Peabody Energy Corp (BTU) 2013 Q3 法說會逐字稿

Welcome to the Peabody Energy Q3 2013 earnings call. For the conference, all participant lines 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'll turn the conference now over to the Senior Vice President of Global Investor Relations and Corporate Relations, Mr Vic Svec. Please go ahead, sir.

Okay. Thanks so much, John. Good morning, everyone. Thanks for taking part in the conference call for BTU. With us 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'll turn the call over to Mike.

Thanks, Vic. Good morning, everyone.

Peabody is pleased to be reporting strong results for the third quarter. Our operations ran very well, with solid volumes and improved cost performance in all regions. In particular, Australian costs were at their lowest level since the first quarter of 2011. We continue to execute on our plan and remain focused on controlling those factors that position us to succeed in all market conditions.

Let's review the quarterly results in more detail, beginning with the income statement. Third quarter revenues totaled $1.8 billion, as volumes increased 4% to 69 million tons on higher Australian and trading and brokerage shipments. Adjusted EBITDA of $312 million exceeded the high end of our guidance range on our cost containment initiatives, higher Australian volumes, and solid US performance. Adjusted EBITDA from US mining operations reached $306 million on seasonally higher volumes and good margin, and reduced Australia costs helped to mitigate the impact of lower pricing.

I'd like to take a moment to discuss the impact of our cost improvement efforts. Operating costs declined compared to the year-ago period, driven by year-over-year and sequential improvements in every region. In addition, reductions in corporate spending led to a 9% decrease in SG&A on a year-to-date basis. Turning to taxes, the $16 million income tax benefit was lower than our guidance, as the majority of the anticipated benefit has shifted to the fourth quarter due to better than expected third quarter earnings. Diluted earnings per share totaled $0.06, with adjusted diluted earnings per share of $0.05, which included a $0.03 charge related to early debt extinguishment.

Then in December, we chose to refinance our credit facility based on the favorable capital market conditions and upcoming maturities. We completed an upsized 5-year $1.65 billion revolver, as well as a 7-year $1.2 billion term loan. The refinancing allows us to extend maturities, increase our liquidity and gain additional financial flexibility by extending the term of the credit facility. We benefit from low annual amortization of $12 million per year related to the new pre-payable term loan.

Now, let's turn to the additional detail within our supplemental schedules. In the US, third quarter volumes of nearly 50 million tons reflect seasonal increases, particularly in the PRB. Revenues per ton were 5% lower than the prior year, in line with our guidance, as higher-price legacy contracts expire. Costs improved by over $1 per ton compared to the second quarter, driving a 4% increase in US gross margin per ton. We continue to target full-year US unit costs 2% to 3% lower than the prior year on cost reduction actions and shifting volumes to our most productive operations. These efforts drove US costs per ton down to the lowest level in three years.

In Australia, volumes rose 6% to 9 million tons on increased output from several mines including the PCI operation. During the quarter, we shipped 4 million tons of met coal at an average price of $110 per short ton. We sold 3.1 million tons of seaborne thermal coal at an average price of $78 per short ton. Third quarter costs per ton were below $70, due to the success of the owner/operator conversion, improved productivity at our PCI mines, and more favorable exchange rates. Based on our year-to-date performance, we are pleased to be reducing our Australian cost guidance to the low to mid-$70 per ton range for the full year.

Trading and brokerage adjusted EBITDA improved over the second quarter, but reflects continued low market volatility and limited structured transaction opportunities. We expect earnings from this segment to be largely in line with recent performance until volatility increases.

That's a view of our income statement and key earnings drivers. You'll note that operating cash flows totaled $213 million during the quarter. We ended the quarter with $551 million of cash and over $2.2 billion in total liquidity.

The third quarter reflects $90 million of LBA payments. Fourth quarter cash requirements include $185 million of LBA payments, along with our semiannual bond interest payments. Capital expenditures totaled $62 million, 80% below prior year levels, as we continue to trim our sustaining capital needs and reduce project spending. Our capital targets for the full year have been further reduced to $350 million to $400 million, as we continue to manage spending for the remainder of the year.

