Peabody Energy Corp (BTU) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Peabody Energy Corporation second quarter earnings release conference call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session with instructions being given at that time.

(Operator Instructions) As a reminder, this conference is being recorded and I would now like to turn the conference over to your host, Mr. Vic Svec. Please go ahead, sir.

Okay, thank you, and good morning, everyone. Thanks very much for taking part in the conference call for BTU. With us today are Chairman and CEO Greg Boyce; Executive Vice President and CFO Mike Crews; as well as President and Chief Commercial Officer Rick Navarre.

We will make some forward-looking statements today and they should be considered along with the risk factors that we note at the end of our release, as well as the MD&A section of our file documents. We also refer you to peabodyenergy.com for additional information. With that, I'll turn the call over to Greg.

Thanks, Vic, and good morning, everyone. It is clear Peabody had another outstanding quarter on the strength of our US and Australian mining platforms with our underlying cost control and strong top line lift. In addition, I'd say our financial position is better than ever.

It is also apparent to me that we're just beginning to reap the benefits from our portfolio optimization programs, and the long-term cycle for coal. Our operating initiatives are yielding results. Both he US and international markets have much more upside and we have the leverage to rising volumes and pricing as we capitalize on the fastest growing coal markets.

So let's take a minute to review the coal fundamentals and our position in these markets. In the Asia-Pacific region, we've seen a two-pronged growth driver in the first half led by China's appetite for energy and particularly coal imports, as well as recovering generation and steel production in the developed economies such as Japan, Korea and Taiwan.

Peabody expects Pacific thermal coal imports to rise more than 10% in 2010 while global metallurgical imports may soar some 30%. Now one area I'd like to discuss is Chinese growth. You know, there's a certain deja vu element to the roller coaster views about China's economy.

We have long observed a recurring syndrome. China announced its targeted growth rates of 8%. The economy outpaces that growth leading to investors' skittishness. The government then announces cooling measures to ensure sustainability of growth but nervousness increases.

And finally, when the accounting is finished, GDP has grown 9% or 10%. And then this cycle repeats itself.

I will say we regularly expect 8% to 10% plus GDP growth out of China and have not been disappointed in any of the past 10 years. Amid the global financial crisis, China even managed 9% growth. In the first half of 2010, GDP grew 11.1%. Now as China lets its foot off the gas just a bit, 2010 GDP estimates have been revised to 10%. The US should be even one-third so lucky.

Now let me offer a few key China data points which we think support the long-term energy and coal demand trends. First of all, the simple fact is that yesterday's announcement that China has become the world's largest energy consumer is profound.

The US held that position for over 100 years. And underneath this, some have been concerned that China auto sales are easing, but consider the June sales were up 25% from a prior year, which itself was up 40% over 2008. GM's announced it is selling more cars in China than in the US and this year China will sell more cars than any nation ever.

The China steel intensity per capita is increasing but remains at just half or less that of the US, Japan and South Korea and China will ultimately pass these nations in steel intensity as housing is being built up versus out. There is hundreds of millions who need air conditioning and appliances that take steel to make and power to run.

Also this year China will pass the US in a leading manufacturer. China has also just announced a $30 billion investment in the transmission grid system to further expand electricity availability. China's power demand growth in June was double-digit again, and year-to-date generation is up a robust 19%.

So all of this translates into China's coal demand growing at a rapid clip and coal imports continuing at a record pace. The June numbers just out show another impressive month with China net imports totaling 11 million tons. So now back to the markets.

While we have seen some moderation in the growth of global met coal demand this has occurred primarily in the lower-quality products. Some of the newer steel mills are struggled with blending and have forced greater reliance on high quality hard coking coal products and expanding the spread among met coal qualities. But overall consumption of met coal remains strong.

During the second quarter, the benchmark met coal prices settled at the second highest price ever at $225 per metric ton for the reference price. If you look at electricity generation we see continued demand growth. Power plants starting operation this year represent 340 million tons of annual coal demand.

And thermal coal from Newcastle is in the triple-digit price range for future years. So the bottom line, we are justifiably bullish in the near term and feel stronger than ever about the long-term super cycle for coal driven by Asia-Pacific growth.

Now in the US, economic activity has yet to fully recover with much more upside potential in the future. But even so coal supply demand fundamentals are solid in 2010. On the demand side, coal is gaining market share for power generation and coal consumption by generators is up 6% this year.

Power plants are running at high utilization rates with cooling degree days 30% above the average and 49% above last year. Meanwhile, US coal production is down some 3%, driven by a 12% decrease in Appalachia. Coal stockpiles have declined below prior year levels. The stockpile draw over the past five weeks has been nearly 15 million tons and that is eight million tons more than normal. So as a result, PRB and Illinois Basin inventories will be at near normal levels by year end.

So you can see why coal prices have marched up in the quarter and continue to set post-recession highs in the Powder River and Illinois Basins, particularly. Longer term, we believe we're well positioned. Most US peers have major positions in regions that are likely to see production declines of up to 25% to 30% over the next five years.

But Peabody's key regions, the PRB, Illinois Basin and Australia, are set to see growth of between 15% and 50% during that same time. So against this backdrop of global coal markets, Peabody is realizing good prices now with significant market leverage in future years. Peabody has 20% to 25% of our expected production to price for 2011 and that grows to half our production by 2012.

