Peabody Energy Corp (BTU) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Peabody Energy second-quarter 2012 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 a reminder, today's call is being recorded.

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

Okay. Well, thank you, John, and good morning, everyone. Thanks very much for taking part in the conference call this morning for BTU. And with us today are Chairman and CEO Greg Boyce; as well as Executive Vice President and Chief Financial Officer, Mike Crews.

And we do have some forward-looking statements today, as always. They should be considered along with the risk factors that we noted at the end of our release, as well as the MD&A sections of our file documents. We also refer you to peabodyenergy.com for additional information.

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

Thanks, Vic, and good morning, everyone. I'll start with some high-level comments, and then review our financial results in more detail. Peabody continues to manage through difficult market conditions, both in the US and internationally. Our US operations performed well in the second quarter; but, at the same time, we experienced mixed results from our Australian platform.

We also further improved our strong financial standing by reducing our leveraging capital spending during the quarter. I will now review the quarterly results, beginning with the income statement.

Second-quarter revenues of $2 billion were consistent with prior-year results, as stronger US realized pricing Australian volumes were offset by lower US production; a decline in Australia prices; and lower margin shipments from Trading and Brokerage.

Adjusted EBITDA of $453 million was down from the prior year, due mainly to lower pricing from the Australian operations. In the year-ago quarter, benchmark prices pricing for metallurgical coal was $330 per ton and $130 for the annual thermal coal settlement, which is $120 and $15 per ton higher than this quarter, respectively.

Compared with our expectations, adjusted EBITDA was at the low end of our guidance, due to production challenges at contractor operated mines, weather issues, and late-quarter shipping issues in Australia that impacted volumes and margins. Greg will discuss our actions to improve performance at contractor mines in a moment.

With higher ongoing DD&A related to the acquisition and expansion projects, as well as increased interest expense, diluted earnings per share totaled $0.78, with adjusted diluted earnings per share of $0.73. The results include a $60 million net tax benefit related to the integration of acquired assets into our Australian consolidated tax group.

So we expect the third quarter effective tax rate to be approximately 25%. Including the second-quarter tax benefit, we now expect a full-year effective tax rate to be in the 15% to 20% range.

So that covers the income statement. And I'll now turn the additional detail within our supplemental data. You can see that the Americas business unit continues to perform well in a challenging market, and has benefited from cost containment efforts and our fully contracted sales position.

In the US, sales volumes were down slightly from the prior year, due to contract restructurings and reduced shipments on the requirements contract.

The slight decrease in volumes was more than offset by higher realized prices, which are up about 8% in the West and 9% in the Midwest over the prior year. Our productivity and cost containment actions resulted in cost increases of less than 4%, leading to a nearly 35% increase in our overall US gross margin per ton. As a result, US Mining adjusted EBITDA was up 27% to $273 million for the quarter.

Shifting to Australia, shipments totaled 8.2 million tons in the quarter, up 26% over the prior-year period, as a result of last year's acquisition; as well as additional volumes from the Wilpinjong expansion, resulting in Australia mining adjusted EBITDA of $240 million. This was $156 million lower than second quarter of last year, $140 million of which was due to lower pricing.

During the quarter, we shipped 3.6 million tons of met coal, at an average price of $164 per short ton; and 2.7 million tons of seaborne thermal coal, at an average price of $97 per short ton. We also shipped 1.9 million tons of thermal coal under domestic supply contracts.

Our Australian cost of $78 per ton reflect a higher percentage of met coal and sales mix compared with the prior year. Our mix also benefited from record production at our low-cost Wilpinjong Mine, which helped to offset higher costs, particularly certain contractor operations.

Our current expectations for production volumes and mix have us continuing to target Australian cost to be in the upper 70s per ton range for the full year.

Adjusted EBITDA from Trading and Brokerage was $45 million, in line with last year, as the business continues to benefit from an expanded global trading platform.

Finally, Resource Management's adjusted EBITDA declined $22 million year-over-year, as market conditions limited land and reserve sale opportunities in the US.

Now let me review cash flows and capital spending. Peabody's operating cash flow was $280 million for the quarter, leading to a $489 million cash value balance at June 30. We used our cash balance to opportunistically repurchase $242 million of bonds below par, as a result of our commitment to improve the balance sheet, resulting in annual interest savings, going forward, of some $15 million.

We bought back some $100 million of shares during the quarter at an average price of about $23.50 per share, given the significant undervaluation. And we continue to invest in key growth projects to meet rising seaborne coal demand.

Capital spending was $196 million in the quarter, and $434 million so far this year. We have reduced our 2012 capital targets by some $200 million since the start of the year to $1 billion to $1.2 billion, in response to market conditions.

In addition, payments for new PRB coal lease commitments will be approximately $250 million in 2012. During the quarter, our total debt to capitalization ratio improved to 52%, and we do not have any material debt maturities until 2015. Peabody also maintains a healthy liquidity position of $1.9 billion.

Turning to our outlook, we've reduced our targeted 2012 Australian coal sales to 31 million to 34 million tons, reflecting the challenges we discussed. But we are maintaining our sales target at 185 million to 195 million tons in the US. Including Trading and Brokerage, Peabody's total 2012 sales are expected to be in the 230 million to 250 million ton range. For the third quarter, we're targeting adjusted EBITDA of $350 million to $450 million, and adjusted diluted EPS of $0.20 to $0.45.

