Peabody Energy Corp (BTU) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Peabody Energy second-quarter earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions). Also, as reminder, today's teleconference is being recorded.

At this time we will turn the conference call over to your host with Peabody Energy, Mr. Vic Svec. Please go ahead sir.

Well, thank you, Tony, 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; our Executive Vice President and Chief Financial Officer, 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. We also refer you to PeabodyEnergy.com for additional information.

I will now turn the call over to Mike.

Thanks, Vic, and good morning everyone. Once again, Peabody turned in a quarter with significant increases in all key income statement measures. Revenues, EBITDA, operating profit, income, EPS are all up sharply over the prior year. This performance comes in the face of a number of external issues in the first half, so we were targeting even greater results in the last six months of 2011, and have a clear path towards the best year in our history.

Let's review our second-quarter, beginning with the income statement. Peabody set a new mark for revenues, exceeding $2 billion in the quarter. Revenues increased 21% and were higher across the board -- US Mining, Australian Mining, and Trading and Brokerage, even with mining sales volume on par with last year.

EBITDA increased 32% to $580 million, which includes a $25 million provision, or $0.06 per share, related to the pending resolution of outstanding litigation.

Australia led the way with a 69% increase in EBITDA. Our Australia operations contributed more than 60% of Peabody's mining EBITDA in the second quarter. Higher EBITDA led to a 41% rise in operating profit to $458 million. And net income increased 36% to $292 million. Excluding the non-cash remeasurement of income taxes, our adjusted income was $308 million with $1.11 in adjusted, diluted EPS. That is a 61% increase over the same quarter last year.

Our effective tax rate was 25% for the quarter, excluding the effects of income tax remeasurement. And we are targeting the mid-20% range for the full year.

I will now discuss some additional detail within the supplemental income statement. In Australia our volumes rose 8% over the prior year, while revenue per ton climbed 38% to more than $128 per ton on increased realizations for both metallurgical and thermal coal.

We sold 2.3 million tons of met coal in the second quarter at an average price of $246 per short ton, a 50% increase over the prior year. We also shipped 3 million tons of seaborne thermal coal at a realized average of $97 per short ton, up 16% over last year.

We had roughly $37 million in EBITDA impacts related to the Australia weather effects on the [cold] chain, most of which resulted from co-shipper vessels, those that wait on multiple producers to load before shipping.

Regarding Australia's cost increase for the quarter, while we are largely hedged on currency, the Australia dollar rose 26% over the same period last year. Also, with higher coal prices come increased royalties. These two factors combined to increase our Australian cost $9 per ton.

Costs were also impacted by the beginning of a longwall move in Queensland, as well as normal cost escalations. We were expecting full-year per ton cost in the upper 60s, with costs rising somewhat on higher exchange rates, while also benefiting in the fourth quarter from our Wilpinjong expansion.

Finally, Australia margins rose to nearly $55 per ton, representing a robust 43% EBITDA margin.

Turning to the US, volumes were constrained in the quarter, first by heavy rains in the Midwest, and then by flooding across the Missouri River value that hampered Western shipments, lowering EBITDA by $36 million. We were down nearly 4 million tons from our PRB and Illinois Basin expectations.

Higher revenues per ton in the Midwest helped to drive a 23% margin per ton expansion. In the West costs were impacted by the reduced PRB shipments and the geology challenge at Twentymile we discussed last quarter. Through advanced engineering and execution we were able to quickly resume longwall operations, and limit the impact to $34 million.

Both Trading and Brokerage and Resource Management had solid quarters posting a combined $74 million in EBITDA. Trading benefited from higher margins on a greater mix of export volumes.

The combined benefit of all segments resulted in a 45% increase in operating profit per ton to $7.88. We generated $395 million in cash flow from operations, a 35% increase over the prior year.

We have $1.25 billion in cash and short-term investments, and a combined $2.7 billion in liquidity. And with the retirement of $218 million of bonds in April, our total debt to cap ratio has declined to 32%.

We continue to target capital spending for 2011 at $900 million to $950 million. We are also in an excellent position to implement our new growth initiatives, which Greg will address in a moment.

I would like to close with a review of our outlook. For the third quarter we are looking for continued higher results and target EBITDA of $575 million to $675 million, and adjusted diluted EPS of $1.05 to $1.25 per share.

Our third quarter is likely to be impacted as US railroads recover from the fighting, as well as ongoing co-shipper risks in Australia.

For the year we are raising our adjusted diluted EPS targets to $4.20 to $4.60, with EBITDA targets now ranging from $2.3 billion to $2.5 billion. I would also refer you to our Reg G schedule in the release regarding our target ranges for DD&A and other line items.

With that look at the quarter and our new targets, I will now turn the call over to Greg.

Thanks, Mike, and good morning everyone. You have seen us start 2011 better than any year ever. And we are targeting our second-half EBITDA that can rise another 30% to 50%. Peabody also continues to add to a global platform that is the best in the business.

I will review the market fundamentals and then discuss significant activity on the global growth initiatives that I believe will further differentiate Peabody as the world's premier coal company.