So if we move to our growth projects, Peabody has major activities on several continents. In Australia, we continue advanced expansions that can take volumes from 27 million to 29 million tons this year up to 40 million tons by 2014. This may mark the official opening of the new NCIG Port in which we are the second largest participant and we also joined the consortium looking at privatizing some of the Queensland rail assets.

In Asia, we're advancing multiple projects. Most recently, we welcomed Winsway as our new joint venture partner in Mongolia. Winsway is the leading importer of Mongolian coal into China and will be a great asset as we develop our licenses and resources.

And in the US, we began shipments at Bear Run, our major new surface mine in Indiana which will grow to over eight million tons over time. And we continue to make progress in developing a sustainable PRB export off the West Coast. So in summary, Peabody remains committed to sustainable and meaningful growth.

We look forward to a second half which is even better than our first and continued expansion into 2010. Now at this time, I'll turn the call over to Mike for a review of the second quarter performance, along with a discussion on our outlook. Mike?

Thanks, Greg. Peabody turned in a great second quarter that was our best since the onset of the recession. Our operations continued to deliver exceptional results which drove substantial operating cash flows. We've refinanced our credit facility, gaining greater flexibility to execute our growth plans, and we are raising the midpoint of our EBITDA and EPS targets for the year.

I'll begin with a review of our income statement and operational highlights. Second quarter revenues of nearly $1.7 billion were 24% above the prior year on slightly higher volumes. The key driver was Australia where volumes increased 28% and average prices rose 49%. EBITDA reached $440 million, 35% above prior year and much higher Australia results and solid US performance.

The increased mining contributions more than offset reduced Trading and Brokerage activities. Let me take you through the EBITDA drivers in more detail, beginning with Australia where results were 75% above prior year. Second quarter met sales totaled 2.2 million tons, more than double last year.

Our realized price for met coal averaged $162 per short ton, higher than both last quarter and last year, reflecting the benefits of new settlements. Second quarter sales were driven by a combination of business priced in line with the industry benchmark and carryover volumes.

On the seaborne thermal side, we sold 2.6 million tons, on par with last year at a higher average price of $84 per short ton. Turning now to costs, you will recall that last year we had a much larger mix of thermal coal sales as met shipments were delayed due to price settlement negotiations.

In the second quarter, costs were $58 per ton. We continue to target full year Australia costs in a range of $55 to $60 per ton. With higher prices and volumes, combined with costs in line with expectation, our Australian margins expanded to more than $34 per ton.

Turning now to the US, our quarterly results benefited from higher Midwestern prices and lower costs in the West. Midwestern prices were more than $3 per ton higher than last year. Costs averaged $34 per ton reflecting a combination of lower volumes and the start-up of the new Bear Run Mine. Absent the transition costs associated with Bear Run, costs would have increased less than 5%. All told, Midwestern margins were nearly $1 per ton higher than last year.

In the West, our margins climbed 33% to more than $5 per ton, led by higher volumes and cost containment at our PRB operations. Rounding out the discussion, Trading and Brokerage delivered $14 million of EBITDA. The decline was the result of lower exports due to the weak Atlantic market, along with vessel timing, and lower trading levels due to market dynamics.

Moving on to taxes, our effective tax rate was 27% excluding currency remeasurement, in line with our full-year expectations of 25% to 30%. While on the subject of taxes, I'd like to touch on the latest developments in the Australian resource tax. As expected, things have changed quickly in just a few short months.

We are encouraged by the changes in the tax scheme, including the reduction of overall rate and the increase in the producers return threshold to accommodate existing operations. The new proposal is still subject to legislation in late 2011 following an election that has been called for next month. We continue to move forward with our growth plans in the region.

After accounting for taxes and $19 million of currency remeasurement, our adjusted income from continuing operations totalled $195 million with adjusted EPS of $0.69, 38% above last year. And included in the second quarter's results are $0.02 of charges related to our credit facility refinancing that I will discuss in a moment.

Turning to the balance sheet, our $292 million in cash flows from operations helped to drive cash balance to more than $1.1 billion, and our liquidity remains strong at $2.4 billion. During the quarter, we successfully refinanced the senior unsecured credit facility which now consists of a five-year $1.5 billion revolver and $500 million term loan. Our new facility was significantly oversubscribed and includes a good mix of domestic and international banks.

Capital spending during the quarter totalled $117 million. Our full-year CapEx target remains $600 million to $650 million. Looking forward, we expect our growth in EBITDA and EPS to continue. Third quarter EBITDA is expected to increase to $475 million to $550 million given higher pricing in volumes. Adjusted EPS for third quarter is targeted at $0.75 to $1 per share.

And we are pleased to be raising the midpoint of our full-year outlook. Targeted EBITDA for 2010 is now $1.7 billion to $1.9 billion with adjusted EPS of $2.60 to $3.15 per share. At these higher levels, we remain on track for 2010 EBITDA that could rival 2008's record results. So with that review of our outstanding second quarter, as well as expectations for an even stronger second half, we will be happy to take your questions at this time.