Now, the ranges reflect expectations for continued Australian challenges, including performance at contractor-operated mines; a longwall move; lower thermal coal pricing; a temporary shift in the mix of met coal; and the introduction of the carbon tax. I also point you to our Reg G schedule in the release, regarding our ranges for DD&A, taxes, and other line items.

With that of our second-quarter results and outlook for the third quarter, I will now turn the call over to Greg to discuss the coal markets and Peabody's position.

Thank you, Mike. Peabody's weathering the macroeconomic storms well. We've taken steps on the commercial, operational, and financial front to continue to position the Company for success. I'll start with a review of the market conditions, and then discuss Peabody's many operational initiatives.

Peabody is guarded in our near-term view of global market fundamentals. US coal markets have shown some positive signals, but significant recovery is not yet at hand. Europe is weak economically, but surprisingly strong on coal use. And while Asia has downshifted, it continues to power the world's economic growth.

All told, we continue to look for seaborne coal growth of some 10% in 2012. Now, in terms of China's performance, met coal imports hit a record -- 75 million metric tons in the second quarter; and are up 74% in the first half. And while thermal coal imports are up significantly, we also showed net metallurgical coal imports up over 60% year to date in China.

Generation growth slowed in the second quarter, but is still growing at 6% year to date. And I would say, for now, the pullback of the China economy appears to be manageable. And China clearly has more tools than most governments to foster domestic growth.

In India, generation is up 11% year to date, with thermal coal imports rising 13%. And while strong, they are slightly lower than we expected by this time. The developed economies such as Japan and Europe have also shown increases in coal generation and imports year-to-date, running counter to their economic trends. In sum, coal remains the fastest-growing fuel in the world, and was the only fossil fuel to report above-average growth in 2011. Coal now accounts for more than 30% of global energy consumption. That's its highest share since 1969.

Longer-term, we continue to see a major positive trend for global coal demand, even though the trend line may incur quarter-to-quarter variability. The fundamentals for coal demand around the globe remain solid, driven by unprecedented global urbanization that supports generation and steel production. Peabody continues to project that new coalfield generation will require another 1.3 billion metric tons of thermal coal by 2016. And metallurgical coal use is expected to rise by 25%, or 250 million metric tons per year, also by 2016.

That's the global view. In the United States, we continue to expect domestic coal used to decline 100 million to 120 million short tons in 2012, due primarily to coal-to-gas switching. And we're beginning to see supply decline to match demand. The US shipments to domestic utilities were down more than 100 million short tons on an annualized basis in the second quarter, and additional cutbacks continue to be announced.

With gas prices up more than 50% on recent levels, PRB coal generation is back in the money, and coal plants are running strong. And the strong summer burn combined with improved supply/demand fundamentals are starting to bring down stockpiles. June stockpile draws were nearly double the 10-year average, and second-quarter cooling degree days ran 28% above the norm. We're also beginning to see customers reentering the market for 2013.

US industry conditions remain difficult as we continue to see mine closures in response to lower demand. But at the same time, strong companies at the low end of the cost curve are likely to come out the other side in good shape. We believe that domestic coal use will rebound in 2013 due to higher gas prices. And we look for particularly strong gains in coming years from the PRB and Illinois basin.

Now, Peabody has taken a number of steps to succeed within the current market environment. In the US, our 2012 production is fully priced; with 2013 volumes 70% to 75% price priced, assuming current-year production levels. And during the quarter we leased more than 1.1 billion short tons of ultralow sulfur coal reserves at the North Antelope Rochelle mine, the world's largest and most productive coal mine.

We've also reached agreement with Kinder Morgan to expand our Gulf Coast export capacity for our PRB, Colorado, and Illinois basin products. Longer-term, our US approach remains straightforward -- focus on remaining being at the low end of the cost curve, and implement smart commercial strategies. This protects us during down markets and maximizes margins during strong conditions.

In Australia, we've increased our output and are taking steps to improve performance at contractor-operated mines. First, we're aggressively managing our agreements to hold contractors to their stated performance standards, and working with them on a detailed basis to improve results.

Second, we're now beginning to transition into the new mining area at Burton, which will increase output later in the year.

And third, we're moving to owner-operator status at mines representing some 40% of our Australian output. This transition will take place in the first half of 2013. It is expected to increase productivity, reduce cost, and improve reliability.

After this is complete, some three-fourths of our Australian production will be Peabody-operated. This accompanies additional production from mines that have recently expanded or received new permits, which will increase productive capacity later this year.

And while we have adjusted our Australian volumes based on our first-half performance, we continue to make progress on a number of our Australian projects. Wilpinjong set a new production record in the second quarter after its recently completed expansion. Millennium Mine is adding met coal volumes as its expansion nears completion in the third quarter of this year.

The Metropolitan Mine modernization is on track, although we've extended the timeline for hard coking coal expansion to 2014 to 2015. This has allowed us to upsize the expansion to 1 million to 1.5 million short tons of added volume.