What strikes us about the global markets is how much our underlying thesis is proven from quarter to quarter, and how events change, but the outlook stays the same. The world remains in the early stages of a long period of major demand growth, and so-called one-time events in the industry that constrain supply now occur each quarter.

Global coal demand remains robust. World steel production is up 8% year-to-date. Globally the world will use an additional 70 million to 80 million tons of metallurgical coal this year. Electricity generation is rising rapidly in developing countries, and coal is backfilling for nuclear power in Europe.

China remains a cornerstone of growth. The first-half GDP grew 9.6%. Electricity generation increased 14% and steel output was up 10%. Last quarter there was concerns about over an easing of China imports, yet imports have now risen for four straight months, and we believe we are on a pace for a stronger second half.

India is now the world's fastest growing importer. Their thermal coal imports are up 45% year-to-date. Europe is increasing thermal coal imports, as Germany closes its nuclear plans, and coal displaces high-priced gas.

And escalating demand growth continues to strain global supplies to the point where any external events take on magnified importance. Labor stoppages, rains, permitting challenges and transportation issues are common.

Strong near-term fundamentals have kept international pricing near record levels for both met and thermal products, with the recent settlements coming in higher than most expected. Longer-term the world could need more than 500 million tons of additional met coal per year by 2020. And some 700 gigawatts of the new coal-fueled electricity generation is expected to be online by 2020, requiring well over 2 billion tons of additional thermal coal.

Just consider this, China's 12th five-year plan targets $100 billion in investments in generation, transmission and subway construction activities by 2015.

Now in the United States light economic growth in industrial output translate into weak demand overall. But there are encouraging signs. Powder River Basin and Illinois Basin use is rising to serve new plants and existing plants that are switching from Appalachian coal. We are seeing new Illinois Basin customers from New York to Florida, and export demand continues to rise for all coal products. We are increasing our PRB shipments this year from the Gulf and West Coast, and we recently sold Illinois Basin coal to India.

On the supply side Mike noted that flooding is affecting the river markets, as well as Western rail shipments coming East. This has led to significantly above average stockpile draws recently.

With the tight supply/demand picture and favorable long-term market outlook Peabody is in the midst of the largest global growth program in the Company's history. Our approach is to continue to expand our platform in the regions that serve the fastest growing markets through organic growth, joint ventures and acquisitions. And you have seen this plan demonstrated by progress on multiple fronts in recent days.

Last week we initiated a takeover proposal for Macarthur Coal through a joint venture with ArcelorMittal. We like Macarthur's asset base and leading low-vol PCI position. And we believe our operating, commercial and project management skills would be a good fit for Macarthur's active mines and growth potential.

In addition to M&A, Peabody remains active in organic growth as we expand the current Australian platform to 35 million to 40 million tons by the 2014 and 2015 timeframe. The first expansion project will be completed in the fourth quarter of this year at our Wilpinjong Mine. And we have additional increases in Australian production slated over each of the next several years.

Also, in Australia we agreed to buy the remaining 5% of the Burton Mine, giving us additional access to met coal sales.

In Mongolia Peabody was selected by the government as part of a consortium to develop the Western bloc of Tavan Tolgoi, along with a Russian railway group in China Shenhua. We would be an equity partner in the project, and are working on finalizing the structure and commercial terms, which then require government and parliament approval.

This process began with more than 20 companies, so we view the selection as confirmation of our rising global presence and high mining standards.

In China we announced that we are pursuing development of a 50 million ton per year surface mine in partnership with the Xinjiang Uygur provincial government. Xinjiang produced 100 million tons of coal last year, yet is expected to reach 1 billion tons per year over time. That is equivalent to nearly the entire US production base. The government is very supportive and has committed to accelerate the allocation of coal resources for the project.

In the US we were named last week as the winning bidder on a 220 million ton reserve block in the Powder River Basin. The PRB remains the cornerstone of Peabody's production base. We feel this quality coal will be increasingly valuable as that backfills into US markets, while the 8800 product is increasingly exported to Asia.

We also believe that low-sulfur goals will be increasingly valuable given the most recently proposed EPA regulations.

Finally, we are expanding commercial discussions with Asian customers for the proposed Gateway Pacific Terminal, where we have a 24 million ton per year throughput agreement. We continue to be encouraged by the widespread support for the project.

So taken together, Peabody's growth initiatives will allow us to achieve our Asia 100 vision. They also represent the new shape of our Company, one that has been building since we began our international focus in 2004. We have opened offices and trading centers, put in place dedicated teams on multiple continents, developed deep financial reserves and capacity, and have conducted exhaustive analysis of markets, geologies and companies.

We are now taking these international activities to the logical next step, even as we continue to deliver the results that earn us the right to grow.

So that is a review of our results, the markets and our growth projects. At this time, Mike, Rick and I would be pleased to take your questions.

(Operator Instructions). Jeremy Sussman, Brean Murray.

So you have got a lot of good moving parts going on right now. Can you maybe give us a sense of timing and maybe initial economics of things such as Tavan Tolgoi in terms of maybe CapEx needs, production? And then the same for as much as you could give us would hold true -- same question, for your large Chinese surface project?

