Peabody Energy Corp (BTU) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Peabody Energy fourth 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. I will now turn the conference over to the Senior Vice President, Investor Relations and Corporate Communications, Mr. Vic Svec.

Think you John, and good morning everyone. Thanks very much for taking part in the conference calls for BTU. With this today are Chairman and CEO, Greg Boyce, and Executive Vice President and Chief Financial Officer, Mike Crews. 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. We also refer you to peabodyenergy.com for additional information. With that, I will now turn the call over to Mike.

Thanks Vic, and good morning everyone. Peabody delivered record safety results and global revenues in 2012, and achieved other notable accomplishments, including record adjusted EBITDA in the US and our highest Australia volumes to-date. This solid operating performance reflects the strength of our platform in the face of significant declines in pricing and US coal demand. I will begin by discussing our 2012 results, and then provide a review of our outlook.

Revenues grew 2% in 2012 to reach a new high of $8.1 billion. This was driven by sharply higher volumes in Australia that more than offset seaborne price declines, as well as an increase in US realizations that overcame a 10 million ton decline in shipments. Total shipments of 248.5 million tons were in line with prior year volumes. 2012 adjusted EBITDA totaled $1.84 billion. Contribution from US mining operations rose 8% to $1.26 billion, due to margin expansion, despite challenging markets. Australia contributions of $939 million were impacted by more than $430 million of price declines compared to the prior year.

Trading and Brokerage results totaled $120 million for the year, declining on lower realizations on export volumes, reduced mark-to-market earnings, and the roll-off of structure transactions. So looking at additional detail within our supplemental schedules, US volumes declined 5% from the prior year, due to lower customer demand and contract deferrals. US revenues per ton rose 7% on higher realizations in both regions, where we benefited from entering the year fully contracted. Cost per ton increase less than 4%, and were primarily due to lower shipments and higher royalties.

These results lead to a 13% increase in average US margins per ton. In Australia, volumes increased 30% to 33 million tons, benefiting from a full year of production from acquired operations, as well as the expanded Wilpinjong and Millennium mines. Australian revenues declined 13% to $106 per short ton in 2012, due to lower realizations for both metallurgical and thermal coal. During the year, we shipped 14.1 million tons of met coal at an average price of $156 per short ton, and we sold 12.2 million tons of seaborne thermal coal at an average price of $96 per short ton. Australian costs average $78 per ton for the full year, on par with targets. We held the line well on costs, limiting the increase to just 4%.

So that's a quick review of operational results that drove our adjusted EBITDA contributions for the year. Our financial results were further impacted by the results of an impairment review, which was driven by the significant changes we saw in the global markets this year. These additional factors led to a consolidated loss from continuing operations of $471 million, or $1.80 per diluted share. Results include $3.88 per share in after-tax impairment and mine closure costs, tax valuation allowance adjustments in Australia, and impacts from the re-measurements of taxes. I will walk through each of these items in more detail, which are outlined in the table and footnotes on page 2 of our release.

Starting first with the impairment and mine closure charges. The global commodity slowdown in 2012 impacted valuations across many different asset classes, and the coal space was no exception. Our review of asset values in the fourth quarter reflected the significant price declines experienced in the second half of the year, which included net settlements 50% lower than the highest seen in 2011. The impact was further compounded by an Australian dollar that remained persistently strong through the downturn, along with new taxes and royalty rates. This resulted in pretax non-cash write-downs of approximately $800 million related to Australian operating assets.

Now, by way of comparison, the pretax write-downs associated with our Australian portfolio comprised less than 10% of the total investments we've made in the segment since 2004. And the portion related to our 2011 acquisition represents about 7% of the purchase price. We also incurred $77 million of charges related to other nonoperating assets, and recorded $45 million of mine closure costs associated with the previously announced Willow Lake mine closure. These combined charges totaled $2.61 per share after tax. You'll also note that the re-measurement expense on foreign income tax accounts totaled $8 million for the year, or $0.03 per share. These items are excluded from adjusted EPS of $0.84 for the year.

Now adjusted EPS includes $1.24 per share of income tax expense, primarily related to valuation allowance adjustments, as we'll see an footnote 1 to that table. The same factors evaluated in impairment testing must also be considered when determining recoverability of deferred tax assets. The charges primarily relate to valuation allowances for net operating loss carry-forwards, and have no impact on cash taxes.

If you look at the fourth quarter on this same basis, our adjusted loss per share of $1.12 includes $1.48 of these same tax charges, with the difference in the fourth quarter and the full-year charge on taxes being the benefit of the valuation allowance changes we've recorded in the second quarter. Despite these charges, we remain confident in the long-term growth of the Pacific seaborne market and our positioning to serve these needs.