Thank you. (Operator Instructions) Our first question will come from the line of Pearce Hammond at Simmons & Company. Please go ahead.

Good morning.

Good morning, Pearce.

Great quarter. Met coal pricing, where do you see it right now for high quality met, FOB the port and for lower quality mets in the spot market?

Well, Pearce, as you know, we just recently settled our met coal settlements for the last quarter and really in just a couple of weeks ago at $225 for the high quality coals and about 75% to 80% of that number for the semi-softs and PCI-quality coals, and that was in meaningful volumes. So really since that point in time we haven't really transacted in the market, and frankly, I don't think there has been much volume in the market since that point in time to really give you an indicator of any changes in the price.

Of course, we've heard a lot about sentiment in the last week or two around China, but I don't think that is really more -- it is much more than noise in the press right now, as to what is really happening because we haven't seen a lot of changes in the pricing.

For the high end of your guidance range for the EPS guidance for the full year, is it fair to assume that that is -- assuming a met coal price similar to the recently agreed to benchmark?

We try to stay away -- we got into the quarterly pricing, Pearce, we try to stay away from giving that pricing, obviously, for strategic reasons with the customers, to really talk about that in too much detail.

That's fine. And then finally, from a rule of thumb standpoint, if we look at the Australian resource super profits tax, if your tax rate for this quarter was 27%, what is a rough estimate of what it would look like at the time that the resource super profits tax takes effect? What would you think?

Yes, this is Mike, Pearce. When you think about the taxes, we look at a combination of both the corporate income tax to royalties that we pay, and then this incremental resource tax. And what was quoted when the RSPT came out initially is that the tax rates all-in could be in the high 50s.

You look at a 10% rate, give or take, on the royalties. So we're seeing right now an all-in rate of somewhere around 48%, so it's just an incremental couple of percent at this point with these provisions based upon our project pipeline, as we know it.

Great. Thank you very much.

Thank you. Our next question comes from the line of Brian Singer at Goldman Sachs, please go ahead.

Thank you. Good morning.

Good morning, Brian.

Couple of big-picture questions. First on the PRB. First, how much PRB production do you think you could easily bring on if the market continues to improve and then longer-term, how are you thinking about School Creek costs and what -- what you would need to see to make a decision to bring that on?

Sure, couple of point question there. Let me start with what our underlying capacity is in the PRB. And when you say bring on quickly, that's, you go from everything starting out with just ramping up overtime at the operations with existing equipment, to then, bringing in some of the easily attainable and short-term equipment for additional capacity, maybe some more dozers for overburdened stripping and the like.

And then you get into the haul trucks and the loading equipment that may take you 12 months or more to get substantial capacity brought back in. But if you just look at our platform, we have been migrating our sales to our North Antelope Rochelle operation.

With the investments we've made there over the last three or four years both in terms of loading efficiency and blending capacity, it is in our view the lowest cost, most productive operation in the Powder River Basin and that's one of the reasons why we've seen the cost performance out of the PRB and the margin enhancement that we have.

So we continue to load that operation up. But it has some capacity because we could be running at higher overtime rates. Then if you look at our Caballo operation, we're running that operation in that 24-million-ton-a-year rate and that operation in the past has run at 32 million to 34 million tons. But it would take mining equipment to make that happen, particularly trucks.

And then the same thing with a our Rawhide operation, that operation has about 6 million to 8 million tons a year of capacity with additional mining equipment. So net-net what I'm saying is that we have additional capacity in the near term with overtime, extra shifts, a bit of equipment, additional utilization.

And then as you look out over a period of a year, say, if we were looking at additional capacity for next year, we would have to be looking at trucks, and bringing those, buying those trucks for delivery in the second half of next year. And then in 2012, obviously, you have even more.

Now, then you take into account our ability to begin to produce out of School Creek, and, again, School Creek we've always talked about in the near term will be a bit of a margin enhancement play for us, as we -- being close to North Antelope Rochelle, a lot of synergies in terms of production of that reserve base. So we might begin to ship some of our volumes down to School Creek and you might see that even starting next year as we're just going through the planning exercises now.

But ultimately School Creek has the ability of anywhere from 25 million upwards of getting up to 35-plus million tons a year of operations. So as the PRB moves forward, and is the fastest growing region in the US and gains market share overall in the US, we've got the capacity to grow with that volume.

Great. Thank you very much. That was really helpful. Separately on the quarter, the met coal volumes fell relative to the first quarter slightly. Obviously, that realized prices were higher but can you comment were there any changes in mix or any reason for the slight downtick in quarter-on-quarter? [Met], if I recall, maybe the first quarter was a little stronger than you thought in the first place?

You always have to be a bit careful with quarter-to-quarter comparables out of Australia. I mean a couple of vessels moving between shipping on the last day of the quarter versus the first or second days of the following quarter have a big issue with volumes. In some cases our volumes are slightly impacted or can be impacted by what our competitors are doing. Most of these vessels are blended vessels.

We may have coal available to ship and I will tell you all this quarter we had coal available to ship. In some cases we were delayed because our competitors in Australia were having operating problems. We do our best to mitigate those during the quarter.

