Peabody Energy Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 26, 2023

There are 6 speakers on the call.

Operator

Good day, and welcome to the Peabody's Earnings Call for the Q3 of 2023. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Carla Kimuri.

Operator

Please go ahead.

Speaker 1

Good morning and thanks for joining Peabody's earnings call for the Q3 of 2023. With me today are President Chief Executive Officer, Jim Grech Chief Financial Officer, Mark Sperbeck and our Chief Marketing Officer, Malcolm Roberts. Within the earnings release, you'll find our statement on forward looking information as well as a reconciliation of non GAAP financial measures. We encourage you to consider the risk factors referenced there along with our public filings with the Securities and Exchange Commission. I'll now turn the call over to Jim.

Speaker 2

Thanks Carla, and good morning, everyone. In the Q3 of 2023, we delivered strong operational results Better than expected production and effective cost management. We also advanced initiatives at Shoal Creek in North Goonyella that illustrate our ongoing commitment to continue investing in our seaborne metallurgical portfolio. During the quarter, our Board approved full funding at North For the completion of initial development through the commencement of longwall operations in 2026. We are also excited to announce that we have reached an agreement to acquire a large portion of the Warthes well coal deposit adjacent to our existing North Goonyella mine.

Speaker 2

This is a tremendous opportunity to extend our world class coal deposit and leverage our existing infrastructure and equipment. Before I

Speaker 3

expand on the quarter, I

Speaker 2

want to thank our global employees for their continued focus and commitment to working safely and efficiently. Now turning to the global coal markets. Seaborne thermal coal markets remain volatile during the quarter with modest pricing improvements. Robust but moderating coal and natural gas inventories in the Northern Hemisphere have continued to weigh on demand for high energy thermal coal, coupled with better supply prospects due to drier weather on Australia's East Coast, resulting in Newcastle coal trading within a range of $130 to $160 a ton. China's year to date imports of lower grade thermal coals continue to significantly surpass the prior year, with an increase in the annual thermal coal input run rate of approximately 93% over 2022 levels.

Speaker 2

India has also increased seaborne market participation as our power demand continues to grow. Recent Import trends have led the I-eighty report that elevated global demand for thermal coal imports so far during 2023 are pointing to 6% year on year growth in overall seaborne coal trade versus 2022. Within the seaborne metallurgical market, global crude steel output during the quarter continued to be variable with weaker production rates in Europe and South America, offset by notable year on year crude steel production growth in some Asian markets. Metallurgical coal supply has remained constrained With the rate of exports from Queensland remaining below historical rates and premium hard coking coal remaining highly sought after. Premium hard coking coal indices finished the quarter around $3.30 a ton, recording a 42% increase during the quarter.

Speaker 2

The outlook for metallurgical coal remains positive with seaborne supply remaining below historical levels combining with strong purchase interest out of India And new import demand for steelmaking coals within the Southeast Asian region. In the United States, Electricity generation from thermal coal has declined year on year due to low gas prices and growing renewable generation, Although quarter on quarter improvement in Colburn was recorded through a warm end to the summer. Natural gas prices continue to recover during the quarter With U. S. Natural gas pricing currently at around $3 per MMBtu.

Speaker 2

Near term demand for U. S. Thermal coal is anticipated to be supported by higher gas prices, while also challenged by comparatively high generator inventories. Now moving on to our operating segments. As expected, our seaborne thermal 3rd quarter coal exports came in at 2,700,000 tonnes.

Speaker 2

Segment cost per tons were lower than the Q2 due to stronger production and lower sales price sensitive costs. Our seaborne met segment shipments were 1,500,000 tonnes. Total segment cost per ton were 20% lower in the Q2 due to strong production and lower sales price sensitive costs offset by timing of sales. At Shoal Creek, we continue to make significant progress towards resuming targeted longwall production early in the Q1 of 2024. With a potential that this could be pulled forward into Q4 2023 as developmental coal production is ahead of target due to favorable geological conditions in the L panel area and installation of the new fit for purpose longwall is well underway.

Speaker 2

In the PRB shipments of 22,700,000 tons were better than anticipated. Caballo produced 4,200,000 tons, The most in a quarter since 2012. The Naram complex produced almost 16,000,000 tons, Similar to the Q3 last year and the mine has recovered nicely after tornado damage facilities in June. Higher production and lower maintenance Costs allowed us to reduce costs by nearly 8% from the previous quarter while expanding margins by more than 70%. Now the U.

Speaker 2

S. Thermal shipments were 4,200,000 tons as expected and above the 3,800,000 tons from the previous quarter due to increased customer demand. Our customers did see their inventories come down in July August, but September likely saw inventories increase again. Looking to 2024, we sit comfortably with about 80,000,000 tons priced at $13.77 a ton in the PRB And nearly 15,000,000 tons priced at $51.18 per ton in other U. S.