So that's a review of our income statement and key earnings drivers. We also generated strong operating cash flows of $1.5 billion in 2012, enabling us to pay down debt of $416 million. We took prudent steps in the fourth quarter to increase our financial flexibility and expand our maximum leverage ratio covenant through 2014, and we remain focused on reducing debt levels in the coming year. Capital expenditures for the year totaled $997 million, and we reduced 2013 targets by approximately 50% to $450 million to $550 million. Primarily aimed at sustaining capital as well as completion of the owner-operator conversions in Australia. We closed the year with nearly $560 million of cash on hand and liquidity of $2.2 billion.

I will close with a review of our outlook. For the first quarter, we are targeting adjusted EBITDA of $200 million to $270 million, and adjusted diluted loss per share of $0.26 to $0.04. These changes reflect lower realized metallurgical coal pricing, higher Australia costs, impacted by the timing of additional overburden removal, startup costs associated with the owner-operator transition, and a higher met coal mix, and reduced US shipments, as well as lower realized pricing in the US, due to the expiration of higher priced contracts. I also refer you to our Reg G schedule in the release for additional details regarding DD&A, taxes, and other line items.

For the full year of 2013, we are targeting US volumes of 180 million to 190 million tons and Australia sales of 33 million to 36 million tons, including 15 million to 16 million tons of met volumes, 11 million to 12 million tons of seaborne thermal volumes, with the remaining from domestic contracts. With Trading and Brokerage, Peabody's total 2013 sales are expected to be in 230 million to 250 million ton range. We expect results to improve after the first quarter, based on increasing Australia sales and margins. We are targeting full-year Australia costs in the low $80s per ton range, which will be impacted by a higher met mix and external pressures, including a full year of the carbon tax.

In the US, we are targeting average revenues per ton to be 5% to 10% lower than 2012, and costs largely in line with last year. Trading and Brokerage results are likely to be lower than 2012, due to expectations for lower margin business and reduce volatility. Full-year depreciation, depletion, and activation levels are now expected to be approximately 10% higher than 2012. We expect improvement in corporate SG&A as a result of our cost containment activities. So that's a brief review of our 2012 performance and outlook. For a discussion of the coal markets and other updates, I will now turn the call over to Greg.

Thanks Mike, and good morning everyone. It's clear that 2012 was the year that saw solid achievements by Peabody in the face of extraordinary industry pressures. It's a credit to the team that we were able to set new marks for safety, deliver record US results, reach another new high for Australian volumes, integrate our newly acquired assets, and achieve strong cost containment across the US and Australia platforms. I'd like to start with a market overview, and then focus on Peabody's top priorities for 2013.

Global coal markets were heavily impacted in 2012 by a slowdown in China's growth, persistent weakness in European economies, record low natural gas prices in the US, and increased supply from a number of coal exporting countries. The weakness in global economies is still evident, but we have seen good indications recently that the China economy is accelerating, US gas prices have improved, and production responses are helping to rebalance global market fundamentals. Looking closing at metallurgical coal markets, stock prices for high quality, hard coking coal have risen nearly 20% off the lows seen in September, and are now trading higher than quarterly contract settlement prices for the first time in six months.

Also lowball PCI prices continue to show strength relative to the high quality product. Following 2012's modest 1% growth in global steel production, the World Steel Association is forecasting a 3% increase this year, resulting in growth in seaborne metallurgical demand. This will be led by China, where recent data indicate the economy has again accelerated. Fourth quarter GDP grew from the third quarter, and again approached 8%. December steel production grew 8%, and PMI data rose to a two-year high. China's net metallurgical coal imports rose 27% in 2012 to a record 52 million tons, and we expect China to continue to access the seaborne market for its growing met coal needs.

In the seaborne thermal markets, a number of key importing countries continue to show strong increases in demand. Frigid temperatures in both China and India lead to strong increases in coal generation and December coal imports. In China, rising coal generation drilled a sharp reduction in utility stockpiles, and capped a record year for thermal imports that rose nearly 35% over 2011. Icy conditions currently in China's northern Bohai Bay are impacting domestic coal shipments, further increasing the need for greater imports into the South.

India's coal generation rose 13% in 2012, leading to a 23% increase in imports. We would expect a growing reliance on imports to help satisfy India's continued buildout to meet its energy needs. Japan and Europe also increased thermal coal imports in 2012, as coal continued to substitute for declining nuclear generation, and as international gas prices remain high. We expect to see burn thermal coal demand to grow in 2013 in excess of 40 million tons. We look for approximately 75-gigawatts of new coal-fueled generation to come online globally in 2013, which will require another 250 million tons annually at full capacity.

On the supply side, we continue to see curtailments at higher cost mines in both met and thermal production coming from exporting countries including the US, Indonesia, Australia, Canada, and Mongolia. The current challenges of the wet season in Indonesia and Australia, strikes in several locations, and port issues all are a reminder that ultimate met and thermal coal shipments generally run at a healthy discount to nameplate capacities.