And at the Middlemount joint venture, production is ramping up. And we received an important environmental permit, allowing the mine to expand to its planned 4 million short tons per year on a 100% basis.

So that's a brief overview of the markets and Peabody. To summarize, we see some signs of global coal demand expanding and US supply/demand fundamentals beginning to balance. At the same time, we continue to be cautious, given European recession; China deceleration; and high stockpiles that persist in the US.

Peabody is not immune to these forces, but we believe we are best positioned to weather larger market challenges. We have moderated our CapEx; extended several mine projects; bought back both bonds and shares; and we continue to invest through the cycle to seize on long-term opportunities.

So with that, Operator, we'd be pleased to answer questions.

(Operator Instructions). Michael Dudas, Sterne, Agee.

Good morning, everybody. First question, you talked -- Peabody is going to have, it looks like, a 5% reduction in production and output in the United States. Looks like the industry is tracking at plus-10%. Given where current strip prices for Illinois and PRB coal is, are you carefully looking at potentially pulling back a little bit more, given where inventories still haven't been yet, and where pricing is today? For 2013, of course.

Yes, as you look at 2013, that's really the question that everybody is looking at. We are very encouraged by the summer burn and the current downward trend in stockpiles, particularly when you look at the stockpile response in the Powder River Basin markets and the Illinois Basin markets, vis-a-vis the East Coast markets. But it is something we're watching very closely. We're just now starting to see customers come back into the marketplace; some for this year, and a few for the out years. We had already adjusted our expectations and our sales position for 2013; 70% to 75% sold at current production rates. We'll have to see how the next 2 to 3 months play out, in terms of inventories and demand, to really be able to have a sense for 2013 volumes. But suffice it to say, we'll look at all of the things relative to adjusting volume, based on what the market needs for 2013.

And, a follow-up on that same volume question for Australia -- so are we -- to look at 2012's performance, is it more operational that's not getting the tonnage to the marketplace? Or are you pulling back because of pricing or demand? And as you look to 2013 for your Australian platform, is this just the limiting of how much Peabody can get these changes in owner-operated mines to get production to the marketplace? Or are you looking at the market for, depending on your quality of coal, to pull back on delivery because of price?

Yes, kind of a multi-point question, maybe; in different points in time, slightly different answer. The volumes that we've reduced in Australia are really the result of underperformance at our contractor-operated mines. And as we looked at the second half of the year, we looked at what opportunities we had to try and make up that volume. Not only would it be very high cost, but we would be looking to, if you will, to force it into the market at a time when the market is moving, but it's not robust. So we decided that we would not try to make up those times this year.

For 2013, all of our production forecast internally that we had, we have not changed on the contractor owner-operated conversions we're already scheduled to complete in the first half of 2013, most in the second quarter. Those are still online, and we have not changed any of our forecast internally for volumes out of Australia for 2013.

Thank you, Greg.

Jim Rollyson, Raymond James.

Good morning, guys. Greg, going back to that owner-operator switchover from contracting -- obviously it's still early, but when you are thinking along the lines of how switching to Peabody-operated mines will play out in terms of efficiencies and cost, et cetera, what kind of benefit do you think you'll get once you are switched over? I think you said up to 75%. But how big a magnitude is that, as you go through the next few quarters?

Yes, well, we're going to see the major impact in 2013 as we complete the changeovers in that latter part of the first half, although we'll start to see some of the incremental benefits in the beginning of -- or, in the first quarter of next year. But you've got benefits from a number of areas. Number one is, you've got a margin that contractors make that you bring internal, and you recapture that cost; number one. Number two, as we've talked before, we're replacing smaller equipment that is normal for contractors to use with larger-class equipment that drives lower manpower for our unit of output, and it drives much higher productivity.

And then, the last piece is, it's all about variability. And one of the things that you've seen is a bit more variability in this Australian platform than we would like to see. You don't see that much operating variability in the US because we run all of our operations. And so, as you make the combination of savings, in terms of the contractor margins; productivity improvements because of upsizing the equipment; labor savings, because you've got lower manpower per unit of output; and reducing variability, all of those things we would expect to begin to see significant improvements through 2013.

Maybe switching gears for my follow-up, you guys usually have a pretty good handle on your view and the outlook for the export market out of the US, which we've been clipping along here at a pretty good pace compared to what most people expected at the beginning of the year. Kind of wondering what you're thinking -- how this plays out for the second half of the year? Where do you think annualized US exports are going to be, just given the softness we've had in the international pricing here in the last couple months or so?

Well, it's always a bit difficult to determine because we don't visibility into how much forward people were contracting some of the international sales. But, suffice it to say, when you look at the thermal pricing in the international marketplace; and you take that back into, say, predominantly the East Coast, those producers are going to see pressure in terms of their margins. And the same thing with met coal, depending on what happens with -- certainly, the mid-quality and lower quality met coals are taking the brunt of market softness right now.

You know, 128 million annualized today, I don't think that's going to -- that wouldn't be hold at that high level. By the end of the year, we're going to be down around 120 million total exports by the end of the year, somewhere in that range.

Great, thanks.

Brian Gamble, Simmons.

