Federal Minister for Resources and Energy Josh Frydenberg’s April 2016 statements on the health of Peabody’s Australian operations have been called into question following the release of its 2015 financial statements.
The financial statements lodged with ASIC this week by Peabody Australia Holdco Pty Ltd reveal a grim situation. In 2015 Peabody Australia lost $2.7 billion, a substantial increase from its $1.2 billion loss in 2014. Its Australian operations owe $5.7 billion in intercompany loans to US subsidiaries named in the bankruptcy filings. The holding company has negative shareholder equity of $6.5 billion – an amount significantly worse than the $3.8 billion in negative equity in 2014.
The 2015 financial statements reveal a net current asset deficiency of $4.8 billion. Despite this, the financial statements say reasonable grounds exist to believe the company is solvent. Amongst other things, the accounts rely on a letter of financial support from a US Peabody entity that is listed in the bankruptcy proceedings. That US entity historically provided loans to Peabody in Australia, but due to the bankruptcy proceedings, monies cannot be drawn from that facility.
A U$250 million loan to provide additional support is referred to in support of the going concern basis. That facility is insignificant given the magnitude of debt and financial leverage. Over the last two years Peabody Australia has averaged $160 million net losses each month. The accounts note that if certain contractual rights are exercised it might impact the generation of operating cash inflows.
The Australian holding company manages the finances of its subsidiaries which include the Wambo and Wilpinjong mines in NSW. Both mines are seeking to expand at a combined cost of over $600 million.
However, in Peabody’s response to submissions on the Wilpinjong expansion, the company relies on the U$250 million loan to proceed with the project. But the financial statements say this loan is for operational expenses and therefore it cannot be used for capital expenditure to finance expansion for either Wilpinjong or Wambo. It is not clear how Peabody can afford to expand.
Peabody’s dire financial position in Australia and bankruptcy in the US has caught out a number of Australian banks. NAB, despite making climate change commitments in 2015, is involved in a separate facility finalised in February 2016. NAB has the final word on securing the U$250m loan which according to Peabody will help expand coal production.
The extreme financial distress faced by Peabody Australia raises questions about just how reassured we can be that the company remains solvent. Mr Frydenberg needs to revisit the assurance he provided in April in light of the information available in the recent financial statements.
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