Now turning to the US markets, we saw US coal demand began to rebound in the second half of the year. Coal generation declined 13% for the year, recovering from the 20% decline in the first half as natural gas prices rose sharply in the second half. In fact, US coal generation actually increased year-over-year in the fourth quarter. US coal production declined an estimated 70 million tons in 2012. In 2013, we expect an improved supply/demand balance as stockpiles normalize, led by a 40 million to 60 million ton increase in US coal use. We expect US met and thermal coal exports to fall from 2012, due to current pricing in the seaborne market. Based on producer announcements and early trends we are seeing so far this year, we would expect US production to continue to decline in 2013.

Now, turning to Peabody. A year ago I noted that we had four primary focus areas. In spite of a challenging year in the markets, I'm pleased to say we've made significant progress on all four areas in 2012. At operational excellence, we set a new marks with safety, with incidents down 9% from our prior year record. We held the line on cost, despite lower US volumes and inflationary pressures in Australia. We successfully integrated MacArthur acquisition into our Australian platform, elevating them to Peabody standards.

We improved productivity by 36% at Coppabella and 25% at Moorvale. We implemented new mine plans, widened benches, introduced double-sided loading. We increase product blending, and put into place processing and coal recovery programs. We also completed several late-stage organic growth projects, realizing increased volumes in 2012 from the Millennium and Wilpinjong expansions, and finishing the Burden extension project. Finally, we strengthened the balance sheet. Mike noted our repayment of more than $400 million in debt, generation of significant cash flows, and completion of 2012 with a strong cash position. That concludes a busy 2012.

Looking to 2013, the Peabody team again has four primary focus areas. First, we continually target operational excellence in safety, productivity, and production. We continue to advance a deep culture of process improvement across the business, and recognize that the road to achieving our financial targets begins by optimizing safety and production at each operation. Second, we have a relentless focus on driving out cost and capital at all levels of the organization. Allocating capital in a fast-paced industry with long-lived asset, but rapidly changing prices, is among the most challenging decisions any resource company faces, and we continue to emphasize a rigorous returns-based approach to this process.

Third on our list is to maximize cash flow to pursue debt reduction. Peabody also continues to target opportunities to monetize selected assets to advance debt reduction in 2013. And fourth, is the position Peabody to benefit from the eventual market recovery. This includes completing late stage monetization projects, as well as the owner-operator conversions in Australia. While stewarding capital in the near term, our resource-base trading platform, infrastructure actions, and pipeline of future products in multiple regions all put Peabody in an excellent position to have both volume and price improvements when market strengthen.

The owner-operator conversions at Wilpinjong and Millenium, the top coal caving at North Goonyella, and the modernization in our Metropolitan mine all provide a solid blend of cost control, increased volume, and a higher mix of metallurgical coal. So with that review of the global market conditions and Peabody's primary focus areas for the new year, Operator, we will be happy to take questions at this time.

Certainly.

(Operator Instructions)

Just as a reminder, if you could please limit yourself to one question and one follow-up. First on the line is Shneur Gershuni with UBS.

Hi, good morning, guys. Just before I start my questions, I was just hoping to get one clarification. There are a lot of moving parts in today's press release. I understand you got to report on a GAAP basis and so forth. When we think about it from an apples-to-apples basis, on an operating EPS basis Q3 versus Q4, and then you have the $1.48 impact. I kind of end up with about a $0.36 estimate for 4Q kind of on an apples-to-apples basis for ongoing EPS. Is that a fair way to think about this quarter?

Yes, I think that's a fair way to look at it, based on the way you would have been modeling. You would not have included any of these asset impairment or mine closure costs, or these valuation allowance adjustments. So that math seems reasonable.

Great.

On a going basis.

Cool. Just two quick questions here. Overall, you're guiding into the low $80s for cost for 2013 in Australia. Kind of the shape of the curve is that you are expecting costs to improve kind of throughout the year as you shift to owner-operator, so forth. Is there kind of a target, a year-end target, or a zip code kind of where you'd kind expect to end up by the end of the year? Is it still in the $80s, is it in the high $70s and so forth? I was wondering if you could give us a little bit more color on the cost shape for this year for Australia.

Yes. Well, in the release what we talked about, and for our guidance, we are targeting low $80 per ton range for the year. I recognize there is a bit of a range there around what low $80s constitutes. As you think about the first quarter, some of the guidance we gave in December and some of the color that we've talked about are the additional overburden removal that we need to do. Some of that's just the timing of overburden removal at Wilpinjong, and in the case of Eagle Field that we talked about it in this summer is actually moving to a new mining area. When you look at some of that, you look at where we think volumes are going to be. That's going to drive a portion of the cost of the first quarter a bit higher, but then we expect that to improve over time. By the time you get to the full year basis, you could be a little lower in that low $80s range.

Great. And then just one follow-up question. Greg, you had mentioned an interest in disposing of some assets and so forth in the focus on the balance sheet. You did purchase some debt in shares in 2012. You've got a fairly low CapEx forecast for '13, and if you are kind of expecting things to improve in 2Q and 3Q and 4Q, would expect you to have free cash flow and so forth. Do you need asset sales to execute a reduction in debt, or do you see or forecast being able to use some of your free cash flow to purchase some debt, and maybe even consider some shares as well, too?

