Roula Khalaf, the esteemed Editor of the Financial Times, curates her favorite stories in this weekly newsletter. This week’s spotlight shines on a developing story in the coal industry that has significant implications for both Peabody Energy and Anglo American.

Peabody Energy, a major U.S. coal producer, has announced that it is currently “reviewing all options” concerning its substantial $3.3 billion agreement to acquire coal assets from Anglo American. This reassessment comes on the heels of an explosion that necessitated the shutdown of one of the mines included in the acquisition deal.

The Moranbah mine in Australia, which is included in the deal and is the largest asset in terms of annual production, has been temporarily closed following an incident on March 31. Anglo American characterized the event as a “small, contained ignition,” which led to the immediate evacuation of personnel. This mine is particularly critical to the transaction, as it produces approximately 5.6 million tonnes of steelmaking coal annually and was expected to play a pivotal role in Peabody’s expansion efforts.

In light of these developments, Peabody issued a statement affirming that it “remains in conversation with Anglo American” and is actively “preserving all rights and protections under its purchase agreements.” However, the closure of such a significant asset raises substantial concerns regarding whether the transaction can move forward as initially planned.

Anglo American, on its part, has pledged to collaborate with safety regulators to thoroughly investigate the explosion. However, it has not yet provided a timeline for when operations at the Moranbah mine might resume. In addition to the Moranbah mine’s issues, another mine included in the deal, known as Grosvenor, has been inactive since an underground fire occurred last year, and there is currently no scheduled date for its reopening.

This sale of coal assets is a critical component of Anglo American's extensive restructuring plan, which was catalyzed by a failed £39 billion hostile takeover bid from BHP last year. As part of this strategy, Anglo is divesting its coal and nickel assets while also spinning off its platinum and diamond businesses. These changes are aimed at refocusing the company and enhancing shareholder value.

Peabody Energy had been gearing up to enter the financial markets this week to secure the necessary financing for the acquisition. However, the recent mine explosion and unfavorable market conditions have led to a postponement of this process. Sources familiar with the situation have indicated that while Peabody has a $2 billion bridge facility in place, this temporary financing was expected to be replaced with permanent financing prior to the completion of the deal.

The ongoing volatility in coal prices, coupled with a significant decline in Peabody’s share value—down over 50% since the deal was announced last November—has placed additional pressure on the company. As of now, Peabody's market capitalization stands at approximately $1.3 billion, a shadow of its former self.

Furthermore, a $325 million convertible bond that is linked to Peabody’s stock price has recently fallen below its face value, further complicating the company’s financial landscape.

Under the terms of the agreement struck last November, Peabody is set to pay $1.7 billion in cash at closing for the Anglo assets, along with deferred payments totaling $625 million to be made over four years. In addition, there are contingent payments that could reach up to $1 billion, contingent upon future milestones, including the reopening of the Grosvenor mine and certain coal price benchmarks.

Experts advise that since the deal is already in place, Peabody has limited flexibility to modify its terms unless a “material adverse change” occurs. The question remains whether the temporary closure of the Moranbah mine qualifies as such a change.

Should Peabody successfully acquire the Anglo assets, it will significantly bolster its position in the global coal market, elevating its production capacity from 7.4 million tonnes in the previous year to an impressive 21.9 million tonnes annually by 2026. This acquisition would position Peabody among the world’s largest producers of metallurgical coal, a crucial component in steel manufacturing.

Interestingly, this is not Peabody's first brush with financial distress, as the company previously declared bankruptcy in 2016 due to a dramatic downturn in coal prices that impaired its ability to manage the debt incurred from its acquisition of Macarthur Coal five years prior.