But that -- all that means is the volumes move around bit by bit, particularly at the beginning and the ends of the quarters. One of the reasons why our ranges are the way they are, is because -- one high-priced vessel and you're looking at potentially $10 million swing in earnings, and it may be that you miss it just by a -- by four or five hours in terms of getting a vessel to sail out of the port.

So I think -- I think overall we were pleased with the performance, had full coal availability been where it needed to be, we might have been able to get one or two vessels, but for the year, it all averages out.

Thank you very much.

Thank you. Next we'll go to the line of Jeremy Sussman at Brean Murray. Please go ahead.

Hi, good morning.

Good morning, Jeremy.

Greg, you talked about the quality, in expanding quality spread, I believe, -- expanding spread among met coal qualities, I assume that's in terms of pricing and maybe demands. And would you mind just elaborating on this a little bit?

This is Rick, actually. When you look at the met coal qualities, over the last several months there has been -- there was a lot of lower quality met coal that entered the market, as you're aware, that was blended and moved in. And a lot of customers were having some difficulty with some of that coal.

So we've seen a return by our customers looking for higher quality coal to offset some of the lower quality coal they committed to. So we're seeing a stronger demand for the higher quality products that we produce, mostly out of Australia.

Okay. Okay.

Jeremy, just to add a bit, it is no different than steel, not all steel production is of the same quality. Depending in what the underlying demand is for steel, whether it's for the average plate type qualities or some of the specialty steels, same thing with the met coal. And what we've seen is a really strong, strong demand for the higher quality met coals.

Everybody needs those to blend off and around and as Rick said, what we saw was a bit of exuberance in terms of the amount of stuff that was moving into the market, that it was questionable whether it was met coal, but people were taking it and trying to blend with it and there has been a bit of a backing away from that and more pressure now on the higher quality coals.

Great, no, that's very helpful. And just a quick follow-up. Any change in sort of how you're viewing potential acquisitions, sort of, now that, I guess with a couple months removed from everything you went through with MacArthur, which I assume was mostly met coal or PCI-driven at the time?

I don't think there is anything that is fundamentally changed our views long term and/or what the underlying drivers for that acquisition target, or the others that we look at. We are still very -- very acquisitive and continue to look for opportunities that will provide a good acquisition to add to the portfolio, particularly in the seaborne-traded coal commodities.

Perfect. Thanks very much.

Thank you. And next we'll go the line of Mark Liinamaa at Morgan Stanley. Please go ahead.

Hi. Unless I missed it, I didn't hear any comments about the port, West Coast port. Can you talk a little bit about how you might see that business model unfolding? And does it have to be a, like a kind of a Peabody-only type effort? Thanks.

Well, I mean, obviously you didn't miss it. We didn't have much detail included in our comments, and that was by design because all of this is a bit early stage and still going through a fair bit of baseload work in terms of where the optimum locations might be and what would make sense. So we're being a bit -- a bit careful in what we say.

But having said that, our initiative is, what can we do in volume and quite frankly what can we do in volume for Peabody, order to move PRB coals into the Pacific Rim, but as well as what can we do for our other coal products in the US, Illinois Basin and even Colorado, into the international marketplace. But you'll hear, as it unfolds, we'll provide more information on progress that we're making but it's just in a period of time where we would like not to go into too much detail.

Suffice it to say there is a tremendous amount of work that's taking place. And our initiatives -- are focused on what we can put in place that will provide us a significant volume of capacity for PRB coals out to the West Coast.

But would you see it as something to tighten the market or something to find a home for your ability to grow production?

Both.

Okay. And then can you just maybe touch on your confidence level that something can happen in Mongolia before the election? How things are going there?

Well, they're already off on their holiday so, I mean, Mongolia, the legislature has put together a very broad framework now for moving forward on TT, but they're all on their national holidays now and then they'll go into their election period.

So there will be some -- there will be some engagement over the next month, but we really think it's probably going to be the beginning of fall before we have reengagement at a more substantive detailed level and, obviously, we still feel very good about the positioning that we've placed Peabody to be, to be a participant in that process.

Okay. So you're still confident. That's great. Thanks, guys.

Thank you. Next we'll go to the line of David Khani at FBR Capital Markets, please go ahead.

Hi, gentlemen.

Morning, David.

I guess with the trading numbers coming down for this quarter, you mentioned sort of a -- some of the reasons, what is sort of the outlook for the remaining part of the year, and then I guess second part of it is, with some of the new offices that you've opened up, are you starting to see some of the fruits of the labor from those new offices?

Yes, David, this is Rick, I'll touch on that. We are seeing some improvement in our numbers and our volumes initially from the expansion of our trading platform across the globe, for sure. And you can see that in our international numbers are being -- are taking a larger share of the total trading tie, if you will.

When you look at what happened in this particular quarter, I'll give you a couple of things that, obviously, reduced export volume out of the United States because of what is happening in Europe with the lower prices had an impact. We had a couple of shipments that didn't go out for a variety of reasons, equipment issues or other things. So we missed a couple of shipments, but we'll get those back later in the year.

And then in really just the last piece would be in the last month or two we've had strong pricing across the Pacific markets and European markets but it has had limited volatility. It has been in the high 90s but with very little volatility and very little liquidity.

