Decline in coal export prices puts squeeze on Peabody margins

The profitability of coal mines operated in Australia by Peabody Energy slumped in the September quarter, amid continuing pressure on export prices, forcing the group to continue cutting costs to maintain the viability of its local operations.

The gross profit, as measured by earnings before interest, tax, depreciation and amortisation, of Peabody's Australian mines in the September quarter slumped to just $US74.8 million ($78 million) from $US221.4 million a year earlier.

In the nine months to the end of September, the gross profit of Peabody's Australian mines stood at just $US287.7 million, from $US757.4 million tonnes a year earlier. The slump came as the price achieved per ton of coal sold from its local mines fell to $US77.85 from $US101.85 a year earlier.

The steep fall in the sales price left the company scrambling to cut costs quickly to protect margins.

So far this year, Peabody has cut an estimated 850 jobs at its Australian mines, with about half being contractor jobs and the balance internal employees. Earlier this week, it halted operations at its Metropolitan mine, south of Sydney, where it is seeking to stem claims for wage rises.

To cut costs, the company has also moved from contracting out the operations of its mines to running them directly.

The gross profit margin per ton of coal sold from its extensive Australian mines fell to $US8.25 in the September quarter, down from $US26.08 a year earlier.

Lower prices suffered from its Australian sales were partly offset by a 6 per cent rise in shipments to 9 million tons, which included 4 million tons of coking coal and 3.1 million tons of steaming coal, it said. In the same quarter a year ago, output totalled 8.5 million tons.

The production rate will be unchanged through the balance of the calendar year, since the company is targeting 2013 Australian sales of 34 million to 36 million tons, of which 15 million to 16 million tons will be coking coal for the steel industry, which carries higher profit margins, and 11 million to 12 million tons of export steaming coal, which is mostly used to generate electricity and for other industrial purposes.

Peabody said it continued to work to cut costs at its local operations by reducing the number of contractors used, owner-operator conversions at its mines along with lifting productivity at mines producing lower-quality coal, which is used for pulverised coal injection directly into blast furnaces.

Peabody paid $1.5 billion for Excel Mining in 2006 and followed that with the $5 billion purchase of Macarthur Mining in 2011, just as coal prices were peaking.