Peabody Energy Corp (BTU) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Peabody Energy first-quarter earnings release. For the conference, all the participants are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. (Operator Instructions).

As a reminder, today's call is being recorded.

With that being said, I will turn the conference now to the Senior Vice President - Investor Relations and Corporate Communications, Mister Vic Svec. Please go ahead.

Okay. Thank you, John, and good morning, everyone. Thank you for taking part in the conference call for BTU. With us today are our 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 sections of our file documents. We also refer you to PeabodyEnergy.com for additional information.

And with that, I will turn the call over to Mike.

Thanks, Vic, and good morning everyone. Peabody turned in very solid results in the first quarter. Revenues, EBITDA, operating profit, and earnings per share all rose sharply over the prior year. Our operating cash flows expanded further and our balance sheet is extremely strong. We expect to grow from here as we target higher results over the balance of 2011. Let's review the quarter beginning with our income statement.

Sales volume rose 5% to 61 million tons led by higher demand in the Powder River and Illinois Basins. Australia volumes were predictably lower given the record flooding that we discussed on our last call, coupled with continuing rains in Queensland throughout the quarter.

Higher US volumes and increased metallurgical and thermal coal pricing in Australia drove a 15% increase in revenues to $1.7 billion. Even with the rains, Australia was the primary driver of a 17% increase in EBITDA to $416 million. Operating profit expanded 22% while net income climbed 32% to $177 million. Our effective tax rate was 25% in the quarter excluding currency remeasurement, and we are targeting the upper 20% range for the full year.

Income from continuing operations rose to $180 million. Excluding the non-cash remeasure method income taxes, our adjusted income was $186 million with adjusted diluted EPS of $0.67, both significantly above the prior year level.

Now let's review the building blocks of EBITDA in more detail on the supplemental income statement. I will first turn to Australia where we expected a lighter quarter for shipments. The substantial weather events that continued in the first quarter led to a 10% volume decrease from the same period in 2010.

I am pleased to report that all of our Australia mines are producing and shipping coal with the rail line that serves our Wilkie Creek thermal coal mine coming back online at the end of March. We are also beginning to rebuild Australian inventories.

Australian revenues rose 30% demonstrating Peabody's leverage to pricing seaborne pricing. The average revenue per ton rose 43% over the prior year and exceeded $100 per short ton and these will both move higher with the rising benchmark prices. We sold 2.1 million tons of met coal in the first quarter at an average price of $186 per short ton, which was more than 50% higher than last year based on the benchmark price set last December. We also shipped 2.1 million tons of seaborne thermal coal at a realized average of $83 per short ton.

Weather-related production effects were the largest items that impacted cost for the quarter. Other factors included increasing sales related royalties as well as a higher mix of met coal shipments and unfavorable exchange rate movements. Peabody remains approximately 75% hedged for the remainder of 2011 at approximately $0.80 for the A dollar. First-quarter Australian margins still rose 70% over the prior year and would have been higher but for the impacts of flooding.

We expect costs to be the same or a bit higher in the second quarter. In addition to a longwall move at a Queensland met coal mine, weather-related mine plan changes at the number of locations are temporarily impacting productivity and cost for overburden removal. We are targeting full-year Australian cost per ton in the mid-60s range as our production increases and new capacity comes online. We look forward to ramping up with an Australian shipment run rate for the remainder of the year that should be 30% to 40% higher than the first quarter.

Turning to the US, strong demand drove an increase in shipments in the quarter -- PRB, Illinois Basin, Colorado, and the Southwest also shipment increases. Year over year, revenues were higher in the Midwest from contracts at the Bear Run and Wild Boar mines.

Western revenues per ton eased on the combination of mix and some rolloff of higher price contracts signed before the recession. We held the line on cost in the Midwest with Western costs affected by the timing of repairs as well as a longwall move in Colorado.

Overall, EBITDA contributions from the US operations rose 3% over the prior year and we are looking for that trend to hold for the full year. Australia operations saw 55% increase in EBITDA and our trading and brokerage activities rebounded from the fourth quarter, contributing more than $26 million.

Overall, our operating profit per ton rose 16%.

Reviewing the balance sheet, our results lead to cash flow from operations of $221 million, a 28% increase over the prior year. Our cash and short-term investments stand at a healthy $1.4 billion. And you'll recall that our capital spending is targeted at $900 million to $950 million with the majority slated for growth projects.

We had a slower start to the year on capital, given the weather challenges in Australia, but expect spending to ramp up over the next three quarters.