This is Rick Navarre. It is a bit premature for us to get into too much detail on those projects, but I think as we are looking at them now as they begin to develop, you are talking about a development horizon that will probably take us 24 to 36 months, and then begin to start to build the mine out. And then probably on both of those fronts in a 3- to 5-year window before you see coal coming out. So that is at the highest level.

I think on the CapEx it is a bit early as we continue to work through how the partnership is going to work in Mongolia. We have a number of partners, as you know, with China, with the Russian railroad, and as well as the government of Mongolia, but we're fairly confident that at a 15 million ton a year level the CapEx will come in at a number that is consistent with what we would see in a normal surface mine in -- [that we would be] building.

I guess I would just add, often times we see some large numbers around the Tavan Tolgoi development. The vision of the Mongolian -- government of Mongolia is to develop the mine, extensively develop a rail network in Mongolia, add coal conversion projects, power generation projects, industrial parks. So you start adding up all those multiple components of their vision for full development and the numbers can get high.

But for the mining component itself that is going to be something that is going to be within the range of international standards on a per ton of development.

That is -- I appreciate that. Then just as a quick follow-up, regarding Macarthur, can you give us a sense of what a potential partnership with ArcelorMittal could mean for you, not just on the Macarthur, but generally speaking with everything you've got going on in Australia?

Welcome I think that Arcelor obviously being the largest steel producer in the world, and obviously there is a shortage of coking coal around the globe, and I think it is just a natural fit between Peabody as we expand our position in coking coal, as they continue to try to lock in security supply.

We have a number of other organic projects that we are working on. We have a number of other opportunities around the globe. I think it is just a good fit for us to work together.

As it relates to Macarthur, they are already a 16% shareholder. It bolsters our chances very significantly of being very successful on this bid. We only need to get 50% of the shareholders to take control of Macarthur. And we start with 16%, meaning we really have to get another 34%, which is about 60% of the free float that is available. So is a strong partnership for us.

Great, thanks very much for the color.

Shneur Gershuni, UBS.

Jeremy actually covered a lot of the questions I had, but I did want to ask about there has been a proposal for carbon tax in Australia and so forth. A lot of talk on how it is going to impact different companies. I was wondering if you guys have done any analysis yet as to what the potential impact could be on Peabody's operations?

Well, I guess at the end of the day, until the -- until the carbon tax is actually finalized and passed, there is a lot of different variations of impacts that you can do. The preliminary numbers would indicate that surface operations have a much less impact than some of the deep gassy underground mines. The government is talking about assistance and transition packages for the deep gassy mines, which is in the process of being finalized.

So those will be mitigated over a period of time. So at the end of the day as we look at the carbon tax we have factored that into our activities in Australia. One of the main points that we look at is to the extent that those carbon taxes increase cost then the best way to offset those is to consolidate and provide synergies, or extract synergies. That is part of the main initiatives relative to the Macarthur transaction. And as we continue to expand our brownfield expansions in Australia it allows us to also extract lower costs because of increased volumes.

At the end of the day, we as a company, and the Coal Association are very strongly opposed to the carbon tax. We don't think it is the right policy framework to move forward with. But in terms of specific numbers, it is too early to really come out with any modeled impacts on a specific basis.

That makes sense. One follow-up, if I may. I was wondering if you can give us some commentary just about pricing in general for metallurgical coal for the upcoming quarter, as well as PRB.

With specific to metallurgical coal there has been a lot of the weather impacts in Australia in the last couple of years, as we all know. Are buyers looking to pre-buy or try and get ahead of the rainy season, and could that be a source of strength in the upcoming settlement?

Then, suddenly, secondly, if you can talk about the PRB as well too. It has kind of been weak recovering a little bit, and kind of how you see the market in 2012/2013.

Sure. Let me start with the met market. Basically on the met side we have seen the two highest prices in history in the last two quarters, with the $330 and the $315 settlements. Obviously, some of that is driven by the fragile supply and demand. We think that goes forward. So that is because of the weather in Australia.

We have the same customers [that is like] trying to get ahead of that. Most of it has been based on quarterly pricing, but I think they were very -- it was an easier settlement than most thought in the last quarter at $315, because there is, clearly, a shortage. And I think most people underestimated the time it was going to take for Australia to recover because of the flooding.

Frankly, we are still recovering. We're not -- we are seeing a lot of other producers that are still not delivering the coal, which is causing shipment delays and other issues. So I think we still see a strong number coming up in the next quarter.

Really over time we still continue to believe there is a structural shortage of metallurgical coal that is going to drive a strong pricing and high margins in that piece of the business for a long time to come.

As we look at the Powder River Basin, what we have seen -- some of the fundamentals, obviously, we have seen flooding that has begun to bring down the inventories at the PRB burners. We think probably by the end of the summer that they will probably be at the lowest point for stockpiles they have been in three years. As a result of that we have seen the forward pricing on PRB move up substantially.

