How Much Will This Move Cost Peabody?
Ten days after a worker was killed while on the job at the site, Peabody Energy (NYSE:BTU) has announced that it will close the Willow Lake Mine near Harrisburg, Illinois. “The mine has failed to meet acceptable standards for safety, compliance and operating performance, and these ongoing issues make the operations unsustainable,” the company said in the announcement.
One of the core components of the CHEAT SHEET Investing Framework focuses on catalysts that will move a company’s stock. Shares of Peabody came down only about 1 percent on the day the closure was announced, indicating that investors do not see much downside in the plant’s closure.
Catalysts are critical to discovering winning stocks. Check out our newest CHEAT SHEET stock picks now.
How Will the Closure Affect Peabody’s Earnings?
“Peabody expects to incur a largely non-cash, one-time charge estimated at $40 to $60 million ($0.10 to $0.15 per share after tax) in the fourth quarter primarily to write off assets, increase asset retirement obligations and accrue severance. The company expects little effect on ongoing earnings from the closing,” the company’s release states.
This EPS hit cuts into the average analyst expectation of $0.27 for the current quarter. Assuming a $0.15 per-share charge, earnings of $0.12 per share would mean a second consecutive quarter of earnings declines.
The company notes that the Willow Lake Mine sold 2.2 million tons of coal in 2011 and “expects little effect on ongoing earnings from the closing.”
How Will This Affect Peabody’s Stock?
Investors will want to keep the one-time charge in mind when analyzing the stock. The closure may ostensibly look bad, but shuttering the plant may ultimately free up resources that the company can delegate to more profitable initiatives.
Given unfavorable market trends for coal in the United States — see the extreme volatility of James River Coal (NASDAQ:JRCC) and recent sell-off of industry leaders like Alpha Natural Resources (NYSE:ANR) — smart asset management and cost reduction has become an essential part of an effective strategy for every coal company.