Turning to our outlook, we are targeting full year 2013 adjusted EBITDA of $1.07 billion to $1.15 billion, with adjusted diluted earnings per share of $0.27 to $0.45. These ranges reflect the commissioning of a new longwall top coal caving system at North Goonyella and a longwall move in the fourth quarter. Financial targets exclude any impact from a tentative settlement agreement with Patriot Coal and the United Mine Workers of America, which is still subject to definitive agreements and court approval. I also refer you to our Reg G schedule in the release for additional details regarding DD&A, taxes, and other line items.

That's a brief review of our third quarter performance and outlook. For a discussion of the coal markets and other updates, I'll now turn the call over to Greg.

Thanks, Mike. Good morning, everyone.

Mike has recounted our strong quarterly results, which clearly exceeded expectations. The Peabody team has done a great job executing our key priorities -- operational excellence, capital discipline and cost containment. Our third quarter results reflect ongoing success in all these areas. These accomplishments, combined with the increased certainty from recent events, such as the Patriot agreement and our successful refinancing, provide Peabody with tremendous upside potential as market fundamentals continue to improve.

I'll review the current state of the coal markets and then discuss how Peabody's platform is positioned for success. Within the global coal markets, metallurgical coal prices have rebounded some 15% to 20% off third quarter lows on increasing steel demand and continued production cuts; while the addition of new coal-fueled generation is driving a 50 million ton increase in seaborne imports this year. In recent months, we've seen improving macroeconomic conditions that support continued coal demand growth, including expanding global PMI and a rising GDP from both developed economies and China.

Coal generation in the three largest coal import markets -- China, India, Japan -- surged by over 20% in recent months. India's thermal coal imports are up 37% this year. The rupee's recent rise will support more imports. Japan is adding new coal-fueled plants and coal generation has risen for nine straight months, requiring additional coal imports. German coal generation has risen 10% this year, due to its low cost and reliability advantages over renewables, resulting in a 19% increase in coal imports through June.

The World Steel Association recently increased its forecast of global steel use, projecting a rise of more than 3% this year, with further growth in 2014. All of this increased demand has not yet been fully reflected in current coal pricing due to strong supplies. We are encouraged, though, by rationalization of marginal production and reduced capital spending on new coal projects, which is helping to balance the markets. In China, production is down over 85 million tons this year, as higher-cost mines are now shut down. Some 2,000 small coal mines are now targeted for closure by 2015. US metallurgical coal exports have fallen 9% year-to-date, declining even more sharply this quarter. Reductions are expected to continue as legacy contracts roll off.

Longer term, Asian economies are expected to account for the majority of coal demand growth as urbanization and industrialization drive increased consumption. In China, coal demand is expected to continue to grow some 200 million tons each year over the next five years. With consumption patterns shifting as older plants are closed, emissions technology is deployed on the existing fleet and advanced supercritical coal plants are built away from major population centers.

China also is investing in at least 20 coal-to-gas projects, as international gas prices remain four to five times that of the US. It is clear from China's recently announced air quality initiatives that the result will be lower emissions but higher coal use, a pattern similar to the US over the last 30 years. As direct localized coal use is reduced, more coal will be used for generation, coal-to-chemicals and coal-to-gas in plants built outside of major cities. The coal-based electricity and gas produced from coal will then be brought into the cities to supply energy.

Now, let's turn to the US market, where coal fundamentals are improving on greater supply/demand balance. Coal demand increased 8% in September and accounted for 41% of US electricity generation. Coal production has declined 20 million tons this year, as over 150 mines have been idled, with much of the reduction coming from smaller mining operations. Production reductions are expected to continue into 2014. Customer inventories of PRB coal are at 30% below their peak levels from 2012 and expected to move into the upper 50-day range by the end of the year. Some power plants are close to 10 days use and actively contracting for additional volumes.

The excess mining capacity in the Powder River Basin continues to be constrained by parked equipment with deferred maintenance, increasing overburden ratios, and no new investments over the last several years. Now, longer term, we've evaluated the regulatory landscape in the US, including the recent EPA proposals. We still see the Powder River and Illinois Basins benefiting from rising US coal demand, for backfilling for eastern plants, and higher capacity utilization rates within the remaining coal fleet, the yearly annual use growing some 135 million tons for the five years through 2017. So that's the market backdrop.