You look out about 2014/2013, you are saying numbers as high as almost $18 per ton. So you see strong contangos. You have seen a strong movement up as these stockpiles are coming down. And that doesn't even factor in what we think will be the next move in PRB, which is the fact that if these new EPA rules go forward, and they go into effect January of 2012, which they are supposed to go into effect, they are going to require significant rebalancing of burn towards low-sulfur coal to meet the standards. And having ultra low-sulfur coal, PRB [0.5] type goal, is going to be very strong.

And we will see a return to the premiums that you used to see several years ago for the differences between some of the PRB product. So we think the prices today are probably even understated because of the value that they will have in going forward. So we feel very strongly about PRB pricing moving forward.

It is one of the reasons why you see us have the kind of open position we have for 2012, and significant open position 2013 and 2014, is because of the factors that Rick talked about.

Those are higher than where we would have been last year at this time.

Okay, Greg, Rick, thank you very much. I appreciate the commentary.

Jim Rollyson, Raymond James.

Maybe a little shorter-term question than you like to go with sometimes, Greg. But on the guidance just for this year, based on what you did first half based on 3Q, obviously, you are implying a pretty strong 4Q. I just wanted to maybe rehash for a second the drivers of the big step-up implied in 4Q. It seems to me you've got the volume recovery continuing post-flooding. You've got the impact of the Wilpinjong growth project, and obviously the impact that those have on cost. It seems like recovery in US volumes just as the transportation and weather issues kind of go by the way and then the impact they have on cost. What else in your thoughts are driving the upside in 4Q relative to the rest of the year just as we progress?

Sure, okay. Well, I appreciate the question, because I think it is -- we need to provide a bit of clarity. If you look at the difference between the third quarter and the fourth quarter, in the third quarter as we have established our guidance, the things that we took into consideration is we've got two longwall moves in the third quarter. We've got a longwall move we have started at North Goonyella, which will go into -- it is going through the third quarter now. And then we will be -- have a longwall move at our Metropolitan Mine.

Now these are our two big met coal mines in Australia. So those will be completed in the third quarter. Those operations will be up and running in the fourth quarter, so, obviously, there is a difference in volumes and revenue streams between the two quarters just between those two operations alone.

We also have our Wilpinjong expansion coming online in the fourth quarter, so that will boost our volumes out of New South Wales into the thermal market. Most of those -- most of that expansion will be heavily weighted toward towards additional export coal.

In addition, we expect additional volumes in the fourth quarter out of our Millennium project versus what we are going to get in the third quarter. We anticipate getting all the final regulatory approvals late this quarter so that we can begin ramping that project up in the fourth quarter. So all net, net those are some of the major differences between the Australian platform between the two quarters.

Then you move to the US, we anticipate residual impacts in the Powder River Basin during the third quarter because of the railroad issues. Both the UP and the BN still have significant parts of their system that are not fully operational. A lot of rerouting that is going on, which is causing delays in the entire Western rail system, so that everybody is below where they would anticipate being at this point in time. And we expect that is probably going to continue in variable form through August and, in some cases, maybe into September. And that should be pretty well cleaned up, and fourth quarter back to normal.

In addition, for us, Twentymile is just now starting to reach its full strides. We expect it to continue to perform at higher levels through this quarter, and then fourth quarter get back to its very high productivity levels as we get into different geologic zone in that panel.

So you start adding those differences up, and you can see why we have third-quarter estimates where they're at, but a much significantly improved fourth quarter.

That is very, very helpful. Then just as a follow-up, looking ahead to next year and thinking about Australia, your cost outlook for this year is now in the upper 60s. I think you started in the mid-60s, but with everything moving that is where it is. As you go forward into '12 it seems like you're going to have some of the continued growth initiatives, volume impact, which helps out your cost. Hopefully, we will be absent the flooding next year as far as the impact that has had on your cost this year. Notwithstanding currency guesstimates, but what are you thinking for a normalized cost basis on a per ton for Australia as you head into 2012 relative to 2011?

This is Mike. As you think about 2011 and the multiple moving parts that we have had -- and did have the weather issues in the first half that are impacting costs. We have also seen, even with our hedge position, FX rates move up, so they have been stubbornly high here at about $1.07 right now.

So we are going to have to work through the budget process and really figure out where we come out in 2012 in terms of the mix of tons. You're correct, that as the volumes come up that puts downward pressure on our overall cost. Some of that will be mitigated by what we expect to be higher -- or even if it keeps with stable exchange rates with our hedge positions as they are a bit lower as you move further out beyond the 6- to 12-month period, that will have an upward impact on pricing. And always the high-class problem of higher sales prices equal higher royalty impacts.

So a little too early yet?

A little too early yet, but we would indicate that, obviously, cost pressures in Australia are larger than they are, say, here in the US platform. Given the nature of the mining industry and the extent of all the activities going on in Australia, you know, the inflation rates overall in Australia are higher than they are here.

So, as Mike indicated, we have got drivers that will reduce costs and we anticipate drivers that will increase costs. What the net, net effect of that is is probably a bit too early to tell, but we will just see where it comes out.

Alright, that's helpful. Good quarter, guys. Thanks.

Andre Benjamin, Goldman Sachs.

