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Peabody on the brink of Chapter 11 bankruptcy

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World Coal,

Peabody Energy, the largest US coal producer, has moved on step further to filing for Chapter 11 bankruptcy protection, admitting that it exercised the 30-day grace period on interest payments of US$71.1 million due on 15 March.

It also noted that its independent auditors have warned that, without significant improvements, asset sales and/or other favourable changes, the business may not be sustainable over the course of the year.

The auditor’s opinion, which was included in the company’s Form 10-K annual report, is likely to accelerate the company’s obligations to repay its massive debt pile, which stands at about US$6.3 billion after the company’s US$5.1 billion acquisition of Australian coal company, Macarthur Coal, at the height of the mining boom in 2011.

Peabody’s rivals, Arch Coal and Alpha Natural Resources, have already been forced into bankruptcy as a result of their own significant debt loads from large acquisitions of metallurgical coal assets at a time when metallurgical coal was fetching over three times its current price.

Peabody had been hoping that the sale of two mines in Colorado and New Mexico to Bowie Resources would provide some respite but the sale is yet to be completed.

Peabody’s announcement will not come as a surprise to the market, said Doyle Trading Consultants’ Jack Chidester, noting that the company drew down the balance of its US$1.65 billion revolving credit facility in 4Q15 and had admitted that one if its first-line debt holders had expressed concern that restructuring talks were not happening in bankruptcy court.

“Today’s news does not guarantee Peabody will file for bankruptcy [but] we believe a Chapter 11 restructuring is the likely course of action, particularly amid pressure from senior creditors,” said Chidester.

Exacerbating the pain for US coal miners, the Energy Information Administration recently released analysis forecasting that natural gas would overtake coal on an annual basis in the US energy mix in 2016. According to the EIA, natural gas will supply 32% of US electricity generation, while coal will supply just 31%.

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