Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Like a fashion store that's seen better days, Peabody Energy has tried to stoke buyer interest in recent years by offering some deep discounts on select Australian coal mines. Those in the market for such assets needn't rush: it's about to turn into a clearance sale.

The biggest U.S. coal miner by tonnage may seek Chapter 11 bankruptcy protection, it said Wednesday, crippled by $6 billion of debt and operations that have turned a profit in just one quarter since the start of 2013. Administrators scouring Peabody's books to work out the best way to raise some cash will be taking a close look at what's left of its balance sheet Down Under.

Down, Down, Down
Peabody quarterly net losses...and four instances of net income
Source: Bloomberg data

Even after four years of depreciation, writedowns and asset sales, Peabody still has a bigger asset base in Australia than it does in the U.S.:

Where the Money Is
Peabody's Australian assets are more valuable than its U.S. ones
Source: Bloomberg data

The majority of these mines are producing export coal to feed the power stations and blast furnaces of Japan, Korea and China, as opposed to the vast North American operations that mainly dig stuff up for the domestic market. Anyone making a bet that coal prices are at a cyclical low would find the Australian pits much more attractive than Peabody's U.S. mines, which are mostly tied to long-term contracts with little room for improvement should prices rise.

Peabody Australian mines

Furthermore, buyers are already out there. Former Xstrata Chief Executive Officer Mick Davis has been looking at Rio Tinto's Australian mines for his X2 Resources private-equity firm, according to people with knowledge of the matter, while Mitsubishi Corp. -- which has mine ventures with BHP Billiton in Australia's Bowen Basin nearby several of Peabody's pits -- plans to double its output of coking coal by 2020

If Peabody does enter Chapter 11, these assets could find themselves on the block rather quickly. Regardless of whether the administration of the U.S. business triggers insolvency in its Australian subsidiary, those managing the process will be obliged to run the business for cash. Short of praying for a recovery in coal prices that hasn't come over the past four years, asset sales are likely to be their best course of action.

There's just one problem with Peabody's Australian mines: Exposed as they are to global market prices, they're not very profitable at the moment. Its metallurgical mines, which dig up the coking coal used in steelmaking, have lost money even at the most generous level of gross profits in five out of the past eight quarters. Due in part to some $1.28 billion of asset impairments across the company last year, its international operations made a pretax loss of $1.47 billion during 2015 -- an extraordinary negative margin of 74 percent on its $2 billion of revenue.

There's Money in Dirt
Gross profits per metric ton at Peabody coal operations
Source: Company reports

That's unlikely to be enough to put off motivated buyers. Anyone who's watched the counter-intuitive gyrations of share prices after earnings releases will know that asset impairments and sell-offs at fire-sale prices are often looked on fondly by investors. Profits have a habit of magically improving once you've removed the burden of all those depreciation charges.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net