I'd like to take a minute to discuss Peabody's recent successes. This quarter punctuates a year in which we have driven clear, sustaining cost improvements across every region of our operations. US costs have declined more than $1 per ton over the second quarter, while Australian costs dipped below $70 per ton as we've reset the cost base. Within Australia, costs in our PCI mines are down 20% compared with last year. We've recently set new dragline performance in overburden removal records in our Coppabella mine. Also, the success of the owner/operator conversions continues to exceed our expectation, with cost down 30% compared to the first quarter of this year.

Our North Goonyella mine is expected to benefit from the commissioning of longwall top coal caving technology this quarter, with larger equipment better tailored to the mine's geology. All of this occurs against the backdrop where Australia has reemerged as the go-to supply source for high quality coals in the Asia-Pacific region. The new Australian government is working to improve the competitive landscape for mining companies, including the targeted repeal of the carbon tax. Inflation rates in Australia have fallen and the Australian dollar has eased, while the rise in global freight rates favors Australian coal into Asia.

Peabody's well-capitalized platform reflects major investments made in recent years, which have, in turn, allowed us to make substantial cost reductions without major spending. We have a large portfolio of development projects that help provide us with meaningful upside to improving coal markets.

So with that review of the global market conditions and Peabody's position, Operator, we're happy to take questions at this time.

(Operator Instructions)

Michael Dudas, Sterne Agee.

Good luck in the games this week. First, my one question is I guess for Greg. As you characterize the outlook for the met coals that you ship into the Pacific Basin, over the next 6 to 12 months, are you more confident about the demand side of the equation or finally seeing some supply rationalization that apparently is needed to get pricing to move in a better direction?

I guess I would say I feel better about both sides of the equation, Michael. But if you just take the demand side for a minute, we see China really establishing a good set of legs underneath their economy. Their steel industry continues to grow. They're spending on infrastructure. Their economy seems to be, in our view, beginning to get steam again.

All of that is continuing to put pressure on the demand side. Then when you look at what's happened with -- whether it's East Coast US, whether it's even some of the marginal production out of Australia. In our view of what's been happening is, there was a significant number of projects that were started back in the 2010 timeframe -- 2011 when prices had gotten very high, that were coming into the market over the last six months, even some of them just being commissioned within the last quarter. They have been offsetting the production that was coming out of the market that was high cost.

Now that those have come into the market, we're still now going to see, in our view, exits from the market from high cost production as we continue to rationalize in this -- at these prices. So, as you look at both demand and continued rationalization, we're feeling better about both of those bringing the market into balance during the course of next 6 to 12 months. That's absent any disruptions that we would normally see over the last five years in the met market whether it's weather in Australia or infrastructure or anything of those natures.

That's very helpful, Greg. Just one quick follow-up. When you highlight in your comments about Chinese production falling year-to-date and the plans to close the 2,000 unsafe higher cost, smaller mines. How much -- if you could like how much of that would be thermal versus met? Is there an opportunity for met imports to increase even further over the next 1.5 to 2 years because of what's happening internally on the production side in China? Thank you.

Well, I think, exact percentages are pretty tough to come up with. I would say the Shanxi Province is a heavy metallurgical coal producing province. Reports that 40%-plus of those operations are struggling. A lot of the small operations are in that region. So we think that their met coal production is going to be under more pressure than their thermal coal production. But as with anything in China, it's tough to put definitive numbers around it.

Excellent, Greg. Thank you.

Brandon Blossman, Tudor, Pickering, Holt.

Greg, big picture question for you. Say, over the next two or three years, where's the focus for Peabody going to be? Is it going to be increasing efficiencies? Squeezing out that extra margin with lower costs? Or is there going to be some growth within that time period?

Well, obviously the path that we're on now to continue to optimize our portfolio is one that we're not going to let up on. What we're seeing -- what we saw in the second and really in the third quarter was a culmination of about five years worth of portfolio strategy investments. Starting new low cost operations whether it's in the US at Bear Run or El Segundo; focusing our Powder River Basin operations on our North Antelope Rochelle operation; the expansions and the new properties; and the rehabilitation work that we did at the MacArthur Coppabella mines, all of that was designed. We're seeing the strength of all that strategy in the results of the third quarter.

But as we go forward -- you talked about a two- or three-year time horizon, based on the sheer magnitude of the capital projects that have been canceled in coal both on the thermal side as well as metallurgical coal side. Our focus is going to be -- what are the next couple of projects that we can bring to market when this market sharply changes? Because there is going to be -- there's a continuous demand drive, 30 million tons a year of additional met coal, 50 million tons a year of additional thermal coal, that's going to have to be met. Existing capacity is not there to meet it. So it's going to be -- what are the best opportunities that we have with this great portfolio of undeveloped properties, particularly in Australia to bring a couple of those to market and grow.