Speaker 2

Thermal. In addition to our active operations, we continue to advance redevelopment efforts at North Goonyella, the Key organic growth metallurgical opportunity within the portfolio. As anticipated, we achieved a significant milestone when we received the required Approvals to reenter Zone B. Reentry has occurred, ventilation has been established and we're operating under normal mining processes. The conditions in Zone B are better than expected with no impediments to the installation of conveyors and access to our southern longwall blocks.

Speaker 2

Next steps in Zone B include the installation of new ground support, removal of the old conveyor system and installation of a new conveyor system to support commencement of development operations. This new conveyor system, which runs from the surface to the coal face, will result in improved reliability and capacity. New continuous miners and development equipment that were ordered in late 2022 Are scheduled for delivery in Q1, 2024 for the commencement of Development Cove. Since commencing redevelopment in North Konya in late 2022, the company has invested $75,000,000 of the initial approved redevelopment capital expenditures, which includes further ventilation, equipment, conveyors and infrastructure updates. Overall, our operations had an outstanding quarter, enabling us to deliver consistent and predictable results and highlighting the benefits of our unique Diversified portfolio.

Speaker 2

I'll now turn it over to Mark to cover the financial details.

Speaker 3

Thank you, Jim. In the Q3, we recorded net income attributable to common stockholders of 120,000,000 or $0.82 per diluted share and adjusted EBITDA of $270,000,000 The company generated $87,500,000 of operating cash flow Continuing operations, which included an increase in working capital of $81,000,000 largely reversing the 2nd quarter working capital benefit as expected. We also reached a $72,000,000 cash settlement with the Department of Labor for black lung liabilities related to discontinued operations. The settlement discharged a $76,000,000 legacy liability from the company's balance sheet and eliminated the almost certain risk of a much larger collateral requirement proposed in the new DOL rules. Through October 20, we have returned $307,000,000 to shareholders, reduced our share count by 9.3 percent and have $713,000,000 of remaining authorization under our share repurchase program.

Speaker 3

We remain steadfast in our commitment to return at least 65% of annual available free cash flow to shareholders. After the recently declared Q3 cash dividend of $0.075 per share, based on year to date results, $103,000,000 is currently available for additional share repurchases. Turning now to 3rd quarter segment results. Seaborne thermal recorded $116,000,000 of adjusted EBITDA. Higher production at Wilpinion and a lower mix of Wambo underground production Reduced cost to $43.68 per tonne, below the low end of our guidance.

Speaker 3

Despite lower price realizations From additional high ash Wilpinion production, adjusted EBITDA margins were approximately 40%. The Seaborne Metallurgical segment generated $79,000,000 of adjusted EBITDA. Cost per ton were below the low end of guidance, mostly due to lower sales price sensitive costs. Lower than anticipated price realizations resulted from the widening price gap between premium hard coking coal and PCI coal. PCI achieved only 64% of the benchmark price in the 3rd quarter compared to 86% in the previous quarter.

Speaker 3

Despite the relative weakness in PCI coal prices, the segment reported 32% adjusted EBITDA margins. The U. S. Thermal mines produced $103,000,000 of adjusted EBITDA, an increase of 32% over the prior quarter, benefiting from much stronger demand for PRB coal. The PRB mines generated $54,000,000 of adjusted EBITDA And shipped 22,700,000 tons, exceeding guidance by more than 8%.

Speaker 3

BRB margins improved Substantially to $2.38 per ton, up from $1.38 last quarter due to higher shipments and lower maintenance costs. The other U. S. Thermal mines delivered $49,000,000 of adjusted EBITDA. Shipments of 4,200,000 tons were in line with expectations, while costs were a bit higher due to timing of repairs, contracted services and higher fuel costs.

Speaker 3

Taking a peek at our outlook, full year guidance has improved in a couple of areas. We are lowering seaborne thermal cost Guidance $5 per tonne to $45 to $50 as we expect full year volumes to be at the higher end of the 15,000,000 to 16,000,000 tonne range. Our reclamation efforts continue to be efficient and we are reducing the expected cash required for final reclamation by $5,000,000 to a range of $60,000,000 to 70,000,000 Specifically for the Q4, seaborne thermal export volumes are expected to increase to 2,800,000 tons. 500,000 tons are priced on average at 161 per ton and 1,500,000 tons of high ash product and 800,000 tons of Newcastle product are unpriced. Costs are expected to be $45 to $50 per ton.

