Big insurance companies will provide Australian governments with financial guarantees linked to the rehabilitation of coal mines run by Peabody Energy, under a third-party surety bond issuance that Peabody believes is a first for the Australian mining industry.
Coal miners have traditionally provided Australian regulators with cash deposits that are held by governments or banks as a collateral guarantee that taxpayers will not be left footing the bill for rehabilitation at the end of a mine's operating life.
The system has effectively frozen hundreds of millions of dollars worth of guarantees, and in a bid to boost liquidity and financial flexibility, Peabody recently worked with local insurers to issue $US115 million ($146.2 million) worth of third-party surety bonds.
Fresh from reporting the miner's best profit result in years, Peabody president Glenn Kellow said he believed the surety bonds were "the first of their kind" in the Australian mining sector.
"Another successful action was creating an Australian surety bond market with broad support. I'm excited to say that we made significant progress on that front by working with insurers to initiate an initial tranche of approximately $US115 million of surety bonds in January," he told investors in recent days.
Under the system, the insurer guarantees to pay the regulator any rehabilitation shortfall, while the insurer charges the miner a commercial rate for taking on the risk.
The program is part of a broader effort by Peabody to liberate the cash it has tied up in bank guarantees, thereby allowing it to pay down debt faster or invest in mine extensions.
"Through surety bonds, letters of credit and bank guarantees, we anticipate releasing nearly all of our remaining restricted cash in 2018," said Mr Kellow.
Insurers broaden appetites
AIG Australia's head of trade credit and surety, Liam Berry, said surety bonds had been common in the Australian construction industry and were increasingly being adopted elsewhere.
"Traditionally surety bonds have been the staple of the construction industry, however Australia is now seeing the appetite of insurers broadening into a number of new markets, including mining rehabilitation," he said.
Peabody's vice-president of corporate affairs and investor relations Vic Svec said the company would seek to issue more surety bonds in Australia in the near future.
Low coal prices and a heavy debt load pushed Peabody into Chapter 11 bankruptcy in the US in April 2016.
At the time of going into Chapter 11 the company had $304 million deposited with Queensland regulators for rehabilitation of its six mines in that state, plus a further $138.4 million deposited with New South Wales regulators.
Peabody resumed trading on the New York Stock Exchange in April 2017 on the back of a financial restructuring and a strong recovery in coal prices.
Peabody's Australian thermal and coking coal mines are arguably its best assets, having contributed 56 per cent of the $US1.49 billion of earnings before interest tax, depreciation and amortisation (EBITDA) the miner generated in 2017.
The 2017 result was the Australian division's best since 2008, and Peabody is now looking to invest in life extensions at its North Goonyella coking coal mine in Queensland plus its Wilpinjong and Wambo mines in New South Wales.