He also said that banks had been overreacting when it came to lending to fossil fuel producers and that was part of why Peabody probably would not be able to offer cash for the Australian company.

“We are not too enthusiastic about getting shares from Peabody who are essentially thermal coal people in exchange for our coking coal,” Mr Brazil said.

“We got out of thermal coal because it’s probably starting to peak, and they think it could come down, but coking coal has still got a better future.”

Tough environment

Peabody, which mainly produces thermal coal for power stations, has been looking to increase its exposure to coking coal used for steel making and which has better prospects over the long term amid mounting environmental pressures on coal power generation.

The St Louis-based Peabody, which filed for Chapter 11 bankruptcy once in 2016 and came close to filing for Chapter 11 a second time in 2020, has been constrained by bankers who see too much risk in thermal coal prospects.

A former Peabody employee told the Financial Review that after the US giant purchased Macarthur Coal in Queensland in 2011 for almost $5 billion in cash, the company found it difficult several years later to refinance the notes used to make the purchase.

“The interest on the debt went up because the banks wanted more to cover the risk of lending. With scrip, you don’t have to worry about that,” the former employee said.

Mr Brazil, who is also the father of former Macquarie group investment banking superstar Ben Brazil, said he thought banks and government subsidies were making it tougher than was necessary for coal producers and electricity generators.

“I think banks are overreacting,” Mr Brazil said, “It’s not just the banks but the government regulations that are coming up everywhere – the Queensland government is putting new royalties on coal.”

Even though he said he was not enthusiastic about a Peabody scrip deal, he was open to considering details when they were made public.

“Yes we would consider it, but you would consider anything, wouldn’t you?”

Mr Brazil owns 0.25 per cent of Coronado, whose shares have surged almost 60 per cent since the start of the year, and jumped more than 8 per cent to $2.09 on October 12 when it confirmed the Peabody discussions. The stock has since softened as coal prices declined, closing at $1.86 on Friday.

Price fluctuations

For the six months to June, Coronado made a record $US562 million ($875.7 million) half-year profit, up 685 per cent from its $US96 million loss in the first half of 2022.

The Newcastle thermal coal price reached about $US400 a tonne earlier this month from about $US240 a tonne a year ago, an increase of about 67 per cent, while the price of futures for coking coal recently hit $US276.80 a tonne.

That stands in contrast to the typical difference between coking and thermal coal prices, with top quality NSW thermal coal traditionally fetching about 60 per cent of the prices paid for top quality Queensland coking coal.

But the invasion of Ukraine and the subsequent blacklisting of Russian fossil fuels has changed the traditional hierarchy of coal prices.

Peabody boss Jim Grech has made it clear over the past year that the domestic-focused US thermal coal industry was in “secular decline” and he wanted to buy more coal mines that sell “seaborne” coal; a comment that was code for Australian mines that sell to Asia.

Many local investors have also viewed the potential deal as a case of a top-of-the-cycle, private equity sell-down by major shareholder Energy and Minerals Group (EMG).

EMG declined to comment, but some private equity operators say the US has a bigger debt market that is non-bank and more susceptible to rising interest rates.