I wanted to follow up on something you mentioned in prepared remarks. Mike, I think it was you, you mentioned a mix shift in Australia. Is that limited to Q3? Is that a back-half of 2012 issue? How long does that persist? And maybe you could give us some semblance of what buckets, and the magnitude of change in each one, just to kind of help us out on that shift?

Sure. When you talk about, and you look at the guidance we gave for Q3, relative to what our performance was for Q2, the range is lower. The bulk of that impact is going to be around the production and sales mix. So there's a combination of -- we expect to realize lower thermal pricing in the third quarter. We've had a little bit of shift in mix toward some of the higher ash thermal, so that's going to have an impact on margins.

As we transition at Burton, as we've been discussing, from the current operation into the new operations, that's going to have a quality impact in the third quarter. And then we'll look to see some benefits once we get the full Burton widening project coming on. And then, there is a little bit of carryover pricing; about 0.5 million tons out of 2Q into 3Q. So, all told, that's in the, probably, a $50 million range, as it relates to the third quarter. And we would look to improve from the third quarter going into the fourth quarter.

Do you think the fourth quarter can be back to Q2 levels? Or do you think it's a step change improvement, but maybe not back to Q2?

Well, I mean ultimately, when you look at the full year, we do have a shift to more met tons. We do still have the contributions from the required operations that are at higher costs this year, due to the remediation efforts. So that's going to have an impact on the margins that we have in the fourth quarter as well.

Okay, great.

Some of that -- sorry to stop you -- but part of that impact on that is, we do expect to ramp up in some of the volume on the back half that would mitigate some of that impact.

Okay, that's helpful. And then, Greg, to follow up on one of your answers to Jim's question -- you gave a pretty decent breakdown of the benefits that you guys can expect as you shift over to, essentially, BTU-run mines versus contractor mines. Can we get any sort of quantified data around how much of an impact on either overall costs or overall output that you expect? Is it in the 3% to 5% range? Or are we talking more like 10% or 15%, when BTU runs those mines?

Yes, our view would be, when you roll it all up, our expectations are, it's 15% to 20%. Now, that -- up to a certain degree, offsets other pressures that we're having in the platform, in terms of cost. So net-net, it may be around the 10% overall improvement.

But at the operations themselves, just for those changes, it would be that 15% to 20% gross improvement that would be netted out by inflation and other cost pressures that we have.

I guess I would just -- in all of this discussion here, just provide a little bit more color here. When you look at the contractor operations that we run in Australia -- in the case of our open cut operations at Wambo -- those are our premium, higher-margin, typically higher-margin thermal coal, coming out of New South Wales. And with the Burton and the Millennium operations in Queensland, again, Burton is a premium hard coking coal. So any delay in tons coming out of those operations carry a very high-margin impact with them. And to the extent that a Millennium -- you'll recall, we have a bit of a delay in receiving the expansion permits. And to the extent that contractors' productivities are not where they need to be, then those tons get shifted out in time.

So when you really add those things up, what we're seeing here is a movement out, in terms of getting those operations stabilized, based on the plans that we've had to expand them. And so, volumes are moving out; that's impacting the near quarter. But we still expect to benefit from all of those programs, as we begin in the fourth quarter and then into next year.

Andre Benjamin, Goldman Sachs.

Good morning. Two questions -- first on your discussion of the expansion plans that you are now reevaluating. Do you feel that the reevaluation was more driven by demand or price -- i.e., if the prices stay constant but demand were to pick up, would you feel more comfortable committing to a timeline for those mines to be developed? And how long after you decide on that, could you say that those mines could be developed?

Yes, well we are really talking about two mines; and, maybe, take them one at a time. At our Metropolitan mine in New South Wales, we had a two-phased program there. One was modernization of the surface facilities, and all of that program is on track and in place. And then we had one of the main aspects of that program for expansion was a new drift. And the drift contractor that we had and the drift progress that we were making was falling significantly behind schedule. So we've replaced the contractor, and that's put us at a different time frame for completion. And that's why we've made this decision to lay that project, to make sure that we get the drift down.

Now, the good benefits of that is, we've got an opportunity, now, to do some additional work, particularly underground, that will allow us to upsize the expansion. It was originally going to be a little less than 1 million tons a year. We think when we are complete, a year later, it will be 1.5 million tons a year of hard coking coal. At Codrilla, the issue really was, the more that we did engineering around Codrilla, we realized that we wanted to do some more technical evaluations around not only the near-term mine plan, but also to do some value engineering around the optimization of surface facilities, particularly in relationship to surrounding deposits that might co-use those facilities going forward.

So we took the logical decision that you would take in any market, to just step back and make sure that you've got the engineering right, and the mine plan right, before you begin spending the large amounts of money for mining equipment and everything else. So I guess you would say that the market taking a breath has allowed us not to go at a pace too fast. And I think both of these projects are going to be much stronger, at the end of the day, than maybe they would have been before.

The only other one that we're reevaluating is the Wambo open cut. But that's really an issue of -- with the contractor, issues we're having in Australia. Most likely, that would be one that we would want to do as owner-operated. So that's just a matter of timing, doing a bit more engineering work, and drilling on the surface to make sure we've got the right mine plan for that.

