Peabody Energy Corp (BTU) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Peabody Energy fourth-quarter 2011 earnings call. 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 reminder, today's call is being recorded. With that being said I will turn the conference over to Senior Vice President, Investor Relations and Corporate Communications, Mr. Vic Svec.

Thank you, John, as always, and good morning everyone. Thanks very much for joining us for the conference call for BTU. With us today are Chairman and CEO, Greg Boyce; Executive Vice President and Chief Financial Officer; Mike Crews; as well as President and Chief Commercial Officer, Rick Navarre.

We do have some forward-looking statements. They should be considered along with the risk factors that we note at the end of our release as well as the MD&A section of our filed documents. And we always refer you to peabodyenergy.com for additional information. With that, I will turn the call over to Mike.

Thanks, Vic, and good morning, everyone. Peabody delivered record revenue, EBITDA, operating profit and net income in 2011, with rising contributions across the board from US and Australia Mining, Trading and Brokerage and Resource Management. These results demonstrate the strength of the Peabody platform and our ability to achieve results in the face of weather and geologic issues. I will begin by discussing our 2011 results, starting with the income statement.

Diluted earnings per share totaled $3.76 and EBITDA climbed to $2.13 billion. As you will recall, our guidance range for 2011 did not include the impact of the Macarthur transaction, which decreased diluted EPS by $0.41 and EBITDA by $95 million. Diluted EPS grew 42% to $4.17 per share, and EBITDA rose 21% to $2.22 billion excluding Macarthur, well within our guidance ranges.

Revenues grew 18% in 2011 to reach a new high of $8 billion, including $153 million for Macarthur. This was driven by higher volumes in the US, improved pricing across the platforms and increased trading and brokerage activities.

Turning to EBITDA, EBITDA totaled $2.22 billion for the year and Australia's EBITDA increased 22% excluding Macarthur. Australia EBITDA increased despite approximately $235 million of FX from the North Goonyella roof fall and subsequent longwall startup, which impacted EBITDA $60 million more than we had anticipated in the fourth quarter. These issues have been resolved and the longwall is again operating within the expected production range.

US EBITDA increased 3% on higher Western volume and pricing improvements in the Midwest.

Contributions from Trading and Brokerage more than doubled on higher pricing and increased exports, and Resource Management results benefited from the sale of several non-strategic assets as part of our portfolio optimization process. We had acquisition-related items of $95 million, including two months of operating results and various costs associated with the transaction. Including the impact of the Macarthur acquisition-related items, EBITDA totaled $2.13 billion.

During the quarter, we began a sale process for the Wilkie Creek mine in Southern Queensland. These results have been classified outside of continuing operations for all periods on the schedules.

Our effective tax rate was 31% for the quarter and 27% for the year, excluding the income tax remeasurement. We expect our tax rate for 2012 to be similar to the 2011 rate.

Turning now to the additional detail within our supplemental Peabody data, for Macarthur tonnage for Coppabella and Moorvale is reported on an attributable basis, but Middlemount is excluded, as it's accounted for an equity method basis. For comparative purposes, per ton data reflects Peabody prior to the acquisition.

In Australia, volumes were 24.4 million tons, slightly below prior year results, primarily due to lower North Goonyella shipments and first-half weather issues. Revenue rose 27% to $120 per short ton on higher realizations of both met and thermal shipments. During the year, we shipped 8.5 million tons of met coal at an average price of $227 per short ton. We also sold 10.1 million tons of seaborne thermal coal at a realized average of $94 per short ton. Australian cost for the year averaged $71 per ton, in line with our prior guidance. Unfavorable exchange rates, the roof fall and subsequent recovery issues at North Goonyella, along with higher royalties, led to the increase.

In the US, our volumes increased 5% from the prior year on higher sales in both regions. Western volumes benefited from strong demand for PRB coal, particularly from our North Antelope Rochelle Mine, that produced a record 109 million tons in 2011.

US revenues per ton rose 3% over the prior year on higher average realizations in both regions. Midwestern cost increased 5%, in line with our expectations, largely due to compliance-related costs and higher labor rates. Costs were largely stable in the West for the year. Fourth-quarter costs at our Western operations improved almost 6% from the third quarter on higher volume in the PRB in Colorado.

Operating cash flow reached a record $1.63 billion and capital spending for the year was $903 million. In 2012, we were targeting capital expenditures between $1.2 billion and $1.4 billion, including $200 million to $250 million related to Macarthur projects. Approximately two-thirds of projected spending relates to our expansion projects, while sustaining capital is expected to average in the $1.25 to $1.75 per ton of production.

We finished the year with nearly $800 million of cash and liquidity of almost $2.5 billion, even after utilizing $1 billion of cash for the purchase of MacArthur.

Turning to the balance sheet, we finalized our permanent financing during the quarter for the acquisition with a $1 billion term loan and $3.1 billion in seven- and 10-year bonds with a combined current average rate of 5.2%. The staggered maturities fit well with our existing debt portfolio, and the term loan increases are pre-payable debt to $1.5 billion. Our total debt to capitalization was 55% at year end, consistent with the mid-50% range we discussed last quarter.

So I would like to close with a review of our 2012 outlook. For the full year, we are targeting US volumes of 195 million to 205 million tons and Australia's sales of 33 million to 36 million tons, reflecting the addition of MacArthur, organic growth at several mines and recovery from 2011 whether and geologic issues. With trading and brokerage, Peabody's total 2012 sales are expected to be in the 245 million to 265 million ton range.