A couple of questions. The first, could we get a little more detail on specifically Peabody's Queensland operations? I know last quarter you said you were virtually back up and running. I wanted to see if you guys completed that and all your mines are back up to normal.

And then could you also look across the industry and maybe give expectations for say a run rate third quarter versus fourth quarter and how you are thinking about capacity going into next year?

Sure. I think in terms of any residual weather-related impacts, our operations in Australia are up and running. Our volumes have recovered, and we expect those to -- as some of our development projects come online as we talked about higher volumes in the fourth quarter than in the third.

In terms of the infrastructure system in Australia, because other producers are still having issues it really hasn't been tested. The rail system, the projects that they had are moving along. And the ports have had capacity certainly out of Queensland. So, overall, we are expecting to get at least from our platform closer to normalized levels.

The biggest risk that we face is what we call co-shipper risk in Australia, where particularly in the met coal side of the business these vessels that get loaded have, in some cases, two or three different producers loaded into the vessel. To the extent that other producers are still struggling, that can delay the timing of those vessels. But that is probably the biggest risk that we have right now.

I think the rails, as Greg mentioned, are not -- they are probably running at 60% to 70% in some parts of the network. And if you look at the expectations for Q3/Q4 in total, I guess, we're still looking at a number -- we think that lost production for 2011 is probably around 35 million tons.

Thank you. That is helpful. I guess as we think about M&A as you work through the potential bid for Macarthur, I am just wondering if you could discuss your appetite for doing any additional transactions beyond the ventures you have already announced, and that bid, if there is any target level of leverage or willingness to use your balance sheet that we should think about as we try to assess the future size of any opportunities. And the last piece would be any preference for met versus thermal or any geography?

Well, I think, obviously, we are continuing to look for the ideal properties that make sense. And we look at a number of things throughout the year. They are not always for sale at the right time or when we want them. Things, when they come for sale, we have to take a look at them.

There are still assets that we are interested in, and we continue to look at that fit our portfolio nicely. The timing is always subject to a number of issues.

As it relates to the financial side, I will turn it over to Mike, and let him give you a little bit of color on how we look at it from a financing perspective.

So from a financing perspective, when you look back in history a bit, and we did the Excel acquisition, we previously indicated we had -- we were comfortable with the targeted debt-to-cap range. That is one of our primary metrics that we look at at 40% to 60%. We flexed up to about 56% when we did that deal.

We said we were comfortable with that because we had development stage properties and we were going to bring us online. We were going to grow our way out of that leverage. That is in fact what has happened.

We have continued to build up cash. I mentioned we had $1.25 billion in cash, which would be our first starting point for currency. We have good access to our existing credit lines.

We have been very successful as a crossover credit. And we know we have good access to the capital markets, leaning firstly towards leverage. There is equity out there as a possibility down the road -- that would really have to relate as to what the mix was on the number of projects we have and when they fall at one point in time.

But we have good operating cash flow. When we have talked about our CapEx ranges just for the existing portfolio of $900 million to $950 million, we anticipate funding that out of cash flow, along with existing potential smaller bolt-on acquisitions like this Burton acquisition. Then beyond that we will look at a good prudent mix of financing and feel that we can carry these off.

These larger projects are multistage. They are going to require cash over a longer period of time. And we have the ability to prioritize that and manage through it over the next 2 to 3 years.

As we look at all of the opportunities that are out there, as Rick said, you cannot always plan the timing of when they become available. But suffice it to say, as we look at balancing M&A activity with project development activity, you can be assured we are going to pay close attention to the financial structure and the capital structure of the business.

To the extent there is more M&A out there, we are bringing in earnings as we do those M&A transactions. That grows the business and adds value. And as Mike indicated, we will be prudent between the capital structure and the equity structure all intended to grow the business over time.

Any product or geography preference?

Well, we have always indicated -- obviously, we feel very strongly about the seaborne markets, both met coal and thermal coal. And so to the extent that we have a high preference for those areas and those products that can access the seaborne markets, and then with both the China and the Mongolia activities, those operations that are in close proximity to the fastest and largest coal market in the world, which is the China markets.

Meredith Bandy, BMO Capital Markets.

I guess just sticking with Australia for a second, I was wondering if you could review for us which unions you guys have in your Australian operations, and when maybe you have some more contracts coming up?

Well, the main union that we have with our Australian operations is the CFMEU, which is the main union representing virtually all of the coal mines in Australia, with one or two exceptions.

The labor contracts continue to rollover at varying times. I think our next major contract renewal is -- it is next year, I believe, at North Goonyella.

Then is there any -- I don't know what the legal ramifications are in Australia. Is there any possibility of the CFMEU at your unions being able to strike in sympathy with the BMA?

No, the strike actions have to be specific within the context of the company and the operations that they're dealing with. So to the extent that BMA has got issues with negotiating contracts, those are issues that they need to deal with. We've got good contacts and good relationships with the unions at our operations, so we don't anticipate any issue there at all.

Have you already started negotiating for the 2012 at North Goonyella?

No, it is a bit early for that.

A bit early for that. Okay.

Brandon Blossman, Tudor Pickering.