Well, I think right now we're pursuing a combination of both tracks, Shneur. Obviously any excess cash flow that we generate, and we believe we will, we will use that for -- focus more on debt reduction in the current time frame. But we also believe that we do have a suite of selected assets that could be monetized, and we would use those proceeds, initially for debt reduction, and then depending on how much progress we make on our debt reduction, we would look at other uses for that cash.

Great. Thank you very much. I will jump back in the queue.

Our next question is from Michael Dudas with Sterne, Agee. Please go ahead.

Good morning, gentlemen.

Good morning, Michael.

Greg, you mentioned in your prepared remarks you expect to see the balance in the US improve as we see further production cutbacks. Could you share maybe a little bit more detail on how you are seeing, on the global thermal and met side, production decisions by competitors out of Australia, Indonesia, Mongolia on the met side, and add Columbia for on the thermal side.

Sure. Well, I mean, obviously I can't really talk to what goes on behind their decision-making process, but just the observations that we would have in the marketplace. You can certainly see that when met coal prices got to the point where they are in the first quarter, whether it was disputes in Mongolia, whether it was reduced production out of Australia, whether it was the US exports coming down significantly out of the East Coast, we started to see increased supply response based on that level of pricing, which obviously we think is a good indicator of that pricing will need to go up in order to sustain things. That is on the met side.

I mean, on the thermal side, again, you saw a reduction in the East Coast exports. We saw a fairly large number of Australian reductions, particularly from the higher cost section of the Australian framework. And even to a certain degree, some of the Indonesian producers struggling a bit. Again, when you start looking at what price it got down in the seaborne market, in the fourth quarter on a spot basis, and that was starting to take production off. Again, that gives us some confidence going forward that we will see the type of price recovery through the year that we would like to see.

My follow-up, Greg, would be in the news recently we've seen a major mining company reassess their opportunities for mining coal in Mozambique. We are hearing some issues that you talk about disputes in Mongolia, et cetera. Could you address those on where new or expanded opportunities in those countries may be in the stage? Has it been delayed a few years because of what's been happening in the marketplace and also on the government side? Is there any more thoughts on your participation in Taven, and how that process is moving forth throughout 2013? Thanks.

Okay. Well, maybe just talk about Mongolia for a minute in terms of our involvement there. Obviously, we still are involved in Mongolia. We are still involved in discussions around Taven Tolgoi, we are still involved in discussions with the government as they begin to look at their mining laws to try and come up with a framework that makes sense on a go-forward basis. When the markets, the full steam came out of the markets that gave everybody an opportunity to step back and look at these new projects and say, what's the timing, what's the way to generate value, when's the right point in time when you would start developing and bringing new product into the marketplace? In the case of Mongolia, it gave them a chance to step back and say, we want to take a look at the right mining law framework.

We are still positive in the long term. We have always tried to indicate cautiousness in the near term in terms of any timing expectations. I think when you add up Mozambique, when you add up Mongolia, when you look at some of these other frontier areas, it just points to the inherent value of the operation and the Australian platform that we have, because we know we can mine those coals and get them to market. The concept that all of a sudden the market is going to be oversupplied with high quality hard met coal from all of these frontier areas, I think we are seeing is just not a case. It's not easy to turn this stuff on and produce it. Therefore, it bodes well for those that have it in their portfolio and can produce it and bring it to market, even if you have to pay a little higher relative to you tax out of Australia, it's still the right zip code to be producing high-quality met coal.

Thanks, Greg.

The next question is from Meredith Bandy with BMO Capital Markets. Go ahead.

Good morning and congratulations on the quarter. I wanted to ask, first, if we could, just maybe for Greg, pull back and look at the long-term growth project. I know a lot of these projects are deferred, but what is the current sort of priority among the growth projects? Also, what are you thinking about for the former MacArthur assets now?

Yes. I think if you look at -- you almost have to look at our portfolio of projects and say that the priorities, when the markets return, would be in reverse order of the ones that we took off. Obviously, the Codrilla project in Australia would be very high on our list to look at what we could do to advance that project. That's obviously a PCI call. And then in addition, we've got in the US, we've got one or two projects. Gateway North at our Stage Creek project in Colorado, that at the right time, when the market requires it, both would come forward.

So it's almost in reverse order. Now, following on that, if you are looking at, particularly at our Australian platform with the MacArthur assets, we've picked up a very large reserve and resource-based there. We've continue to do drilling during these periods of time. We are firming up and finding that we've got a much better set of assets than we originally anticipated. So over the longer term, you will see more and more projects out of the Queensland area for us as the markets [begin] demand more coal.

As a follow-up to that on the MacArthur assets, there's a report out that there has been some flooding in the former MacArthur mines. Is that correct, and do you know the extent? I know it's probably not as bad as we've seen the last few times.