I would like to conclude by turning to our outlook. For the second quarter, we see improvements in volume, revenues and EBITDA, led by Australia. We are targeting second-quarter EBITDA of $525 million to $625 million and adjusted diluted EPS of $0.85 to $1.10. Australian contributions will benefit from increased volumes as well as record settlements for both metallurgical and thermal coal in Australia.

Our second quarter is likely to be impacted by residual effects of the Australia rains as well as lower Colorado production related to geologic issues at Twentymile. Twentymile mine had a pillar squeeze just last week on the longwall tailgate section. We had no incidents or injuries, but for safety reasons we stopped production.

Our technical teams are working with MSHA on the best way to resume production. This involves a range of possibilities from added support near the tailgate to relocating the longwall. We may have significantly reduced longwall production coming from Twentymile in the second quarter. The impact of this could range from $25 million to $75 million between lost production and higher costs of relocating equipment.

For the year, we are targeting improvements in all major financial metrics with EBITDA ranging from $2.1 billion to $2.5 billion and adjusted diluted EPS of $3.50 to $4.50. We expect to tighten this range as the year proceeds.

For now, our largest unknown relates to met coal pricing in the third and fourth quarters. I would also refer you to our Reg G schedule in the release regarding our target range is for DD&A, taxes, and other line items.

It is clear that we are looking at significant earnings increases year over year, from 15% to 40% for EBITDA over 2010 levels, and we look forward to keeping you posted on our progress.

So that review of our quarterly results and expectations, I will now turn the call over to Greg.

Thanks, Mike, and good morning, everyone. Following a strong start to what is expected to be a very good year, I would like to discuss the dramatic events shaping the global coal markets along with the multiple growth initiative that Peabody has been advancing all over the world.

Let's turn to one of the most active energy markets in recent memory. So far this year, heavy rains have limited shipments from most coal suppliers south of the equator. Australian met and thermal sediments have set new records. Oil prices have again surged and questions have been raised about the future of nuclear power and the emissions profile of shale gas.

With oil prices again over $100 per barrel, some have cited political unrest or the weak dollar to suggest that this is temporary. To us, it is more basic and the answer lies in limited supplies, major emerging market demand, and developed country economies that have begun to recover.

Now the very unfortunate events in Japan have a number of implications for coal. We see modest near-term dislocations on Japanese coal imports, a shift in coal use for steel mills and power plants elsewhere as they run at higher rates, and added steel demand for the rebuilding effort. Longer term, however, all nations are reviewing their nuclear programs, taking some nuclear plants off-line and looking hard at license extension requests. Third-party reports indicate more than 600 GW of nuclear power are currently under consideration.

Now if coal satisfied half that increase it would translate to approximately 1 billion tons of increased annual demand.

China's March numbers show a nation that is rapidly accelerating with industrial production up 15%, thermal generation rising 13% and imports stronger than February. China's first-quarter GDP once again beat the pundits and grew at almost 10% clip.

India's thermal coal imports rose 33% in the past 12 months. European coal markets are strengthening are strengthening as gas prices escalate and nuclear plants go off-line. And global steel production is about some 10% year to date, which over the course of a year would require nearly 100 million tons of additional metallurgical coal.

The supply side remains very tight. Heavy rains removed some 30 million tons from the seaborne market in the first quarter from major exporting nations on four continents. Peabody resumed production more quickly than many and lost less than 1 million tons of shipments in the first quarter. And while all of Australia lost approximately 25 million tons in the first quarter, we are still looking for Australia to increase overall exports in 2011. And that is certainly true for Peabody, where we are targeting an increase of as much as 15% in our Australian exports this year.

Peabody was pleased to advance record settlements for Australian coal. We've priced some 3 million tons of metallurgical coal with quarterly contracts in with the $330 a ton benchmark. And for thermal coal we are in the process of pricing 4 million to 5 million tons in line with the benchmark of nearly $130 per ton. This demonstrates good earnings power for the remainder of 2011 and nearly all of our 2012 met and thermal seaborne volumes are leveraged to these strong markets.

The longer term landscape is equally bright. As we move through the early stages of a long-term super cycle, coal is expected to fuel more incremental generation over the next decade than gas, oil, nuclear, hydro, geothermal, and solar combined.

In fact, more than 700 GW of coal plants are planned or under construction, representing nearly 2.5 billion tons of coal use. Most of this growth is in Asia, and Peabody has a unique access to this region from Australia, Asia itself, and the US.