All right. That's interesting and a good context for that. Then going kind of the opposite end of the spectrum, Mike, quarter-over-quarter, three months ago you put out guidance -- you hit that out of the park. What was the biggest driver of that change from what you expected to see third quarter and what actually happened?

Yes. As I mentioned in my remarks, I think it really comes down to -- for this quarter, we said volume guidance. We said cost guidance. We really ran on all cylinders in terms of where we were on the upper end of those volumes, when you look at the US, you look at Australia. Trading came in pretty well in line. It's just that -- it's that focus on getting the operations into position to succeed. I think that, coupled with the cost reductions have really been driving it. At a sub -- just under sub $70 on the cost side on the Australia platform provides significant benefit, but we also had some good volume out of all the business units.

Yes. I think just to add to that, we've talked a lot over the years about trying to eliminate variability in this business. Operating variability is always -- it's tough to -- had been tough to predict. It was always an issue for us. Particularly before we went to owner/operator conversions, our destiny in Australia wasn't in our own hands per se. So I think again, what we're seeing in the third quarter, particularly, is our ability to continue to drive that variability out of our operating platform. The team did a great job in terms in delivering the operating results, which drove volume, drove cost reductions and expanded the margins.

All right. Great. Thank you very much, guys.

Paul Forward, Stifel.

On the -- I guess a couple things. One, is on the -- we saw some snow impact on the Powder River Basin over the last couple weeks. I wondered if you could give us an update on what you're seeing out there? Has there been any kind of change one way or the other in the outlook for either pricing or volumes in 2014, when you think about kind of as you've wrapped up the remaining uncommitted tons for 2014?

Yes, Paul, just in terms of the -- we had a very early and very unusual blizzard in the plains, the first week of October. I haven't seen the actual final numbers yet, but my sense is, it's probably going to be one of the lowest first week of October numbers the Powder River Basin has seen, not only the impact at the mines, but the rail impacts because of the snow. But having said that, the Powder River Basin recovers very quickly. At this point in time is running at normalized rates. I think in terms of -- you'll notice that we priced a bit of coal this quarter. We continually do that, particularly when we're putting together long-term multi-year deals out of the Powder River Basin. So we saw a little bit of that, but it wasn't much. I think we priced --

That was 5 million tons of new business --

-- of new business.

-- secure those longer term contracts.

Total price of about another 3 million for a total of 8 million and that was really just re-opener. So, as we indicated on the last call, we're being very judicious in terms of how we sell and price that coal and are comfortable with our current position relative to 2014 sales and open position.

Great. You've given us some positive data points about recent news on Asian import demand. Yet at the same time, you've backed off on the high end of your guidance for capital spending for this year. So I was just wondering if you'd give us a little sense of -- has your stance changed at all about project development out of Australia? Maybe as you think about 2014, can you think about uses of cash along those lines? Do you have better returns internally? Or do you think more about uses of cash being more redirected toward debt reduction for next year?

Yes. When you look at the capital reduction targets, we've brought that down a couple times. There's two components to it. Obviously, there's sustaining capital. There's project capital. As we've worked through the first nine months of the year here, the project capital, whether it's -- Mavis Downs finishing out the owner/operator conversions; the modernization of the Metropolitan, that's there behind us. But we've been very, very tight in terms of what our sustaining capital spending levels will be.

We have traditionally throughout these quarters tracked below, just through capital discipline. That's why we've continued to bring those capital targets down. What I will tell you is, we spent a lot of time as we're working through our annual budget and 5-year operating plan process to understand -- okay, on the sustaining capital side, let's leverage the benefits we have on a condition based monitor. We're driving out repairs. We're extending equipment lives. That should have a positive impact on sustaining capital.

As we've said, we're below the $1.25 to $1.75 per ton range for that component of our capital. But at the same time, we want to make sure that we're not making short-term decisions that are going to impact on us a long-term basis. So we're continuing to allocate dollars in order to position ourselves for some of the permitting and other work that we do to allow for to us bring projects on at the appropriate time. So, while it's come down in total, we think we're striking the appropriate balance between short-term capital, disciplined cost, cost reduction in that area, but also planning for the future.