Sure. Well, I will tell everybody that news on flooding impacts is coming in in real-time out of Australia. I will try to give you a bit of summary of what I know as of now. Middlemount, which was a MacArthur asset, which is jointly owned by ourselves and Yancoal. Yancoal put out an announcement day before yesterday, yesterday, indicating that the Middlemount mine was impacted by flooding from a recent cyclone. They are still assessing how long it will take to get that mine back into production. They are talking several weeks or more for that to occur. Again, that number is moving around because they are still evaluating on-site. In terms of our legacy operations, we have got -- all of them receive rainfall. The cyclone moved from Queensland all the way down through New South Wales. We are assessing impacts we may have at Burton and at Wilkie Creek, which of course we account in disc ops because of the sale process.

The rail systems that were most impacted were the rail systems in Queensland that flow through the Gladstone Port. The good news for us is that we don't ship through the Gladstone Port, so the rest of our rail network is essentially open. It's a matter of us assessing now any of those two particular operations, and then working with the folks at Middlemount in terms of that timing. All of that said is there has been impacts across Queensland and New South Wales. We don't have a full answer at this point in time. We are still assessing the impacts. The numbers that we have given for the quarter don't assume unusual impacts from rain events. We always build in a few days of rain. But to the extent that there is a material impact or any material change, we will have to notify everybody once we get a full assessment of the impacts.

All right. Thank you. Very helpful.

Then we'll go to David Gugliotta with Barclays. Please go ahead.

Hi, a couple quick questions. First, the $200 million to $270 million EBITDA range for Q1That's a pretty wide range. I'm wondering what's behind such a wide range, given, I'm assuming, that you've got Q1 met locked in at this point.

Well, I think it's a couple of things. I mean, obviously, there's shipping variability in every quarter. We always provide in that particular range. And then it's just normal operating variability. I mean, I don't think that range is particularly wider than historical range, Dave, for any particular quarter. So I think that's pretty much where it stands.

Okay. I guess to clarify the question. Is the main metric between the low and the high, then, cost, volume, or price assumptions?

Well, most of it would be on volume, and then to a certain degree on cost, which flows out of whatever the final volume numbers are. Very little on price, given that we've got a high sales position in the US, price position in the US, and the price for the Australia met and thermal coals are priced for the quarter. It's less on price and more on operating variability and volume variability and shipping variability.

And to a lower extent, we were targeting -- or lower volume out of the US platform too. So there could be some volume component with the US as well.

Okay. Just to move on, I was wondering if you could just give us a quick update on the permitting process for the export facility out in Washington.

Well, essentially, it's in the public comment period. For the EIS, that's going to run its course. Probably has at least close to another 12 months' timeframe for that. And then it's going to be what comes through the EIS in terms of permitting requirements prior to the time that any construction begins. It's essentially on the same kind of a schedule we've talked about before. There's nothing really new to add, and no changes to that timeframe.

Okay. And then just the last question, real quick. Longer term, obviously quite a bit of talk out of the Administration recently regarding carbon, again. I was wondering, seeing some numbers that are fairly high on some of the targeted emission reductions, fairly high in terms of the incremental impact on coal demand by 2020. I've seen some numbers as high as 200 million tons of incremental demand destruction in coal. Seems pretty high. I was wondering if you could comment on the recent talk out of Washington, and if 200 million tons seems a bit aggressive by 2020.

Well, it'll be no surprise my view is I think that is unrealistically aggressive in terms of the ability to scale back coal generation here in the US I mean, in all of our longer term forecasts, we've always had natural retirements and environmental regulatory required requirements within the coal fleet. The concept that plants are going to be closed prematurely in order to meet artificial carbon targets, I think we don't think that that's going to be the future because we don't see how you make up for that volume of coal generation loss in that short period of time. I think in summary it is, we are comfortable with the forecast that we have for retirements within the generation fleet, and both 2020, I think there's going to have to be a more reasonable glide path, if anybody's really look at hard carbon numbers, which I'm not convinced that we are going to see at this point in time.

Dave, one of the things that are lost in a lot of these analyses are the fact that the US coal fleet only was running about 55% utilization last year. So upside to that is significant over time. You will continue to see some of these smaller plants retire, but the larger plants are receiving those major capital investments for all of the latest control technologies. Once they do, we will run at good utilization rates.

Okay, great. Thanks very much.

Ladies and gentlemen, just a quick reminder, if you would limit yourself to one question and one follow-up. We'll Paul Forward with Stifel. Please go ahead.

Thanks, good morning. I wanted to ask on your Australia volume guidance for 2013, 33 million to 36 million tons. You just had a quarter in which your sales run rate was around a 39 million ton rate, if you were too annualized that fourth quarter number. Obviously, there weather issues that reminding us you can't annualized one quarter. The capacity is definitely there. I was just wondering if you would look at the 39 million ton run rate for sales that you have in the fourth quarter and compare that to your expected run rate of 33 million to 36 million for the full year '13. What changes to the mix, or whatever else is going to drive a lower rate of sales in '13 compared to what you just did?