Let's see, it is probably just a couple follow-up questions. One, Australian met, two points here. Just quality spread on pricing, it looks like your realizations are a little bit lower quarter-over-quarter versus benchmark. Are you seeing any increasing spread in the market there?

And then also just on the production side, so you think co-shipping is your biggest issue for Australian met. Does that mean that your production is essentially backup online in full and you are increasing inventory waiting for vessels, essentially?

Let me answer the first part of the question. This particular settlement we have seen a little bit of a spread between the lower-quality coals than the higher-quality coking coals. I think at the last settlement it was about up to 80% to 82% correlation, now down in the 70%s. So there has been a little bit of a spread on the lower-quality coals, obviously, leading to the higher price on the high- quality coking coal. So you have seen a little bit of a movement there, nothing too significant.

As it relates to the coke shipper issue, as Greg said earlier, our mines are up and operating. We've got coal available, but it gets difficult at times. They won't come pick your coal up if you don't have the other coal available for the ship. So the rail men [don't] even come pick up your coal if the other party doesn't have their coal available.

So it is a balancing act, and we try to -- we work as hard as we can on it every quarter to try and make sure we get our shipments out. It is something I think we do pretty well, but it is an issue when others are -- when you are relying on others to get their production up the line.

Great. That's helpful. And then talking about the other end of the spectrum, PRB. And this is a general question or a broad question, but can we infer any change in strategy around PRB? So we had [NLBA] that you guys won that you didn't nominate -- fairly unusual, obviously. There is, obviously, a nice line of sight on exports, but also a good chance that low-sulfur coal is going to be more prized.

And I think you alluded to general more bullish view on PRB pricing. Does that all tie together as perhaps a change in strategy on PRB or just a more bullish outlook on the value of those tons?

I am not sure that would indicate any change in strategy. The PRB has been the cornerstone of our production platform for a number of years. We have been active in PRB lease sales over a long period of time.

As we look at the PRB, you're correct, we see the long-term export potential, particularly with the developments at the Gateway Pacific Terminal and the increasing environmental rules in the US as to, once again, provide potential uplift for PRB in terms of volumes and margins.

So as we look at how do you continue to sustain the level of production, when you're producing 140 million to 150 million tons a year of PRB coal you have to continue to replace that reserve base.

So it isn't any surprise -- it shouldn't be any surprise that for any lease sale out there we're going to actively look at those reserves, look at their proximity to our operations, how they can be integrated into our operations in order to not only provide longevity, but also the potential to expand as the economy here in this country recovers and exports become a much bigger component of PRB in the longer term.

Great, thank you very much.

Paul Forward, Stifel Nicolaus.

I just want to follow up on that PRB question -- a couple of things. I guess, one, is there with this rise that we have seen in the forward outlook for pricing, has that changed your outlook on the timing of School Creek? And can remind us again how big of a project School Creek is?

And maybe as a follow-up to that, Caballo, you made a big commitment to Caballo. In 2006 it was a 33 million ton per year mine. Last year it was about 23.5. Can we expect that Caballo will go back to those peak levels or even potentially beyond that given the right market?

Yes, I think, for both of those operations, given the right -- or the market demand and level of demand in the marketplace, we have capacity. Caballo used to run at around that 33 million, 34 million ton a year level, so the infrastructure at site could support that.

Now we would have to go and replace a lot of mining equipment, which we have moved away from Caballo over the last number of years as it went down to that 24 million ton rate. So in order to replace that mining equipment you are probably looking at a buildup of 12 or 18 months, if the market demand was there.

In the case of School Creek, that operation when it shut down in its previous life, was running at around 25 million tons a year. The infrastructure there, we think, could be upgraded and get that operation up into the mid-30 range.

So as you look at both of those we think that provides us the ability to grow with the market, to grow to meet these export commitments that we are looking at making as that Gateway Terminal comes online. And then meet the increased demand in the US as these environmental regulations continue to take in over the next 2- to 5-year period of time.

Okay, thanks. And just -- there were some CapEx questions earlier. I just wanted to clarify, if you've got an outlook -- forgetting about the Mongolia and China projects, forgetting about Macarthur, you've got $900 million to $950 million of CapEx this year. As you look at 2012, 2013, you've got a lot of projects in the works. Where can we anticipate approximately the direction of your capital spending is going to go, just in Peabody-only projects for the next couple of years?

Well, in Peabody-only projects, because of the Australian buildout, probably not going to be a lot of change over the next couple of years. We've got expenditures that we have to continue to make at Burton for that widening and extension. We are going to have expenditures at the Millennium Mine once we receive the approvals at the end of this year, begin to expand that operation.

Wilpinjong will be essentially behind us. Metropolitan will still have some additional capital over the next couple of years to get that expansion fully where it needs to be. Then ultimately in the -- in a couple of years out we will start to see capital kick in for that [denim], North Goonyella, lower seam combination expansion at North Goonyella. So I don't have the exact profile in front of me, but I would say that for the Peabody-only you are probably not going to see much change.

