Peabody's Mongolian Partnership

Recently, Peabody Energy Corp. (BTU - Analyst Report), the world's largest pure-play coal company, renegotiated an agreement for a 50/50 joint venture [JV] partnership with Polo Resources Limited. The JV gives BTU ownership in 50% of Polo's Mongolian coal interest for a cash contribution of $25.8 MM.

Mongolia holds a substantial amount of metallurgical coal reserves that are in close proximity to Chinese and other Asian markets. There is believed to be up to 1 billion tons of high quality (thermal and metallurgical) reserve potential located in the South Gobi coal region.

This is a great opportunity for BTU to acquire high-quality assets at a time when asset values are depressed. Although large scale development would not occur for several years, this will give Peabody access to the highest demand markets with the most growth (i.e. China, India and other Asian emerging markets).

Over the medium-term, steel consumption looks to grow most rapidly in emerging economies such as China and India. According to the Australian Bureau of Agricultural and Resource Economics (ABARE) urbanization, industrialization and a growing work force will be integral drivers of steel consumption. ABARE estimates that steel consumption in China and India will grow by 7% per year over the next 5-6 years.

Because metallurgical coal is a key ingredient in the steel-making process, this also means the demand and price for metallurgical, or coking, coal will rise over the medium-term as well. Already having a competitive advantage over its U.S. peers via its Australian assets, the development of potential Mongolian assets over the next several years would give Peabody high quality reserves with more attractive proximities to the highest demand markets in the world.