Peabody Energy Corp (BTU) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Peabody energy third-quarter earnings release.

(Operator Instructions).

With that being said, I'll turn the conference now over to the Senior Vice President of Investor Relations and Corporate Communications, Mr. Vic Svec. Please go ahead.

Well, thank you, John, 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 Chief Financial Officer, Mike Crews, and President and Chief Commercial Officer, Rick Navarre. We do have some forward-looking statements, 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 filed documents. And we also refer you to peabodyenergy.com for additional information. I will now turn the call over to Mike.

Thanks, Vic. Peabody again delivered exceptional financial results, posting our third quarter in a row of increasing EBITDA. Top line growth and solid operational performance drove margin expansion in all regions. Year-to-date operating cash flows reached a record $884 million, and we're again raising the midpoint of our annual targets. I'll begin with a review of our income statement and operational highlights.

Our third quarter sales totaled 64 million tons, exceeding last year on higher volumes from Australia Trading and Brokerage segments. Revenues were nearly $1.9 billion for the quarter, on the combination of higher sales volumes, and increased realized prices in each of our operating regions. Australia was again a key driver, with revenues significantly above both last quarter and last year. Consolidated EBITDA reached $571 million for the quarter, or 67% above the prior year, on a near tripling of Australian results and improved US performance. Trading and Brokerage also turned in a solid quarter, contributing $44 million.

Let me take you through the performance drivers in more detail, beginning with Australia. During the third quarter, we sold 7.4 million tons in Australia, including 2.4 million tons of met coal, and more than three million tonnes of seaborne thermal coal. Our met coal prices averaged $192 per ton, significantly above both last quarter and last year. Third quarter's realized prices illustrate the benefits of both business price, in line with the quarterly industry benchmark, and more than 200,000 tonnes of carryover volume. On the seaborne thermal side, our sales price per ton averaged $79 versus $72 last year.

Turning now to costs, results were better than last quarter and last year. A higher ratio of thermal volumes, combined with ongoing cost containment, delivered costs of $56 per ton. Let me take this opportunity to touch on our currency exposure. The Australian dollar appreciated 13% during the third quarter. Fortunately, we are approximately 85% hedged for the remainder of 2010, and we're currently 75% hedged for 2011, both at approximately $0.80. Our program has been an effective tool for minimizing the EBITDA volatility associated with currency movements. For the full-year, we continue to target Australia costs in a range of $55 to $60 per ton. The combination of higher prices and volumes, and costs in line with expectations, raised our Australian gross margins to 44%.

Turning now to the US, our quarterly results benefited from higher prices and on-going cost control. Realized prices in the Midwest were 5% higher than last year, and costs were flat, even with the start-up costs at Bear Run. As a result, third quarter margins rose more than $2 per ton, and now average nearly $11 per ton. In the West, our margins continued to exceed $5 per ton, benefiting from higher realized prices in each of our regions, as well as a change in sales mix towards more southwestern and Colorado volumes. On the cost side, the effect of that same change of mix was minimized by a 5% improvement in our PRB productivity. And looking ahead, fourth quarter's Western costs will reflect a longwall move in Colorado.

Rounding out the EBITDA discussion, Trading and Brokerage delivered $44 million, which exceeded last quarter on a higher volume of physically settled transactions. Moving on to taxes, our effective tax rate excluding currency remeasurement was 27%, and continues to be in line with our full-year expectations of 25% to 30%. I would also note that expense associated with non-controlling interest totaled $12 million this quarter or $0.05 per share. As the profitability of our joint ventures increases, so does the portion that is allocated to our partners. Excluding the impact of $43 million of non-cash currency remeasurement, our adjusted income from continuing operations totaled more than $280 million, with adjusted diluted EPS of $0.99, both more than double last year's level.

As a result of our strong third quarter operational performance, cash flows from operations totaled $427 million, and helped to drive the cash balance to nearly $1.4 billion. Our third quarter capital expenditures were $126 million. Fourth-quarter spending is expected to be the highest of the year, as we begin finalizing Bear Run, ramp-up spending on Australian growth projects at Wilpinjong, Burton, and Metropolitan, and take delivery of production equipment in the US and Australia. For the full-year, our CapEx target remain $600 million to $650 million. As we turn our attention forward, targeted EBITDA for 2010 is now $1.85 billion to $1.9 billion, with adjusted EPS of $2.95 to $3.15 per share. At these higher levels, 2010 EBITDA may rival our record year in 2008. So with that review of our outstanding third quarter results and view for the year, I'll now turn the call over to Greg.

Thanks, Mike, and good morning, everyone. Peabody is again reporting excellent results, driven by operating portfolio that's both broad and deep. No other producer has such a platform, and this was again evident in the range of production announcements we saw prior to the start of this earning season. Now looking forward, we see our operating base expanding, our multiple growth initiatives accelerating, and the global economy strengthening. And this has great implications for Peabody's financial strength, earnings growth, and ability to create value. We recently returned from China where Peabody's leadership reviewed both the long-term energy outlook, and our many Asian initiatives.

