Questions arise over funding for Peabody’s $5.8bn coal mine deal

Peabody Energy’s share price in the US is down almost 50 per cent in the past year.

Peabody Energy’s $5.8bn Australian coal mine acquisition from Anglo American remains under a cloud after its shares have dived, the coal price has fallen and funding costs have blown out since it struck its deal in November.

Peabody Energy shares have crashed more than 50 per cent in the past year, and almost 40 per cent in six months, at a time that the company’s annual report said it had $US1bn ($1.6bn) of liquidity in December.

The deal at the time was financed by a $US2bn bridging loan provided by Kohlberg Kravis Roberts and Jefferies, but that was in November, and market volatility and the fall in the coal price means that funding terms for debt are now less favourable.

The coal price has fallen from about $US200 a tonne to about $US185 a tonne, which some coal mining groups is the difference between making a profit and breaking even.

At the time of the announcement, Peabody Energy said it would look to finance the deal at a leverage ceiling of 1.5 times earnings. It would refinance the bridging loan with high-yielding secured notes, a secured term loan and minority stake sales of its mines including its Centurion mine in Australia (currently under way), Moranbah, Grosvenor and Capcoal mines.

Other forms of funding would be convertible unsecured notes and common equity and reclamation bonding alternatives.

Now there are questions about where Peabody Energy finds the money. It was expected to close in the middle of 2025, contingent on regulatory approvals, pre-emptive rights and customary closing conditions.

Peabody Energy’s share price in the US is down almost 50 per cent in the past year and almost 40 per cent in six months with its market value at $US1.6bn.

At the time of the announced transaction, it did not say that it was subject to financing, which suggests that the deal will complete, but the question is at what cost to Peabody.

Shareholders have long memories, and Peabody before has wound up in Chapter 11 Bankruptcy in 2016 after paying too much for large acquisitions, only for the price of coal to collapse.

Peabody agreed to a cash consideration of up to $US3.8bn, including $US2.05bn at completion and a deferred cash consideration of $US725m, plus the potential for up to $US550m in a price-linked earn-out and a contingent cash consideration of $US450m linked to the reopening of the Grosvenor mine. The miner is based in St Louis and the play for Peabody Energy was to reweight its portfolio more towards metallurgical coal from thermal coal, and its investors on Monday sold off the New York-listed stock on the back of its purchase.

Peabody is understood to have brought in plenty of reinforcements, with consortium partners in addition to Indonesia’s BUMA in its Moelis-advised camp.

It has counted activist investor Elliott Investment Management as an investor over the years and has taken a cautious approach since its recapitalisation to deal making activity.

The company became a major force in the Australian coal market following its acquisition of the Australian-based Macarthur Coal portfolio in 2011 for about $US5bn.