We pretty much sat on the sidelines most of this quarter because there wasn't a lot of direction, and then that caused us to be a bit lower on our trading profits than we would like to be. If you look at the last two years, Dave, we have been running in the $30 million or $40 million per quarter and if we can return to the normal volatility that we think the market will go back to and get liquidity in the market, I think we can return to those same numbers. But we do need to see those things come back to the market.

But then with these new offices you would expect those numbers, the $30 million to $40 million, to trend up over time, wouldn't you?

I think over time. It takes time, like with anything, we approach trading very cautiously and we move into it slowly and make sure we get our feet completely and firmly on the ground before we make a lot of -- take major positions in these markets.

Okay. And then the second question would be what's your view for imports of both steam and met into China specifically for 2010 and 2011?

My best guess, David, is about 125 to 135. That would be my number. I think on an annualized basis if you look at the data that just came out today, it probably takes you into a [140-ish] number. I think if we run closer to what we just saw in June it would be 125 to 135. Could be surprised on the upside. Doubt I'll be surprised on the downside.

And then that's combined so if you have a breakout --

Combined, yes, that's met and thermal.

That's a net number on a combined basis.

Okay. And then directionally, I mean if you don't want to commit to a 2011 number, is it up and--

I would say it's at least flat to that number.

Um-hum.

It is a little early to say up, yet. But I don't see it going down. David, I spent the last week in China having a lot of discussions around this topic and I feel pretty good about that.

Good.

Yes, I mean, as you recall, Dave, we have been talking about it increasing for a number of years and everybody thought it was going to go and retrace back to much lower levels. I mean, I think, as you look at the underlying energy demand and economic demand in China, and where it may go not only through the back half of this year but then into next year, as Rick says, we feel very confident it's going to stay strong.

But I would say, early days the underlying fundamentals would say it may even continue to increase, maybe even at a slower rate, but continue to increase.

And would you say the -- would you feel more confident on the steam side versus the met, or met versus steam? What do you think is going to grow either percentage or actual tons more, the steam side or the met side, into China?

Well, I think -- I think they're both going to grow. If I'd have to say which one I think may grow a little bit more, it might be the met coal given where their steel sector is and where their demand is. But their electricity generation has got longer legs in terms of compound annual growth rate over the next 10 years, I think, versus where their met coal is, it is just that they're structurally short of met coal.

You can see more volatility in the met coal side because of policies and the way they manage the steel industry. But when it comes to, as Greg said, the long-term fundamentals of electricity demand and fundamentally where the demand is with the coastal plants and all the logistic issues the steam coal demand is going to be there.

Great. Thank you.

Thank you, next we'll go to the line of Paul Forward at Stifel Nicolaus. Please go ahead.

Thanks. Good morning.

Good morning.

On the Australian volume guidance, you have 27 million to 29 million unchanged. First half was just 12.6. So I guess if you were to take the midpoint of your guidance, your implied guidance, for the second half of the year, it would be about 15.5 million tons or about 7.7 million tons a quarter, is all of the incremental step-up NCIG, or would you expect volumes elsewhere to rise as well?

Well, I think the vast majority of it would be NCIG, no question, Paul, although we do anticipate some slight increases elsewhere. The Queensland, particularly DBCT chain, is running better mid-year than it was earlier in the year. We expect that to continue after a bit of maintenance work this month. And so we expect a bit stronger back half of the year out of Queensland. And then with the NCIG port additions continuing to ramp up in New South Wales.

All right. Thanks. And looking at the Western US I thought, now the cost number was a really good one in the quarter, just, if we compare this quarter to the year ago, prices were about unchanged and volumes were up just slightly but costs were down 10% or down about $1.28 per ton.

I was just wondering if you could provide a little bit more detail on what drove this cost decline and if we can keep those kind of cost levels in the second half of the year?

Well, I think, as I said earlier, if you recall the investments that we made in the Powder River Basin over the last three or four years in term of upscaling our shovel fleet, our truck fleet, the major drag line work that we did, and then the input crashing and conveying and blending facilities in North Antelope Rochelle, all of those were designed to structurally reduce as much as possible our operating costs, particularly out of North Antelope Rochelle. So as we continue to load that operation up, we've seen those benefits.

But I would also say our operating team has spent a considerable amount of time, and we've talked about it a bit in New York, on all of our operating efficiency and our maintenance programs. We really benefited this quarter from a number of maintenance activities that we normally would have had to do that are operating and maintenance practices have allowed us to extend out and get higher utilization and higher life from major components and pieces of equipment.

So some of the savings this quarter are permanent, some are just timing quarter-to-quarter, and we'll see -- we'll see some of those have now moved into the third quarter, but we expect some of the ones we had budgeted and planned for the third quarter, will move out as we continue to get better and better and have higher efficiencies. So I think that was a big component of it. Mike, any other color in terms of the details of the costs?

I think you've hit on it. We've had slightly higher volume and the big change, really, has been where we have been on maintenance.

I talked about it last quarter that we had a very strong shipping month in the first quarter that also pushed a couple of things out. So it is a combination of maintenance optimization and also strong shipping and some of that may get pushed into the third quarter.

All right. Thanks very much.

Thank you. Next we'll go to the line of Kuni Chen at Banc of America-Merrill Lynch, please go ahead.

