World's largest coal producer warns of bankruptcy risk

Peabody Energy is in a race to renegotiate debts. Photo / Getty Images

Peabody Energy, the world's largest private sector coal producer, said there was a risk it could go bankrupt for the second time in five years, as it raced to renegotiate debts in the wake of tumbling demand for the fossil fuel.

The New York-listed miner is at the centre of upheaval in energy markets as natural gas and renewables replace coal on the North American power grid. The economic fallout of coronavirus has also sapped demand for coal used in steelmaking, an important market for Peabody's Australian operations.

St Louis-based Peabody shed $5.2bn in debt while in bankruptcy court in 2016-17, leaving hedge fund Elliott Management, a former debt holder, as its largest shareholder.

Yet the company is again struggling to meet its debt obligations, according to filings.

Twice weekly newsletterEnergy is the world's indispensable business and Energy Source is its newsletter. Every Tuesday and Thursday, direct to your inbox, Energy Source brings you essential news, forward-thinking analysis and insider intelligence. Sign up here.

Peabody reported a net loss of $67.2m on Monday as coal sales volumes dropped by 23 per cent in the third quarter to 34.7m short tons. "2020 has been a year unlike any other," Glenn Kellow, chief executive, told analysts on a conference call.

In Australia, an insurance company sued Peabody to demand more collateral held against surety bonds, which are a form of guarantee to fund the costs of cleaning up shuttered mines.

Earlier this month the company agreed with the insurer and the writers of other surety bonds to resolve about $800m in collateral requests.

However, the deal only stands if the company is able to get relief on debt covenants from its banks and to extend the maturity of its 2022 corporate bond with investors by the end of December.

"They have been unable to reach an agreement with bondholders and their revolver banks," said a trader at one of the fund managers that holds the 2022 bonds. "It's really just about whether there is a way to get back to the table. We'll see."

The 2022 bond edged lower on Monday to a new low of just above 40 cents on the dollar, having traded close to 100 cents on the dollar in February, before a sell-off prompted by the pandemic.

Peabody is the fifth-biggest coal producer in Australia. It has five mines producing coking coal, a key ingredient in steelmaking, and three that churn out thermal coal, which is burnt in power stations to produce electricity.

It is also a leading producer in the US where its coal properties include North Antelope Rochelle, the world's largest coal mine. A cost-saving joint venture proposed with Arch Resources was blocked by a US judge in September.

Peabody said it was "probable" that its fourth-quarter results would push the company below a required minimum net gearing ratio under its credit agreement with banks. The company reclassified all of its $1.6bn in debt as current on its balance sheet.

"The combined risks associated with our recent financial results, market conditions, additional collateral demands and potential credit agreement non-compliance raise substantial doubt about . . . our ability to continue as a going concern," Peabody said.

The company's shares fell 7.7 per cent on Monday to a new post-bankruptcy low of $1.08.

- Financial Times