Okay. Thanks Mike.

Jim Rollyson, Raymond James.

Just following back up on Paul's last question on the CapEx, given you've pressed that down and continue to press that down. When you think about your longer term needs and just the short-term market situation, do you think you continue to keep pressure on CapEx at least for next year while things are still depressed, depending on obviously how fast things start to recover? But are you thinking in that direction, that you're going to be pressed down here? Or how long can you keep CapEx depressed?

Well, certainly on the sustaining side of our capital spend, our view is we're going to be able to maintain these kind of levels for another year or two based on the cycles of our equipment and our capital base that we have. As Mike indicated, we're in the process right now of looking at what amount of capital we want to spend for project development.

By that I mean, drilling, de-gasification of some of the underground reserves, some feasibility study work and those types of things. So we haven't finalized exactly what that level is going to be. But suffice it to say, our intent is to make sure that we're spending enough capital to maintain our optionality to move very quickly on these development projects when the market does take that turn. Because the last thing we want to do is be behind the curve.

Sure. Makes perfect sense. Greg, you talked a lot about some of the cuts that have happened over the last few quarters at high costs mines and more you expect to continue. When you think about the market and you laid out a pretty good big picture, maybe positive thought that things are improving in the right direction. When you think about some price recovery that happens as some of these mine goes offline and hopefully as demand continues to improve, how do you think about the -- those mines staying offline? Or maybe put a better way, as we start seeing prices recover, how fast do you think that supply can come back to the market and maybe keep a lid on pricing or not? What's your view?

Well, I think it certainly varies. I think for a lot of this production, it's going to be difficult for it to come back, particularly for all of the small mines. Probably the US is more difficult than other places because you've got such a changing regulatory environment, particularly in the eastern part of the US. So I think a significant amount of that operation -- that production probably won't come back, unless we saw massive price spikes for a period of time.

The international stuff, say out of Australia, Algeria, again, we're going to need substantive price increases, I think, before you're going to see people commit new capital to even get their existing operations back up to their nameplate capacity. Then you're going to need a level of pricing well above that before you're going to see any greenfield capital go into either thermal coal or met coal.

So, there is some capacity that will come back, but it's going to come back at much higher prices than it would have previously. Because I think people are going to be very, very careful before they start committing 5- to 10-year capital expenditures on a short-term movement in the price. So we're going to have to see high sustained pricing at two levels. First level is incremental capital to the existing operations. Then the higher level would be greenfield operations.

Very helpful color. Thanks, Greg.

Mitesh Thakkar, FBR.

Congratulations on the quarter. Just some talks on the PRB side, we recently saw a very limited interest on one of the LBAs. I think one of the concerns is that we are not seeing the pricing response. So how do you think about a potential falloff in supply if we continue to see kind of these kind of choppy prices and subdued contracting levels? I think it's more of an issue for 8,400 coal, but would love your thoughts on that.

Yes. I think we would agree with your analysis. There is going to be at the current price horizons -- there's been discussion going around, what is the latent capacity out in the Powder River Basin that can come back in as prices continue to increase? We've talked before. Our view is it's fairly limited. You're going to get a bit of overtime bump where people can run existing equipment harder.

Once you go through that, which is a small component, then people are going to have to start spending real cash to repair equipment that's been parked, replace engines, wheel motors and the like. That will provide a bit of an increment. But then in reality people have not spent capital to replace equipment that ultimately reached the end of its useful life or spent capital to overcome the annual increase in stripping ratio that naturally occurs in the Powder River Basin.

So the mining capacity overhang in the Powder River Basin is significantly lower than what the nameplate or infrastructure -- loading infrastructure and rail infrastructure capacity would be. So I think we are seeing -- the longer this goes on, we are seeing long-term lower productive capacity out of the Powder River Basin, until again we see significantly higher price horizons where people feel like they can make adequate returns for the cost of leasing, developing and buying new equipment for the Powder River Basin.

Okay. Now, what is the price do you think replacement CapEx start coming back in the PRB?

Well, let's just say, it's higher than it is today.

All right, guys. Thank you very much.

Thanks, Mitesh.

Jeremy Sussman, Clarkson.