Let me first set the context for the demand supercycle that coal has entered. The demographics and resulting trends are overwhelming. Today 3.6 billion people lack adequate access to electricity, and another two billion people over the next two decades will need electricity access. China now forecasts that 290 gigawatts of coal fuel generation will come online between 2011 through 2015. This alone represents over one billion tons of coal per year at full operation. Also, this occurs as major steel plants are built along the coast to attract even more met coal imports. And everything we have seen to date in China is just the beginning, as Chinese leaders continue to believe the nation will still be in development mode, 30 or 40 years from now. And beyond China, our nations such as India and Indonesia with large, fast-growing economies and populations, that will quickly raise their market share of global energy demand.

So that's the long view, but the near-term dynamics are also compelling. It is striking that the coal markets are as solid as they are, with only one leg of the global economic stool providing meaningful support. Asia is driving demand growth, while the US and Europe still lag. Global generation is growing at a double digit pace in places such as China and South Korea, while global steel production is up 22%, and running at an all-time record. And contrary to various sentiment, steel prices continue to increase in the third quarter. China's net coal imports are running at 140 million ton annualized rate. And initial data out today, suggests that China was a net importer of 13 million to 14 million tons in September. While this surprises some, who continue to underestimate China's growth, in our mind this is just new business as usual.

Yet China represents less than 20% of the global seaborne coal market. The other 80% of the global market has been rebounding in 2010, with large Asian economies performing particularly well. Global met markets have been routinely settling about $200 per metric ton. Newcastle thermal coal has exceeded $95 per ton, and now passes $110 per ton just three years out. The near-term fundamentals will continue to tighten, as seasonal rains have come early to Indonesia, and industrial demand is picking up again in China. And while Asian nations are holding up the global economy today, European and US energy demand growth remains more challenging.

This summer saw a record reduction in US stockpiles, more than twice the average, on the strength of stable production and significantly higher cooling degree days. We have also regained a portion of the 2009 coal-to-gas switching in 2010, though the weak economy has once again brought down gas prices. We now expect US GDP and industrial production to remain muted in 2011, and believe the US recovery will be more pronounced in 2012. I would also note, we're very comfortable with our US contracting strategy, as we look out over the next several years. With the US economic growth still lagging, natural gas prices low, and the return to normal weather patterns, we believe it's wise to have contracted significant volumes for 2011. On the other hand, we have more volumes open from 2012 and beyond, than any other producer.

Now, Peabody's operating base is very well positioned to capitalize on the near and long-term global demand trends. In Australia, we have made progress in our multiple expansions of metallurgical and thermal coal mines. We have approved the capital for low-cost Wilpinjong mine expansion, and began the expansion of the Burton metallurgical coal mine. And as we grow in Australia, we continue to ensure that we have transportation capabilities, such as a new contract with Queensland Rail, and our 18% participation in NCIG, including the second phase of expansion. In the US, we began expanded operations at the major Bear Run surface mine in Indiana last month, with the arrival of a second dragline. We announced a new Gateway North expansion in the Midwest, and we made additional progress in citing and detailed planning for a west coast port. All of this occurs, as we see the Illinois and Powder River Basins capturing demand growth, as central Appalachia continues to decline.

And in Asia, we have advanced multiple initiatives to develop joint venture mining and supply agreements. During the quarter, for instance, the GreenGen business licenses were approved in China, and construction is on track towards a 2011 start. And we have a number of other projects in the works in China and Mongolia, and we're advancing plans to source coal from Indonesia, and supply coal to India.

In summary, Peabody had outstanding quarter. Our financial position is strong, and our status as a growth Company has never been better, with projects advancing on multiple continents. I thank our 7,000 employees around the world, for their continued focus on safety and operational excellence. And I began by noting that Peabody continues to distinguishes itself through our results. And we remain confident that BTU's multiple will expand to it's historic level and premium over our peers. So that's a brief review of our outstanding quarter, and our favorable outlook. And at this time, Rick, Mike, and I, would be pleased to take your questions.

(Operator Instructions).

And first from the line of Shneur Gershuni with UBS. Please go ahead.

Hi, good morning.

Good morning, Shneur.

I guess I have two questions. One is with respect to Australia production, given the well-reported weather issues that are out there. How confident are you hitting your target for the end of the year? And then second, and as part of that question, if you can talk about where you think the next met settlement will go, for the first quarter, whether you think it trends upwards or downwards?

Well, maybe just talk a bit about our Australia production. For the fourth quarter, I mean as you look at the third quarter, there is no question that has been a fair bit of weather-related impacts across the Australian region, both in Newcastle and Queensland. And if you recall historically, we operate our business in Australia with a fair bit of stock on the ground, so that we can be opportunistic when others have production problems. Well, that same strategy helps us at times, during this when there are weather-related production impacts. Other producers struggle more than we do.

We were capable, and able to ship out of stocks during periods of times when our operations have some weather-related interruptions. So for us the third quarter impacts were very muted. Any impacts would be more related to transportation and/or port issues, rather than production for us. Not to say we do not have some, but they were very muted. And we would expect that would occur in the fourth quarter as well. We still have a wide range for our fourth quarter production out of Australia. Our forecast of volumes for the year across our entire platform, US and Australia, remain intact. All I would say, we probably will see a stronger performance out of the US, and a more muted year-end performance out of Australia, relative to midpoints in our various guidance ranges. Maybe I will have Rick talk a bit about met coal trends, and at least the dynamics in the met coal markets.