Now Peabody's growth initiatives were as active as the global energy markets in the first quarter. Among other actions, we announced a throughput agreement for up to 24 million metric tons per year of our PRB coal through a planned export facility in Washington State to serve the large low CV market in the Pacific Rim. We see this market expanded by some 75% within five years.

We announced two agreements to pursue development of large open cut mine projects with partners in China. And we were named to the short list of companies for potential development of a major block in the plan to Tavan Tolgoi coal mine in Mongolia in what most believe to be one of the best undeveloped metallurgical coal deposits in the world.

We increased our sourcing agreements from Indonesian producers to support our growing trade platform and we made progress in our multiple expansion projects in Australia. We are extending the new slope and ordered the equipment for our Metropolitan expansion. We are constructing the prep planned expansion at Wilpinjong and we are moving over Burton for the box cut entry for the Burton extension.

Now there is a simple reason we are targeting Australia and Asia. Our view is that the Western Hemisphere will be a much smaller factor in the global coal growth story over the next decade. We are a growth company and we believe that the Australia-Asia region will constitute more than 80% of the world's seaborne supply demand growth over the next five years.

Peabody's blend of organic growth and business development activities gives us a significant global growth platform. We continue to focus on several key objectives -- increasing seaborne exports, developing metallurgical coal production, and expanding at the low end of the cost curve.

It is clear to me that this approach will lead to considerable earnings growth and further set us apart from the competition. Peabody looks forward to increases in the second quarter and even stronger earnings in the second half of 2011. We have got the leading position and the lowest cost and fastest growth regions of the US and we have significant catalyst for growth and avenues to increase shareholder value over the short, medium and long term.

So with that summary, we would be happy to take your questions at this time.

(Operator Instructions). Michael Dudas with Jefferies.

Good morning.

Good morning, Michael.

Looking at the outlook going forward in the Pacific Basin, do you anticipate the Australian output from the country to offset some of the difficulties you've seen in the first quarter from a coking coal standpoint? And how much do you think coking coal price upside can be limited relative to what steel prices do in the global markets?

This is Rick. Let me answer the last part of the question first. As we look at what happened in the first quarter, we saw the met prices go up significantly to $330 a ton and --. But you also saw steel prices increase roughly 100 -- about the same amount, $100 per ton.

So there is capacity there. Steel prices have gone up and given you enough margin from the steel production to get that done.

As you look at Australia overall, as Greg said in his remarks, we expect Australia's exports to still be higher than last year. So ultimately we still see met coal coming out of Australia being very, very strong this year as well as seeing what is going to happen with thermal coal.

But having said that, there's obviously still companies that are still having mines that are on force majeure. So a little bit of that's left to be seen at the -- for the rest of the year.

Thank you.

Good morning, everyone.

Maybe just to add to that, you know, as we indicated, steel production is up about 10% year over year in the first quarter and if that trend continues, which we anticipate it will for the remainder of the year, even with volume growth and recovery out of Australia, the structural gap within the global seaborne met coal market we think will remain through the course of the year.

Jeremy Sussman with Brean Murray.

Yes, hi, good morning. You mentioned exports in Australia should be higher this year than last. Is it safe to say that you think thermal exports will be up while met exports out of Queensland will be down? Or not necessarily. And either way could you give us a sense of how [NCIG] given your stake in met thermal is doing?

Well, thermal exports will be up out of the New South Wales, out of the new [Castle port] because of the additional buy-ins being driven by the NCIG ramp-up. We continue to be going through that ramp-up period there as the dredging of the channel in front of the docks gets completed over the course of the next two quarters in Australia.

So the port is going well. We are on that ramp-up schedule and that is really what is driving the thermal coal exports.

Metallurgical coal, that is going to be flat to maybe slightly down, predominantly because of what has occurred in the first quarter.

Okay. Very, very helpful. And just a quick follow-up. You still got up to 5 million tons of met coal left to price this year and you've also given us annual guidance. Can you guess maybe a sense of where you see things shaking out in the back half of the year, relative to the first couple of quarters?

Well, all I can say at this point is we think we have incorporated the range of outcomes and the range of our guidance. You are correct in saying that for the last two quarters of the year, the met coal pricing is open and subject to what happens in the market place. Obviously we still feel very strongly about the fundamental dynamics of met coal in terms of the potential supply the question through the back of the year and demand. And so we think we've incorporated what those might be in terms of the range of guidance that we provided, Jeremy.

Thanks very much, Greg. Appreciate it.