In the US we are targeting stable margins. Australian costs are expected to be in the high 70s per-ton range, reflecting the addition of higher-cost Macarthur volumes, carbon taxes in the back half of the year, higher royalties as well as higher inflation. For the first quarter of 2012, we are targeting EBITDA of $500 million to $600 million and adjusted diluted EPS of $0.50 to $0.75 per share. The ranges reflect a decline in benchmark pricing from the fourth quarter to $235 per tonne for high-quality hard coking coal and $171 per tonne for low-vault PCI coal, seasonally lower PRB volumes and a longwall move at our Twentymile Mine.

Macarthur is expected to contribute less than $100 million of EBITDA in 2012, given the significant cost increases necessary to correct overburden deficiencies at Coppabella and to complete major repairs at both mines that have been deferred under previous management as well as reduced pricing based on current levels. As Greg will outline shortly, these expenditures will allow us to enter 2013 with a solid foundation for higher productivity, lower costs and improved financial performance.

I would also refer you to our Reg G schedule in the release regarding our ranges for DD&A, taxes and other line items. (inaudible) you will note that DD&A is expected to be approximately 15% higher than the fourth quarter of 2011 on higher Australian volume and the preliminary view of the Macarthur acquisition.

That's a brief review of our record 2011 performance and outlook. For a discussion of the coal markets in 2012 areas of focus, I will now turn the call over to Greg.

Thanks, Mike, and good morning, everyone. I will briefly review the markets and Peabody's position and then turn to our core focus areas for 2012.

It is rewarding that Peabody recorded the best financial results in our 129-year history. We achieved these results while setting another new mark for safety with a nearly 30% improvement, completing a major metallurgical coal acquisition, mining first coal at two Australian expansions, adding to our trading business and advancing joint venture opportunities in Asia. We begin 2012 in a strong position to succeed in a two-speed global economy, marked by sluggish Western GDP but high ongoing growth in developing Asia. Peabody is well-positioned for solid results in the near-term and more robust growth as world economies recover.

I'll turn first to the global markets. Both coal (technical difficulty) use increased again in 2011, led by growth in demand for global steel production and higher electricity generation in emerging Asian economies. Global generation rose 12% on average in the key nations of China, India and South Korea, which more than made up for the modest declines in Japan and the US. Global coal imports rose 6% in 2011 and topped the 1 billion metric ton mark.

China was again the major story in seaborne coal, accelerating imports through the year. After records in the last two months, China set a new mark in 2011 for net coal imports, 14% above the 2010 record. India was the fastest-growing coal importer last year, increasing thermal imports 35% to 85 million tonnes.

In 2012, we look for greater global reliance on coal and the seaborne market. It is clear that the world's fastest-growing economies continue to increase coal use to drive economic activity, create jobs and improve quality of life. We expect the seaborne coal market to expand again in 2012, driven both by steel production and electricity generation. Projections call for growth in steel production in 2012 that would equal a 50 million tonne increase in net coal use just this year. We have begun to see steel prices stabilize recently after destocking activities and are looking for seaborne met coal demand to rise 10% to 15% to as much as 300 million tonnes.

Nearly 90 gigawatts of coal-fueled generating plants are expected to come online in 2012, representing more than 300 million tonnes per year of coal at normal utilization rates. We expect thermal seaborne coal demand to rise another 5% to 10% and 2012, led by growth in China and India. Japan and Germany are also expected to increase imports to backfill for ongoing declines in nuclear generation. We believe Australia will supply half the growth in global coal exports in 2012.

And longer-term, IEA has forecast a 65% increase in global coal use by 2035 under its current policy scenario. Under IEA's forecast, coal will become the largest energy source in the world. The energy growth from coal is forecast to be 30% greater than the increase in global gas consumption and more than double the growth in oil use.

Now turning to the US markets, cogeneration declined by some 5% in a year that was marked by a dormant economy, regulatory headwinds and an oversupplied gas market. We are expecting some further reductions in US coal generation in 2012 from ongoing coal to gas switching, as long as gas prices remain very low. This is likely to disproportionately impact Eastern US coal demand due to the high Appalachian cost structures and the location of the least efficient coal plants.

Partly offsetting generation declines, we do look for a further rise in coal exports in 2012. Now, Peabody is fully contracted in the US with the vast majority of our production in the low-cost Powder River and Illinois Basins. We also have a growing seaborne coal platform to provide upside with Asian markets showing strong coal demand growth.

Against this backdrop, Peabody is targeting several key focus areas for 2012. First, we intend to continue to target operational excellence across the platform with a particular focus on our new expanded Australian production base, mining safely, operating at optimal capacity factors and driving process improvements. For instance, you will see us begin to move away from contractor mining at our Wilpinjong and Millennium Mines to become Peabody operated. We believe this is more appropriate, given our core competencies in surface mining.

Second, we look to fully integrate the Macarthur acquisition into our Australian platform. Peabody is now the world's largest supplier of seaborne low-vol PCI coal. The acquisition expands Peabody's presence with quality coal products, targeting a high growth region. It provides major growth opportunities and a large reserve base.

We told you at the time of the acquisition that our first steps would be to start integrating the assets, driving operational improvements and realizing synergies. After several months of ownership, we are more encouraged with what we see in terms of the asset and resource base, the quality of the personnel both in Brisbane and the operations and the project pipeline. It's also very clear to us that the mines were not being operated to sustainable industry standards. We have chosen to address this issue head-on and are aggressively moving to bring the mines up to Peabody standards during 2012.

While this will clearly impact the first-quarter and full-year results, it also establishes the foundation for higher volume, lower costs and improved productivity in 2013 and beyond. And as we look to realize synergies from the acquisition, principal areas include marketing with blending and logistics, operating synergies, including purchasing, productivity and prep plant yields; administrative and financial system integrations as well as elimination of public company costs; and the physical synergies that come from operating in the same region with sometimes adjacent reserve blocks.