Yes, Shneur, obviously we've just finished the settlements last time at about 209 for the hard coking coal. And as we look right now, there are a couple of things starting to give some positive indications that that number might be a little bit low, going into the next quarter. Obviously it's a little bit early yet. But with, as Greg said, with all of the weather disruptions, there's a bit more tightness in the market, particularly in Queensland, So that's going to have an impact. We're probably hearing that spot pricing now has probably inched up to about 220 from 209. And I would also say that from our viewpoint, from where we sit, what has happened with currency, we would fully expect to get the change in currency, which has been about 13% in the quarter should flow back into the price settlements.

Okay. And I was wondering if I could have one follow-up, with respect to the Powder River Basin. I'm not sure, but based on my calcs, it looks like you may have contracted some Powder River Basin for 2011. There has been some commentary out there by other producers about a $15 market or higher. I was wondering if you guys are seeing some similar trends as well too?

I mean, certainly in the early part of the quarter, the market was 15 plus for [NeoTC], and we were able to capture sales in that range. We didn't have a lot to sell, as Greg mentioned in his remarks. We probably sold 10 million tons for '11, still have a bit to sell, but not a lot. I think that is a position that we are happy to be in. Leverage is a good thing, in the right doses, and in the right time. But most of our leverage is geared towards the recovery period in '12 and '13. And when we look to '11, and as we did in '10, we think it's going to be a bit slower, and I think we are pretty happy that we are pretty well sold out for '11 so. But we were able to capture some of the higher prices. That is the reason we are sold where we are, because it allows us to be selective in making those sales.

And do you feel the market is still close to that area right now?

I think it is right now. I think there's -- if I looked out to the next quarter where our position is, I wouldn't not want to be very long, PRB coal, in the next quarter. I do not see a lot of catalysts in the next three to four months that are going to change that That is why you see a flat curve -- price curve. It's in the $14 to $15 range, but if there's a lot of supply out there chasing the market, it could come down a little bit, for at least in the near-term.

Okay. Great. Thank you very much.

Our next question is from Pearce Hammond with Simmons & Company. Please go ahead.

Yes, good morning. I was curious if you could provide a little bit more color on your Mongolian strategy, specifically a little bit more about Winsway, and then how you see the Tavan Tolgoi process developing?

Yes, Pearce, this is Rick, I'll take that. Just on our overall strategy on Mongolia first. And then I will break it down into the two components. But overall, obviously, we look at that as a strong market opportunity with it's proximity to China, it's large open-cut reserve base of high quality, both thermal coal, as well clearly, high quality metallurgical coal. The Winsway partnership is an interesting opportunity for Peabody. We currently have a significant number of licenses that we purchased almost two years ago now, that we have. And Winsway becomes a very good partner for us, because they control or operate a significant amount of logistics chain. They are responsible for about 60% to 70% of the exports in China today go through Winsway changing stations and toll gates. So it is a good partnership for us long-term. They are strong company. They just finished their IPO as you may be aware, a well-managed organization. So we have got a 50/50 joint venture with Winsway, to develop resources outside of the strategic resources, which would be Tavan Tolgoi.

Tavan Tolgoi, on the other hand, large five to six billion ton deposit of high-quality metallurgical coal, we continue to look at that as an opportunity down the road. I would say it's a very fluid situation with the government, as it always has been. Ultimately that reserve will get developed, and Peabody hopes to be there when it does get developed, and be one of the winners on the ultimate auction process.

Great. The follow-up is have you seen any impact from the Chinese provinces, scrambling to reach the energy efficiency and emission targets that are tied in the '11 five-year plan?

We did actually. and we talked about that on our last call that we expected that China would slow down a bit in the third and fourth quarter, as they try to reach that five-year target. And they did basically do that. They shut down some of the higher energy intensive businesses, some of the older steel mills and other factories. And they did shut down a lot of things to try to reduce their energy intensity to make that five year goal they committed to.

Interesting, Pearce, though, I think part of what we're seeing with the import numbers, early import numbers for September is, I think the expectation is the October quarter is going to come roaring back in China, now that they have met their targets through the first nine months of the year.

And you share the same sentiment?

Yes, we see the fourth quarter I think being a strong quarter in China. Certainly from a coal perspective. There are still stockpiles that need to be replenished. There are still transportation constraints internal to China. And there is still a massive restructuring program going on, both on the met coal and steam coal side in China with their production base. And all of that continues to put pressure as we saw in the September import numbers for coal coming into China.

And they had a little bit of weather as well. The winter has hit a little bit earlier than normal, so they are starting to feel that as well.

Thank you very much.

Next question is from Michael Dudas with Jefferies. Please go ahead.

Good morning, everybody.

Good morning, Michael.

My first question is, some reports in the marketplace about shipments of some of your coal to Europe from the Powder River Basin. Can you talk a little bit about what the customer is thinking about there? And is it the concern of the lack of potential supply from say, Poland/Russia, or Colombia that is driving more thoughts towards sub-bituminous products out of the US?

