Peabody Energy Corporation (OTCMKTS:BTUUQ) has become one of the great spectacles of the trading year. It’s like the nine-foot tall bearded lady or the boy with three legs at the circus. The chart is pure P. T. Barnum at this point. OTC traders can’t take their eyes off it. To wit: the common shares ran from $0.54 to $18.75 in just a few months, and then fell 60% in a couple days. Here is a look at why and how.
In our last piece, we pleaded with readers to be careful about fading the action in shares of BTUUQ (it subsequently rallied from $6.75 to $18.75 in the following two days!), noting that the company’s bonds were starting to get bought in a panic and that the cost of borrowing shares to short had skyrocketed into the bounce. That’s an incredibly frightening combination for a short in a Chapter 11 case. Then add in erupting average daily dollar volume and a float under 18 million shares, and you have a perfect storm of squeeze potential. The final nail in the coffin for shorts was the renegotiation of thermal and met coal pricing in Asia in October establishing a major jump in coal prices of between 50% and 110% premia to pricing just months ago. That brings into the picture a real risk of total recovery for the company. Even if that risk is small, it’s enough to liquidate the short interest that had built into the initial bounce from $1/share to $5/share.
Peabody Energy Corporation (OTCMKTS:BTUUQ) trumpets itself as a company that engages in the mining of coal. The company operates through Powder River Basin Mining, Midwestern U.S. Mining, Western U.S. Mining, Australian Metallurgical Mining, Australian Thermal Mining, Trading and Brokerage, and Corporate and Other segments.
Peabody Energy is involved in mining, preparation, and sale of thermal coal primarily to electric utilities; and metallurgical coal that include hard coking coal, semi-hard coking coal, semi-soft coal, and pulverized coal injection for industrial customers. The company supplies coal primarily to electricity generators, industrial facilities, and steel manufacturers.
As of December 31, 2015, BTUUQ owned interests in 26 active coal mining operations located in the United States and Australia. It also engages in direct and brokered trading of coal and freight-related contracts, as well as provides transportation-related services, which involves financial derivative contracts and physical contracts. In addition, the company operates a mine-mouth coal-fueled generating plant; manages its coal reserve and real estate holdings; and supports the development of Btu Conversion and clean coal technologies.
As of December 31, 2015, the company had 6.3 billion tons of proven and probable coal reserves.
On April 13, 2016, Peabody Energy Corporation along with its affiliates filed a voluntary petition for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the Eastern District of Missouri. Peabody Energy Corporation was founded in 1883 and is headquartered in St. Louis, Missouri.
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As we noted above, this stock started to rally on some improving trends, but those trends came in a context of seeming hopelessness for recoverable value in the common equity. As such, there was a scramble to get a borrow line on shares for massive shorting off the initial squeeze.
However, the situation quickly devolved into a nightmare for bear fund players in October when the market for thermal and met coal exploded in a ramp of demand from Asia after production cutbacks in China. Spot prices more than doubled due to a Chinese curb to production capacity, which was compounded by intense flooding in the Shanxi province.
The combination of factors created a dearth of local supply, which in turn ramped import needs for coal. The result was a sudden and massive jump in the market price for coal.
Contracts for Japanese players are generally renegotiated on a quarterly basis. The crimping of supply in China stacked the October Tokyo negotiation heavily in favor of producers, and a landmark deal was struck on October 12 between Peabody and Nippon Steel to set the fourth quarter metallurgical coal contract benchmark at $200/ton, which is more than twice the price reached in June.
“Steelmakers definitely had the hope that spot prices would fall quickly,” Robin Griffin, a research director at Wood Mackenzie Ltd. in Brisbane said in an e-mail. “But they’ve come to the realization that prices are not going to come down in the immediate future.”
Earning a current market cap value of $147.8M, BTUUQ has to be seen as a turnaround story at this point. That said, the ride will be full of unpredictable and probably massive swings. And traders should note that its biggest and most directly comparable rival in the space, Arch Coal, just emerged from Chapter 11 several weeks ago, and the common shares of ACIIQ on the OTC went out worthless. For continuing coverage on shares of $BTUUQ stock, as well as our other hot stock picks, sign up for our free newsletter today and get our next hot stock pick!