Thank you, that's helpful. For my follow-up, we've heard one of the rails indicate that the PRB burn utilities inventories have peaked, and/or are beginning to improve. How much of the decline in the percentage of your unpriced coal for 2013 was due to new contracting, versus just shifting out some of the volumes for 2012? And then the pricing on the new business, has that been closer to the strip pricing of 10 to 12 that we saw for most of the quarter? Or has it more been more towards the midcycle levels, say 13, 14, or higher?

Yes, well, I would say most of the change in the 2013 contracted volumes was the establishment of this year's production as the base production for 2013. If you look at what we're saying, if we used this year's production as a surrogate for 2013, we're 70% to 75% sold out. We've had our normal price re-openers that we've negotiated during the course of the quarter. Those have a number of different mechanisms; they're baskets, they're indices; there are all types of things that relate to those re-openers in terms of setting price.

We've had some of our business contracts that we renegotiated with some of our customers for this year deferred sometimes into 2013. But that was really only about 4 million tons. Now, in part of those restructurings, we were also able to pick up new business for 2013 to the tune of about 6 million tons in the quarter. So, net-net, I would say the only business that we really booked anew for 2013 in the quarter would have been around the $6 million worth of new business. And because those were all part of contract restructurings, the market pricing at the time really didn't come into play.

Thank you.

Meredith Bandy, BMO Capital Markets.

Hey, guys. Just wondering if I could get an update on couple of ports. First, the agreement you guys signed with Kinder Morgan -- I know you said that takes you to 5 million to 7 million tons in the Gulf. In terms of total export capacity, what are you moving from in the US? Maybe including a little bit through Canada, West Shore, whatever.

Yes, I think this year our estimate will be, we're looking at out about 10 million tons for the year. That's a combination of exports through DTA; some exports through the West Coast. And then. the rest would go out of the Gulf. So this would allow us expanded capacity out of the Gulf. Primary targets for us would be Colorado coals, Illinois Basin coals, and PRB coals, as the market strengthens internationally during the course of the back half of this year and into next year.

So it allows us access to multiple ports in the Gulf. And it allows us the ability to deliver the coal to those ports through multiple methods, whether that's by rail or by barge down the river from the Illinois Basin.

And then, any color on the SSA Marine port?

Well, that port, it's in the permitting phase right now. They are finalizing all the terms to be able to launch the EIS. That's a couple-of-year process. And you get beyond that two-year period of time, to go through the permitting. And then there is about an 18-month to two-year construction period. So we've still got that 4-year window; 3.5, 4-year window of time out in front of us, assuming no major objections due to the permitting process.

All right, thanks.

Shneur Gershuni, UBS.

Hi, good morning, guys. My first question is related to the PCI market. Spreads have widened out some of that blame. Obviously, it could be due to the fact that you've had some striking industrial actions at some specific hard coking coal mines. How do you think about the PCI market going forward? Do we go back to the traditional spread? Or does the moving but not robust market kind of limit that option in the near term?

Well, we think eventually we'll get back to the historical spread, particularly once we start to see economic activity pick up. Right now, the demand for hard coking coal is remaining firm. And, as always in these markets, the lower-quality calls -- particularly the semi-soft, not necessarily the PCI coals, but the semi-soft coking coals -- begin to widen on that differential to hard coking coal. But we see this at strong markets, strengthening markets, and we see those historical differentials returned.

Okay, and my follow-up question is, in your prepared remarks you talked about the share buybacks and some debt being taken in. You also, in some of the earlier questions, talk about potential reevaluation of M&A -- I'm sorry, of CapEx and so forth. At this stage in the game, where your stock is currently trading at and so forth, where does the share buyback rank in your view of where you want to deploy capital in the near-term, relative to the longer-term?

Good question. We continue to put additional deleveraging at the top of our cash list. But share buybacks are probably right behind that. We were able to accomplish of ratio of both in the second quarter. We're going to watch the cash generation during the back half of the year. We'll see where our final capital numbers come out. And we'll opportunistically look at doing the same things during the rest of this year and into 2013. But I would say that we still want to do some more deleveraging, as our first priority; and then we'll continue to watch the share market as a secondary one.

Great, thank you very much, guys.

Timna Tanners, Bank of America.

Yes, hi, good morning. I just really want to explore a little bit more what you're saying in the hard coking coal markets; since I was gratified to see, in your release, that you're getting contracts in line with recent settlements. But it does seem like the spot market has really collapsed or fallen sharply, I guess, in the last couple weeks. Just any of your thoughts on what's causing that? What might cause it to recover? Whether or not some of your other colleagues out there might cut capacity in a bigger way? And anything on the met market, please.

Yes, I think in the last couple of weeks, obviously, the markets -- China determined what it really means out of Australia when BMA indicates that they are coming to closure on some of their labor unrest. And I think people are still trying to sort through -- what does that mean? How quickly can they really begin to return to the market, in terms of production?

I think in terms of -- most people have got contracts that they're still delivering under. To the extent that folks have additional capacity, and are trying to sell that into the spot market, you've got Europe that remains down in terms of any of their steel sector. You've got Korea and Japan, which are not seeing growth right now. China is up about 1% the last quarter, couple of percent in the first quarter. So overall, 1.5% to 2% up on their steel production. So they are lower than we have been historically.