Yes, Mike.. I think it is the consistency of supply. The Powder River Basin -- getting coal from Peabody out of the PRB is going to be a consistent supply. Obviously, the European suppliers are not going to be as dependable -- as out of the US And it is a mix issue. They are mixing it into their blend. It's the right cost. And is something that they can certainly -- they've have seen us do in the United States, why can't they do what we're doing in the US, with blending high BT coal and low BT coal, why can't they do that in Europe. And it's -- we have got a lot of discussion with this particular customer. And we were able to convince them to do that. And we think it's going to be a win-win for both of us.

Just to add to that, I think they look at it as diversity in the supply base. Historically, Europe had South African and Colombian coal all to itself, and that coal is just strongly being pulled into the Pacific rim. And I think the UK, and some of the other European consumers are starting to say, well, we probably really need to test what other opportunities are, particularly PRB, for coals into Europe.

And I guess following up a little bit on that, with security of supply turning towards Powder River Basin, do you think the market is paying a bit too much attention to some of the discussions in opportunities for developing the west coast port for shipping PRB coal west? Is that way too far in the future for people to be concerned about, is that something that could find some more support and acceleration as we move into 2011, that could turn the PRB to a little bit more of a dynamic market, than what we have seen in the past?

Well, obviously, it's an issue that we are spending a lot of time and significant effort on, because we think it can make a major difference, in terms of the PRB dynamics. But that does not mean it is the only avenue for exporting PRB coal. And the Gulf continues to be an opportunity, particularly as the Atlantic basin gets shorted from traditional coal sources into the Pacific rim. But there is no question that a major new port out of the west coast could positively impact PRB dynamics.

I appreciate your answers. Thank you.

Next in the line of Paul Forward with Stifel Nicolaus. Please go ahead.

Yes, thanks. You noted that big inventory draw downs we've seen this year in the US until about August. But, I guess, from what we have seen, weak demand over the past few weeks, and a little bit of pick up in volumes, particularly in the PRB, we started to see some building again. Would you consider actually taking some of that, or stalling some of the growth that you would expect in the PRB in 2011, if these markets do not hold up? I know, Rick, you talked about PRB pricing fading over the past couple of months. What is your view on 2011, and where you might -- whether you might need to exert a little bit more discipline?

Well, Paul, you just gave a good segue, as to why we like our 90% sold position out of the PRB for next year, because we did not want to go into next year or into the end of this year, having to play significant volumes out of the PRB. So we are very happy with where we're at it, and fortunately do not have to face those decisions, because essentially we are sold under contracts. But I think that will be a question for others as they look at where the market goes next year for as Rick said, the catalyst for additional major volumes seem to be pretty slight for next year.

All right. And just one last point on this -- you reported $40 million of other operating costs in the third quarter. Just curious, what is the likelihood that we will see that level going forward, or were there some specific items that boosted that number?

When you look at -- this is Mike -- when you look at that versus last year, we are up a bit. And some of that has to do with higher retiree health-care costs on lower discount rates, so it's an amortization. There was another -- there was a litigation settlement, small one of $5 million in this quarter. So the run rate for the rest of the year, I would expect to be a bit lower, mainly due to that litigation settlement we had in the third quarter.

All right. Thanks very much.

Our next question is from Brian Singer with Goldman Sachs. Please go ahead.

Thank you, good morning.

Good morning, Brian.

You mentioned earlier on Mongolia, I wanted to follow-up on two additional expansion initiatives. First, where you stand on getting an upstream position in China. And second, maybe a little more color on your comments on how to best position to take coal out of Indonesia and into India.

This is Rick. Let me -- I will start with the Indonesian first. In Indonesia, obviously there's a lot of opportunities there, that we are continuing to look at. And that's a -- it is a good market, it's a good production market for us to -- mostly it's all open cast coal mining. And we're looking at probably four to five initiatives that will allow us to take a meaningful position, but not a majority position in some coal properties that will allow us to participate, and have coal to sell into in India, and the rest of the Asian markets. So you'll -- more to come on that, is what I can basically tell you. You will hear more about that in the future. As it relates to China, the same thing. We have got a number of opportunities that we are working with, they take time, we are working with partners, and you have to work through the government agencies to get the properties on line, get them drilled, get them -- and get all the permits. And it just takes a bit of time, but I think that once again, we hope to continue to update you on that, and give you some meaningful advancements on both of those areas, in the next twelve months for sure.

Great, thanks. And as a follow-up, switching to Australia, as we look at margin trends there, can you talk to -- A; how you see cost trending and the FX impacts there? And B;, any color on the spread between some of the weaker met blends relative to the benchmark?

Yes, when you look at the cost profile we have had in Australia, we have been extremely pleased. Now on a year-over-year basis, you see a significant decline. You will recall, we had the delay on met settlements last year, so we had a lot of met coal that shipped from -- that should have been in the second quarter, that was in the third quarter as well. So some of that is a mix issue. Sequentially, we are also down, and that is a function of a little bit more of thermal mix. But also, is that thermal volume comes up, it is coming out of the lower cost mines that we have in Australia, so we are very pleased with that.

