Peabody gets $534m coal margin call, Goldman steps in with 10% loan

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(Bloomberg) — Locking in a price to sell coal at $84 a metric ton must have seemed like a good bet for Peabody Energy Corp. one year ago.

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At the time, many factories and offices were still closed, electricity demand was low, and as vaccines began to be distributed, it was unclear when the global economy would experience a fuller recovery. Lining up hedging contracts for Peabody’s Wambo mine would ensure the Australian site would be profitable at a time when world leaders seemed determined to move away from the dirtiest fossil fuel.

The world is, of course, very different today. Russia’s war in Ukraine has further fueled a coal rally driven by a squeeze in global energy supplies. Australia’s benchmark coal price has risen more than 400% in the past 12 months, hitting $425 on Wednesday. And instead of reaping the rewards of those hurdles, Peabody was slammed with a $534 million margin call.

The sum represents more than half of the cash the American coal giant had at the end of December and prompted the company to enter into a $ 150 million line of credit with Goldman Sachs Group Inc. % interest rate and for the fact that the bank announced in 2019 that it would phase out coal financing.

“That’s a lot of money that needs to come out now,” said Andrew Blumenfeld, director of data analytics for McCloskey. “That’s why they had to make a deal with Goldman.” He said the 10% rate was unusually high and likened it to “a payday loan” needed to cover immediate expenses.

This could be just the beginning of the blow to Peabody, America’s biggest coal miner. Margin calls could increase if the coal market rises. Prices could hit $500 a tonne this year, said Steve Hulton, senior vice president of coal markets at Rystad Energy in Sydney. The deal with Goldman will give the company some breathing room, he added.

“That’s what really worries them,” he said, referring to the possibility of more margin calls.

Peabody did not respond to calls and emails seeking comment. Goldman responded with its policy statement regarding coal financing, but did not provide further comment.

Peabody’s margin call is one of the starkest examples of how the volatility sweeping commodity markets will slam companies betting the wrong way. Oil, metals and grain prices have surged since Russia’s invasion of Ukraine, which threatens to disrupt supplies at a time when many commodities were already short of production. Chinese nickel company Tsingshan Holding Group Co. faces billions of dollars in potential losses on short positions in the metal, while commodity trading firms are forced to seek additional funding amid historic spikes in prices stretch credit limits.

coal rally

Coal prices began to climb in the middle of last year as the global economic recovery led to increased electricity consumption and unexpectedly revealed a global shortage of fuel for power plants. The Australian benchmark price almost tripled from the first quarter of 2021 to the third.

The war in Ukraine has further fueled market fears of shortages. Russia provided nearly 18% of global coal exports in 2020 and was Europe’s top supplier. Nations around the world are now looking to line up other supplies, but it’s going to be difficult. Few miners have invested in new capacity to deliver a product that has a bleak future in a world committed to fighting climate change, and they have limited ability to increase production. Six months ago, there was already a global shortage when countries demanded fuel for power plants, and if Russian tons are taken off the market, it will only get worse.

“That’s more black swans than I’ve ever met,” Blumenfeld said of McCloskey. “I’ve never seen this kind of market.”

In the long run, higher prices will be good for coal companies, even Peabody.

The company has hedged 1.9 million tonnes of the Wambo mine and has derivative contracts for a total of 2.3 million tonnes. Most of the deals were signed in the first half of 2021. Its marine thermal unit, including Wambo and another Australian mine, exported 8.7 million tonnes last year, and most of the production that is not covered through the hedges is priceless. This means that the company can possibly take advantage of a market that has never been higher.

‘Pure Gaming Dinosaur’

Margin call is “a short-term pain,” Rystad’s Hulton said. But the company will likely see significant revenue gains later, which will help it cover Goldman’s financing costs, he said.

The $150 million line of credit matures in 2025, and Peabody said the cash would “support the company’s potential short-term cash needs.”

For Goldman, providing financing to America’s largest coal miner may seem to contradict its 2019 commitment. A close look at the details of its policy, however, shows that the bank has said it will refuse “direct financing” deals for new mines. coal, leaving the door open to other arrangements. The bank said it would phase out funding for thermal coal mining companies that lack a diversification strategy “within a reasonable timeframe”.

Peabody has been mining coal since its inception in 1883, making it a “dinosaur in its own right,” said Justin Guay, director of global climate strategy for Sunrise Project. While the company this month announced a joint venture to develop solar farms, he said the venture was not large enough to change the nature of Peabody’s business and should not be viewed as a diversification strategy. .

Goldman “wrote a weak policy for itself, and now they’re driving a coal truck through these loopholes,” Guay said. “They just can’t help themselves.”

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