Jim Rollyson with Raymond James.

Good morning. Maybe you spent a lot of time talking about the positives, just kind of one small negative possibility out there on the cost side with obviously oil prices running diesel, just materials. It is a high-class problem, but can you spend maybe a minute or two just kind of talking about what you guys are seeing on the cost side? I'm assuming that some of the delta in the guidance ranges versus maybe where consensus was probably falls on the cost side. Just trying to get some color there.

This is Mike. There is -- some of the cost impact that you'll see is really going to relate to the Australia platform. As I mentioned in my remarks, we are targeting the mid-60s. We are a bit higher than that today and expect to be in that range or a little higher for the second quarter. That moderates somewhat as production and sales come up in the back half.

And then when you think about that platform, we will talk about commodities and FX. Commodities across the worldwide platform were 65% hedged for the rest of the year at an average price of about $81 a barrel. On the FX side, we are about three quarters hedged at an FX rate of $80. So when you look at those two, we have somewhat mitigated the impact of commodity cost particularly as it relates to the US operations. We think we may be up slightly on a full-year basis as it relates to commodities, but it's really not a major driver for cost profile.

Okay, that's very helpful and, Greg, any color or thoughts on the kind of the timeframe of getting this West Coast facility up and running?

Well, as we --. As you just look at for planning purposes reasonably there is going to be a two-year or so permitting process and then, you've got an 18-month solid base case of construction. So you are looking somewhere between three and four years if things go without delay. Obviously we'll just have to see what materializes through the permitting process and once we get into construction, we believe it's more controllable in terms of the timeframe. But we are looking at that three-and-a-half to four-year time frame.

Great. Best of luck.

Thank you.

Holly Stewart with Howard Weil.

Good morning. Quick question. Just a little bit of more color on the Twentymile. How much of that is actual longwall production?

Well, the situation --. I mean all of the lost production at Twentymile that we would incur would be all longwall production. Our development units at Twentymile are still operating. And it really relates to whether we have to relocate the longwall or whether we can proceed with a very significant secondary support program that we have been in discussions with with the MSHA technical team over the last three or four days.

So we are optimistic that that will be the route that we go, but there's still analytical work that is taking place as we speak before final decisions can be made. If we have to move the longwall, then the down time, about three months, is to redirect our development units into an area where we could develop the new location for the longwall to start mining again.

So that's why we provided the range because we really don't have a final answer at this point in time. And obviously, we will keep people updated and posted as we go through the early part of the quarter.

Okay. Well how much of the needed 7.7 million tons at Twentymile last year, how much of that was longwall?

Almost (multiple speakers). Almost all of it is longwall. You don't -- I would just -- 95%.

Okay, okay, perfect. And then, just for -- as a follow-up, have you guys had any opportunities? I mean we have heard a little bit of commentary on some of the other companies about having some opportunities to export some Western bit coal. Have you done any of that yet?

Yes, we have, Holly. This is Rick. As I said at the -- in our last call we booked almost 7 million tons of export business in the fourth quarter of last year and we booked another 3 to 4 million tons in the first quarter of this year and that is a combination of our Colorado products, PRB product and Illinois Basin product. But certainly have been able to book a fair amount of Colorado coal.

Perfect. Thanks.

Andre Benjamin with Goldman Sachs.

Thank you, good morning. Couple quick questions. I guess the first would be on the met coal side. What are you guys seeing in terms of demand by region? We have heard a little bit of color that the Chinese buyers are a little more on the sidelines due to a high second-quarter benchmark price. And could you maybe compare out that may differ from, say, what the Indian buyers and Europeans are looking to do right now?

When you look at the Chinese, actually, when you look at the total numbers for what they've imported in the first quarter, while they are slightly down on thermal for various reasons that I am happy to discuss, on the met side they actually have imported more metallurgical coal than they did last year in the first quarter.

So while there is a lot of discussion about price sensitivity, they need the coal. And that goes back to our fundamental thesis that the market is structurally short of met coal and the Chinese are going to be short as well as all the other -- as well as India because obviously they don't produce any met coal. And so they are all importing more met coal at this point in time.

And I guess, the other regions.

On the thermal side?

The other regions?

I was more focused on met, but I am happy to hear your thoughts on thermal as well.

You're talking about the regions for metallurgical coal? I mean, the other regions are up as well. I mean you could talk about India and overall metallurgical coal, the market is going to grow in line with the 10% growth in overall steel demand.

All right, I just didn't know if there was any pockets you were saying that were maybe different from the overall global trend, but that's helpful.