Hi, good morning, everybody.

Good morning, Kuni.

I just wanted to circle back to the proposed tax changes in Australia. Excuse me, my understanding is that there is an ability to write-off growth CapEx investments there. So is it possible over the next couple of years that you could actually generate a tax benefit out of your Australian operations?

Well, there's a couple of different components here. There is the write-off of your existing asset base and they changed the rules because it originally started with book value over on an accelerated basis over a five-year period and now they've allowed you to look at the market value. But then that's frozen really in the May 2010 timeframe.

As you start to look at projects, because this wouldn't come in until 2012, anyway, so it wouldn't have an impact on our tax rate for 2011. As you get into 2012 there could be some potential for write-off, immediate write-off of some capital investments at that point.

Okay. Do you have a sense directionally as to whether that's -- those two would be a net positive or negative?

In our overall tax rate?

Just for Australia.

I think it just really remains to be seen where we are in the timing of our capital investments as we get into that 2012 timeframe.

Okay. Fine. Fair enough.

I would say , whatever you do there, you do have to be conscious as to how that is brought back into the US and then integrated into our overall tax structure. That's why I think we continue to try to provide guidance on our overall tax rates because we do have a lot of moving parts within the

Okay. Understood. And just as a follow-up , can you give us some color on what you're seeing as far as vessel queues out of Australia, if you compare July relative to May or June?

Well, I think certainly as you look at Newcastle, I think the Newcastle port has been running reasonably well. The queue is such and the loading timeframe is within the window you would expect almost at a normal level. A ten to 14-day kind of thing. Queensland DBCT is still -- still dealing with a high queue, but if you -- if you refer back to my comments earlier about how some shippers had operational problems and didn't have coal availability. For ships that have multiple cargos on them and one shipper doesn't have the coal, they get delayed and they get -- they stand in the queue, and other ships will then go around them.

So it's -- you just can't take the total number of ships and assume that that's the total length of time that everybody is going to be incurring vessel-by-vessel. So some vessels are coming in and being loaded as soon as they arrive. Some are having to wait multiple weeks for coal to be available.

But overall the demand for met coal out of Queensland is still very strong. That queue is longer, and even though the port has performed better, that queue has not come down appreciably.

Right. Thank you.

Thank you. And next we'll go to the line of David Gagliano at Credit Suisse. Please go ahead.

Great, thanks. It looks like the figures in the press release imply you sold forward a fairly meaningful amount of US thermal coal for 2011 delivery. My questions are how much did you actually sell for 2011 delivery during the quarter? And if you could provide the average prices of those forward sales and hopefully break it down by region, that would be great. That's the first question.

Good try, Dave. 20 million tons. Approximately 20 million tons was sold in for 2011 delivery in the quarter.

Okay.

As you could expect, just like, it's broken down principally going to be between the Midwest and the Powder River Basin, largely in the Powder River Basin, about half of that was reopener. So what was just actually sold that was uncommitted was probably about 10 million tons.

Okay. Is there a reasonable--

Not going to get into prices probably into much detail.

Okay. Is it reasonable to assume it was priced around forward curve-type matches?

Certainly. It would be forward curve -plus. We would be safe with that.

Forward curve. And roughly was that relatively evenly spread throughout the quarter, was it early in the quarter, late in the quarter? When was most of that priced?

It varies, I think it was probably, I would say, pretty even I guess is the best way to look about it. I'd have to think about each particular sale. There is so many sales that go into 20 million tons.

That's true.

Sales. But I think pretty evenly. But the price, as you know, PRB prices continue to march up, have been marching up and we think they will continue to march up based upon what we're seeing and what we're feeling and what is happening with inventories, and people begin to start looking at what they need for next year, and so feel pretty good about it, where price is set at.

Okay, great. That's helpful. And then just as a quick follow-up, you mentioned there were some Bear Run start-up costs that flowed through the Midwest cost line. I was wondering if you would just quantify those costs and when do you expect those start-up costs to come to an end?

When you look at it on a subsequential basis, it was about $1 per ton from the first quarter to the second quarter.

$1 per ton, and should we expect those to come to an end?

Yes, I think the largest part of the impact you're going to see was in the second quarter. We'll start to see that smooth out as we look at our full-year cost.

Great. Okay. Thanks very much.

Thanks, Dave.

That you. Our next question comes from the line of Curt Woodworth at Macquarie. Please go ahead.

Hi. Good morning, everyone.

Good morning, Curt.

Greg, I have a follow-up question on the coke and coal volumes. Not necessarily for the quarter, but looking back for the past two quarters, you've had sequential declines basically since the third quarter of last year. I know that scheduling and competitive issues can impact a quarter, but you still in the last three quarters have been shipping fairly well below third quarter 2009, and yet steel production is up a lot, the rail is running better. The upgrade on the Queensland line. So I'm wondering what do you think your normal capacity in shipping level is out of DBCT right now? And then I have a follow-up.

Curt, this is Rick. Let me address the third quarter of 2009. I think what you're looking at is an anomaly. If you recall last year in the first half of the year we didn't ship very much met coal because of the issues that we were still negotiating over the carryover pricing discussion with our customers. We were largely shipping thermal coal.