Excellent cost control. Greg, on the back of that, I wanted to get a sense of how we should think about how this flows through into 2014? Specifically for this year, obviously US cost guidance remaining in kind of the down 2% to 3% range. Australia in the low $70s, low to mid-$70s. So given kind of the trend, how much more I guess can we see as we head into next year or through next year?

Yes. This is Mike. When you look at the cost position, we're guiding to a 2% to 3% lower for this year. We're on track on that in the US. Very pleased with our cost reduction initiatives in Australia. But going back to the US, first, as we look at these cost reduction initiatives, we still think we're in the early innings. There are things that have been implemented this year that can provide some full year benefit next year. Now the potential offsetting fact of that is where we come out in volumes. We haven't provided volume guidance for next year, but that's a positive indicator.

On the Australian side, as you look through the results for the quarter, we had cost reduction initiatives. We got a bit of a benefit on currency. But on a year-to-date basis, currency has actually been unfavorable. On a full year basis, currency has really not been an impact. So Australia is really being driven by these cost reduction initiatives. We're extremely pleased with the progress that they've been able to make.

So ultimately, we think there is some sustainability as you get full year benefits out of cost reduction initiatives that have been implemented this year going into next year. How does that get -- that gets mitigated somewhat by a higher mix of met coal particularly as we look at the end of this year. Then, you've got a potential for a carbon tax relief next year, hopefully, as well. So there's some positive indicators. We've had a bit of lower sales related costs. It ultimately just depends upon what our ultimate volume is going to be and our mix within those volume as we set our targets for 2014.

Great. That's very helpful. So just a follow-up, I mean it sounds like without putting words in your mouth -- I know you haven't given guidance, but it's conceivable with the initiatives that you take that we could see -- given let's just assume, the Aussie/US dollar stays at current levels that both in the US and Australia, it is conceivable that we could see some further reductions next year.

I mean it's something we'll certainly be targeting for, continuous improvement in terms of cost reduction. But there are other factors in play and FX is one that you note, as well. We'll just have to wait and see as to where we come out ultimately. But it's something we're certainly focused on building on the momentum and the successes we've been able to achieve this year.

Great. Very much appreciated. Thank you.

You're welcome.

David Gagliano, Barclays.

My question relates to (technical difficulty) sales volumes in 2015. I believe this is the first time that you indicated 40% to 50% going forward in 2015. Can you give us some prices in the Midwest and the West associated with those committed volumes?

No. As you know, Dave, we typically do not do that for a couple reasons. First is proprietary versus our peers from a competitive perspective. The other is that we have different mines, of course, with different qualities and so you're not always on a same store basis depending on the timing of those. But did want to -- as you noted, initiate our view and that is based really on how much is committed I would note based on anticipated 2013 production volumes. So of course, by the time we get to 2015, we'll see what actual production looks like, also.

Okay. Well, how about this? To make it apples to apples, can you give us directional indication versus what was just reported in the Midwest and the West? (technical difficulty)

We do not, Michael. We don't give -- or Dave, I'm sorry.

Yes. That's okay, whatever.

(laughter) We do not give forward views on book business from a pricing perspective.

Okay. My follow-up question real quick. The fourth quarter -- the guidance for the year -- we're trying to update our models over here. And to get it to work, we have to make some rather odd assumptions for sales prices per ton in the fourth quarter in the US. Is there any reason that sales prices per ton should change meaningfully sequentially in Q4 versus what was just reported?

Maybe we can follow up with you on that, Dave. There's nothing that comes to mind that would give you that result.

Meredith Bandy, BMO Capital Markets.

Most of my questions have been asked. But I just wanted to see if I could get an update on Metrop? Also, are there other union negotiations coming up that we should know about?

Yes. Just to tell you where we're at with Metrop, I mean we've been negotiating with the team at Metrop over the course of a number of weeks, going back probably eight weeks or so now. We're still optimistic obviously that we'll come to a resolution that works for the workforce as well as for us. The whole industry is rebasing. The discussions are all around what that rebasing ought to look like. We've had historically a good relationship with our workforce at Metrop. So we don't see -- we're not anticipating that this is going to be a long-term situation. We're hopeful to get a resolution that works for them as well as for us.

Other contracts that are coming up, if any?

We're in the process of having discussions with our workforce at Coppabella and at Wilkie Creek. Both of those EBAs come due this year. I'll remind everyone, we went through 2012 with several of these EBAs and were able to successfully negotiate those as well. So again, don't see where this will be a long-term issue and look forward to coming to a conclusion.