Not really. And on the thermal side it -- just real briefly on the thermal side we have seen China slightly down, down in the first quarter compared to last year, but there's some reasons for that. Obviously just price, couple of things -- supply, disruptions in Indonesia and Australia impacted the ability for Aus -- China to take imports and receive those. Second, there was a dislocation in the pricing. Australian and Indonesian pricing was above parity pricing with Chinese markets.

What has happened since then, of course, is the Chinese didn't buy a lot of coal in the first quarter. Their stockpiles went down 20% to 50% in the regions. Their generation is up 10 plus percent on coal side. So now their stockpiles are short. They are back in the market buying coal. The government has recently increased the tariff rate on electricity prices in over -- in 16 of the provinces to make sure that they can afford to buy coal in the open market and we have seen the [Chingmungdao] coal price go up significantly. We have seen a lot of interest in pricing.

So as we look forward, we think the rest of the year for imports into China should be a lot more like last year.

I guess my last question would be back domestically, could you provide a little color on the PRB versus Western production for the quarter? How would you expect those to trend through the year given you are almost fully contracted with -- we just read that you guys did very well at [Narm] last quarter, so do you expect to maintain that high peaking level of productivity going forward?

Well, you are absolutely right. We had a -- we did have a strong first quarter at the PRB and then [in fact Narm] had an exceptionally strong quarter. You know, right now we are still operating very well. We are still shipping at strong levels.

But it is based on the customer demand and right now the customers are still calling for the coal and we continue to look at it through the course of the year. So we don't see a significant change if that was what the nature of the question was over the back three quarters of the year in terms of our overall volumes.

All right, thank you very much.

Dave Gagliano with CSFB.

Thanks very much. I just have a couple of cost related questions. First on the Twentymile mine just to clarify. I think you said [$25 million to $75 million] negative impact in Q2. What number is actually factored into your Q2 targets? And then as a related question, are you assuming any additional negative impacts from Twentymile in Q3 and Q4 within your full-year targets? That's my first question.

Well, I think the first part of your question is I think both numbers are included in the range. That's when we established the range for the quarter, we anticipated that being potential between the 75 -- 25 and the 75. Obviously we are anticipating -- depending on how long we are down, impacts will give us a potential impact different number for the year. Because we do have a longwall move scheduled at the end -- in the fourth quarter currently at Twentymile. If we are down for a whole quarter to move the longwall now, that longwall move gets deferred potentially to next year. If we are only down for three weeks or so, then that longwall move will still be in this year.

So again as we looked at the guidance range for the full year, we had to take that into account, not having an answer yet.

Okay, all right. My follow-up question on just on the commodity and the FX hedges, what is your hedge position for 2012? You know around oil and around say the A dollar and I was wondering if you could just wrap any numbers around the cost sensitivities to changes in the key commodities? Say for example, oil and currencies. Thanks.

Sure. This is Mike. When you look at 2012 and it gets -- the numbers are indicative because until we work through the budget process, I am not sure what the requirements are. But based on the current estimates that we have today for fuel, we are a little over 55% hedged at a barrel equivalent of about $75. For FX, we are about 55% hedged and again at about the $0.80 rate. When you think about sensitivities, a $10 million or $10 per barrel change in the price of oil is about $10 million impact on fuel prices or fuel costs to us. On FX, a $0.05 change in the exchange rate for 2011 is about $18 million and that ramps up a bit to more like $50 million as we get into 2012 with the lower hedge position.

Okay and just to clarify that sensitivity, that $10 on the oil side. Is that before or after the hedge?

That is net of hedges.

Okay, perfect. Thanks very much.

Brandon Blossman with Tudor Pickering.

Good morning. Let's see. First, I would like to follow up on Andre's PRB question. Just perhaps digging a little deeper, so is this, you said it was customer-driven. Is this spot tonnage or contracted tonnage for the kind of incremental production out of the PRB?

Well, all of our -- we were essentially contracted when we started the year. So this is all contract tonnage. But even within our existing contracts, customers have the ability to move some volumes around quarter to quarter. Very strong burn in the first quarter and so, we will just see how the rest of the year materializes.

Obviously, summer weather and then ultimately fourth-quarter weather will have some impacts in terms of the customer requirements in the back half of the year.

And is it possible to contrast that view or the production view with the price trajectory over the quarter?

