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We have maintained our Neutral recommendation on coal producer Peabody Energy Corporation (BTU - Analyst Report). The status quo is explained by an unfavorable guidance for 2013.

The sluggish pace of the U.S. economic recovery and stringent environmental regulation continue to weigh on the company. These have prompted the company to shut down two of its mines in the second half of the year.

The recent company guidance shows that the 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.

Besides, 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.

The positive catalysts for the company could be the recovering prices of natural gas in the U.S. A biting winter could also revive demand. Increasing coal based electricity generation in India and Japan could also benefit the company given its Australian exposure.

Despite an expected recovery in 2013, the prospects for the coal company are far from robust. The lingering recession in Europe and increasing use of alternate energy in the U.S. will continue to pose challenges for the coal companies.

The Zacks Consensus Estimates for the fourth quarter and full year 2012 are 26 cents and $1.97 per share, respectively. The estimates reflect a year-over-year decline of 80.9% and 52.8% from the respective prior-year levels. The downtrend points towards a steady decline in the demand for coal thereby hurting the earnings prospects of the company.

Peabody Energy retains a short-term Zacks #3 Rank (Hold rating). We presently prefer Hallador Energy Company (HNRG - Snapshot Report) holding a short-term Zacks #2 Rank (Buy rating).

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.

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