And then looking forward, on -- for the rest of the year, we continue to target 55 to 60. We do have some currency risk there, although we are 85% hedged, so that is muted somewhat. And when you look at the cost trends inside of that range, you have got potentially higher to merge. We talked about FX, a little bit higher sales related costs. But we have also had very good performance out of our longwall operations, and that has been a tremendous impact on our costs this year.

Yes, I think the second part of your question had to do with the spread between the high-quality coking coals, and the semi-soft and the PCIs. And as Rick mentioned earlier, we view all of the met coal market dynamics right now as providing upward pressure on the full range. Clearly much stronger pressure on the high-quality coking coals, whether it is a combination of the exchange rate, increasing demand across the globe going into next year, some weather-related impacts across the Australian platform. All of those things are going to put, in our view, upward pressure across that full suite. But no question, much more strongly on the high-quality goals, which favor our platform.

Great. Thank you.

Our next question is from Wes Sconce with Morgan Stanley. Please go ahead.

Hi, guys. Good morning. Where do we sit with the School Creek expansion? And given your outlook for continued supply pressures in Appalachia and demand recovery, how much additional PRB and Illinois Basin tonnage, do you think will be called on, say by 2012?

Well, maybe start with the overall view. We have always felt, and still believe, that Illinois Basin and Powder River Basin will be the supply to back up the increasing decline in Central App. And we see that Central App decline being exacerbated by the regulatory environment that they are operating under. As it relates to School Creek, we have always said that School Creek production, as we look at School Creek, we look at it as a margin enhancement play for our PRB platform. And, to the extent that sometime over the next several years we start to see some volumes coming out of School Creek, it would be as an ability to improve our margins out of the PRB, not necessarily as an attempt to increase our overall volumes.

Well, thanks. And a follow-up, do you expect your current mix of met coal quality to change in 2011 and '12? And I'm curious if there's any upside to your forecast today, on the unpriced volumes, and what would drive that, if it was additional contribution from semi-soft or PCI out of Wambo?

Yes, I think we are still working through the details of our operating plans over the next couple of years, particularly the timing of some of the additional volumes that we have coming in, with our expansion programs down there. But there is the potential for a slight increase in the lower quality met coals, in the early part, based on where those expansions might come into play. But we're really not ready to give you any full number details on that yet, but that possibility exists.

Thanks.

You will continue to see swings, when the markets are extremely tight, you will be able to sell more of our Wambo product into the met market as a cross-over coal, than in the thermal market, as we did this year, early in the year. So I think some of that's just going to be dependent on how tight the market is as well.

Do you have tonnage in met and thermal exports booked for 2011 and '12?

Not very much. Very little.

Yes, 2011 which is for some of the thermal would be under some of the semi annual pricing contracts, that reprice on April 1. Obviously on the met side, it's all quarterly business, or almost all quarterly business at this point in time.

And that's all open.

I appreciate it, guys. Looking forward to site visit next month.

Our next question is from Brett Levy with Jefferies & Company. Please go ahead.

Hi, guys. Can you talk about what you're hearing, in terms of the Australian super tax, or the state of play leading up to 2012, and where you think it's going to land at this point?

Yes, where we are with the Minerals Resources Rent Tax, is the Australian Government's Policy Transition Group just issued an issues paper last week. As they start to move from the framework that was agreed to, prior to the federal election into crafting legislation. So the key takeaways are, it remains a significant improvement over the original RSPT proposal. The majority of the provisions that were outlined in that framework still remain. There are a handful of issues that will need to be discussed, that are points of clarity, clarification, to be reviewed. So we are very active, in terms of -- we just started probably a first week of negotiations with the government through our contacts, and directly through the industry groups such as the Minerals Council of Australia. So, having said that, it remains to be seen what the final legislation is going to look like. It won't kick in until 2012, and I think once we complete that process over the next several weeks, we will have a little better clarity on what the ultimate impact will be.

And then as you look at that, does that impact the way you would view expansion or acquisition opportunities in that country?

You have to look at it in terms of directing our investments. I think with the conversions from the RSPT to the MRRT, while it is clearly an incremental tax to us, we believe it's manageable at this point, relative to our organic growth profile.

Okay. And then other countries, do you see there is a contagion at all at this point?

You see some rumblings here or there, but in terms of our operating portfolio that we have today, nothing really immediate on the horizon.

Thanks very much guys.

You're welcome.

And we'll go to Jim Rollyson with Raymond James. Please go ahead.

Hi, good morning everyone.

Good morning, Jim.

We -- natural gas prices here lately, and kind of projected for a little while, have obviously spurred a lot of talk about the impact on the coal business or demand domestically. On a short-term basis, looking into next year from a switching standpoint, and a lot of guys have started talking about what the next several years looks like, in terms of some of the older plants getting retired on the coal side, and maybe being replaced by gas. Can you guys to share your thoughts on that subject, just kind of where we stand today, and how you are viewing that as a threat to US coal burn?