Really, we are not pricing any business in the quarter. As Greg said, this is contractual business we are delivering and maybe we are delivering at an accelerated rate because the customer is requiring more coal and so when we are able to meet the shipments out of our production platform and that is what is really happening and when those trains show up, we are loading. And as -- you know we will see how that works out at the end of the year whether the customers still need more additional coal. If they do, obviously that will have an impact on pricing at that point in time.

And I was thinking more just the spot price in the market. You know you pull probably $1 dollar or so off of the 2011 and 2012 curve throughout the quarter.

We haven't been selling anything on the spot market. As a matter of fact I think we have only sold about 3 million tons of PRB coal during the whole quarter on a go-forward basis. So we haven't sold anything at those prices.

Yes, because we are contracted for the year, that would be more of an issue for folks that have an open position this year.

Generally from a parking standpoint, do you think that there's just fewer -- there's just like less liquidity out there and folks are getting their tonnage through acceleration of contracted tonnage as opposed to spot tonnage?

I think you are better off looking at the log rate. In the PRB you are better off looking at the longer term, the annual market as opposed to the quarterly market. The quarterly is definitely impacted by liquidity and what is happening in the marketplace and if the customers are in the shoulder season or not and who's buying and the customer's long or short coal and they are putting coal in the market. You really got to look at the longer term. Look at 2012, 2013 on an annual basis and what you'll see there is prices that are in contango up $1 each year from where they are today.

Curt Woodworth with Macquarie.

Good morning. I was wondering if you could just talk broadly about what you are seeing in Australia on the export position. You know when do you think you are going to get back up to full capacity. It seems like you've managed the weather-related issues better than some of the other companies and just the country in general when do you see it getting back to more pre-flood export rates? That's my first question.

Sure. Well, I can obviously speak specifically about our operations. I don't have a sense because we don't have the detailed knowledge in terms of all of our other competitors in Australia.

From our operating perspective, I mean we've got all of our operations except for Burton are essentially up to full productive capacity. Burton, we have got one of our pits that the very lowest level coal seam, we are still pumping the water to uncover that, and we expect that will occur this quarter. But essentially, Burton is back into production from the upper seams. It's just hampering our full flexibility.

So, we see a strong shipping quarter this quarter and then building through the back half of the year. For instance, our Wilpinjong expansion should provide additional tonnage in the fourth quarter of this year for export capabilities.

You know, our stockpiles are recovering. The last of the real issues for us was the Wilkie Creek line. It was reopened right at the end of March. We are going through a bit of a ramp-up period as they continue to finalize the track repairs, but that should be behind us in the course of another month at the most.

So when you look at -- when you look at port capacity right now and rail capacity, those are not an impediment. Particularly out of Queensland, there is capacity both on rail and port. The issue is other producers are still having production problems. So we are trying to be opportunistic in terms of using some of that capacity.

New South Wales, I think right now most people are up and running. There are a couple of unique situations with a mine that has some underground water issues and another one that has some underground fire issues. But, overall, the industry in New South Wales is running relatively well without residual rainfall effects.

Okay, great. In terms of the 2Q dynamic, is most of your volume that's going to be sold out of Australia, would that be under the new benchmark? Or will you have any carryover or pushed out tons that will be involved in the type quarter things?

Most of the volume is going to be priced obviously on the quarterly benchmark at $330 a ton and then as we said on the thermal side we have about 5 million to 6 million tons still priced. And the majority of that will probably get priced at the $130 benchmark for thermal pricing. As it relates to carryover tons, we had less than 100,000 tons that qualified for carryover. We were able to negotiate most of that and incorporate that into the benchmark pricing as a result of some of the force majeures that we had as a result of the flooding. So very very little impact on carryovers.

Great. Thanks.

David Lipschitz with CLSA.

Good morning. What do you hear from the theory of Chinese aspects in terms of some domestic ramp-up of coking coal and the different spreads between the international price and the Chinese domestic coking coal price?

I mean there is no question that China will continue to do what they can to develop metallurgical coal resources that they have and thermal coal resources, for that matter. But I think as Rick alluded to earlier, we think in both context and particularly in the metallurgical, the high-quality metallurgical coal, they are structurally [short]. And they will always require imports of the highest quality met coals and I think the market reflects that activity.

As Rick talked about, they continue to import strongly through the first quarter on the metallurgical coal. And that is because of the structure of their supply industry for metallurgical coal.

Thank you.

Brian Yu with Citi.

Thanks. Good morning. I was wondering if you could share with us what the range of the metallurgical coal price forecast baked into your address for the full year and the second half? This will help us calibrate our models for our own pricing assumptions.