Okay. Thank you very much.

Neil Mehta, Goldman Sachs.

Congratulations on the quarter. There's been a lot of attention on asset sales in the space. Can you kind of talk about your framework for thinking about that? Do you think the current business mix makes sense? Are there opportunities to monetize assets as you've done in previous quarters?

Yes. As part of our deleveraging strategy, we've looked at portfolio optimization. So we'll continue -- it runs the gamut between non-strategic assets, potential development properties that may have better value in other people's hands on a different timing basis. So those are some of the things that we continue to look at. You'll recall, we had a reserve sale in the Midwest in the second quarter that's going to generate some good EBITDA in our resource management segment and will also generate $70 million of cash for the full year. So we've had some efforts concentrated there.

I mean, in terms of broader things, we've been an active portfolio manager over the past 15 years. Current focus today is in the area that you've noted, of things where we could find some things that are creative in order to generate cash for debt repayment. That's something that we'll continue to look at. It depends on our market outlook, our view of the assets and our view of the market conditions and market receptivity for those types of transactions, but it is something that we're very focused on.

All right. Thank you. Then a couple macro questions. In your view -- I know it's always tough to quantify in millions of metric tons, but in your view, how over supplied is the met market as we stand today?

Well, I think we've seen third-party estimates that say we're 20 million tons or so, give or take of oversupply. We wouldn't necessarily quarrel with that estimate. I would just say that's balanced to get at a 3% world steel demand where demand for met coal is going up 30 million tons a year. So those are the numbers that we're kind of using in terms of the way we look at going forward the business.

Makes sense. The last question, if we see high precipitation levels again in Australia, how have Australian coal mines adapted over the last few years to make sure they're prepared to keep supply going in the event of another extreme rainy season?

Well, I think there's been -- some of the operations have probably done some things to improve their capability. I would say probably in the environment we've been in over the last 18 months, they probably haven't done near as much as one would have expected they would have done. We did all of our work several years ago, so we feel very comfortable where we're at relative to a wet season.

We did some additional work at the Coppabella and Moorvale operations as part of the rehabilitation work that we did. So we feel like we're in pretty good shape. So we'll see. I guess what I'm saying is, there's probably been some improvements, but my guess is probably not the full amount given the nature where the market was over the last 18 months.

Fair enough. Thank you very much, guys.

Lucas Pipes, Brean Capital.

Greg, you mentioned earlier that you have an attractive project pipeline in Australia for future growth, especially on the met coal side. When you look at these projects, what do you think is the necessary price in order to earn an attractive return on these projects?

Yes. We're not really of a view to give any individual prices as to what the return components are. I'll just go back to what I've said previously. In our view, prices have to be well north of $200 a ton to incentivize greenfield capital into the met coal space. I think that's probably true for everybody. That's -- probably ought to leave it there in terms of specific pricing.

I just would say that, obviously, Queensland is the best zip code in the world for metallurgical coal assets. The development portfolio and the properties that we bought as part of the MacArthur acquisition was clearly the best package available in the world. We've done a fair bit of work on that -- those assets since we bought them. We feel better about them now than we did when we did buy them. So we will have significant opportunities when the time is right.

That's helpful. Thank you. Then a follow-up question on your Australian pricing. It held up very well considering where spot prices were during the third quarter, both on the met coal and on the thermal coal side. If you could maybe elaborate on what's been driving this? Then what should we expect for the fourth quarter given where prices are right now?

Yes. Realizations were down just a bit for the second quarter into the third quarter. Some of that's a mix of the met coal -- the mix within met and then also the mix of met versus thermal. We've talked about the implementation of longwall top coal caving system at North Goonyella in the fourth quarter. So we would have an expectation that our net volumes would increase as a percent of the total and the high quality of our coking coal would go up as well, which would have a corresponding uptick in realizations.

That's helpful. Thank you very much, gentlemen.

You're welcome.

Brett Levy, Jefferies.

I know that you guys don't want to give information on prices. I think on the previous call, you had mentioned that, the pricing that you have been able to achieve more recently is sort of above the forward curve. Maybe I would try to say, has that continued? Then also, based on everything you've said about supply and demand in the next several years, is it fair to say that you may wait a while before you lock in additional pricing for 2014 and 2015?