Our early analysis suggests that these synergy value should be in the $60 million to $80 million per-year range, hitting in 2013 and beyond as we fully integrate the operations and marketing. The net present value of these synergies could be $750 million to $1 billion. We have significant opportunities to add additional value as we develop the resource base with future growth projects and position Peabody as one of the largest suppliers of global met and thermal coal.

We are also progressing on a number of projects. We are accelerating the development of Codrilla, which we expect to produce first coal in late 2013. Middlemount is already ramping up production with the completion of a new rail spur to connect to the Northern Missing Link, and we are part of a group named as preferred respondent for Abbot Point, which has a 30 million ton capacity expansion underway. We are working through options to optimize the combined long-term port capacity that is available to us.

So all of this leads into our final focus area, to continue to advance our organic growth to serve those regions with the strongest demand increases. The Wilpinjong, Millennium and Wambo open cut mines are expected to add more than 5 million tons of planned sales from our Australian coal platform in 2012. Expansion of the Burton Metropolitan met coal mines continue with additional coal expected in late 2012 and 2013, respectively. We have signed contracts to allow for the extension of the Twentymile Mine in Colorado and are also advancing the 4.5 million ton per year Gateway North mine, which replaces the smaller Gateway Mine.

So, in closing, Peabody recorded record results in 2011, and we are working through mixed markets from a position of strength, and we intend to keep driving value through several key areas of focus in 2012.

So with that, operator, we would be pleased to take questions at this time.

(Operator instructions) Michael Dudas, Sterne Agee.

Good morning, everybody. My first question is, as you look out to the growth in Australia with your new expanded platform, can you characterize in 2015 where you're up to -- it seems like you would be up and running fully, what the mix of product -- will your mix of met coal and thermal coal into the marketplace -- and maybe more, driving down a bit -- your mix of hard coking semisoft PCI change dramatically from where we are today, so we can get a better sense of what kind of pricing and margin to anticipate from these mines?

Mike, this is Rick. I think -- and you know, as we look forward to 2015 -- and obviously, these are preliminary and it's going to be dependent upon when the mines come onboard --

Of course --

And projects, of course -- we're probably looking at, as we said, 45 million to 50 million tonnes maybe of total production by that time. I'd probably put -- about 22 million to 25 million of that would be metallurgical coal, and probably another 40%, the other 40% of that, out of that, would be export thermal coal, and then we would have the domestic contract with probably 7 million or 8 million tonnes, to round that out.

Of that balance, we're probably going to be sitting at 40% to 50% hard coking coal, maybe slightly higher, PCI at probably 30% to 35%, and then the semihard to semisoft -- mostly semihard -- but in the 15% to 20% range.

That's helpful, Rick. My follow-up is, as you look out into 2012 and the certain need for improved coal consumption globally, how do you characterize, say, Indonesia and their ability to meet these targets over the next couple years, and Australia, given the lack of weather issues we witnessed in 2012 versus 2011 in achieving these targets? Thank you.

I guess you are talking about -- as competitors against Indonesia. Indonesia, obviously, is going to continue to be a strong player in the export thermal market. They will be challenged to produce as much as they have -- grow as much as they have in the past because of their own internal demand that is going to continue to grow as they have a number of coal-fired plants that are going to be coming online over the next several years.

So I think they will be challenged, and also the quality in Indonesia will continue to get lower. So, Australia is going to be the go-to place, as it always has been, on a balance of met and thermal coal. So Australia looks pretty strong; we look strong. We have got port capacity to move the coal, and I think that's kind of the key out of Australia. You have got to have the capacity to move the product. Lots of folks have plans to rebound and grow in Australia, but they don't have the port capacity or rail capacity to do it.

Terrific, thank you.

Brian Gamble, Simmons & Co.

Maybe a little more clarity on the Australian spending this year, a couple hundred million dollars from the legacy Macarthur assets. Obviously, you want to get those up to your standards, understandable. Is that spending that is layered throughout this year and next? I'm trying to get a feel for how to layer in the efficiencies. You mentioned high $70 for your expectations for the cost. Should we expect those to improve as 2012 progresses, or should those remain fairly consistent through this year with the efficiencies and production gains realized next year?

I think you're going to see most of that next year. To give you a flavor on those, we find ourselves with a significant overburden stripping deficit at Coppabella. It's pretty clear that previous owners had issues during 2008-2009 global financial crisis. They had issues with weather, and overburden stripping was -- suffered because of it. So as we come in there, we've got potentially 12 million cubic yards -- or cubic meters of material we have got to move to get that operation back to its steady-state stripping ratio area.

We're planning on trying to move essentially 90%-plus of that this year. And of course, all of that has to be expensed as we move it.

In addition, as we have analyzed a major piece of equipment, it's clear that major -- a repair deferral was occurring in the last six months of the prior management operating those assets.

So, as you start to add all of these things up, our decision was we're going to aggressively try and rehabilitate, put back on a solid track. And then lastly is productivities, equipment utilizations, operating hours were all much lower than Peabody standards. We knew that going in; that was part of the value that we were going to bring to the equation. As we looked at the detailed records, it was worse than we thought.

But having said all of that, expect it in 2012. In 2013, we expect to be much more on a steady-state full-run basis out of those operations.

Great, and as my follow-up, let me get your comments on the natural gas situation in the US with regard to switching. I know that we have seen significant Central App/Northern App burning, switching occurring over the last couple years. As we get down south of $3 an M, the economics for some of the other basins are called into question. Have you seen utilities or had discussions with utilities that are either burning PRB or Illinois Basin coal start to contemplate changing their fueling sources moving forward?

