U.S. Markets open in 3 hrs 46 mins

Edited Transcript of BTUUQ earnings conference call or presentation 29-Oct-19 3:00pm GMT

Q3 2019 Peabody Energy Corp Earnings Call

ST. LOUIS Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Peabody Energy Corp earnings conference call or presentation Tuesday, October 29, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Amy B. Schwetz

Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer

* Glenn L. Kellow

Peabody Energy Corporation - President, CEO & Director

* Vic Svec

Peabody Energy Corporation - SVP, Global Investor and Corporate Relations

================================================================================

Conference Call Participants

================================================================================

* Christopher Michael Terry

Deutsche Bank AG, Research Division - Research Analyst

* David Francis Gagliano

BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst

* Lucas Nathaniel Pipes

B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst

* Mark Andrew Levin

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

* Matthew Vittorioso

Jefferies LLC, Research Division - Analyst

* Matthew Wyatt Fields

BofA Merrill Lynch, Research Division - Director

* Michael Stephan Dudas

Vertical Research Partners, LLC - Partner

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to Peabody's third quarter earnings Call. (Operator Instructions) As a reminder, today's call is being recorded today, October 29, 2019.

I'd now like to turn the conference over to Mr. Vic Svec, Head of Investor Relations and Communications. Please go ahead, sir.

--------------------------------------------------------------------------------

Vic Svec, Peabody Energy Corporation - SVP, Global Investor and Corporate Relations [2]

--------------------------------------------------------------------------------

Okay. Thank you, Paula, and good morning, everyone. Welcome to BTU's earnings call for the third quarter. And with us today are President and CEO, Glenn Kellow; as well as Peabody's CFO, Amy Schwetz. During our formal remarks, we'll reference our supplemental presentation, and that's available on our website at peabodyenergy.com.

Now on Slide 2 of this deck, you'll find our statement on forward-looking information. We encourage you to consider the risk factors that are referenced here as well as our public filings with the SEC.

I would also note that we use both GAAP and non-GAAP measures. We refer you to a reconciliation of those measures in the presentation as well as our earnings release.

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

--------------------------------------------------------------------------------

Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [3]

--------------------------------------------------------------------------------

Good morning, everyone. We had an active quarter with some notable achievements, several challenges and multiple changes to our portfolio and organization.

First, on the achievement front. I'd like to recognize the Powder River Basin, which turned in multiyear low costs. In addition, we are advancing what we expect to be a highly synergistic joint venture with Arch Coal involving our PRB and Colorado assets.

On the ESG front, our operating teams continue to excel in safety and land restoration, taking a coveted Sentinels of Safety award as well as 2 Office of Surface Mining reclamation awards this month.

The quarter wasn't without challenges. And as we noted last month, we were affected by reduced seaborne volumes and pricing, recovery from a highwall failure at the Middlemount joint venture and deferrals of shipments. You've also seen us pay back in the Midwest given reduced demand.

Finally, I mentioned ongoing changes to the portfolio and organization. We believe the completion of the pending PRB/Colorado JV represents a tremendous opportunity to create substantial value.

With North Goonyella, while we remain frustrated along with everyone by the protracted timing, we've also identified a path forward. We continue to work to ensure safety, de-risk the process, optimize the mine plan, reduce and stage costs and maximize the value of the asset. Also, as expected, we have closed the profitable Kayenta Mine and announced the likely closure of the Wildcat Hills operations in the Midwest.

In Australia, the United Wambo JV with Glencore has received a major permit approval, and we've also decided to proceed with the Moorvale South extension. There's no question that downdrafts in industry conditions can lead to pressures, but also opportunities, and we continue to evaluate those opportunities with an eye to improve asset quality, generate cash flows, unlock synergies and create shareholder value.

Finally, we have made significant strides to streamline our organization, reset operational performance and strengthen our portfolio, and work here will continue in coming months.

With that, Amy will now cover the financials in more detail.

--------------------------------------------------------------------------------

Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [4]

--------------------------------------------------------------------------------

Good morning, everyone. As I characterize the last year, we recognize that challenges, particularly from our met segment that have led to a lack of consistency and result, a consistency to both you and we rightly came to expect.