Okay. Thanks, Paul. A couple things, I guess. We moved a lot of material that was in stockpile in the fourth quarter of last year, so our sales run rate was higher than our production run rate, number one. Number two, when you start looking at -- you've got a certain amount of physical mining capacity. We've already talked about in the first quarter of this year, we've got to move, at Wilpinjong, some higher levels of overburden. That will reduce the capacity at Wilpinjong through the year, which was one of our big generators.

And then we do have a couple of long wall moves during the course of this year in Australia at are underground, big underground operations, which will impact our production capacity a little bit as well. So when you look at it, you really can't take fourth quarter and fully annualize it. I think the range that we have in there is the range that we see going forward. Obviously, we always look to do better than that, if the market will take it. I think hopefully, those have given you some data points as to why we think the range is reasonable vis-a-vis what we did in the second half of last year.

Great, thanks. Also, as far as your guidance goes for US average pricing down 5% to 10% in 2013, can you give us a little sense of, when looking at that range, how much of that is a result of a mix shift back toward PRB sales from '12 into '13? And how much of that is within each region you've got contract expirations at higher prices, and so you'll have within each region any price decline? So mix versus region-specific price declines?

Yes, this is Mike. On a revenue perspective, it's really more of the roll-off of some of these contracts that we've seen in prior periods that's driving it more than mix.

Okay. Thanks.

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

Good morning, gentlemen.

Good morning.

First of all, congratulations on the quarter. My first question is, can you update a little bit about the Wilkie Creek sale process? Or any other non-core asset sales which you are looking at?

Sure. I mean, we still have an active sale process for Wilkie Creek. We have a number of interested parties that we are working through negotiations. It's a process that's taking a bit longer than we would have expected. I think some of that is people just trying to get their head around some uncertainty in the market, but we still a good interest in those assets. When we have some additional information, we will be able to provide that at that time. Then at the same time, we continue to look at other items within the portfolio that it may make sense for us to look to try to monetize for debt reduction. Then again, on that one, if something comes up that's significant, we would provide some additional information, or we'd provide it on the next quarter call.

Okay, great. And just a little clarification. Can you give us a sense of kind of a cost bridge? Because your fourth quarter Australian cost looks like it's in the low- to mid-$70s range. For the first quarter, given your full year target, it looks that is going to be in the high $80s kind of range. If I look at the carbon tax and other sort of large increases and those things, those should remain similar, I think. Can you give us some sense of various buckets, or connect that bridge bit for us a little bit?

Sure. We had good performance in the fourth quarter. When you look at the first quarter, some of the items that are an impact at. Recall that we said for the full year, low $80s per cost per ton, not high, and then we'd may be more heavily weighted toward that range in the first quarter. What's impacting that, some of these overburden removal costs, some transition costs associated with owner-operator, but then one of the bigger items as it relates to the quarter and the year is just a higher mix of met coal in the portfolio shipments relative to thermal coal.

But that item would be full year item too, right, you'll see the higher met coal in the full year as well?

That's right, too. On a full-year basis, the big drivers of the rising costs are going to be the mix impact of more met coal, and then some of that more focused on some of the higher cost production within the met portfolio, and then also we have the impact of carbon tax, which we estimated at $1 to $2 per ton for the year.

Hi, Mitesh, this is Greg. For the first quarter, it's a mix issue as well, because Wilpinjong is where we've got a mine through this high strip ratio area that lowers their production volume, increases their costs. Given that that's our largest lowest cost operation, any changes there reduce their low cost averaging tonnage and [toffs] at the higher cost met coal mix that we're going to get. So it's both a cost and a volume mix issue for the first quarter, as well as for the year.

Great. Thank you. This is great color, guys.

Our next question is from Andre Benjamin with Goldman Sachs. Please go ahead.

Thank you, good morning.

Good morning.

First question. You got it around 180 million to 190 million tons in the US versus 193 million this year and flat costs. I wondering if you could provide a little more color on how you're thinking about volumes and costs across the different regions, particularly the PRB versus sale and [libation]. Try to think through coal-to-gas reversal impact and more normal weather on the PRB versus the closure of some of your higher cost operation in the Illinois Basin.

Well, I think you just starting in the Illinois basin. Obviously, we've closed the Willow Lake mine, and their quality which had a little bit of tonnage in the early part of last year. So you are going to see a natural reduction from the closure of those two operations in the Illinois Basin. In our Colorado operations, the export business has not been quite as strong as it had been. So we will see a slight reduction in our Colorado platform. The rest of it is out of the Powder River basin, although we continue to optimize our production out of the PRB between North Hanover, Shell, Caballo, and Rawhide. But I think those are generally the three areas that account for that slight reduction in 2013.

And then to keep beating on the Australian cost question, a follow-up on [Shinel] Miitesh's question. I wanted to know, given the overburden and the start-up costs do seem to be having a pretty big impact on the first quarter, would you argue it may be too aggressive to especially model something below that $80 a ton by the end of the year as more of a normalized starting point to get to the low $80s for the average for the year? Just trying to figure out what the right starting point is to get beyond the first half of the year.