This is Rick. Clearly, as you get down below $3, it really takes you -- you have to get south of $3 to start talking about any displacement of a Powder River Basin product. But you're going to see that on a small level, with pricing where you are at today. You're starting to hear some of that from some of the customers, so we know that's something that we are going to have to talk to our customers about. But the good news is we're in a fully contracted position for this year, for this reason.

If you look at -- and not taking today's prices, I would say my best estimate right now of what's going to be displaced in 2012 in the coal burn is probably going to be 35 million to 40 million tons, largely capped production under our estimates, because that's probably going to be -- 80% that's going to be capped. If you get and stay down where the prices are today, it could be as high as 85 million tons, and probably 70% to 80% of that will be capped production. But then that will start to dip into the PRB and Illinois Basin a bit as well. So it's a good time to be with a firm contract and have your position sold out.

Rick, just to clarify, the 35 million tons to 40 million tons of displacement -- you mean that's incremental from 2011, or are you going back to some baseload year?

That's incremental from 2011.

Thank you very much.

Shneur Gershuni, UBS.

I was wondering if you can give us a little bit of color on the met market in Asia right now. The price has come down quite a bit after the floods have receded and so forth, and it seems to be stabilizing. But if you can talk to us about how customers are interacting -- are they trying to delay when they receive shipments and so forth? And if you can talk about PCI discounts, if you expect it to narrow over the near-term or not?

Shneur, right now, obviously, the prices have dropped off the record highs of the 330 level, and we're down to -- just came off of 285 and just now settled at 235, still a pretty solid number in the marketplace. And I think the most recent monthly settlements that BHP is rumored to have been done have been in the 235 range.

So I think 235 seems to be holding pretty firm. There's not a lot of spot activity that's taking place. We haven't had a lot of -- you know, really, much of any pushback from customers near-term. So we're feeling pretty good about the fact that we have kind of bottomed out maybe in the -- in this range going forward. As you look at, look forward, I think we will continue to see a low- to mid-200 range in the next quarter.

Okay, and then I was wondering, given Brian's prior discussion about fuel switching and so forth, got to assume that the pressure ratchets up on trying to get the port on the West Coast done. Can you give us an update on where you think that's at, where the permits are at, or kind of what the next milestones that we should be looking towards?

We just entered the permitting process out, really to -- and that happened in 2011. And it was an overarching permitting process where we kicked off the process to get moving in the EIS. And that's where we really have to move forward. That will take us a two-year -- take probably two years to get that done. And that assumes that we are not delayed by any legal challenges, and that's probably a pretty big assumption, frankly.

But -- so it's two years and it takes 18 months to build it. But we are still marching forward as quickly as we possibly can to try to get that port up and running at the highest level.

So, essentially, you are one year into a two-year process, basically?

We are probably six months into it from a permitting standpoint. We have been into it for a number of years to get to this stage, but from the permitting -- from launching the first stage of permits, we're probably six months into it.

Great, thank you very much, guys.

Holly Stewart, Howard Weil.

Just kind of a quick question on the PRB, I wanted to get your thoughts. You guys obviously have the biggest position out there and probably have the best vantage point. So what's going on in the PRB besides just weather-related in terms of weakness and pricing? Was there an inflation in prices due to CSAPR, or what do you think is driving the decline?

I think it's a couple of issues, Holly. I think, when you look at what's happening with gas, there's obviously a psychology going on with customers not really wanting to buy a lot of coal right now because they need to see how -- they don't want to -- obviously, they are not going to buy a product when they think they can buy gas and below $3 an MMbtu. So they are not going to be buying coal. So there's not a lot of activity. As they look at their total burn, what they're seeing is because of significant mild weather and because of the economy, frankly, their generation is down. So they're starting to build stockpiles. They may have committed for too much coal. So what happens in this type of environment, and we have seen it happen before in 2009 and 2008, is the customers and the traders both get caught long. So the traders are long coal, the customers are long PRB coal. So what do they try to do? They try to resell it into a very thin market where nobody wants the product. That drives the price down. So you have seen the price come off of its highs of a couple months ago, where it was $15 on a year forward. Now it's down into the $10-$11 range.

The good news for us, and I can say this and part of it -- we would like to be lucky at times -- is that the last sale that we made was at $15, and we're sold out. So we'd rather be lucky than good at this point in time.

Yes, very nice. And then just my follow up -- lots of moving pieces on all of your expansions going on in Australia. So can you just help me out here? It looks like there was a little bit of a fall-off in the seaborne thermal volumes in the fourth quarter. How do you get to that higher output range in 2012?

Yes. If you look at the fourth quarter, we had some issues at our Wambo operations in New South Wales, partly weather related and partly longwall. We moved the longwall; we had some slower ramp-ups on the longwall there at the Wambo and combined that with the open cut. So part of the difference is our ability to bring that operation back up to a steady state that we forecast for 2012.

In addition, obviously we are going to have a full year of the expansion at Wilpinjong moving through. We saw some volume from that in the fourth quarter of last year, but not at the full run rate, and we will see that during 2012.

Perfect, appreciate it.

Andre Benjamin, Goldman Sachs.

First question -- I wondered, in Cleveland, are you continuing to see any coal shipper or weather-related issues? And do you anticipate any reason why the industry won't be able to get back to prior peak rates, say by the end of this year, as we go into 2013?

