For decades, pundits have been predicting the end of King Coal’s reign. The pundits have come and gone, but coal is still on its throne. In the past three years, coal usage worldwide has increased some 25 percent, with the economies of China and India fueling much of the demand. One of the biggest benefactors of coal’s newfound popularity has been St. Louis–based Peabody Energy Corp., the world’s largest private-sector coal producer.
In 2005, Peabody recorded revenues of $4.64 billion, up about 28 percent from last year. Still, Peabody CFO Richard A. Navarre toils in an industry often perceived as unsafe, environmentally unfriendly, and a poor investment compared with alternative energy forms.
In the view of the 45-year-old Navarre, however, those perceptions are about to change.
Last year was a record one for Peabody Energy in terms of revenue and profits. Was there anything that surprised you?
Not really. As we look at the fundamentals, they’ve never been stronger in the coal sector. That’s [partly] due to the tight supply for all forms of energy. Meanwhile, demand is being driven not only by the strength of the U.S. economy but by the strengthening of other economies, such as China’s and India’s. We think it’s just the beginning of a long stage of growth for Peabody Energy. Over a billion tons of our business is under long-term contracts, and as we replace those contracts, we’re finding most of the prices have doubled over the past two years. So we see the string of record profits continuing to grow.
What are some of the factors driving up the price of coal?
The high end of the cost curve is driven a lot by geology, and in the United States there’s been some tough geology in some of the eastern coalfields that’s led to high prices. But there’s also tightness in competing fuels. Coal competes directly with gas, for example, and for peak hours of the day it also competes with other fuels for baseload electricity. So those are things that have an impact on price.
Overall, you held the line on cost increases to 5 percent this year. How?
By focusing on process improvements as well as organic growth projects. This is a natural-resource industry, and Peabody has almost 10 billion tons of coal reserves, by far the world leader. If we can bring on capital projects and grow them organically, we can keep our cost structure level. At the same time, we have teams that are managing the consumption of equipment, such as tires, as well as the high cost of diesel fuel and explosives. We saved almost $50 million last year over the spot price on diesel-fuel hedges.
After the tragic accidents in West Virginia, a lot of attention has been paid to mining safety. What’s been the response at Peabody Energy?
Many of the improvements that have been recommended we’ve always done, such as safety discussions before every shift. We’ve also been working with some legislative groups to test technology, such as the personal emergency devices [PEDs] that legislators want each miner to have underground. But one of our biggest fears is that there’s a false perception that some of these things can be fixed technologically, and not all the technology is proven today.
What are you referring to specifically?
When you push legislation in a crisis environment, you tend to push it beyond the capabilities of the technology. PEDs, for example, haven’t been proven to work at every operation…. In addition, some of the legislation calls for having these in place within 30 to 60 days, and that’s just not practical.
It seems as though predictions about the resurgence of coal have been around for decades. What’s different this time?
As you look at the growing economies around the world, most are being fueled by coal because of the scarcity of other fuels. There hasn’t been a new nuclear facility built in decades. Here in the States, coal demand is expected to increase from 1.1 billion tons to 1.8 billion tons by 2030, fueled by the new power plants that are being built, the increase in GDP, and BTU conversion technologies. You’re really seeing the market opening up for additional uses beyond electricity and steel manufacturing.
Your CEO, Greg Boyce, recently predicted that coal will eventually displace gas and oil. Is that really feasible?
It’s already occurring in other countries. In China, they already have $15 billion invested in coal liquefaction. In South Africa, a large portion of the diesel fuel is created from coal liquefaction. Meanwhile, coal has a role in taking some of the pressure off gas prices in this country. When you look at $50-plus per barrel of oil, coal can be liquefied for $35 or $45 per barrel to create an ultra-low-sulfur diesel fuel. The technology exists today. And look at how many large U.S. companies are getting into gasification. General Electric bought the technology from Chevron; Texaco is building gasification facilities, utilizing coal as a feed stock. That’s why you see all this optimism. You look for the alternatives and there aren’t many that are as abundant as coal, have proven technology, and are right beneath our feet.
As we head into the proxy season, shareholder groups are clamoring for more information about climate risk. How are you responding?
Since 1990, we’ve improved our carbon intensity by 40 percent, on a unit-of-production basis. Prairie States, a large, mine-mouth generating plant that we’re developing, will have carbon-dioxide emissions that are 15 percent below current levels. Longer term, though, these are incremental steps…. That’s why we want to continue to invest in technologies such as FutureGen [a federally sponsored effort to build a zero-emission coal-fueled power plant by 2012].
Finally, I have to ask: Do your kids get coal in their Christmas stockings?
They get coal stocks for Christmas. Everybody wants coal stocks for Christmas.