And once we settled pricing and settled the carryover issues, we shipped a lot of met coal in the third quarter because we had a huge, huge backup. So that was an unusual quarter to compare it to. So you really pretty much have to, not look at that quarter, and because the whole first half of 2009 was only 1.8 million tons of met coal and in the third quarter I think we had 2.9 million tons.

So it was an unusually--little bit higher. But more than likely if you look at the average right now we're averaging 2.5 million to 3 million tons a quarter is what you could expect for the met coal going forward.

Okay. All right. 2.5 to 3. And then in terms of China. So China right now is around, call it 15% to 20% of seaborne demand, and I'm wondering, number one, how much are you guys selling to China right now, maybe just a sense of what proportion of your mix and have you seen any changes in that mix recently?

Last year I think we probably sold 5 million tons to China last year. I would say that mix is pretty consistent. It may be down just a little bit on the thermal side out of Australia as Indonesia is taking a little bit more of that business. But Australia has picked up more on the met side.

Yes. Okay, thank you.

Thank you. And next we'll go to the line of Michael Dudas at Jefferies. Please go ahead.

Good morning, everyone.

Hey, Michael.

Two questions, first, Bear Run, remind us on the baseload aspect of the contracts that you assigned to the production there. Is there opportunity to sell above baseload tons into the marketplace, and does the market look reasonable either from a domestic or an export standpoint to position that coal at much higher prices?

Yes, a couple of things. I mean, the baseload contracts at Bear Run are approximately 75% of that 8-million-ton production rate. But we should remind folks that when we built Bear Run, we built the infrastructure, including the prep plant, to be able to easily be expanded up to 12 million tons a year.

And so as we look at what are the markets at both in terms of domestic and the Illinois Basin growth, there is -- there is opportunities to take advantage of what's happening in the spot business as well, and/or additional contract business.

But is that 8 to 12, is that a multi-year phase-in?

Yes, it would be a multi-year phase-in. We built the prep plant big enough to get up to that level, but we would have to buy the equipment, the screens and the spirals and the like inside. Basically add another circuit to that prep plant in order to get up to that level. And some additional mining equipment. So it would take a couple of years to get up to that level.

My second question is regarding cap spending. Certainly looks like second half of the year is going to be accelerated for what you did in the first half. Could you remind us where that delta is being allocated above your maintenance level spending?

And as you get an early look to 2011 and with the five-year growth plan, are we going to see significant ramp-ups in that type of run rate, and/or just a little bit of sense of when the timing would be to start seeing additional capital ramp-up with you're current growth opportunities?

Yes, I think on the CapEx front for the rest of the year, we're running at about $221 million, I think, on the first half. So clearly we've got some lack-loaded expenditures. There is a couple of things going on there. A lot of that is in Australia. It is production equipment for the underground operation that is more back-end-weighted as we went through the budget process and where we were looking at lead times. Equipment in general on a sustaining basis is a little more back-loaded. And then finally, there is a fairly large component of that overall total related to our Australia projects and you have the metropolitan expansion and we'll have some, incurring some charges on. But probably the larger one is the box cut capital that we have for the current operations. So we'll start moving dirt in the back half of the year and that will drive up the expenditure, as well.

Well, let's say early look on 2011 is the second half run rate give or take where you might be in 2011, or are there opportunities you haven't really brought to us yet, possibly in the US or elsewhere, maybe some of these joint ventures and investments that could bump that up?

Yes, it is early in our cycle for next year to be really trying to give any kind of guidance, obviously, know what our sustaining levels are. On a project basis, we're now going through fairly extensive project reviews to see what we will add for next year.

All right. Fair enough. Thanks, gentlemen.

Thank you. Next we'll go to the line of Shneur Gershuni at UBS. Please go ahead.

Hi. Good morning, everyone.

Good morning.

Most of my questions have been asked and answered, but if I can just have one follow-up question to Dave's question before with respect to the PRB pricing. You're not -- your operation currently right now is running at less than optimum operation. You talked about different ways you can move the production up and so forth.

Are these the price levels that once you sell out for next year, that you would be happy enough to move up your production levels, or would you prefer price to be above this level before you were to bring on incremental tons to where you're currently operating at?

Well, there's no -- there is no question that the price level that we're starting to see in the out years provide a margin for our PRB. But obviously we want to see things sustainable before we're going to make major moves in terms of production changes.

So absent any change in the curve right now you probably are going to continue to run at the same run rate?

Yes, within reason. I think when you look at the curve right now I would say that the PRB curve has some work to do, to be honest with you.

I think when you compare it to the other price curves in the other basins, both domestically and internationally, it is too flat, to be honest with you. It needs to tighten up and needs more upward pressure on the out years on the pricing.

Particularly for anything that would require capital allocation.

Great. And my second question, you guys have expressed some frustration in the past with respect to valuation, and so forth. You have a share buyback that's authorized.

Given the current share price level, are you more incentivized or more interested in potentially pursuing some share buybacks as an opportunity to deploy some of the capital that you have given that you have over $1 billion on hand at this point right now?

Well, I think your overall question is what is our plan for all of this cash that Mike has accumulated in terms of our liquidity. And as we've always said, our first choice is growth.