Speaker 3

Seaborne metallurgical volumes are projected to be 45% higher at 2,200,000 tonnes due to the absence of a longwall move, Continued development coal coming out of Shoal Creek and a reversal of the mine sequencing and sales timing that impacted the 3rd quarter. 200,000 tons are priced at 164 per ton and the remaining unpriced volumes are expected to achieve 65% to 70% of the premium hard coking coal price. Costs are expected to be $110 to $120 per ton. In the PRB, we are anticipating shipments of 21,000,000 tons, resulting in full year volumes at the high end of our guidance range. In the Q4, we expect average realized prices of $13.30 per ton and cost of $11.55 per ton.

Speaker 3

Other U. S. Thermal shipments are expected to be 4,100,000 tons in line with the Q3, resulting in full year volumes at the low end of our guidance range. In the Q4, we anticipate an average price of $51.40 and cost of approximately $43 to $44 per ton. In summary, we delivered another quarter of solid operating results and we expect to do the same in the 4th quarter.

Speaker 3

We eliminated a legacy liability and removed a potentially large liquidity requirement. We are excited about our organic Growth opportunities in the seaborne metallurgical segment and will maintain rigorous attention to operating costs and capital allocation discipline. Operator, I'd now like to turn the call over for questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Lucas Pipes with B. Riley Securities. Please go ahead.

Speaker 4

Thank you so much, operator. Good morning, everyone.

Speaker 2

Good morning, Lucas.

Speaker 4

Hey, my first question is on warts well and I want to make sure I understand the Structure of that deal, right. It's $136,000,000 cash and then a royalty contingent royalty of 200,000,000 Does the $136,000,000 of cash kind of does that get paid On closing and then the $200,000,000 exactly what is that contingent upon? I think it says recovery of capital. What capital does that refer to, which is Really appreciate some additional color around the timing of initial and later cash flows. And then I have a Second question warts well and that is when would you expect to mine that adjacent deposit?

Speaker 4

Thank you very much for your color on that.

Speaker 2

Yes. Hi, Lucas. Jim Breck here. And first off, congratulations on that beautiful daughter you had just a few days ago. So that's the most important thing on this call.

Speaker 2

So the $136,000,000 is let me see if I can remember all your questions here. That'll be Paid on closing, we expect that to go out sometime in the Q1 of next year. And The $200,000,000 of royalty, again, that's recovered. We start paying that out after we cover a full project investment With in the project. So that's going to be some years into the future, probably not into and if it is at the end of this Decade, if not into early into the 2,030 timeframe that we would expect that royalty to start being paid.

Speaker 2

That I'm sorry, you had a couple of other questions. If I didn't answer, could you repeat them for me?

Speaker 4

Yes. No, that covered the first part. The second part was about that when you would expect to mine those reserves. Yes.

Speaker 2

Thank you. Yes. So what we have, Lucas, we literally closed on this deal just a few hours ago. So we're happy we could do that and get it into the release here. And what we're looking at is optimizing the mining plan right now.

Speaker 2

The way it's laid out is we would still Mine in North Goonyella reserves first. And what we're looking at is the timing of when we would then jump into the words well reserves are contiguous. They're right up Against our property. And so some of the different scenarios we're running is mine just a few panels in North Goonyella then jump right up towards well or maybe mine even a few more panels in North Goonyella, which would take us out towards the end of the decade and then jump up towards well. So we're looking at what gives us the best cost structure with a different mine plan.

Speaker 2

So it could be a few years out to maybe 4 or 5 years out, depending on how we after we start longwall production, right? So it depends on And what gives us the best cost structure, which was very good about those reserves though, Lucas, is us having that optionality is because it's the same coal seam. We're using the same conveyor systems, the same longwall, the same development units, and it's just which direction we take the mine, whether we go to the north or the south faster. We're not going down to a different scene down at a different elevation and we have lots of optionality as far as the mine plan now. So Again, we're still looking at that, but a few years out after longwall starts would probably be the earliest we'd hit those reserves.

Speaker 2

And again, we're still we've just signed a deal and you asked about the payment again that would come at What was your which again we expect that to be in the Q1.

Speaker 4

Very helpful. Thank you for that color, Jim. My second question stays with North Goonyella. You raised the CapEx guidance this morning. We've seen obviously across the industry pretty material increases in capital costs.

Speaker 4

And at this stage, how far down the rabbit hole are you in terms of derisking The capital for North Goonyella would appreciate a sense for your confidence level and where maybe some risks linger in this broadly inflationary environment? Thank you.

Speaker 2

Yes, Lucas, as you said, we're not immune to cost increases just like the rest of the industry. But given the relatively short timeframe, We start development mining here in the Q1. We've got the miners on order be delivered here in the Q1. The conveyor structure that's all in place. There's still some more capital to be spent, but a lot of it has been in ordered or on order Or have been spent already.

