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.