OK, to cut to the chase, is there anyone on board who knows a...

OK, to cut to the chase, is there anyone on board who knows a lot about coal mining? I’m pulling my hair out about Middlemount and need someone to relieve my paranoia, like mmv621 has done for us a couple of times recently on civil contracting issues.

While the punters who are in and out quickly are right to concentrate on Forrestfield, for long term holders like me, Middlemount is the bigger concern. Out of NRW’s $780 million order book at 31/12/2015, around 500 million appear to be from the Middlemount contract ($330 million announced for a contract extension from June, 2017 to June, 2020 and an amount I estimate at $165 million remaining on the older contract). Furthermore, NRW has $80 million in finance leases on equipment employed at Middlemount.

Peabody, 50% owner of Middlemount, filed for bankruptcy yesterday. The good news is that they did not include Peabody’s Australian entities in the bankruptcy filing, and secured a $250 million revolving credit loan to keep the Australian operations going. The bad news is that Peabody’s Australian business, and more importantly the Middlemount mine, look like basket cases compared to the USA properties that accounted for majority of Peabody’s revenues. EBITDA margins on Peabody’s USA properties were running around 19.5% in 2014 and 2015. Middlemount’s were -14.4% (yes, that’s negative) and 11.8% respectively. Middlemount’s loss from continuing operations, before the income tax benefit, was $40.9 million in calendar year 2015 and $80.8 million in 2014. Total assets for Middlemount at 31/12/2015 were $712 million. But liabilities were $704 million, so that equity is only $7.7 million. It’s not a pretty picture.

Questions for the experts, if there are any here,

Sabine speculated that NRW may have insurance, at least for the loss they’d show on the relevant equipment with the finance leases, if Middlemount goes belly up. Can anyone venture an educated guess as to whether that’s likely?

Do you think my estimate that $500 million of the $780 million backlog is attributable to Middlemount is reasonable? If Middlemount disappears and they only have $280 million of backlog left (which hopefully won’t be the case because we’ll have the airport link and new business), would that be life threatening to NRW?

How likely is Middlemount to stay in business and keep NRW on board? Pbawley, whose research is usually thorough and sound, thinks it’s very likely given the relative profitability of Middlemount versus other mines. I’m not so sure. EBITDA in 2013 and 2014 was about -20 million and -26 million respectively. Then it became positive in 2015. Is this an indication that they turned the corner and will do better going forward? Or was 2015 cyclically good? If it’s the later, and they were losing money on an EBITDA basis when coal prices were much higher, then you have to seriously question whether Middlemount will stay in business.

Thanks in advance for any thoughts.