So I think that we liked the fact that we are in a good contracted position on our met coal. And it will take a bit of time, now, to see where the production impacts may or may not come into play, in terms of the current spot market translating into future pricing.

Okay. So, anything specific you're looking for in the fourth quarter, with regard to some of the activity in China; infrastructure bills; or anything on the economic front?

Well, I mean everything that we hear and see is, China is continuing to look at ways to keep their economy going, certainly in that 7.5% to 8.5% GDP range. And infrastructure spend is always a significant component of that. And they've got very, very aggressive plans for (technical difficulty) spending. So the question is, how quickly that translates back into a market impact, particularly in the steel sector.

Thank you.

David Gagliano, Barclays.

Hi. Good morning. I just have a couple of follow-ups related to the -- specifically to the PCI market. First of all, how much PCI -- specifically, PCI coal have you sold thus far in 2012? And what is your target -- within that 13 million to 14 million tons -- what's your target for PCI sales for 2012? That's my first question.

Overall, PCI sales are about 35% to 40% of our overall met volumes out of Australia. Out of the -- we had given you the estimates for the full year out of the new -- what we call PCI mines, which are the former Macarthur properties; and that's in that 4 million to 5 million ton range for the year. We're on track for that kind of a pace. That is primarily low vol PCI coal. And then we also have some PCI coal out at the Millennium Mine.

Okay. And then just, as a follow-up, what prices are you signing your PCI coal for? At least some recent indication, in terms of where the PCI --low vol PCI market is right now for you?

Yes, we're still seeing that as a 72% spread to the high-quality hard coking coal price. And that's, really, five quarters running, it's been in that 72%, 73% kind of a band. You are seeing some discussion out there of widening spreads. But we would point out that PCI and low vol PCI are not the same things. Some people use PCI as a surrogate for semi-soft, which, of course, is always kind of a swing product that can be an upgrade to thermal, as opposed to a discount off of a high quality. That's where some of the US folks tend to be swing suppliers on that. And you're definitely seeing widening spreads, as witnessed by the latest Indian deals, which show major discounts from the US players compared to what we're able to get out of Australia.

Okay -- so, then, I'm sorry. Just one more follow-up, sorry, and then I'll let -- I'll move on to the next person. 4 million to 5 million tons of PCI; 13 million to 14 million in total -- is the balance all high-quality hard coking coal? If not, can you break down the differences there?

Yes, we did about 40% to 50% on the hard coking coal, or the high-quality hard coking coal. And the difference there is, typically, about $5 to $7. And then, the remainder would be the semi-hard product.

Okay. Thanks.

Brandon Blossman, Tudor, Pickering, Holt.

Good morning, gentlemen. Let's see; let's do a couple thermal questions. One, domestically, so you guys are still looking at 100 to 120 tons down year-over-year for US thermal production. Does it give you pause to see the supply response, say, over the last six-plus weeks, given some better coal burns; but that doesn't help inventories, perhaps, as much as you'd like; and, perhaps, puts at jeopardy a good supply response in 2012 and setting up 2013 perhaps not as cleanly as you'd like.

Well, as I said earlier on the call, we're watching the next couple of months very closely. We're seeing stockpiles come down at a record level, certainly in the June timeframe. Temperatures have continued here in July, and we'll see what August and September bring; certainly what August brings. The PRB inventories are coming down very quickly. So I think it will depend on how we come out of the summer season and go into the shoulder seasons -- September and October -- to really determine what inventory levels are, and what 2013 is going to look like. And what, if any, additional response may be needed in terms of the production end of the industry, to make sure that inventories continue to come back down to normal levels.

Yes, certainly July is going like gangbusters from the standpoint of cooling degree days. In a typical July, you get 1 million tons of drawdown on stockpiles every three days. We would certainly hope that it's a larger amount than that that's going on right now, given the weather patterns across the US.

Fair enough. And then, on the seaborne thermal side of things, obviously a pretty loose market over the last three or four months. Demand looks okay, which implies supply is a little bit too much. How do you see that supply trajectory going, say, over the next 12 months or so?

Yes, I think our view is, we're going to see supply tightness. I mean, we've seen a significant amount of thermal coal from the East going into the Atlantic market. At current pricing levels, we think that's going to come off -- start to come off significantly, certainly over the next 12 months. In addition, we've seen amazing growth of volumes out of Indonesia; in fact, higher than we would've projected. Part of it has been, they really have not had any weather impacts. Part of it has been, they've been producing quite well. Our view is that those levels of increases are probably not sustainable. So as the market demand continues, and their rate of growth slows, you start pulling some of the cap tons out of the market; we see the seaborne thermal market tightening to a certain degree. Even, potentially, some of the very high-end cost curve mines out of Australia beginning to cut back as well.

Thank you, that's useful color. I appreciate it, Greg.

Mitesh Thakkar, FBR.

Good morning, everybody. A quick question, just revisiting the domestic thermal coal contracting -- you mentioned you had about 6 million tons of new business. And I know you'd usually don't give up the pricing information. But can you just, directionally, talk about some sort of -- give us some sort of color on the pricing? If you look at the cost structure of -- in PRB, it doesn't make a whole lot of sense to contract the low 12.50, so can you provide additional color around that?