Sure. I mean, obviously, we recovered some of last year's loss of burn to cheap gas. We did not recover as much as we would have liked, based on where gas prices trended through the back half of the year, and where they sit today. As you go into next year, I come back to our discussion earlier about where we sit relative to PRB contracting. The major impacts are in CAP and NAP, for any type of gas switching. But to the extent that natural declines and CAP production perhaps are going to gas, it would be preferable if all of that was going to Illinois Basin and PRB basin, on a 100% basis. It's not today. And as you look out through the course of next year, the view on gas is, we are kind of in -- until the economy really begins to pick up more steam, and until we see the gas producers reduce the amount of gas that they are bringing to the market substantially below economic value for them, we are going to be in this oversupply situation on gas, which is going to continue to provide opportunities in the CAP and NAP burn regions for gas to coal switching.

Do you think, Greg, over time that the exports out of the equation also picks up on the thermal side, that also maybe also helps offset, some of what is going on with gas if, in fact, the gas situation lasts for a while?

This is Rick. It certainly can, obviously, because we have a disconnect in the gas prices in the US, compared to the gas prices in Europe. So European gas prices are certainly higher than what we're seeing in the US So at some point in time, with reasonable transportation, we can get back into the US thermal exports into Europe, as the European demands picks back up. We've had a soft European economy, we've had high stockpiles, and their gas prices have rebounded pretty nicely. So I think you will see some of that going into the European markets, but it's not competitive today, but ultimately that's the viewpoint.

Yes, over time, that is what I was looking for. Thanks guys. Good quarter.

Thanks.

We will go to John Bridges with JPMorgan. Please go ahead.

Good morning, Gregg, everybody. Just wanted to follow up on the PRB coal into Europe. Where do you see the opportunities for this coal going forward? Is it going to go more that way, or might it go through an expanded Panama Canal into Asia, if you can't get the Newport on the West Coast?

Well, I think our first view is that the port on the West Coast is something we are going to spend a lot of time, and we hope has a high probability of eventually coming to pass. Suffice it to say, we've got some coal going into Europe, by evidence by the UK landings. And we are also shipping some of our PRB coals out through the existing ports in the West Coast to China, and some all the way down to Chile. So the coal can travel, and as the global seaborne market continues to tighten, the first beneficiary is going to be the pricing horizon out of the Newcastle production base that we have today. Secondary, will then be volumes continuing to increase, both PRB volumes into that marketplace, but other US thermal volumes over time. So, it's as Rick said, it is dependent on the pace of recovery in Europe, as well as the fact that we continue to see a production disconnect, or a supply demand disconnect over time in the entire global seaborne thermal and met coal market, which will pull coals from anywhere they can.

Yes, we -- believe in that one too. Just as a follow-up, with the privatization of the rail in Australia, does that encourage you to think about putting in -- adding to your own rail infrastructure down there, or how do you see that going forwards?

Well, I think what is going to happen is the Queensland Rail System will start to look more and more like what we have out of the Hunter Valley and New South Wales, where they went through their privatization a number of years ago. Overall, while it's a bit frustrating at times, the pace of the expansion of the rail system in Australia, we have been able to grow our business. Rates are fairly competitive. There is competition among the providers so I do not see us making a significant change in the near-term to how we contract for freight in Australia.

Okay. Many thanks. Congratulations on the results.

Thank you.

Next we will go to Sanil Daptardar with Sentinel Investments. Please go ahead.

Yes, thanks. On the Australian gas question, in fact, how are you thinking about 2011 costs? You did explain a little bit of it. There might be some upward pressure as you think, but where should it go to?

Are you talking about costs across the entire platform?

Yes.

That was for 2000 -- ?

'11.

For 2011. As a think about going forward in Australia there is some upward pressure on cost there. One would be currency on the unhedged portion of our portfolio. The second with , to the extent that you have higher sales prices, you have higher sales related costs. Another is, when you look at the economy in the US relative to where they are in Australia, they never really went into a recession. Unemployment remains relatively low, so there is some wage pressure there as well. And when you look at that upward pressure balanced against where we think we are going to be on the operating portfolio. That is why we are focused on our cost improvement initiatives, our investments in bigger gear, improved capital expenditures to lower our operating costs. And those are some of the things we will look to, to try and temper that cost increase. I think as we work through the budget process, and we will be able to provide some better guidance in 2011 when we get a little closer, but some of those are the macro issues that may be impacting us on the Australian side.

Then on the US side, you've got increasing stripping ratios from year-to-year. The inflation is probably a bit tempered, relative to where it is in Australia. And you have seen the cost containment programs that we have had this year, in terms of bringing our maintenance costs down, holding the other inflation items in check relative to the labor or M&S spending, and we hope to continue that in

Okay. And on the US side, you are just 10% unpriced. How much should we think about the volumes for 2011? And if you go into 2012, if these regulations on environmental things hit the market, how would demand trend, because you have a lot of unpriced portion in 2012? If there are significant regulations on the coal plants, and some other coal plants might just die down, and just are old, and are (inaudible) how should we be thinking about 2011 volumes, 2012 volumes, given unpriced portions?