Speaker 2

A big part of the increase we have has been in labor cost, which at this point is also capitalized. And so those have increased and we think we've captured that in our forecast. That's a big part of the change in the capitalization is on the labor expense. So Given the short timeframe and the amount that's already been ordered or spent, we feel pretty good about those numbers And then being accurate based on all those reasons. Labor is still a bit of a wildcard, but we think we've captured everything with the labor costs that we could see going forward.

Speaker 4

Thank you, Jim. Very helpful. I'll squeeze one last one in. On the met coal side For 2024, a few moving pieces. I know it's a little early for to ask for guidance, but just Between development coal, the good update on Shoal Creek, what is a reasonable Range for your coking coal volumes in this transition period before North Goonyella is fully ramped?

Speaker 4

Thank you.

Speaker 2

Yes, Lucas, Mark.

Speaker 3

We're not giving guidance for 2024 yet. Obviously, Shoal Creek has done a really good job With some of the continuous miner development coal we're getting now and we expect that to be ramped back up beginning Q1 of next year. That did about 800,000 tons last year. It's probably High Point was 2,000,000 tons. They're probably somewhere in the middle there for next year.

Speaker 3

That's the big change.

Speaker 4

And all the other operations, no major changes that you would expect there?

Speaker 3

That's

Speaker 2

right. All

Speaker 4

right. Thank you very much. I'll turn it over. Best of luck.

Speaker 3

Thanks, Lucas. Thanks,

Operator

The next question comes from Nathan Martin with The Benchmark Company. Please go ahead.

Speaker 5

Hey, good morning, everyone. Thanks for taking my questions. Maybe just one last on North Goonyella. Now the project is fully approved, we've got the CapEx update. Did you guys give us any idea on the cadence of that spend?

Speaker 5

It looks like roughly $400,000,000 or so left between now and 2026. And also you mentioned something in the release about regulatory costs that increased there. I know you previously said the reentry With the major approval needed, was there anything else from a regulatory perspective that we need to be mindful of? Thanks.

Speaker 2

Yes. Nate, I'll answer the regulatory Side of that and then Mark can address the cadence question that you had. In Australia, the Safeguard Act Was passed to legislation, I think, was end of July, which affected many industries in Australia, but us included. And so we just got the detail of what that involves and the compliance costs that go along with it. So, those regulatory impacts were something that we had

Speaker 3

to work

Speaker 2

into Our forecast for the mine, that's the main one. There's been some other changes legislatively potentially that we see with the work rules and so on that we've accounted for. But the main Regulatory impact that we're talking about is that safeguard act that came into effect there late in the summer.

Speaker 3

Yes, Nate. We've got about $75,000,000 spent, life to date on that redevelopment at North Goonyella. I'd look at CapEx of about $150,000,000 to $160,000,000 for 'twenty four from 'twenty five. The rest of that capital would come in after Longwall production begins in the beginning of 2026.

Speaker 5

Great color there, guys. Appreciate that. And then Maybe shifting over to the seaborne thermal segment, great job on the cost there. Obviously, full year cost per ton guidance down by about $5 I guess the question is, what's driving that improvement? And is this kind of a new base we should think about going forward in 2024?

Speaker 5

Or are there some other factors to consider?

Speaker 3

A couple of things, Nate. 1, certainly hitting volumes on costs have been very helpful in seaborne thermal. The Aussie dollar It's historically weak. That's also helping us on the costs. We saw cost come down quarter over quarter.

Speaker 3

Some of that was lower sales Price sensitive costs and higher production. We're not providing guidance for 2024 just yet. We'll do that next quarter.

Speaker 5

Okay. Thanks for that, Mark. And then Maybe at the U. S. Thermal business side of the house, Jim, I appreciate your update on 24 Thermal sales and price there.

Speaker 5

Should we kind of assume you guys are close to sold out at those levels? I think you said PRB 80,000,000 tons at 13.70 $7,000,000 and other thermal at $15,000,000 at $51,000,000

Speaker 2

I think if you look at the guidance ranges we're Providing this year for the different markets, that can give you a pretty good range of what we think about for the tons for next year, at this time and Where we sit with these sales within those guidance ranges.

Speaker 5

Okay. Just to be sure, so you're saying maybe Somewhere within this year's guidance ranges for 2024 is not a bad place to start.

Speaker 2

Yes. And maybe Towards the higher end of the guidance ranges.

Speaker 5

Okay, great. Got it. Very helpful. I'll leave it there. Appreciate the time.

Speaker 5

Best of luck in the 4th quarter.

Speaker 2

Thanks, Nate.

Operator

With no further questions, this concludes our question and answer session. I would like to turn the conference back over to Jim Gregg for any closing remarks.

Speaker 2

Thank you all for joining us today. I'd especially like to thank our employees for remaining focused on safety and for continuing to execute on our various initiatives. I'd also like to thank our customers, investors, insurance providers and vendors for your continued support. Operator, that concludes our call.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.

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