Well, you have to remember that that new business was part of contract restructuring. And as we've always said, when we restructure contracts, we maintain NPV value in those contracts. We're not really going to talk about specific pricing, or where we were relative to the price curve. Suffice it to say, when we restructure a contract, we retain economic value in that contract. And all of those tons were originally contracted at a different time frame.

Okay. Great. I think most of my other questions have been answered. Thank you very much.

Brian Yu, Citi.

Greg, thanks and good morning. Excuse my attempt to parse your earnings release like a [fed] statement. But I noticed that when you had talked about met coal price in Australia, you had the word largely in there. And I'm wondering if that means you are selling some of that coal at a discount. And if any of that just relates to -- there are, perhaps, not enough uptake on the quarterly side, and you are selling them on a monthly basis. If that's the case, what percentage of your volumes are being sold on monthly?

Yes, I guess it's just -- I can't sit here today and say we sold 100% of our coal at the benchmark. So we put in the word largely just to reflect that there is a few customers with quality. The other thing is, we always have to negotiate around the quality differentials that we have in each of our properties, relative to the benchmark. And whether that is North Goonyella, a couple of dollars, whatever it is -- Burton -- there's a different differential. Some of the coal we're producing out of Mavis Downs and Metropolitan; so when we say largely, it's just meant to reflect, essentially -- quality adjusted, we are selling at the benchmark.

Okay. And you were able to place the majority of those tons on a quarterly basis?

Yes, well all of our tons are under framework agreements that have volumes in them on a quarterly basis. So it's really -- once the price changes but the volumes are consistent.

Okay, got it. Great, and that's all I had. Thanks for the clarification.

Lucas Pipes, Brean, Murray, Carret.

Good morning, gentlemen. A quick follow-up question on Q3 guidance -- could of walk us through, again, why exactly prices are expected to come down, given that the benchmark is higher in Q3 versus Q2? And your Australian thermal coal volumes, I believe, are largely contracted at the benchmark earlier this year.

Yes, so, when you look at -- on the thermal coal side, you see prices have come down. On the met coal side, while they've been a bit stronger, there's some mix in there. And as we talked about, with the Burton operation, as we transition to the new Burton widening area, there's going to be a differential in mix that's going to be at a lower average price relative to what we would have typically experienced on the Burton property. So those are the two big items. As I also mentioned, we did have 0.5 million tons of carryover. So that's going to lower our average price on the met side as well.

Yes, I guess maybe just to go into a little more detail -- as we look at third-quarter and we set our targets for the third quarter, I just kind of run down a list of things that we take into consideration. And Mike has hit the bigger ones, in terms of changes in met mix; we do have a move of our longwall at Wambo, which is our highest-margin thermal operation in Australia. We do have the Burton Millennium volumes; the contractor issues at those higher-margin met operations. Mike mentioned the carryover volume, the carbon tax.

We also, in our trading shop, we're conscious of looking forward and seeing what's happening with counterparties and volumes in that particular area. Resource management -- that market is soft. And we don't see changes in the near-term in that market. And then even in the US, we talk about the rest of July and August -- we don't know what that shoulder month of September is going to look like. And we haven't really talked about it. But the lack of rainfall in the Midwest part of the country, the river levels are low. We're starting to see some issues with barging.

And a number of utility customers in the Midwest, because of low water levels in the rivers -- the water temperatures are high, which means their discharge temperatures coming out of their power plants are hotter than they should be. So they're starting to cut back on production for those reasons.

So you start to wrap all of this up, and look at the third quarter; we try and come up with the best estimate we can with these uncertainties, in terms of the range and where we think we're going to be.

Thank you, that's helpful. And on the domestic side, you talked about inventory drawdown in the West. Could you maybe quantify where inventories stand in the West versus the in the East?

Yes, on a days-burned basis, we're probably in the mid-70s on the southern PRB type of days burned. You compare that with Central Appalachia, where you're well over 100 days burned, and that's based on both the fact that there are high stockpiles as well as, obviously, a lower burn this year than typical there. So PRB is definitely better than any of the other basins, from probably by 25% or more.

Chris Haberlin, Davenport.

Hi, good morning. Can you give us an update on the plans for Mongolia, coming off the recent election results there?

Sure. Obviously, Mongolia continues to be a work in progress. We're close to the election. The government is all about trying to establish their coalitions; trying to seat their parliament later in August and in September. And if all of that goes well, we would expect to begin discussions again with the government, latter part of the third quarter and into the fourth quarter. Those discussions, I think, will take a bit of time. So, probably won't see much in terms of movement and clarity until the beginning of 2013.

Okay. And then as my follow-up, can you discuss your exposure to Patriot's bankruptcy? And I know that there's been speculation of potential fraudulent conveyance. Can you just give us your reaction to that?

Yes, sure. I'll make a few points regarding Patriot's reorganization, since you've raised the issue. Understandably, I'll need to limit my remarks due to the bankruptcy proceedings. But, first of all, since we spun Patriot in October of 2007, the world in Patriot has changed significantly. If you've read the Patriot filings -- they say in their own filings with the bankruptcy court, these changes included Patriot's acquisition of Magnum Coal, which had its own substantial assets and liabilities. They made significant changes in their capital structure; they decreased demand for coal, due to sharp declines in natural gas prices and the softening of global steel markets, and more burdensome environmental and other government regulations.