Yes, a couple of things -- I guess I would say at this point, weather-related issues in Cleveland have been very muted. The forecast for a bad weather year, a repeat of last year, have not materialized. That's not to say we haven't had rains; we have had some rains. The co-shipper risk -- we effectively eliminated one part of the co-shipper risk by buying Macarthur, and we are able to take advantage of our ability to manage that risk with the integration of Macarthur into the platform in the fourth quarter, and that's part of the synergies we see going forward.

I think there's a couple of areas -- first of all, geology across the entire Bowen Basin in Queensland continues to get tougher. Underground operations continue to have issues. We are not the only ones that have those issues, given the geology. Surface operations are getting to higher strip ratios. There's a lot of activity, and then of course we've got, overshadowing all of this, what's going to happen with labor contracts, particularly with what's going on with the major -- the biggest producer; that's BMA.

So I think that the concept that we are going to see, just because weathers have been better, full recovery out of that Australian met coal platform -- we have talked about it in the past. Effective operating rates are significantly lower than nameplate capacity. So, while we see growth in met coal out of Australia this year, returning back to peak levels by the end of the year, I think, is a real struggle.

Thank you, that color is really helpful. I guess specifically back to Peabody, as you have gotten to know your Macarthur assets a little bit better, do you have any updated thoughts on what the longer-term growth potential is for some of the additional exploration projects that you -- that were discussed by prior management? And I think you highlighted it in your slides. And the second part of that would be, as you look at the Macarthur growth, do you see any potential that you could continue to evaluate your asset base and maybe divest other assets that you consider to be non-core?

Well, two-part question, I guess, taking the second part first, we are always going to continue to evaluate our portfolio. And where it makes sense for us look at divestiture of assets that we would consider perhaps non-core, others would see as core assets. And that's obviously the best match, when you try and sell an asset. And that's the case with Wilkie Creek in terms of our intentions to sell Wilkie Creek.

And we will do that across our global platform, not just in the context of Australia. I think the question about the Macarthur project pipeline -- I would say it's early days in terms of our technical reviews. But everything that we've seen so far, we feel even better about the resource base, the reserve base and some of the projects deeper into the portfolio. Obviously, that was the -- that was a large part of what we were buying was that project pipeline. I would just say, just like we are doing with the acceleration of Codrilla and with the development of Middlemount, we see that pipeline stronger than we did prior to launching the acquisition.

Thank you very much.

Kuni Chen, CRT Capital Group.

Just a quick point of clarification -- most of the questions have been asked already. But just on the CapEx for 2012, does that include what you plan to spend to bring those mines from contract miner to Peabody-operated? I think that was about $400 million of CapEx.

That includes the 2012 portion of that CapEx estimate. That was a multi-year number for the owner-operated, but the guidance for 2012 includes the 2012 portion of the owner-operated capital.

Okay, so that $400 million -- that's probably spread over two or three years?

That is correct.

Okay, great, that's all I have, thanks.

Paul Forward, Stifel Nicolaus.

I believe you talked about in the US in 2012 having stable margins. I was just wondering if you could talk a little bit about the sort of cost inflation numbers that you are anticipating to go into that idea that you would have stable margins in the US in 2012.

Sure, Paul. This is Mike. So when we look, first off, starting with the revenue equation, we do expect to see some modest increases in revenue per ton in 2011 related to 2012 in both the Midwestern and Western regions. When we look at the Midwest on a cost projection basis, you saw we were up about 6% for the year. The target for the Midwest would be somewhere in a similar range there, so low- to mid-single digits on -- probably due to the same reasons that we've had for the inflation from 2010 to 2011.

And then when you look at the Western segment we are targeting currently probably flat to just up slightly, given the mix of tons we've had. We've had good -- with the capital improvements we've made, we have been able to hold the line on cost. One other item there potentially is always fuel inflation, and our hedge portfolio performed well in 2011. So we have been able to the overall hold the line on cost. When you look at some modest increase in revenue per ton, you look at what the cost components may be in the Midwest and Western regions; that's what leads us to a stable margin projection for 2012.

Great. And you had mentioned your last sale of PRB coal was done at $15. We are now looking at the first half of 2012, the forward price curve, to the extent that that represents any real volumes, is down in the $9s. I was just curious; is it time to start thinking about targeting your production toward the lower end of your range that you've given for 2012 and basically conserve your resource and buy tons that are available below your cost of production in the PRB?

That's a decision we kind of make on a daily basis, Paul. If we can by tons cheaper than we can produce them, if the price really gets low, obviously we will do that and we will do that through our trading group. That's something we've been doing for years, if it makes sense, and then we will hold back the production if we need to.

But from where we sit today, we are pretty well sold out at prices obviously above that $9 level, of course. So we are not really in the market selling at $9. But if we can buy coal at -- if prices continue to slide -- because it's really such a thin, thin market. I doubt we could buy very much at those prices. But if we could, we may buy it and place it on our contracts and hold back on the production.

Okay, thanks.

Mitesh Thakkar, FBR.

Good morning, everybody. Can you just walk me through the bridge of your met coal production growth in Australia from 24.5 in 2011 to almost 33-36 in 2012 -- I'm sorry -- total Australian growth by blend, not just met?

That's total production in Australia --

Yes.

I think that's approximately 5 million tons at Macarthur, and then it's another 4 million to 5 million tons of gross tonnage out of the platform, and then there are some recovery tons from the North Goonyella longwall failure.

So is it fair to put in like the total growth from legacy Peabody operation at about 4 million tons, roughly, 4 million, 4.5 million?

Or 5 million to 6 million on the outside range.

Okay, sounds good. And how should we think about this volume ramp-up through 2012? Is it going to be like steadily improving as we go from quarter to quarter as the other mines ramp up, or is it going to be more flat-lined?

It will be a steady growth up.

It will be a steady growth, okay, great.

