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bankruptcy seems extremely probable. <br />This affirmation is corroborated by the credit analyst. As of January 14, the unsecured bonds are trading at 8.6 cents on the <br />dollar for an impressive yield of 99%. The bankruptcy looks already priced -in. With the recent bankruptcy of Arch Coal, the <br />sector's default rate stand at an unprecedented peak of 43%. <br />Over the last few years, 26 coal companies have gone bankrupt. Walter Energy, Alpha Natural Resources, Patriot Coal and <br />Arch Coal are probably the best-known victims of the prolonged downturn. Consequently, 264 mines have closed according <br />to the magazine OnEarth. <br />As Rick Rule said, you must be a contrarian or you will be a victim in the natural resources space. The numerous acquisition <br />made at the top of the cycle back in 2011 were clearly not contrarian. Now, the coal companies are feeling the pain and they <br />are victims. On the supply side, it is important to mention that many mines continue to operate during the restructuring <br />progress under the Chapter 11. It significantly delays the production cuts. <br />With a market capitalization of $80 million and $6.3 billion in debt, the game is almost over for Peabody Energy. The following <br />table illustrates this situation. <br />(Source) <br />Over the last four quarters, the firm generated $5.98 billion in revenue and the cost of the revenue was equal to $5.18 billion. <br />Indeed, it is possible to calculate a gross profit of $805 million. It is important to remember that the gross profit only considers <br />the variable costs associated with the operations. Indeed, it does not include variables like rent, insurance or salaries for <br />employees not involved directly in the production chain for example. <br />On the other side, the interest expense generated by the debt load is extremely high. On a trailing twelve month basis, the <br />interest expense metric is equal to $452 million. In other words, the interest expense represents 56.14% of the gross profit. <br />Furthermore, the operating income is negative by $1.2 billion over the last four quarters. How is it possible for Peabody <br />Energy to pay $6.3 billion in principal if the gross profit is barely sufficient to cover the interest expense? The debt exchange <br />might be the solution. However, this avenue failed for Arch Coal. <br />