Well, I mean, we said it was going to be, what I said we would be in the low $80s for the year. I said we would be at the higher end of the low $80s number for the first quarter.

I mean, remember, part of the costs we are absorbing here in the first half of the year is the impacts of the Queensland royalties which went into effect in the second half of last year, as well as a full year of the carbon tax. So all of those need to be layered in. Again, when you look at the differential between the fourth quarter of last year and the first quarter of this year, they are really operational and mix driven. To the extent that we are going to be above that average for the year in the first quarter, and by the end of the year slightly below it to make up for it, that's a reasonable way to model it. Exact numbers, we don't normally provide.

Thank you.

Your next question is from Brian Yu with Citi. Please go ahead.

Great, thanks. Greg, Looking the (inaudible) you said that you're expecting US thermal coal demand to go up by 40-some odd million tons, 40 million to 60 million. How do you see that being split out in the various regions, and is that baked into your volume guidance for this year?

It is a factor in our volume guidance for the year. Of course, you have to remember that we are predicting the burn to go up 40 million to 60 million. That doesn't mean supplies or production is going to go up that much. We are still working off inventories through the course of the year. But most of that is going to be, obviously, Powder River and MLI Basin burn, based on where you look at the full review on gas pricing. Very little of it probably is going to help the Eastern markets because of their higher hurdle rate in terms of gas pricing to be competitive. So it's going to be Illinois Basin and Powder River Basin coals that will be more rebalanced as the inventories come down as those burns increase.

Okay. The second question is, with the Australian domestic thermal sales, that's about 7 million to 8 million tons. With costs going up, how will pricing on the long-term contracts looking? Are you guys going to recover your costs escalation? When do those start expire, where many of the economics start to improve for you guys?

Yes. I mean, all I can tell you on the domestic contracts is we don't have any concerns that we will be able to maintain a margin in those contracts.

Okay. Thank you.

We will go to Dave Martin with Deutsche Bank. Please go ahead. Dave Martin, your line is open. Please go ahead.

Sorry about that. Thank you. I had a couple quick follow-ups, hopefully. The first comes back to the outlook statement on the first quarter. If I were to assume that Australian volumes were somewhere between 6 and 8 million tons in the first quarter, with much of the sequential to climb coming from the thermal market, is that about right?

Well, we are going to be down a little bit on met and thermal both in the first quarter.

Okay. Then secondly, on costs. I know you have given some directional movement in each year, major regions, but, Mike, I think in your prepared remarks you added a comment about cost containment and lower SG&A, which I believe would be outside of your operating costs comments. What should we expect for SG&A savings in the year?

Yes. So we've undertook that cost containment exercise across the board at the end of last year at that point that we said we were targeting $100 million, 30% of which related to SG&A. The SG&A component, that is still the target that we are going into this year with. So with the rest reflected, the other 70% reflected in the operating costs, which is why we feel like we can hold the line on costs domestically, even on top of escalations, lower volume, mix changes of that nature. Those are the activities we've undertaken to reduce cost, both on the operating and on the SG&A side.

Okay. Thank you.

You're welcome.

Our next question's from Timna Tanners with Bank of America, Merrill Lynch. Please go ahead.

Yes, Thanks for taking my questions. Just two things I wanted to follow up on. One was if you could give us any further detail on the rationale behind the write-down. Obviously, you point out that it's just 7% of the MacArthur acquisition, but it's a pretty recent acquisition. So we are just wondering how much was the acquisition, how much was the coal price? If you can talk us through a little bit of that, please.

Yes. Some of this I alluded to in my remarks, and a lot of this is accounting-driven. As you look at this, you look at your existing operations, what your performance has been for the year, what your outlook is as you undertake the budgetary process, also your life-of-mine reviews. You have to take into the account that. Your near-term outlook, and your long-term outlook. Well, we all know what happened with the near-term outlook. You've seen what's happened with met coal pricing.

At the same time, traditionally what you've seen is as the coal pricing came down, the A dollar, you got a bit of a relief on the cost side. That has not taken place. If you start to have some indicators of [apparent] under the accounting rules, you need to undertake this exercise, which is what we needed to do this year. It's not really an elective process. It's an update of your portfolio analysis, your projected margins, your projected cash flows, and your market outlook. That's what led us to take the impairment charges that we had on the operating assets.

Okay. I guess I will use my follow-up just to clarify that, because it seems to me like if coal prices continue here, the Aussie dollar strengthens, is it possible you take more impairments as you conduct this exercise, as you say a mandatory exercise, next year? Or if you think this is a final point, or how do you look at this going forward?