Ladies and gentlemen, in the interest of time we do ask that you please limit yourself to one initial question with one follow-up question. Mitesh Thakkar, FBR Capital Markets.

I know we are a little bit early on the process on Macarthur, but can you give us some sort of what kind of timeline you are looking at? And I know you're doing the due diligence process, but do you have like a preliminary sense of what kind of synergies we should expect from the operational and administrative point?

Let me cover that. I think from a timeline standpoint, you're right, we are in the process of performing diligence. We hope to complete that sometime in the next week and a half. We started site visits this week and then we move on from there.

Then we will move onto the next phase of this, and there is lots of other -- there is lots of wild cards that can happen in the process. But we will have to get regulatory approval from FERC, which we think is going to be pretty perfunctory, not a big issue. But there is also the normal approvals we have to get from the EU and from -- in other countries. So it depends on how long those take. They could take up to 8 to 12 weeks, probably, to get the overall regulatory approvals completed. So a bit of an unknown there, but we will keep you posted as we know more about that.

As it relates to synergies, obviously, we have taken a hard look at this in the last two years, and I think it is the number that we feel comfortable that Peabody, with the platform that we have in Australia and the proximity of locations that they're going to be synergies, be it equipment synergies and purchasing synergies and other issues.

We are trying to grow the business. So from the standpoint of are we looking at rationalization of the sites, the answer is no in general, because we have to grow the business. So, I think, with that I would probably just leave it at that on the synergy side for this discussion.

Okay, thank you very much. Just one follow-up. There is a chatter about impact of mineral resource tax expansion in China. Does that impact your Chinese project and how -- does it change the way you think about it any?

No, we factor all of that into the activities that we've got going on in China. Their [impluse] and cost for their natural resources development are pretty nominal. They are just starting to try and bring those in line to what we see elsewhere in the world. So all of that has been factored into our analysis.

Richard Garchitorena, Credit Suisse.

Most of my questions have been answered, but just a couple quick ones here. It looks like you priced about 24 million tons in 2012 and 2013. Just wondering if that was primarily PRB? Is it safe to assume forward curve prices are a good indication of where those would have been priced at?

I would say more than half of it is going to be PRB. I would also tell you about 80% of those tons that we priced were reopener tons, so they weren't necessarily new business, they were tons that were subject to contracts that were already in existence that had a reopener provision to come to (inaudible) to be reopened at market.

Clearly, we always -- we will tell you that obviously the curve is a good indication -- the forward curve, not necessarily the [prop] market is not a very good indication where prices are. And we always tried to sell above that because we are selling premium product and a premium service.

Great. And on Twentymile the cost that you saw this quarter, do you think a lot of that is going to be recurring, given they are geologic in nature or will some of that go away over time do you think?

We expect Twentymile's cost will return to what would have been normal levels now that we have worked through the geologic issues. The geology challenge we had are not ahead of us and we don't anticipate repeating those.

Great, thank you. Last question, on the export terminal do you have any update on timing or anything, or is that still through the permitting process at this point?

We are still in the midst of the permitting process. And right now we are still sticking to -- if everything would move along smoothly we would be at essentially a 3.5 year timeline between permitting and building the port, but, obviously, there's a lot of -- a lot of things could happen to change that, but nothing has changed it yet.

Mark Levin, BB&T.

Most of my questions have been answered, but I will ask it this way. In terms of Q3 and even full-year guidance, what factors would lead you toward the upper end of the range or even exceeding that number?

And as my follow-up, what met price would be embedded in the full-year Q4 guidance expectation? Thanks.

I will answer the last part of your question first by saying we are not going to provide what our embedded price is. The first part of your question is, I think the biggest driver is going to be volumes, both volumes in the US, how quickly the rail transportation system recovers will be an indicator. And then in Australia, as we have talked a lot about, co-shipper, the ability to continue to ramp up our baseload volumes out of Australia, and then also to try and take advantage of -- and move all of the additional export tons that we're going to have coming on in the fourth quarter. So I think, probably, the biggest driver will be volume related for us.

Great. Thank you guys very much. I appreciate it.

Dave Martin, Deutsche Bank.

First, I just wanted to start with a quick one on 3Q. I know in your press release you mentioned that your average hard coking coal prices in Australia are essentially near many quotes and trade reports at $315. I am curious on your PCI shipments or lower quality shipments also, would they be close to the $230 range essentially also?

I think you can assume that the spread you have seen out there is going to be something that we are going to experience as well between hard coking coal, reference price, and the semi soft coals that we sell.

Okay, that is fair. Then secondly, I just wanted to get an additional assessment from you, possibly on China. I know you mentioned that imports have been trending up in recent months, but in total import levels have been fairly anemic this year.

I am particularly interested in your assessment of growing production rates in the country, and logistic capabilities in the country. Because there have been some reports that suggest the logistics issues aren't quite as bad today as what maybe they were a year or two ago.

Well, I guess, first of all, I would say that I'm not sure -- I know I wouldn't agree with the use of an anemic term. When you look at the last four months of Chinese imports, they are as strong as they were at the end of last year, and we anticipate they will continue to strengthen through the back half of this year. China is still talking about having rolling blackouts over the next several months because of a lack of coal, and continue to import coal.