I mean, at the end of the day I can tell you what we baked for the second quarter because those are the settlements. For the back half of the year, we have just applied a range probably not dissimilar to the full range that is out there in the third-party views and bake that into the range that we have for the end of the year. I mean, obviously, as you know, as we negotiate these things on a quarter-by-quarter basis in the future, we don't talk about what our forecasts specifically are and we just incorporate a range into our guidance and that is why you see our guidance where it is at.

And then my second question is, Greg, if you could share with us any color you are seeing in the spot markets. It seems like the trade presses are saying that there is not much spot activity, you know, reluctance on the buyer side to commit at these levels. That seems like there's a shortage of coal out there, so any thing, any thoughts that you have on spot market activity from that?

Spot market activity from the metallurgical side of the business is always a little bit spotty, if you will. It's a contractual business, customers need certain blends of coal so they try to contract in advance to get the right product they are looking for and they are opportunistic if they can. If they get short, they are going to be in the market looking for coal.

So as we look at it, there's -- we've recently sold coal into the spot market and we've received very -- very good pricing for that. But the majority of what we do is under contract. And I think that is true for most producers. It's -- they've tried to put an index together to track spot pricing. At the end of the day there's not a lot of spot business in the met coal side.

Thank you.

Garrett Nelson with BB&T Capital Markets.

Good morning, everyone. Just a follow-up to that last question. What is the expected split of your 9 million to 10 million tons of 2011 Australian met volumes between your four different products?

Well, the high quality of our coking coal side we'd be 60 plus percent and the remaining 40% is going to be the semihard and PCI.

Okay, great, that's very helpful. Thank you.

Sunil Dapshadar with Sentinel Investments.

Thanks. Can you just give us a color on the largest ex scenario in Australia?

Sure, we can take a look at what is occurring. I mean obviously in New South Wales, two big projects going on. One is the NCIG expansion and completion of Phase 1 and then development of Phase 2. The biggest component of that is the dredging work that's going on within the ship channel in order to allow the full delivery and loading of Cape-sized vessels. That will occur through the next couple of quarters of this year for the shipping capacity. And then, some additional expansions on the stockpile area and loading facilities that would carry over for a period of time.

There's also some significant amount of rail work that is being entertained or done in New South Wales to increase rail capacity. And then longer term there's discussions about additional expansions at AWCS and then potentially another new terminal at Terminal 4 for longer term capacity.

In Queensland, the big activity right now is what they call GAPE, which is the Goonyella Abbot Point Expansion. That rail line is being built. The port activities are taking place and that initially will add about 50 million tons of export capacity out of Abbot's Point and in the meantime, work continues regularly on rail expansions into the Goonyella line and then, we've recently seen the announcements on Hay Point now going through an expansion over a couple year period of time.

So you know, we've always said that the Australian infrastructure will continue to expand. That is the good news and market demand has continued to expand faster. That is the better news.

But we do see overall growth both out of New South Wales and Queensland in terms of volumes over the next several years.

Okay and after the recent flooding, has rail situation improved in Australia?

Yes. The issues right now as I said earlier are not related to rail issues or port issues and Queensland, particularly, it's related to producers not having the coal. You know, we are back up and running normalized, but not all producers are.

Okay, I'm just wondering on your unpriced met tonnage for the second half of our 4 to 5 million tons, you decided that China is structurally short on met coal. Just wondering why if it is structurally short, why would not China sign the contracts now, but it's waiting for the contracts to be signed later on?

Well, the process of the metallurgs with coal markets on an international basis so that they are quarterly contracts, they are being priced on a quarterly basis so you may have contracts with the Chinese. But they won't be priced until the next quarter because they are being set off the benchmark pricing. And that is happening in all of the markets essentially.

(Operator Instructions). Lance Ettus with Tuohy Brothers.

I just wanted to know, just wanted get a little more detail on the West Coast Port project. I think you said 24 million tons, just I believe the Asian price for thermal coal that you gave is $130 a ton. So what would that relate to as far as how much is it going to cost to ship it there? How much is it going to cost on a per ton basis maybe if you could for the capital cost for the port? And then how much would that relate to back for the actual coal, I guess?

I think it's probably a bit too much detail at this stage in the game. I think what I can tell you is that, obviously, we look at it on a net back basis, backing out all those costs that we come up with a positive margin that's favorable to what we see in today's US market. But today to go into the rail rates and ocean freights and I can tell you that the ocean going freight rate is very low right now which is a good thing. And the capital costs, we've considered all of that. At the end of the day, we are very comfortable that we -- it's a very profitable exercise.