Well, it's something that's subject to market conditions at any point in time. What we have said is that the impairment analysis that we did reflects our market outlook. The other thing that we've said at the same time is, we think we are hopefully in a trough in terms of where we are on market pricing. We're expecting increasing earnings going forward. You think about the economic conditions you have, whether it's in Europe, what we saw previously in Asia, in the domestic markets. There's been a significant confluence of events that are depressing the outlooks that you are required to use for the recoverability of these assets. Frankly, from an accounting standpoint, it's a one-way street. If you see a significant depression in pricing and these models that you do this on are really impacted by the first few years. While we do expect improvements, if you drop the front end of that curve, particularly as it relates to met coal, that puts a lot of pressure on your asset recoverability.

Our next question is from Lucas Pipes of Brean Capital.

Good morning, gentlemen.

Morning, Lucas.

You previously outlined up to like 45, 50 million tons in Australia in 2015, assuming the markets come back. We are at a trough right now. Where could you get, in Australia by 2015, and what amount of CapEx would be necessary?

I think based on our current plans for capital this year, early look, although we haven't fixed plans for '14 fully yet, for '14 would indicate in '15 we will probably be in that 40 million ton range. Obviously if we see a much stronger market response, we've got the ability to accelerate some things, but that's kind of where we are at right now in terms of our thinking.

That's helpful. Thank you. My follow-up. You previously mentioned that there was up to 150 million tons of production coming off-line at China. Have you seen further support for this thesis? If you could provide us an update on kind of what's happening internally in China, that would be very helpful.

This is Vic. You can see a number of announcements that have been out there of cutbacks that have been occurring. That 150 number was an industry number that was reported in-country China. That was relating to a variety of cutbacks on the basis of safety activities at some of the smaller operations there. You continue to see that kind of a trend occurring over time. They have recently come out with the numbers. It looks like overall production was up about 4% in 2012 in China to about a $3.7 billion number. Still a big number, obviously. They are running at a very high run rate and a very fast burn rate, as well. It remains our view that the cost inflation is high there, that there will continue to be a paring back of operations based on safety, and a consolidation toward larger mines that are more distant from the eastern heavy use consumption territories.

That's helpful. Thank you all.

Next we go to Chris Haberlin with Davenport & Company. Please go ahead.

Good morning, guys.

Good morning, Chris.

Recent reports suggesting that PCI prices have shown some surprising strength. Greg, I think you alluded to this much in your comment. Can you just talk about what the trend is there in pricing spreads for PCI, and what's driving that price strength, maybe relative to some of the lower rank coals where we haven't seen much price movement?

Sure. Well, a couple of things. I mean, Obviously, with the PCI coals, you have to look at where the predominant band is for the PCI coals. Korea is the largest installed base of plants that use PCI. You've got Japan. Then you've got China on a growing basis, although it is still emerging. Those are the areas where the steel production is recovered quickest. As you look at the resumption, or the increase in spot pricing that we've seen in met coal, coupled with the growth in steel production in the areas that have the ability to use PCI coal, we are seeing a strength in the PCI coals, certainly in the spot market now. Right now that spread is 85% to the premium, but historically it's been in the 70%s. We have said all along that we thought it would tighten. I don't think 85% is probably near term full stream, but certainly on a spot basis, that's what we are seeing. We do expect the PCI coals will continue to strengthen vis-a-vis the hard coking coal reference over time as we see more and more new plants get built that can use the PCI coals.

And that gives a good segue into my next question. You mentioned strength kind of in the Pacific Basin there. Can you talk about what you are seeing in terms of met demand from the Atlantic Basin, particularly in Europe?

Well, Europe is still pretty tepid, both in terms of economic activity as well as in terms of their steel plant run rate. Our focus right now continues to be on the Pacific Rim, and the only strength really in the Atlantic is coming out of Brazil.

Thanks very much.

And we have time for one more question. That will be from the line of Richard Garchitorena with Credit Suisse. Please go ahead.

Great. Thanks for taking my question. In the release, you highlight you expect declining US exports this year, both on met and thermal. I was wondering if you could quantify how much you think exports it will decline, and also what's going to drive that decline? Is it Australia taking back market share, or is average prices this year being lower than the first half last year? What's driving that view?

Yes. I think, just to give you roughly our estimate, we think met maybe down 20 million tons this year, thermal 10 million tons, total of about 30 million tons out of 2012's 120 million ton level, taking it down to around the 90 million ton mark. Quite frankly, it's just a matter of, certainly East Coast met is at the high end of the cost curve. When prices rolled back, they came out of the market. The same thing for thermal coal, with where the API pricing had gotten in the European market, we are seeing those bookings come down in terms of export volume. So that's our current estimate, our current view, based on what we see in the marketplace.

Great, thanks. If I could ask a follow-up. Does that mean they expect further production cuts in the East as a result?

That's a question for the eastern producers.

Okay. Thank you.

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

Okay. Well, thank you very much. I would like to, obviously, express my thanks, both to the Peabody team, continues to perform at a very high level against a number of market headwinds. But I also want to thank all of you for your interest in BTU. We look forward to implementing our plans for this year, and keeping you apprised of our progress on our next call. Thank you very much.

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