Peabody Energy Corporation (NYSE:BTU) Q3 2023 Earnings Call Transcript

Peabody Energy Corporation (NYSE:BTU) Q3 2023 Earnings Call Transcript October 26, 2023

Peabody Energy Corporation misses on earnings expectations. Reported EPS is $0.82 EPS, expectations were $1.16.

Operator: Good day and welcome to the Peabody’s earnings call for the Third Quarter of 2023. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Karla Kimrey. Please go ahead.

Karla Kimrey: Good morning, and thanks for joining Peabody’s earnings call for the third quarter of 2023. With me today are President and Chief Executive Officer, Jim Grech; Chief Financial Officer, Mark Spurbeck; 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.

Jim Grech: Thanks, Karla, and good morning everyone. In the third quarter of 2023, we delivered strong operational results with 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 Goonyella 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 Wards Well coal deposit adjacent to our existing North Goonyella mine. This is a tremendous opportunity to extend a world-class coal deposit and leverage our existing infrastructure and equipment.

Before I expand on the quarter, I 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 remained 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.

India has also increased seaborne market participation, as our power demand continues to grow. Recent import trends have led the IEA to 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 $330 a ton, recording a 42% increase during the quarter.

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 coal burn was recorded through a warm end to the summer. Natural gas prices continue to recover during the quarter, with US natural gas pricing currently at around $3 per MMBtu. Near-term demand for US 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 third quarter coal exports came in at 2.7 million tons. Segment cost per tons were lower than the second quarter, due to stronger production and lower sales price sensitive costs. Our seaborne met segment shipments were 1.5 million tons. Total segment costs per ton were 20% lower than the second quarter 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 first quarter of 2024, with the 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.

In the PRB shipments of 22.7 million tons were better than anticipated. Caballo produced 4.2 million tons, the most in the quarter since 2012. The NARM complex produced almost 16 million tons, similar to the third quarter 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%. In other US thermal shipments were 4.2 million tons as expected and above the 3.8 million tons from the previous quarter due to increased customer demand. Our customers did see their inventories come down in July and August but September likely saw inventories increase again. Looking to 2024, we said comfortably with about 80 million tons priced at $13.77 a ton in the PRB and nearly 15 million tons priced at $51.18 per ton in other US 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 are 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. 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 phase 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 coal. Since commencing redevelopment in North Goonyella in late 2022, the company has invested $75 million 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. I’ll now turn it over to Mark to cover the financial details.

Mark Spurbeck: Thank you, Jim. In the third quarter, we recorded net income attributable to common stockholders of $120 million or $0.82 per diluted share and adjusted EBITDA of $270 million. The company generated $87.5 million of operating cash flow from continuing operations, which included an increase in working capital of $81 million, largely reversing the second quarter working capital benefit as expected. We also reached a $72 million cash settlement with the Department of Labor for Black Lung liabilities related to discontinued operations. The settlement discharged a $76 million 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 million to shareholders, reduced our share count by 9.3% and have $713 million of remaining authorization under our share repurchase program. We remain steadfast in our commitment to return at least 65% of annual available free cash flow to shareholders. After the recently declared third quarter cash dividend of $0.075 per share based on year-to-date results, $103 million is currently available for additional share repurchases. Turning now to third quarter segment results. Seaborne thermal recorded $116 million of adjusted EBITDA. Higher production at Wilpinjong and a lower mix of Wambo underground production, reduced cost to $43.68 per ton below the low-end of our guidance. Despite lower price realizations from additional high-ash Wilpinjong production, adjusted EBITDA margins were approximately 40%.

The seaborne metallurgical segment generated $79 million 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 third quarter, compared to 86% in the previous quarter. Despite the relative weakness in PCI coal prices, the segment reported 32% adjusted EBITDA margins. The US thermal mines produced $103 million of adjusted EBITDA, an increase of 32% over the prior quarter, benefiting from much stronger demand for PRB coal. The PRB mines generated $54 million of adjusted EBITDA and shipped 22.7 million tons, exceeding guidance by more than 8%.

PRB margins improved substantially to $2.38 per ton, up from $1.38 last quarter due to higher shipments and lower maintenance costs. The other US thermal mines delivered $49 million of adjusted EBITDA. Shipments of 4.2 million tons were in line with expectations, while costs were a bit higher due to timing of repairs, contracted services and higher fuel costs. Taking a peak at our outlook, full year guidance has improved in a couple of areas. We are lowering seaborne thermal cost guidance $5 per ton to $45 to $50, as we expect full year volumes to be at the higher end of the 15 million to 16 million ton range. Our reclamation efforts continue to be efficient and we are reducing the expected cash required for final reclamation by $5 million to a range of $60 million to $70 million.

Specifically for the fourth quarter seaborne thermal export volumes are expected to increase to 2.8 million tons. 500,000 tons are priced on average at $161 per ton and 1.5 million ton of high-ash product and 800,000 tons of Newcastle products are un-priced. Costs are expected to be $45 to $50 per ton. Seaborne metallurgical volumes are projected to be 45% higher at 2.2 million in tons 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 third quarter. 200,000 tons are priced at $164 per ton and the remaining un-priced 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 million tons, resulting in full year volumes at the high-end of our guidance range. In the fourth quarter, we expect average realized prices of $13.30 per ton and cost of $11.55 per ton. Other US thermal shipments are expected to be 4.1 million tons in line with the third quarter, resulting in full year volumes at the low-end of our guidance range. In the fourth quarter, we anticipate an average price of $51.40 and costs 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 fourth quarter. 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.

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Q&A Session

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

Lucas Pipes: Thank you very much, operator. Good morning, everyone.

Jim Grech: Good morning, Lucas.

Lucas Pipes: My first question is on Wards Well and I want to make sure I understand that the structure of that deal right? It’s $136 million cash and then a royalty — contingent royalty of $200 million. Does the $136 million of cash kind of — does that get paid on closing? And then the $200 million, 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 on Wards Well. And that is when would you expect to mine that adjacent deposit? Thank you very much for your color on that?

Jim Grech: Yes. Hi, Lucas, Jim Grech here. And first off congratulations on that beautiful [indiscernible] you had just a few days ago.

Lucas Pipes: Thank you.

Jim Grech: So some important thing…

Lucas Pipes: Thank you.

Jim Grech: So the $136 million is — let me see if I can remember all your questions here. That will be paid on closing. We expect that to go up sometime in the first quarter of next year. And the $200 million 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 if it is at the end of this decade if not into early — into the 2030 time frame that we would expect that royalty to start being paid. Is that — and I’m sorry you had a couple of other questions and I’d try to answer. Could you repeat them for me?

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

Jim Grech: 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. The way it’s laid out is we would still mine the North Goonyella reserves first. And what we’re looking at is the timing of when we would then jump into the Wards Well reserves. They’re 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 to Wards 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 to Wards Well.

So we’re looking at what gives us the best cost structure with the different mine plans. So it could be a few years out to maybe four or five years out depending on how we — after we start longwall production right? So it depends on what gives us the best cost structure. What’s very good about those reserves though Lucas is having that optionality is because it’s the same call scene. 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 of 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 hit those reserves.

And again, we’re still — we’ve just signed a deal. And you asked about the payment. Again that would come at closure which again we expect that to be in the first quarter.