maintain our long-term Neutral rating on the stock.
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