Coronado Global Resources confirms merger talks with US coal giant Peabody

Coronado Global Resources has confirmed it is in talks with US coal giant Peabody Energy, with the $9.3bn combination a fresh sign the coal sector is likely to run hot for some time.

Peabody operates a suite of thermal and coking coal mines in Australia. Picture: Luke Sharrett/Bloomberg

Coronado Global Resources has confirmed it is in talks with US coal giant Peabody Energy, with the $9.3bn combination a fresh sign the coal sector is likely to run hot for some time.

First revealed in Data Room, Coronado said on Wednesday it is “in confidential discussions with Peabody regarding a potential combination transaction”.

Any transaction could see Coronado add its Curragh coking coal mine in Queensland’s Bowen Basin, plus its two US mines to the suite of Australian and US operations of Peabody.

Coronado carried a market capitalisation of $3.24bn on Tuesday, and Peabody is capitalised at about $US3.8bn ($6.05bn).

Peabody operates a suite of thermal and coking coal mines in Australia, including the Wambo and Wilpinjong mines in NSW, along with the Metropolitan metallurgical coal mine in the same state. It also controls four coking coal mines in Queensland’s Bowen Basin and nine thermal and metallurgical coal mines in the US.

Both companies have been the beneficiaries of soaring coal prices caused by the global energy crisis triggered by Russia’s invasion of Ukraine, with Coronado delivering a $US561.9m half-year profit in August – up from a $US96.1m loss in the first half of 2021.

Peabody’s last quarterly financial report to the US market showed the company booked net profits of $US290m for the first half, up from a $US108.7m loss.

A merger with Peabody would offer Coronado majority owner Energy and Minerals Group an exit from the company, with the US private equity firm still holding a 50.5 per cent stake in the coal miner – unchanged since Coronado’s 2018 float.

But despite the resurgent coal price, it is not clear how Peabody would pay for the acquisition of Coronado, given it still carried more than $US1bn in debt at the end of June.

Peabody had about $US1.1bn in cash at the end of the period, but any cash offer for Coronado would likely again put pressure on Peabody’s balance sheet.

Market sources suggest a scrip offer is more likely, but whether the Australian fund managers that make up the bulk of the minority Coronado holdings would be keen on holding shares in Peabody is also unclear.

Only two years ago Peabody was again flagging a potential return to bankruptcy protection in the US as it struggled with excessive debt levels. It only staved off a return to the US bankruptcy courts by splitting off the earnings from its best Australian mine, Wilpinjong, to service its debts as a condition of a company-rescuing refinancing package in 2021.

Another major miscalculation ensured Peabody has missed some of the benefits of soaring thermal coal prices, after the company declared a spectacular hedging loss in the March quarter, telling investors it had been caught out to the tune of $US530m by sharply rising coal prices.

In early 2021, Peabody hedged 1.9 million tonnes of future output from its Wambo underground mine in NSW at an average $US84 a tonne and was hit by a margin call when coal prices soared above $US400 a tonne.

Peabody was forced to raise $US150m in fresh debt to cover the hedge book at its Wambo mine, and said in its June quarter accounts it had booked a $US190m loss on the contracts in the first half of 2022 and was flagging another $US325.5m in likely losses on the toxic hedge book.

In the June quarter Peabody booked a $US409.5m net profit, up from a $US28.6m loss in the March quarter.

Coronado said on Wednesday no transaction had been agreed between the two companies, and there was “no certainty that the discussions will lead to a transaction”.

Coronado shares closed up 15.5c, or 8 per cent, to $2.09 on Wednesday.

Originally published as Coronado Global Resources confirms merger talks with US coal giant Peabody