Peabody Energy (BTU) will benefit from its pivot to coking coal, though risks remain around near-term coal prices and operational challenges tied to mine restarts, UBS Securities said Monday in a note, initiating coverage of the company with a neutral rating.

Once Peabody's pending acquisition of steelmaking coal assets from Anglo American closes, coking coal is expected to account for 70% of the company's net present value, the report said.

A revised rating of Peabody's stock will take time due to its heightened risk profile following five incidents at longwall mines in Queensland, Australia, over the past five years, UBS said.

Peabody is not expected to generate free cash flow for shareholders for the next three years, as funds are earmarked for deferred outflows related to the Anglo American deal, UBS said.

The company still currently benefits from strong operational cash flow and has attractive exposure to both thermal and metallurgical coal prices with potential gains from US coal policy changes, the report said.

UBS has a price target of $14 on Peabody stock.

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