Well, I think first of all, we are not anticipating that 2012 is going to be as you describe it. Clearly electricity needs to be produced, and continue to be maintained. As we look forward, we think the US economy is going to be much stronger in 2012, by the time we get to 2012, than we see it today, and perhaps the first half of 2011, which will not only bring back underlying coal demand, but put the upward pressures on gas pricing that will bring that coal back into the marketplace. I think the bigger concern on regulations would be the production out of Central App and Northern App, which again, from our platform, Illinois and Powder River Basin, will be a positive as we go into 2012. So, as you look at how we think about how we should have contracted for 2011 versus 2012 and beyond, those are the things that we are looking at, and we see it much more of a positive environment for 2012 and beyond.

And I think I would add another couple points, that I didn't mention earlier. On our committed position that we sold during the quarter for '11 and '12, eight million tons in each of those years relates to a long-term coal supply agreement reopener out of our Kayenta mine in the Southwest. And so essentially, when you look at us selling 18 or 19 million tons in the quarter for 2011 and 2012, almost half of that is related to a long-term contract in the Southwest. So we did not sell as much as PRB, but you look at 2012, 2013, as Greg said at the outset, we have over 300 million tons of coal to sell across the entire platform. We feel that is a great position to be in, for what we see as the right time to have that leverage.

Okay. Great. Thanks.

And we'll go to [Steve Morris] with Citizens Trust. Please go ahead.

Good morning. Regarding your dividend policy, have you folks considered making a meaningful increase in that at this time, or is the expansion of the coal production takes the front seat of the driving wheel, so to speak?

Well, I think as we say, as we have talked in the past as we look at uses of our cash we continue to look at all of our opportunities. Growth is always high on the list, whether that is organic growth or through the M&A activities that we continue to look at. We did a bit of financial and debt restructuring during the quarter, and we continue to look at our dividends, and our dividend policies. So, no, it is not off the table, by any stretch of imagination, but is just one of the many things that we look at in terms of how we balance our cash needs. And as we do that, we do look out over a multi-year view of the business, both in terms of what our investment opportunities are, as well as what our cash generation will be.

Thank you for your time.

Our next question is from Curt Woodworth with Macquarie. Please go ahead.

Yes, good morning. I was wondering if you could comment on the capital costs for the Millennium mine expansion?

Well, I think in general, in terms of all the work that we have going on outside of the two projects that we have announced, which is Metropolitan and Wilpinjong, we kind of talked about that $50 to $70 a ton capital -- per annual ton capital for a number, for the remainder of those projects. And Millennium would kind of fall into that category.

Great. And in terms of the capital costs for Indonesia and Mongolia, with some of the potential JV opportunities you are looking at, can you give us a sense for what type of levels those would be at?

We are still evaluating that, but they would be a bit lower than what you would see the US. Obviously, the equipment is a bit -- in many cases, is going to be a little bit less expensive, and in Indonesia, we are probably talking about a $30 per annual ton rate. And Mongolia, is going to be dependent on the nature of the project, and the transportation infrastructure that you have to build, is probably going to be somewhere in the -- if it does not include any infrastructure, it's probably $20 or $30 per annual ton, and it's going to be $40 to $50, if you have to start including any significant amount of transportation infrastructure.

Yes. Okay. And then just given the fact that the infrastructure issues in Australia are improving, albeit slowly. And you have the NCIG capability now, do you feel that making assets purchases in Australia maybe to maximize some of the throughput capacity would make sense? Or do you feel you have better investment opportunities outside of Australia going forward?

We are looking at all of the above.

Yes.

We have capacity, and then we are going to make sure we fully utilize that capacity either through our organic (inaudible) platforms, or through joint ventures, or other acquisitions in Australia to make sure we use that capacity. So it's not an either/or for us.

Yes. And how much additional -- how much extra capacity do you have, looking out for the next couple years? Do you feel like what your production base is going to be will be fully maximizing your port allocation, or are you going to have an upside?

I guess right now, the safest thing I can tell you is, that I think we have certainly adequate capacity to meet the goals that we have on the buildout of our platform. I would probably leave it at that for now.

Yes.

Because it is going to take time, as we see how fast and quickly NCIG comes on board and ramps up. So I think it is pretty safe to leave it at that.

Okay. Thanks very much.

Our next question is from Mitesh Thakkar with FBR. Please go ahead.

Yes, hi. Now my first question is on the met coal volumes for the full-year 2010 and 2011. If my math is correct, for 2012 -- for 2011, it looks like the unpriced volumes ran down about 0.5 million tons to 1 million tons. Is that right?

It should not have -- the total unpriced volumes right now for 2011 are roughly nine million to ten million tons.

Yes, wasn't it 9.5 to 10.5 earlier? I could be wrong. I just think -- (multiple speakers).

-- that tightening of a range. We may have sold a little bit of that, the domestic met coal that may have brought that down slightly from the previous quarter, because we do have one -- a contract that is domestic met inside Australia, that does run over different time frames, than just the quarterly pricing.

Okay.

So that's probably what brought that down.

Okay. Fair enough. And for the full-year 2010, how should we think about met volumes for the full-year 2010? Hello?

Yes, it's about nine million tons.

About nine million tons? Okay. And looking at the US, you mentioned earlier in the previous conference call, that you are expecting a low double-digit kind of export number. Has that changed a little bit, or are you still hoping that kind of number?

I'm sorry --

Which number are you referring to?