With the new -- with the Peabody's legacy tonnage, not with (inaudible).

David Gagliano, Barclays Capital.

I had a question regarding the US market, just a follow up. Given the potential for -- potentially as much as 85 million tons displaced at current gas, I'm wondering if we should expect Peabody to cut volumes, i.e., to work with your customers in 2012, even if you are sold out. Or, should we expect you to continue to deliver into the contracts? And if so, what does that mean for 2013? That's my first question.

Obviously, we always try to work with our customers as best we can, but we have contracts and they -- you know, certain -- and we will work with them as long as the value is still delivered to Peabody. And we've got a lot of long-term customers that have a lot of volume. We've done this before; we balance it out. Obviously, we can't -- every time a customer knocks and wants to cut down the production to buy gas, we obviously can't cancel our contract, of course, and meet those needs because that wouldn't be good business for either side. So we just try to balance it out as best we can. And it's not that we won't get asked the question a few times.

The other area I would add to that is, we do have some requirement contracts. And depending upon what the burn is for the year, those may fluctuate by the very nature of the contracts. We have taken an estimate based on their current view of the burn. But if that changes during the year, they're going to come down by the contract terms.

Yes, absolutely.

Okay, that's helpful. Just a follow-up -- with gas where it is, around 260, how low do PRB prices need to go in order to be competitive with natural gas at this point?

PRB price is at $9, and where they are at today (inaudible), there is not much coal being sold at $9. They are very competitive with gas, even at the $2 range. Right now, when you look at what gas has delivered into most of the utilities and what coal has delivered into most of the utilities, most of the PRB coal that is being sent today at today's price --at historical prices, 90% to 95% of the PRB coal is still economical at today's gas prices. And then it gets to be more of an art than a science when you come to the math, because not every ton that is -- you can't just look at the mathematics because the customer may have a long-term contract with the coal producer, they may have a long-term contract with the rail provider where they have to continue to take the coal, or for electricity reliability reasons, they may continue to take coal.

So it doesn't work out one for one. It may be 30% to 50% of the tons that fall into that category of being uneconomical actually get taken off and get displaced with gas. That's our -- how we typically look at it.

Justine Fisher, Goldman Sachs.

I have, actually, a follow-up to just the last questions on the 2013 issue for the PRB. Is there some hold-back in terms of contracting from PRB producers for the coal the first six months of this year because the forward strip prices will be pretty low? Do you guys hold out longer than you usually would in order to start committing your 2013 tonnage? Or how do we see that playing out if prices don't improve, let's say, over the next couple of quarters, a time during which you historically would have been committing tonnage for the next year out?

In the past, that has been what we've had to do. We've basically had to wait and let the market rebound because the pricing isn't reflective truly of the physical market. And we are not going to sell into that artificially low financial market number that's being driven by other factors. So as you see our numbers, we've got 45% to 50% of our uncommitted production available for 2013. We will have to be patient if that's the case.

As you look at going forward, based on announcements that are made by Chesapeake -- and we would expect to see more of those in the gas sector -- and based on what we think and what the view is in terms of weather conditions during the summer months, we have all seen this turn around very, very quickly. But, having said that, as Rick said, we would -- we take a look at during the contracting period, are we better off going into the end of the year with a more open position, or are we better off going into the end of the year with a more fully committed position?

We took the view to be fully committed this year, at the end of 2011 for this year. And that was a great decision for us. We will make that decision when we get into that June-July time frame, when most of the contracting activity for 2013 would take place.

Okay, thanks. And then just a follow-up on the met market as well -- one of the producers that recently cut their production for 2012 was actually cutting some of their higher-quality met coal mines, the argument being that some buyers of met coal, because the steel market is not doing so well these days, they were willing to operate their blast furnaces less efficiently. And so they were actually moving towards lower-quality coals, whereas I guess I would've thought that the lower-quality coal would be the first to drop off and be more discounted in the current price environment.

So what are you seeing from your customers in the kind of weaker met coal market? Are you seeing more demand for some of the lower-quality coals because of the way the steel market is going, or are you seeing people tend to more -- the higher-quality coal?

Well, there's no question that the high-quality coking coals still get the premium price. It's one of the wonderful advantages of our new low-vol PCI platform out of Australia, is that is a product that steel makers are encouraged to buy because it's a replacement for high-quality hard coking coal. So there's always interest on the part of steel makers to use a lower-priced blend in their furnaces.

But, having said that, I think the other issue involved with that announcement is, when you are at the high end of the cost curve on a delivered basis, you're typically going to be the first ones to push back. One of the reasons we are not seeing push-back out of Australia is because the operating costs and port, rail costs and shipping costs to the customer base, particularly in Asia, is much lower.

Jim Rollyson, Raymond James.

Greg, you answered Brian's question earlier about costs in Australia as you do your work on Macarthur this year, that you didn't expect to see the benefit of that until it's starting next year. Curious, when you kind of balance the benefit of that, and obviously where royalty and the CO2-related costs are going to be, kind of generally with your magic glass looking forward, where you -- the magnitude of where costs might come down as you move into 2013 and beyond relative to the kind of high $70s costs you are looking at for this year?

Well, obviously, that's pretty far ahead to be giving you specific cost numbers. I will tell you, within the Macarthur platform, we're fully expecting in 2013 double-digit reductions in cost versus what we are going to have in 2012, and very substantial because the strip ratio alone at Coppabella is going to come down a couple of points. We are going to have tens of millions of dollars of repairs to large equipment -- shovels, trucks and draglines -- that are not going to be repeatable. They are legacy carryover that should have been done before. And then we're going to have overall productivity gains; we will get more volume out once we have moved the overburden to expose the coal. So we're going to have a better divisor effect.