And Rick and the commercial team are just -- have been tireless in terms of looking at opportunities, as well as, I indicated we're going through, beginning our project review cycle, we want to see what major growth projects we have in our [grannick] platform, what the timing of those look like, so we can really assess what our cash needs are going to be, all with a growth driver first and foremost.

Then beyond that, we continue to look at what our capital structure is, and what makes the most sense in terms of debt levels. We've got the potential for share repurchase. We've got the potential for dividend changes. So we look at all of those.

But I don't think anything has changed in term of our view that to the extent that we can take that cash and deploy it in the growth opportunities, that would be the highest use for that cash.

Great. Thank you very much.

Thank you. And our next question will come from the line of Garrett Nelson at Davenport & Company, please go ahead.

Good morning, everyone. Just a follow-up clarification on Bear Run, the press release says that sales expected to average 3 million to 3.5 million tons in 2010. Did you mean to say that Bear Run sales are expected to total 3 million to 3.5 million tons, or is that kind of an annualized monthly run rate that you're expecting for the balance of the year?

Yes, it's expected to be the total. Probably just a -- it's just the total.

It's the total for this year because it just started up, but it grows to 8 million tons per year, once it gets up to full production, which is probably not quite totally next year, but certainly 2012.

So the mine started up in May and you're expecting it to do 3, 3.5 for the full year?

That's correct.

Okay, great. Thank you.

Thank you. And our next question will come from the line of John Bridges at JPMorgan. Please go ahead.

Hi, Greg, everybody.

Hey, John.

Just a couple of follow-ups. The -- I just get a sense that the amount of contracting you've done for the US this year is perhaps ahead of the normal rate. Is that true? Is that policy, or has it just worked out that way?

Well, John, I think, if you recall, we began the year ahead of the normal rate. Because of where the market was and what was happening with the economy, we entered 2010 largely sold out intentionally and we actually had sold out more in 2011 than we normally have sold out.

So you're right we entered more sold out than we -- than normal, and so that's where we're at today and it was by design because of the softness in the market.

Okay. Interesting. And then School Creek, presumably the comment you made there it is more of a replacement tons next year if it comes in, rather than any incremental tonnage?

That's right. I mean, we're looking at it as a margin expansion opportunity, so it would be shuffling some tons around within the portfolio.

I mean, I'm not -- we're not saying what our PRB volumes are going to be next year, but to the extent that whatever we set that level at, we may take some of those tons from School Creek in order to enhance the margins.

Okay. Got it. And then, given the importance of the Aussie dollar exchange rate, what is -- what is the hedging policy with respect to the Aussie dollar?

John, this is Mike. What we typically do is on a programmatic basis, if you will, we will layer in hedges over time and the primary function of that is to limit volatility. So we'll look out over a three-year period.

We have taken -- we saw some dips in the market earlier in this year and we extended that out just a bit to take a smaller position out in later periods. But we're looking on an average. It is a sliding scale of how much we'll hedge over three years.

And it is a pretty mechanical process?

It is a combination of -- we will layer in hedges on a month-to-month basis to maintain a baseload of what we're looking to do, largely in relation to how much we have contracted. But given our view of the coal markets, we look at the correlations around that and where we think the currency exchange rates are going to be we will take that up or down as we take a view.

Do you make much money on the hedge?

Well, the goal is really not to make money, it is to limit the volatility. We talked about this at the analyst is meeting, we have added, I think it was over $100 million in value over the five-year period.

Thank you. And we have time for one more question and that will come from the line of Jim Rollyson at Raymond James. Please go ahead.

Last but not least. Great quarter, guys.

Thanks, Jim.

Just one follow-up, or actually question. Any thoughts, where you guys thinking on the proposal to privatize the Queensland coal rail track?

As I indicated, Jim, we are part of the consortium of companies that are looking to privatize, at least at this point, the track in Queensland, not the above track or the moving equipment, but the track and system itself. The view is, who best and who is most motivated to make sure that that track system is -- is not only maintained but also capital investments take place to ensure the availability of volume capacity for moving of the coals out of Queensland but the producers of the coal.

And so we think it's a strong consortium that has been put together, all of the producers, essentially, and we've made a strong bid. The Queensland government is still analyzing, it is evaluating exactly what they want to do with those rail assets, but the strategy would be to better align the planning and the investments and the capacity and the rail track to what the mine operations themselves are planning going forward.

That always seemed to be the weakest link on the growth aspect, so any idea when you might hear something about that?

No, it has frankly been a pretty fluid process, and now we've got Australian national elections coming next month, so it's pretty tough to say. I mean, I don't think it's going to drag on for -- for six months or more. I think we'll hear something and see where it evolves to over the course of the next quarter or so.

Great. Thank you, guys.

Thank you. And I'll turn it back to Mr. Boyce for any closing remarks.

Well, I want to thank everybody for your interest in BTU and your time with us this morning. Obviously, we believe there is a lot to like about our position. The markets are strong, our operations are performing very, very well. As you've seen, the results are positive and our outlook continues to strengthen.

I would also like to thank our 7,000 employees around the world for their continued attention to safe, low-cost operations. And with that, thank you very much for participation this morning.

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