We've consistently stated in our SEC filings that, at the time of the spinoff, we believe that our only exposure materiality was about $150 million of possible black lung liabilities, for which Patriot has primary liability. Patriot indicated, in their filings, that they obtained the right to self-insure those liabilities with the Department of Labor. And they posted $15 million in collateral to secure those obligations. We've got a small number of commercial agreements with Patriot. We believe the exposure under those agreements is immaterial. We'll continue to watch the bankruptcy proceedings. But that's where it stands today.

Okay, thank you very much.

Mark Levin, BB&T Capital Markets.

Thanks, guys. A couple of very quick questions. The first -- just a question with regard for the test for impairment, and how you will approach that with regard to the Macarthur acquisition, given the massive fall in met prices. What are the tests that are applied, and what is the timeframe?

This is Mike. I think when you look at -- when you are referring to met coal price, I'm assuming you're referring to what we've seen in terms of near-term weakness, which is what is not what you use for a whole life-of-mine assessment. So when you look at an acquisition like Macarthur, with a couple of operating locations -- we've got the Middlemount joint venture; we've got significant development properties; we've got ramping up volumes.

You have to take all that into account. We'll look at our long-term price expectations. As we get through the remediation efforts that we're doing on the existing operations, we'll take all that into account. I mean, it's something that -- ultimately it comes down to, what are the cash flows expected to be? And if the cash flows are expected to be higher than what the book value, the assets that you acquired are, then there is no impairment issue.

Okay. And then the second question -- if the world doesn't get better in 2013, let's just say it gets worse, how far could you drive CapEx down if things didn't improve or even got worse?

When you look at, just -- we always put our capital in two different buckets -- sustaining capital and growth capital. We've stated that our sustaining capital is about $1.25 to $1.75 a ton; which, at current production rates, would be $300 million or $400 million. Now, some of the growth CapEx, whether it is owner-operator, some things that we would need to finish. But as it relates to development projects, there are things that could be put on hold temporarily in response to market conditions.

We've taken $200 million off our capital targets for this year. When you look back to what we did in the global financial crisis, we had an even more significant reduction in our capital, which had less growth capital built into that number. So it's something we stay very focused on throughout all the operations. And we're looking at where we can reduce, either -- we'll have some normal deferrals or delays, that we've talked about at our Analyst Day, and also on the call today. So there's some natural push out there. We'll continue to look at other things we may be able to delay.

And even on the sustaining side, we will go operation by operation and say, do you really need that [haul] truck next year? Is there something else that we can -- can we go buy used equipment? Can we put something off until future periods? So it is a primary lever for us. You've seen us use, it in terms of redeploying cash for other things like debt repayment; share repurchases; and it's something we stay very, very focused on.

Is it fair to say, Mike, if the world didn't get better, we could -- it got worse, you could drive CapEx down into the $700 million, $800 million range, if not lower?

Yes, we could drive -- yes, I think it would likely be in that range, maybe a little bit wider range. It's just a question of what you have in the pipeline that needs to be completed. But then we would balance that off against our sustaining capital requirements over the next 12 to 18 months.

Richard Garchitorena, Credit Suisse.

Great, thanks for taking my question. I wanted to, basically, touch on the Macarthur integration. In the past, you've highlighted $60 million to $80 million in annual synergies. Given the issues you've had with the contractor-operated mines, do you still see that as a possible in 2013? And also, and related to that, you did mention that costs were going to be in the high 70s, I think, for the rest of this year. How should we think about costs going into 2013?

Yes, a couple of things on Macarthur -- first, Coppabella is an owner-operated property, and Moorvale had a contractor; and, actually, the contractor performance at Moorvale has been improving quite nicely, as we've put in the improvement programs at both Coppabella and Moorvale. So we're pleased with the progress to date. We've got productivity increases, both with the major equipment in the dragline and truck shovel fleets at Coppabella ahead of where we would have forecast. And the same thing in Moorvale.

We've got additional work to do as we restructure those operations. We are just now mobilizing the equipment and the people to make major additional inroads in the overburden removal that we needed to do at Coppabella. That will be built through the back half of this year. Obviously, that will flow through our costs for the back half of the year. And then we're doing some additional -- doing a bit of capital investment at Moorvale prep plant to improved the yields. We'll see that improvement flow through next year.

But I think, overall, our synergy values -- we feel good about where we are at. We're targeting ahead of where we thought we would be at this point in time. And the long-term synergies that we had forecast as part of the acquisition -- that $750 million to $1 billion of NPV synergy value -- we see that, today, same as we did when we made the acquisition.

Thank you.

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

Okay. Well thanks, Operator. And I obviously appreciate everyone's interest on the call today. I want to thank the Peabody team for its continued focus on safe, low-cost operations, and the commercial excellence they continue to show as we succeed in these uncertain markets. The global market conditions and world economies are clearly challenging. But we believe our platform is well-positioned to succeed, both in the near-term and the long-term. I look forward to keeping you updated on our progress. And thanks again for your interest.

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