By Peter Ker

November 9, 2020 - The NSW and Queensland governments are confident that taxpayers will not be left to pay for rehabilitation of coal mines owned by struggling US miner Peabody Energy, which is seeking to use its more profitable Australian subsidiaries to execute a refinancing.

Peabody will on Tuesday update investors on its cash flow problems, which became $US202 million ($277 million) deeper last week when a lender demanded repayment of monies provided to help Peabody to meet its mine rehabilitation obligations and certain infrastructure liabilities.

Ten of the 18 bonds that Argonaut Insurance has demanded be repaid relate to Peabody's Australian coal mines, with those Australian bonds worth a cumulative $US48.75 million.

The Queensland government was named as the obligee – effectively the holder – of almost $US14 million of those bonds, while the NSW minister for natural resources was named as the obligee of $US13.38 million.

Argonaut has demanded repayment amid concerns that heavily indebted Peabody has been losing money this year amid a slump in coal prices.

Peabody reported a $US1.67 billion half-year loss in August on the back of $US1.4 billion worth of impairments on US coal mines.

Peabody was one of the highest profile casualties of the last coal price downturn, going through the Chapter 11 bankruptcy process between April 2016 and April 2017, and fears are growing that it may be headed back that way.

The company is trying to use some of its Australian subsidiaries, including the subsidiary that holds the Wilpinjong mine in NSW, to arrange a refinancing to relieve the pressure on its balance sheet.

The NSW government said it was confident that funds for mine rehabilitation were safe, regardless of the outcome of the legal stoush between Peabody and Argonaut.

''The security deposits held for Peabody’s NSW mining titles are covered by unconditional deeds and are beyond the reach of any legal action,'' said a spokesman for the department of regional NSW.

''In NSW, the security deposit must cover the full costs of undertaking rehabilitation in the event of default by the title holder.''

Despite Argonaut naming the Queensland government in documents filed to a US court, a spokesman for the Queensland treasury department said they did not believe they were holding funds provided by Argonaut.

''The Queensland Government only accepts surety instruments from Australian Prudential Regulatory Authority recognised banks and insurance companies with an 'A' rating or better,'' said a spokesman.

''All Peabody environmental authorities, including those relating to the Burton, Bowen and Coppabella mines, are fully provisioned by cash and surety instruments from approved financial institutions.''

Peabody has repaid a portion of the money demanded by Argonaut and said it was seeking a "mutually agreeable'' solution.

Wilpinjong is focused on domestic consumers, selling thermal coal to the Bayswater and Liddell power stations that are owned by AGL Energy.

Peabody's major rival in US coal mining, Arch Resources, has flagged plans to exit thermal coal mining for power generation in the US and focus more on coking coal for steelmaking.

Arch reported a $US191.5 million loss for the three months to September 30, of which $US163.1 million were asset impairments on its US thermal coal business in the Powder River basin region of Montana and Wyoming.

Peabody is the other major player in the Powder River basin, with the two companies unsuccessfully seeking to merge their businesses in that part of the US earlier this year.

Arch chief executive Paul Lang said the company, which also went through Chapter 11 bankruptcy in 2016, would gradually wind down its US thermal coal mines in the event that it could not find a buyer for the assets.

Arch's Powder River basin mines produced 75 million tonnes in 2019, but will produce closer to 55 million tonnes this year and Mr Lang signalled that volumes could halve again within three years.

"We view this systematic winding down of our thermal operations – in a way that allows us to continue to harvest cash and to fund long-term closure costs with ongoing operating cash flows – as the right business solution in the event we are unable to find an appropriate buyer,'' he said on October 22.