Met coal exports out of US.

Well, I think we were looking at 70 -- I'm sorry -- you said met coal or total exports?

Met coal. Met coal.

Met coal is probably 55 million to 60 million tons out of the US this year.

And steam coal?

The total is going to be 75 million tons.

Steam coal would be at most 20 million.

Okay. Sounds good.

Give you a range of 55 to 60, 15 to 20, and you get there.

Okay, and one last question on the trailing EBITDA. Of the $44 million in trailing EBITDA, how much is overseas? I know you mentioned that Australia was pretty strong. Can you quantify how much of that was overseas, Trading and Brokerage, EBITDA?

It's running roughly half. I don't have it -- I am not sure if I am specific on this particular quarter, but for the year, it will be about 50%.

Our next question is from Brandon Blossman with Tudor Pickering Holt. Please go ahead.

Hi, guys, congrats on the solid quarter.

Thanks.

I guess, just following up on the Trading and Brokerage. Can you -- last quarter was somewhat of an anomaly, second quarter, as far as EBITDA. Can you give some additional color around what the change was quarter to quarter? Was it just volatility as you kind of mentioned last quarter, or was there something else there?

It's a couple -- that is certainly one of the issues, was volatility, and we really just sat on the sidelines for the most part in the second quarter, because of the market wasn't trading with the fundamentals, and there was as much volatility. And the other issue we mentioned last time, is that we had a few vessels, some of our accrual export business out of the US that goes through our trading books, that didn't get shipped in the quarter. That got shipped in the third quarter. So those rolled over into Q3, that is what helped a little bit of Q3, so that's the two principal reasons.

Okay. So I mean, it's fair to expect that to be a second quarter anomaly going forward?

I guess I would say, I hope so. The trading business -- it's always a little bit [buffy] at times, just based on the volatility in the markets, and the vessel timings and such. But as we've said before, we try to shoot for that $30 million range per quarter, roughly $30 million to $40 million, and we have hit that, two out of three.

Thanks on that. And then, Greg, a super big picture question. The M&A landscape, has there been any change in the last four months, in your perspective on opportunities that are out there, public equity markets, probably a bit richer today than they have been in the recent past. Does that change your view at all?

Well, certainly my view of certain parts of the US hasn't changed, despite recent news stories. But I think in terms of overall M&A activity, it's about where it has been. Equities are certainly the international equities have high values. Expectations are still high. I think anything that we see going forward, is going to be done in a less than straightforward way. But that's what Rick and the team are spending a lot of time on, in terms of both asset and equity opportunities.

Our final question will come from Jeremy Sussman with Brean Murray. Please go ahead.

Good morning, everyone.

Morning, Jeremy.

Just to go back to what you said about the Powder River Basin a little bit earlier. We have 2011 prices in the 14, 15 range right now, but that is the curve. And there is always the question of how accurate the curve is. So I mean if you had, and I guess it's not a problem for 2011 for you guys, but if you had to sell material tonnage, do you think we would be looking at a price below the curve right now, or how should we look at that?

Jeremy, all I can really answer, in terms of that question, is there's a reason that we are sitting here 90% sold out for next year, and I will let everybody kind of interpret what that means. We are very, very comfortable with where we are at for 2011. And we are extremely comfortable that we have much larger volumes for 2012 and beyond.

And so, that is probably all I should really say. Okay, that's great. Just one quick follow-up to the last question. I think you said a little while ago that certainly you saw the spread widen between what most of your met coal is in Australia, I guess versus sort of the lower end of the quality spectrum. So as you look, at the M&A landscape, is that something you think that -- do you think the gap is going to continue to stay fairly wide, and you focus more on the higher quality end of the spectrum? Or do you just see the market as a whole staying tight going forward?

Well, I think we're always -- I mean historically, there has always been an oscillation between the hard quality high quality coking coals and the lower and mid range coking coals. And that gap kind of changes over time. It shrinks in extremely tight markets, and it widens when the markets start to ease a little bit. But our view is the demand pull versus the supply capabilities on the seaborne business means that all boats and all prices are going to rise over time. And that is really the focus of the kinds of M&A activity that we are looking at, whether it's high-quality met, mid-to-low met, or thermal coals on the seaborne markets.

Great. That is very helpful, as always. Thanks, guys.

I will turn it back to you, Mr. Boyce, for any closing comments.

Okay, well, thank you all for your continued interest in Peabody. And I want to assure you all, that we will continue to focus on both value creation and operational excellence, as evidenced by our performance of the last several quarters. I guess I would want to end with just noting in the past 24 hours, we are very pleased to have received two prestigious awards. Yesterday afternoon, we were presented with the US Department of Labor's highest safety honor, which is the Sentinels of Safety Award for our Farmersburg mine in the Midwest, in the largest surface mine category. And then last night, we were named the Best Coal Mining Company in the world for the past 30 years at Coaltrans thirtieth anniversary conference in Amsterdam, clearly a tribute to our world-class employees. And on behalf of them, we look forward to our continued success, and, of course, continuing to keep all of you apprised of our progress. So thank you. again.

Ladies and gentlemen, that does conclude your conference for today. So thank you for your participation. You may now disconnect.