By Melissa Pistilli-Exclusive to Coal Investing News ^[1]

^[2]Shares of Peabody Energy Corp ^[3] [NYSE: BTU] shot up as much as 15 per cent Tuesday after the company reported an eight-fold gain in quarterly profits and announced it had obtained the option to purchase a stake in a Mongolian coal venture.

Fourth-quarter profits ^[4] for the St. Louis-based company reached $293.2 million ($1.10 per share) from $35.8 million (13 cents per share) in the fourth quarter of 2007. Fourth-quarter sales exceeded analysts' projections of $1.7 billion and jumped 61 per cent from the same quarter in 2007 to reach $1.9 billion.

Peabody shares ^[5] have fallen 52 per cent from last year and are down 70 per cent from their 52-week high of $88.69. Although Peabody management admitted demand will likely decrease this year, the company remains confident. "We believe the ultimate recovery could be strong, as global economic and electricity generation growth resumes, at the same time that geologic and regulatory hurdles and lack of available capital limit a supply response," said Peabody President and Chief Commercial Officer Richard Navarre ^[6].

Eyes on Mongolia

Despite the global economic slowdown, Peabody is actively positioning itself to take advantage of China's growing energy needs. The company now has the option to purchase ^[7] up to a 50 per cent stake in a joint venture that owns Polo Resources Ltd ^[8]'s [AIM: PRL] coal properties in Mongolia. The properties estimated one billion tonnes of metallurgical and thermal coal reserves are reportedly near key demand centers in China and offer access to Russian export markets.

Long-term forecast for coal remains positive

There is no denying the worldwide recession has led to global cutbacks in the demand for most commodities, coal included. Coal producers like Peabody have been forced to curtail production as demand slumps from both the steel industry and the energy sector.

In the U.S., Peabody Coal is responsible for nearly 10 per cent of electricity production. Peabody has said it anticipates demand in the U.S. ^[4] alone to drop by 60 to 70 million tonnes this year as the recession takes a toll on energy demand. The company also suspects that demand for metallurgical coal could drop by 40 million tonnes as global steel manufacturing is expected to decline by as much as 20 per cent.

"The global economic crisis has put everyone in unchartered waters," said Peabody Chairman and CEO Greg Boyce ^[9]. Now after Obama's election many in the coal industry may feel their without a compass as well. There are growing concerns amidst some industry players that the new administration's greener energy policies may displace King Coal as the nation's top energy producer.

"Obama's going to want to go towards independent energies, so there's a lot of potential for wind, solar, geothermal and run of river; but coal is going to be the ugly duckling," said senior editor of Casey Research's Energy Division Marin Katusa ^[10] in an interview with The Energy Report. Katusa warns that as demand for greener energy sources increases due to "hype, psychology and incentives," many coal companies will see their share prices fall.

However, Katusa believes the renewable energy revolution will be short lived and the nation will once again turn to coal for the majority of its energy needs. "The reality is a lot of these companies will not be able to deliver on the purchasing agreements," said Katusa. "At that point  . . . they will have to turn back to the old reliable dirty energy." In four to six years from now Katusa predicts clean coal furnace technologies will be a reality and coal will once again be "in vogue."

Some industry analysts are confident that the Obama administration's planned stimulus package, which includes spending on infrastructure projects, will generate growth in the steel industry. And this is welcome news for companies like Peabody who mine metallurgical coal and who've seen their share prices plummet on weakening demand.

The coal industry has managed to remain healthy despite the heavy toll the global recession has taken on the mining industry in general. The coal sector is "coming off a year of record contract pricing and can boast a relatively strong collective balance sheet, taking some of the past pressures out of the equation," said Dahlman Rose & Co. analyst Daniel Scott ^[11].

Global construction equipment manufacturer Caterpillar ^[12] has said its business with the coal mining sector has "held up" better than others. In fact, the company reports it's "a little bit more bullish on coal" looking forward for the year than on "metals, minerals and quarrying."

Despite the global downturn's impact on this year's coal demand, Peabody Energy is also maintaining a confident outlook. "We believe that inventories will rebalance, steel demand will recover, new coal plants will come on line and existing plants will run at higher utilization, while difficult geology and lack of capital access will deplete supply and limit infrastructure development," said Chairman and CEO Greg Boyce.