Yes. Two things. Obviously, I continue to come back to the fact that I've got a significant number of folks in my marketing and sales department that I tell them that we -- they need to deliver -- always deliver above the curve. Otherwise, I can just sell the curve. They are very successful in doing that.

In terms of the 2014/2015 pricing, where we see that go. As we mentioned on the last call and would repeat today, we're quite happy to be patient right now for 2014 and 2015. We're doing small increments of business where it makes sense for to us do it, where we're happy with the price. More importantly, happy with the multi-year volume components of the deal. But we -- as I say, we are being patient right now.

Thanks very much, guys.

Caleb Dorfman, Simmons & Company.

I guess first off, it's really hard to point exactly without knowing how 2013 is going to shake out. But when you're thinking about 2014 in the United States, how do you think overall domestic coal volumes could trend? Do you actually think that because we've been drawing down stockpiles this year, you're pointing to a 30 million stockpile drop -- at what point do we sort of normalize and actually start having a supply/demand balance again in the United States?

Well, I think when you look at the amount of production that has come off in the US this year and the beginnings of -- certainly, in the major coal producing regions of Powder River Basin and Illinois Basin, rebalancing of the inventories, I think we're going to see through the end of this year and first quarter of next year, if we have a normalized winter, a rebalancing. The [Cab] region is a region now unto all of itself in terms of their inventory and their burn because they're still impacted by natural gas competition.

I mean our view is, we will continue -- we don't see in 2014 erosion of PRB or Illinois Basin markets due to gas, based on the forward gas curve. We see continued higher utilizations within those burning regions. So I think our view is 2014 will be much more balanced, make some more inroads early in the year on inventories and then we'll start to test what additional volumes can come into the market in the back half of the year.

That's helpful. So we've talked a lot about the seaborne met market. On the seaborne thermal market, pricing continues to be a little bit weak -- I guess helpful that shiny thermal pricing is starting to pick up. What do you think and when do we start seeing the Newcastle pricing improve? When do we get that volatility back, which really drives trading and brokerage?

Well, again it's been an unusual year in terms of -- all of the producing regions are having very good operating runs. There hasn't been any really supply disruptions either due to weather or ports or we had a short strike down in Colombia, which really didn't impact the market because the Russian coal sector was increasing their exports quite well.

So right now, I think the seaborne markets had been affected mostly due to the fact that not that demand wasn't growing, it was growing, but that supply was healthy. I think one of the things that's impacting the markets today is freight rates. We're starting to see a much greater differential because of freight costs. That's going to significantly enhance and improve the competitiveness of Australia, both on the thermal and the met coal side. I think we'll see that continue through the end of this year and into 2014.

So do you think the price recovery is a 2014 event, then?

I'm sorry, what was the question?

Do you think the price recovery is actually going to be a 2014 event? Or do you think we'll have to wait until the end of 2014, early 2015?

Our view would be strengthening during 2014.

Evan Kurtz, Morgan Stanley.

Just wanted an update on the Aussie carbon tax repeal. I know there's been a little bit of back and forth between the government and the Senate. How should we model that? Do you still see that kind of coming on the second half of next year? Do you still see that helping your costs out by a $1 or $2?

I guess our recommendation would be that's probably the best answer right now. There's a possibility it may occur early, but that's -- a number of dynamics, as you indicate, are going to have to fall into place for that to happen. So we would use that mid-year. It is a $1 to $2 a ton impact.

Great, thanks. Just one other quick question on Australian costs. I think Jeremy was kind of getting at this already, but if the Aussie dollar were to kind of stick around the $0.96 level here and just given your hedges right now and the timing of the -- I know you kind of spread them over three years, is it fair to say that currency could actually become a headwind and we need to see currency go lower from here? Or how should we think about that for 2014?

Yes. For 2014, our hedge position is in the low 60% range, at about in the low $90s. So the sensitivity is on a $0.05 change on the exchange rate for 2014 is about $60 million.

Super helpful. Thanks, guys.

That will conclude today's Q&A session. I'll turn it back to you, Mr Boyce, for any closing comments.

Well, thank you, Operator. I guess in closing, I just want to express my appreciation to the Peabody team for a really strong quarter. Their attention to safety, productive operations, the cost management, capital discipline has all really come to fruition very strongly in the quarter. Then I thank all of you for your ongoing interest in BTU. We look forward to updating you after the close of the year. Thank you.

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