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Peabody's 2013 Outlook Unfavorable

CNX BTU

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The coal mining company Peabody Energy (BTU - Analyst Report) released some details of its first quarter and full year 2013 financial outlook. Given the backdrop of two mine closures in the last four months, investors of Peabody will be eager to know where the company is heading in 2013.

Peabody’s first quarter 2013 results will be negatively impacted by a 10% increase in unit costs in Australia, a 5% decline in average realized prices of coal due to expiration of high priced coal contracts and a loss of 2 million tons of sales in the U.S. due to a decline in market-related demand.  However, the company expects to reverse the tide as the year progresses.

Total U.S. sales volume in 2013 is expected to be lower than 2012 levels, with higher sales expectation from the Australian platform marginally arresting the downtrend. Besides, 2013 capital expenditure (capex) is expected to be 50% lower than 2012 targeted levels. The cut in capex suggests that expansion activity at Peabody will remain muted going forward.

The year ahead looks none too rosy for this coal miner unless there is a dramatic economic recovery in the U.S. We believe the chances of such a recovery are debatable ahead of the burning Fiscal Cliff issues.

The coal companies continue to face the burnt of a mild winter, rising competition from natural gas producers and increasing usage of alternate energy for electricity generation. The lackluster demand has forced Peabody to shut its Air Quality Mine in Vincennes, Indiana in September 2012.

The recovering prices of natural gas in the U.S. could bring in a glimmer of hope for the coal producers. A biting winter could also revive demand. However, environmental legislation is bound to affect the coal companies. Peabody closed one of its mines  owing to environmental reasons. Another coal operator CONSOL Energy (CNX - Analyst Report) also decided to idle its Miller Creek surface mine in West Virginia citing environmental reasons.

St. Louis, Missouri based Peabody Energy Corporation is a private sector coal mining company. The company has interests in 28 coal operations located in the United States and Australia, and has joint venture interests in a Venezuelan mine. Peabody Energy retains a short-term Zacks #3 Rank (Hold rating).

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