The World's Thirst for
Energy Means a Bright Future for Peabody
(BTU)
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By:
Elliott Gue
Editor, The Energy Strategist, The Energy Letter,
and Trader's Talk
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Published:
July 30, 2007
Coal is far and away the world's most
important source of electric power and has been for decades. There
are two good reasons for this: coal is more abundant than oil or gas
and it's cheap.
Coal stocks had a rough run in the latter half of 2006. But now
they're cheap, and a great deal of negative news flow on coal prices
has been priced in. It's time to increase your exposure to the
group.
My favorite play on coal is America's largest coal miner, Peabody
Energy (NYSE: BTU, 41.08).
Peabody has the largest exposure to the low-sulphur coal reserves in
the Powder River Basin (PRB) in the western U.S., the region of the
country that will see the strongest growth in coal production.
Peabody has historically had some mines in Appalachia, but these
operations are going to be spun-off into a separate company. Peabody
intends to re-focus its resources on the PRB and its international
operations.
I view this as a positive step. Eastern U.S. mining companies have
seen particularly rapid growth in labor costs and have been
suffering from high employee turnover. This is particularly true
with younger miners -- several companies operating in Appalachia
have noted that young miners tend to leave within one year of
starting work. This is a big problem. Young miners require a large
investment in training, and that investment can't be recouped when
turnover is so high.
The disaster at the Sago mine in early 2006 offers a clear example
of why labor costs are rising so rapidly in the eastern U.S.
Underground coal mining is dangerous and unpleasant. To achieve the
dramatic safety gains of the past few decades, coal companies have
and must continue to spend big on advanced training. Big,
well-publicized disasters like the explosion at Sago also further
discourage potential workers from entering the industry.
The strip mining that goes on in the PRB is another matter entirely.
Fewer accidents have occurred in this region and workers require
less training. Thus, companies like Peabody just haven't seen the
rapid cost inflation of the eastern miners.
And international operations are becoming an ever-larger part of the
Peabody story, moving from 1% to 30% of
earnings before interest depreciation and amortization (EBITDA)
in just five years. While the picture in the U.S. is rapidly
improving and there are signs that Peabody is betting on continued
strength, the situation internationally is even more bullish.
International markets are on fire.
The key production market internationally is Australia. The nation's
proximity to important Asian markets, including China and India,
makes it a natural for meeting rapidly rising coal demand.
Peabody has always had some operations there, but it recently beefed
up its presence by purchasing Excel Coal, an Australian producer
with a large Asian export business. Australia is the major
international production market for Peabody, and the company has
highlighted the nation as a key focus for its future capital
spending.
China and India are big demand growth stories for coal. With their
economies growing in the upper-single to low-double digits, you can
imagine the wall of new demand for electricity every year. Literally
millions of new consumers are buying their first TVs and
refrigerators each year, which adds up to more power demand.
Peabody is now a huge producer in Australia. And there's plenty of
room for the company to make improvements to Excel's mines and
generate more output. This coal will be in high demand for export to
Asia.
Peabody Energy is a buy under $57.
Elliott Gue
Editor
The Energy Strategist, The Energy Letter,
and Trader's Talk
About Elliott Gue
The Energy Letter Editor Elliott H. Gue specializes in the
global energy markets and also has broad interests in technology and sector
investing. He examines the market sector by sector to find the industries with
big tailwinds and avoid investing pitfalls. He has worked and lived in Europe
for five years, where he completed a master's degree in finance from the
University of London, the highest-rated program in that field in the U.K. He
also received his bachelor's degree in economics and management from the
University of London, graduating in the top 3% of his class. Elliott was the
first American student to complete a full degree at that business school.
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