So we're looking at healthy cost reductions out of that Macarthur platform. Really reluctant to give specific numbers yet because obviously we have got to continue to do the work during the course of this year. But we are not talking about minor incremental cost reductions.

Yes, that's exactly what I was looking for; that's very helpful. As a follow-up, maybe just -- you hadn't brought it up, no one has asked it. But usually you talk a little bit about your even longer-term developments in Mongolia and some of the JV stuff you've worked on in China, just kind of an update on all the other stuff.

Well, let me start with China. We are continuing to move forward with a couple of projects in China. We are in the validation and drilling stages right now. We've got drilling contractors in place to validate both the qualities of the coal, and then be able to help us develop a mine plan. So we are moving forward pretty strongly with those projects and hope to get to -- once we get the quality, then we can work out the cost structure and develop the joint venture arrangements going forward for a couple projects that we have in China, particularly Dragon and the Lu'an project that we have there.

As it relates to Mongolia, it's a little bit more complicated, obviously. As we've said in the past, it's a lot of geopolitical issues and balanced with trying to pick the right contractor to mine the coal, i.e., Peabody, with strong environmental and safety and productivity issues around it. The government in Mongolia has just recently gone through a division of the coalition government where all the Democratic party members resigned and they are going into the election season. So if I had to take a guess, I'd say that probably not a lot happens with the Tavan Tolgoi investment agreement in the next three or four months, while they start to campaign for the next election.

And once you get that kind of ironed out, at whatever point that happens, how far beyond that is the whole development scheme?

Well, once again, we'd have to develop the investment agreement. And once you get past the investment agreement, it's probably going to be a two-year process. The investment agreement may take six months, it could take three months, it could take a year. Obviously, it could be done -- in our time line, we could do it in three months easily, or two months. But it's a very difficult process over there.

Yes, helpful color, thanks Rick.

Brian Yu, Citi.

With regards to Wilpinjong and Millennium, I'm not sure if I missed this. But what are the dollar per ton cost savings associated with bringing those mines in-house, let's say relative to what it costs today?

You didn't miss it, Brian. We didn't provide it. Suffice it to say, any time that you've got a contractor in one of these operations, a couple of things happen.

First, contractors tend to use smaller equipment than we would use as an owner-operator. That's because that allows them the flexibility to move that equipment around among a number of operations. Well, as we all know, when you use the largest equipment in the mining industry or larger equipment in the mining industry, you get significant productivity improvement, lower man -- or labor cost per ton, and you get typically more output. So we're going to get those efficiencies that translate into cost savings -- plus the fact that there isn't a contractor out there that doesn't have a healthy margin embedded in their contract. Well, we might as well pay ourselves that margin by operating it.

So when you combine those two alone, they are good, substantial cost savings that provide significant returns on the capital that we're going to spend.

Could you quantify those in any way, like dollar per ton or -- and incremental production?

At this point, I think just suffice it to say, we've got a great return on the capital, and we will have cost reductions across those operations from where they would be, had they stayed at contractor and mining operations.

Dave Martin, Deutsche Bank.

I had a couple clarification questions to start with on your volume guidance. In Australia, you are pointing to 33 million to 36 million tons this year. Does that include the Middlemount volumes, given that it's now reported on the equity basis?

It does not.

It does not. And that would be roughly 2 million tons?

Our share of that would be roughly -- it would probably be 1.8 million tons this year.

Okay, and then secondly, I know you hesitate to provide details on your outlook for the first quarter, but I'm wondering if, in Australia, you could provide some range of volume expectations for the first quarter. You make a statement in your release about potential timing issues in Australia, and I guess I'm really trying to understand that statement.

Yes; we typically don't break specific volumes because it's included in our range. One or two vessels make a significant difference in terms of our volumes. As you look at Australia for the year, we do have volume growth per quarter, so if you just took the annuals, spread it across the year and then adjusted for more volumes in the back end, you're going to come pretty close.

Okay, and then secondly --

(multiple speakers) our share of the Middlemount is probably 1.5 million tons instead of 1.8 million.

Okay. If I may ask one more, you made a couple macro comments that were pretty bullish. The first was that you expect the seaborne market for met coal to grow at 10% or 15%. I'm wondering what you are assuming for Chinese steel production growth and how much additional supply you are expecting out of Mongolia.

And then, secondly, you noted that you believe that US exports of coal will increase in 2012. I'm just wondering what your view is on the mix of those exports.

Well, let me cover the exports out of the US. Last year we did a record number. It went up from about 84 million tons to what we think is probably about 108 million tons. And obviously, you see this continued decline in what is happening in Appalachia. The outlook for that coal is into Europe and into other markets, and so it's the same for some of the Colorado coals and also some of the Powder River Basin coals also going out of the Gulf and going into Asia. So that's really the outlook for where they are going to go.

Our number -- clearly, we think we will be north of 110 next year on exports. I won't give you a specific number, but I think it's easy enough for me to say it's going to grow a bit more. And it will be split fairly evenly between -- if we went up 5 million to 10 million tons, I think I would just say it's split pretty evenly between the East Coast, the Gulf and then the West, out of the ports.

And I think, coming back to the met coal question, if you use a 5% increase in global steel, that translates, in our view, to the increases in met coal demand. We're looking at an additional 50 million tons, which would take seaborne up to about 300 million. That's really going to be driven by China, Brazil, India.

Mark Levin, BB&T Capital Markets.

Most of my questions have been asked -- just two quick ones. One is just thinking about what the tax rate might look like or how to model that for 2012.

