NSW and Queensland coal miner and exporter Peabody Energy has been forced to raise $US150 million to maintain its potential near-term liquidity requirements, after soaring coal prices forced it to find an additional $US534 million to satisfy margin requirements for its derivative contracts.
Peabody currently has derivative contracts covering 2.3-million tonnes of thermal, the majority of which were entered into in the first half of 2021 and relate to 1.9-million tonnes of production from the Wambo mine in the Hunter Valley region of NSW which exports its coal through the port of Newcastle.
Peabody put in place hedge contracts to support the profitability of the mine, securing anticipated average prices of $US84 a tonne (a good price in early 2021) through mid-2023.
But since last August coal prices have exploded – firstly because of tight market conditions caused by shortages in China and India in late 2021 and Indonesia in January.
The Russian invasion of Ukraine in late February however blew prices out of the water, sending the price of typical NSW thermal coal past $US400 a tonne (according to the ICE Newcastle Thermal Coal Index) to a high of more than $US442 a tonne this week. It was $US426 a tonne on Thursday for April delivered thermal coal.
That is up more than 260% from the closing index price of $US169.17 a tonne on December 31, 2021, forcing the huge margin call.
Peabody said that, with the exception of the 1.9-million metric tonnes at Wambo priced at $84 a tonne the remainder of its export sales were largely unpriced and would get the benefit of the current high prices if they persist into the rest of this year.
Peabody said the $US150 million in new credit would come from Goldman Sachs and, along with available cash, would support the near-term liquidity requirements in the event of additional increases in market prices for thermal coal.
Under the company’s derivative contracts, cash collateral is returned to the company upon reductions in the underlying market coal price or as the company delivers seaborne thermal coal into the market at spot prices.
Further, the company said it expected to generate significant operating cash flows from its unpriced sales based on its current operating plans, if the current market dynamics persisted.
The credit facility would be a senior, unsecured obligation of Peabody, which matures on April 1, 2025, and would accrue interest payable at 10% a year on drawn amounts.
While Peabody’s shares fell 16.5% on Monday and have been weak since, they are still up more than 110% year to date.