The first couple of months of the year in terms of the import was really an issue about pricing of electricity in China, and the availability of coal, because of issues out of Australia and Indonesia in terms of shipping locations.

So I would tell you that our view is it is going to be a strong back half. It is going to continue to be strong. And China is going to continue to grow their imports as part of their coal sourcing strategies over the future time period.

So at the end of the day, we feel very strongly about what is happening there. The infrastructure issues in China, let's just take it for a minute and talk about the project that we just signed this past week in Xinjiang province. We are talking about a 50 million ton a year operation of thermal coal. And it is a bit of a domino effect. All of that coal is going to go to the central provinces. The central provinces will then be able to ship a bit more to the coast that will help a little bit to balance the demand that is growing in China for electricity across the Southern provinces.

But rail lines have to be built. Power lines for moving coal by wire have to be built. So the infrastructure issues in China, the demand for energy in China are just -- are a Herculean task to try and meet. So we don't see where that is going to be solved overnight, in fact, that is part of their -- the issues.

Lastly, just coming back to the imports for a minute, the VAT tax that they have had on imports is something to watch, because they are doing everything they can to incentivize additional imports to keep from having the kind of power outages that we are seeing.

Brian Gamble, Simmons & Company.

I was hoping you could relate the quality of Macarthur's PCI coal to your PCI coal. Greg, earlier did you say that your current bid for Macarthur was fully impactful of all the carbon stuff is out there right now that is not consequential at all?

Yes, the answer to the second part of your question is we have incorporated forward views of carbon pricing, as well as the MRRT in terms of where we're at with Macarthur.

So our deal diligence that we are doing now is on the operating and business context, not the impacts of those on the platform.

And on their PCI quality coal, their low-vol PCI is the premium product for low-vol PCI in the marketplace. It is actually -- it is the benchmark product. The Coppabella brand is the benchmark for these low-vol PCI products.

Okay, so slightly better than what you guys consider your PCI, is that right?

Generally speaking, yes.

Then, Greg, earlier you brought up the volume is the biggest impact to Q3 and Q4. You still have a pretty wide range, the 245 to 265 of total sales. Your [first time] volume seemed to point you to the lower end of that. Could you walk us through a scenario that gets you to the upper part of that band?

Well, if you look at our volumes in the US and double that, we are on a ratable basis right now. If you look at where we are year-to-date in Australia, it does suggest stronger second-half volumes, which is what we are targeting right now to get to that 28 to 30 range, which is -- which you would expect, given the rain impacts, particularly in the first quarter that had hit us.

We do have time for one more question. Wes Sconce, Morgan Stanley.

Thanks for getting me in here. Just a quick question for Mike. You previously suggested that EBITDA from your US operations would be flat to up 5% or so this year. Has that changed with the weather-related shipment issues?

When you look at some of the issues, both with the weather and the geologic issues in Colorado, we are still expecting some stronger performance in the second half. We gave a range of up to 5% as a positive relative to last year, and we still think we are comfortable with that range.

Just the last one. You have maintained a relatively conservative balance sheet for some time. Is achieving an investment grade rating a goal for Peabody in the near term?

It is interesting, and I walked a bit through the history over the past five years, and when you look at our metrics there is many of those metrics that map to an investment grade rating. There are pros and cons in terms of access to certain areas of the market, potentially a little bit lower borrowing rates on the debt site only.

You have to couple that with the fact that we view ourselves as a crossover credit. So we have great access to the markets. We think they are on very favorable terms.

Part of the reason we had that debt retirement in April was to get rid of the last set of high-yield covenants that we had. So some of this is positioning. And as we have mentioned, we are comfortable with prudent, but additional leverage in the portfolio to allow us to affect these major growth initiatives that we are looking to take on over the next several years.

Great, thanks a lot.

With that, I will now turn the conference back to Mr. Boyce.

Well, thank you very much, and I want to thank everybody for participating in the call. I guess just kind of my closing reflections here. What you have seen over the last couple of weeks in terms of our announcements with Macarthur, our leasing in the PRB, the Mongolian announcements on TT, our project in China, these are a culmination of multi-years here of developing the horsepower and the -- and positioning ourselves be able to take advantage of what are the best opportunities across the globe to expand our platform.

It is really striking that we've got all of these coming at the same time. It is a testament to the work of Peabody employees. I can't thank them enough for the time and the efforts that they have put in. But it really lays the foundation for a level of growth over the next period of time, which is significant.

We look forward to continuing to bring you up to date on how each one of these unfolds, because each one of them by themselves are significant growth drivers. You put them all together, and the platform has got the potential to grow significantly. So with that, we look forward to updating you next quarter.

Thank you. Ladies and gentlemen, this conference call will be available for replay after 12.30 PM Central time today through August 19, 2011, at midnight. You may access the AT&T Teleconference Replay System at any time by dialing 800-475-6701 and entering the access code of 206725. International participants may dial 320-365-3844. Once again, those telephone numbers are 800-475-6701 and 320-365-3844 using the access code of 206725.

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