Yes. What we are looking at currently is a tax rate similar to where we came out in 2011.

Okay, so just assume that in 2012?

Yes.

Okay, and then the second one just relates to labor in Australia and how you look at your agreements there going forward, maybe the timing of some of those agreements' expiry, how you think about that as you grow your business over there.

Well, we do have agreements that, during the course of 2012, will be renegotiated. North Goonyella will be one of those, a couple of other of our current contractor operations; the contractors have agreements.

So I think obviously everybody is watching what's happening with BMA. We've historically had good renegotiations with our particular unions. We still anticipate that to occur. We've got estimates in our forecast as to what those packages will look like, but certainly what's happening right now in the context of BMA is being watched very carefully.

Greg, how do you think about labor inflation in Australia if you were just modeling that one line item? How do you assess labor inflation cost growth in Australia as you see it right now?

Well, certainly, labor inflation in Australia is higher than in the US, given particularly the demands in the resource sector. You would probably want to be in a 5% range in terms of labor inflation for modeling purposes, just to have it all covered. That's a combination of what salary increases are, as well as, quite frankly, the cost of turnover, because turnover is very high in Australia. It's much more easy for employees to be portable; they've got national insurance, they've got national superannuation. And so for them to shop around and get competing operations is a lot easier. So our turnover in Australia is comparable to everybody else's, maybe slightly lower, but significantly higher than what we have in the US. So that cost factors into that as well.

And the last question -- what percentage is labor as a total of your overall cost of Australia, as you estimate it?

That's a tough number to give with any amount of specifics, just because we do have contractor operations over there. So it's folded within it. It probably wouldn't be meaningful to try to give it as an aggregate.

Brandon Blossman, Tudor Pickering Holt.

First, on Wilkie Creek -- what changed year-over-year, if anything, that moved that into a divestment opportunity?

Well, I would say what changed year-to-year is about a $5 billion acquisition and us -- we always look at our portfolio. After we completed the Macarthur acquisition, we said, okay, let's take a really hard look at our portfolio across the platform. What are the logical candidates for divestiture to allow us to continue growth at other locations as well as look at managing our debt levels? And Wilkie Creek was one of those operations. It's an operation that is down in the Surat Basin, goes through the port of Brisbane, has very little, if any, synergies with the rest of our Bowen Basin/Queensland platform. And we think, based on what is happening in terms of the M&A market down there, it has got high value to other participants. And so that was one that we said made sense for us to sell.

And we may have more across the platform as we go forward. But that's the one, first cab off the racks.

Useful color, and just a couple follow-ons, on that. Are you selling all of the kind of associated reserves in the Surat Basin, in addition to the mine itself?

We, at this point, are focusing on Wilkie Creek. But it's an active process. I don't really want to say much more than that.

Okay, and production out of Wilkie Creek for 2011?

Well, their run rate was around 2.4 million tons. They didn't do that last year because the bridge was washed out for three months, and the (technical difficulty) line needed to be rehabilitated. But between 2 million and 2.4 million has been their historical run rate.

Thank you very much.

Lucas Pipes, Brean Murray Carret.

My first question is kind of regarding the first quarter. Could you provide us a little bit more color on what you expect in terms of --

I'm sorry, Luacs, we can't hear you real well. Can you speak up a little?

Can you hear me now?

That's better.

Sorry about that. So my first question is kind of regarding the first-quarter guidance. Could you provide a little bit more color on what you expect out of Australia in terms of thermal and met coal shipments, and then also out of the US?

Yes. I think, as we talked earlier, we don't really break down our volumes by quarter to that level of specificity. Suffice it to say, the ranges are included in our guidance. Broadly, I would say that, as we indicated in our comments, the Powder River Basin in the first quarter is generally lighter than the back half of the year. We expect that. We've got a longwall move at Twentymile which will reduce additionally our Western volumes versus a pro rata for the year.

Australian volumes -- we've got a level that is growing through each quarter of 2012. So the first quarter will be a lighter quarter. And then, of course, the other differential is we do have lower pricing in the first quarter, particularly on met coal, than we did in the fourth quarter of last year. And when you look at, now, the significant cost to rehabilitate Coppabella and Moorvale through 2012, and some of those are going to be in the first quarter, all of that brings you back down into the guidance range that we established for the first quarter.

Thank you, that's helpful. And then lastly, given your global platform and also trading business, you should have a pretty good insight into what's going on in the Atlantic Basin in terms of met coal demand and so forth. Could you tell us a little bit more what you are seeing out of Europe on both the thermal and met coal side?

Well, it's a little bit of a mixed bag. Obviously, the Pacific market is much stronger than the Atlantic right now and you've got the overhang with the European financial crisis going on in Europe, which is impacting both thermal coal as well as steel demand in Europe. So it's a bit lighter demand in Europe compared to what you see in the Pacific market. And you have seen that in the European -- and you have seen that in the benchmark pricing from the API too; out of Europe, it has dropped. We settled previously probably in about 125. It's down a little bit under 110 now, so it has come off a bit in the last three or four months. But it seemed to have bottomed out quite a bit.

Okay, that's helpful, thank you very much.

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

Well, thank you very much. I guess in closing, I would like to thank both new and existing Peabody employees for the strong performance in 2011, especially in our safety results. I would like to thank our investors for their ongoing investment in BTU. You have heard us say before, we have designed Peabody to make good money in all markets and great returns when the economies are strong. We continue to be committed to maximizing long-term shareholder value, and we look forward to keeping you apprised as this year progresses, both in terms of the legacy Peabody platform, but also in terms of our recovery efforts at Macarthur and what we see with that great project portfolio moving forward during the course of the year. So, thank you all very much.

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