Okay, is this more also to I guess potentially raise US prices by being able to export more? Or is it more that you look at it as a pure interest on a one-off basis on the project?

Well, I think you have to look at it on a whole basis. I think you have to look at it from, number one, you have to make money on the initial sales that you are going to make out of the -- off the coast and if you can make money on that and then it tightens the market, well, that is a good thing as well. And ultimately if the demand is in Asia and it is not in the US, that is where we're going to ship the product.

All right. Thank you.

Brian Gamble with Simmons & Co.

Good morning. Couple of things. One, I guess maybe you could start with Mongolia, just give us an update on the * Tolgoi reserve. I think there's been some news articles that speculate that could be any day. What's your opinion on the decision process there?

The decision process has been very long and it has taken a long time to get to where we are. I think we're -- the positive news is that we are on the short list. With the six total companies, Peabody being one of those.

As we look, we are being told that probably in the next 30 days there will be a finalist group. May not be just one company, could be more than one company, but we'll have to wait and see. I think -- but I think it will be -- it will happen sometime in the next quarter.

How many times you been over there, Rick?

Too many. And more to come. But that's okay. It's a great opportunity. As you look at that deposit, and you look at the metallurgical deposit we have just been talking about it, how short China is met coal, and you look at around the globe and look for large deposits of metallurgical coal that could be mined cheaply, there aren't any. And this is one of the last few that are out there. And so we're fortunate to still be in the finals here and we are going to continue to try to make it to the final list.

On the guidance side, if I may, the half of the delta between the upper end and lower end of your range is based on Twentymile. What would you say is the biggest component of the remainder?

Well, I mean if you look at the range there's multiple components. There's obviously met coal pricing in the back half of the year as a variable We have some volume unknowns and exactly what is going to materialize out of the Twentymile operation.

We've got shipping issues. You know, we always remind everyone that most of the vessels that sail out of Australia are a blend of not only our coal, but co-shipper coal and to the extent that you would have a couple of vessels -- and this has happened before at the end of the year that slip over into the first quarter of 2012 -- these are high-priced, high EBITDA margin vessels that we are talking about. So we build then, we build in shipping flexibility.

Obviously we have got estimates in there for our trading platform for the year. We've got trading platform variability built in. We've got, we are cognizant of not only US volumes, but we run -- we run a mining business, which has periodic geologic issues. So we built in a lot of these things.

I think it is safe to say right now one of the biggest variables is, you know, what the volume and pricing for met coal in the back half of the year would be.

Thank you.

Wes Sconce with Morgan Stanley.

Thanks for taking my call. Just curious. How have the geological issues at Twentymile affected your expectations for the timing of the Sage Creek project? And if you could provide any color on expected capital cost and cost structure of the project, that would be helpful.

Well, ultimately, what is occurring at Twentymile won't impact the timing on Sage Creek. That's an extension and follow on of Twentymile. And we are only talking about whether it's three weeks or three months.

We are still working through our supplier agreements that would potentially baseload the Sage Creek operation and we are doing some more detail engineering in terms of ultimately the capital cost. So not really in a position to get too specific on any of that right now. Other than it's a great reserve and Twentymile has been a great performer for us, continues to be. And we look forward to that extension.

Okay, great, thanks. As a follow-up could you discuss the Western bit market and how you are seeing the export market coming into play?

As we mentioned earlier, we have been exporting some product out of Colorado, into the European market. It is a good product for the Europeans and so we've been able to move quite a bit of tonnage out of our Twentymile platform into the European market on the term basis, as a matter of fact -- it is a three-year period.

Thanks for the color. Good luck.

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

Well, thanks. I want to thank everybody on the call this morning. Obviously we think it is a great time for Peabody in the industry given the global dynamics of what is happening in the energy markets. Obviously I would like to thank the Peabody team. From a safety perspective they continue to improve our performance. You know, we don't want to take lightly how quickly we recovered in Australia, relative to others. That doesn't happen other than a full dedication of the team that we have.

And when you look at where we are positioned globally for the opportunities to grow, whether it is Mongolia, whether it's China, whether it is what we are doing in Indonesia, whether it's this expansion of our Australian platform, whether it is the large port we are involved with on the West Coast, the expansions that were delivered in the US, it has all been done with our people. And I want to thank them. And we look forward to keeping you apprised as we move through the year. Thank you.

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