We would note that the met coal segment continues to be challenged. In part due to asset quality, we have long acknowledged this middle of the road, and we continue to work to upgrade. Shoal Creek has been a great addition to the portfolio, and more needs to be done. As we move through the call, we will discuss actions underway to address these issues.

On the other hand, here is what Peabody has delivered. Our U.S. operations continue to generate cash flows many times that of our CapEx even with the industry backdrop. Our seaborne thermal operations are highly profitable even as higher domestic obligations have pressured export volumes. And we've put nearly $4 billion into investments in the business, liability reduction and shareholder returns in the last 2.5 years.

Against that broader backdrop, let's look at the quarter in more detail, beginning on Slide 4. Third quarter revenues totaled $1.11 billion, down 22% from the prior year, reflecting reduced met coal volumes and $90 million in lower pricing, excluding the impact of higher financial revenues.

As expected, DD&A in the third quarter declined $28 million versus the prior year from portfolio changes and lower contract amortization. We also reduced SG&A by 17% to approximately $32 million on a decline in personnel costs. Other items to note include $8 million in legal expenses related to the PRB Colorado joint venture, as well as the $20 million impairment charge associated with the Wildcat Hills Mine in the Illinois Basin.

Earnings from equity affiliates reflects a loss of approximately $21 million related to the independently operated Middlemount joint venture after the highwall failure in late June. These impacts resulted in a loss from continuing operations, net of income taxes, of $74 million and a loss per share of $0.77.

Adjusted EBITDA totaled $150 million for the quarter compared to $372 million in the prior year, with the largest factor related to the decline of more than $300 million in revenue on lower pricing and volume.

Let's take a closer look at operating performance, starting with our seaborne thermal segment. In line with expectations, seaborne thermal volumes picked up quarter-over-quarter, increasing to 3 million tons of export thermal sales at an average realized price of $72.24 per short ton. Higher quality Newcastle volumes represented 74% of the mix and accounted for favorable realizations even as Newcastle spec prompt pricing moved below the 10-year average. This segment generated third quarter adjusted EBITDA of $77 million despite some $60 million of lower pricing. Margins for seaborne thermal totaled 31%, underpinned by a strong cost performance at both the Wambo Underground and Wilpinjong mines.

Within met coal results, sales were impacted by customer-driven deferrals and a lack of production from North Goonyella. Third quarter shipments totaled 1.8 million tons at average realizations of $120.94 per ton. Lower volumes, along with higher ratios at the Coppabella Mine and an extended longwall move at Metropolitan Mine resulted in elevated met coal costs of $113.63 per ton, excluding North Goonyella. In addition, lower yields and conveyor downtime, followed by subsequent upgrades led to elevated costs at Shoal Creek.

Within U.S. thermal, adjusted EBITDA of $153 million was largely in line with the prior year as cost improvements in the PRB and Midwest offset the impact of lower pricing and volume. The PRB achieved cost per ton of $8.69, a multiyear low. That's 4% below prior year and 12% lower than the first half of 2019. This led to PRB margins of 21% during the quarter and levels that continue to be the best in the basin again this year.

In the Western segment, adjusted EBITDA increased $18 million versus the prior year on strong performance from Twentymile and increased revenues associated with customer funding for postmining costs at Kayenta. Even with a 14% reduction in sales volumes, the Midwest delivered adjusted EBITDA in line with the prior year as margins increased over -- both over the previous quarter and 2018 levels.

On Slide 5. Free cash flow totaled $92 million driven by operating cash flows of $176 million and CapEx of $86 million. As of quarter end, cash and cash equivalents totaled $759 million, with continued healthy liquidity levels of $1.35 billion. We remain committed to ensuring financial strength, and we've taken considerable steps to ensure that strength. And we believe we have a balance sheet that is well positioned for volatility inherent to the mining industry.

Year-to-date, cash returned to shareholders has been largely balanced between buybacks and dividends. Share repurchases accelerated in the third quarter relative to the second, totaling $144 million. As a result, Peabody share count has been reduced by 30% since our listing to about 97 million shares today.

We remain committed to shareholder returns as a basic tenet of our investor appeal, understanding that modest deleveraging and reduced coal pricing moderate our near-term cash flow generation. Our balance sheet is strong, our cash level is high, liquidity has only increased since last quarter and our reduction in liabilities has nearly matched our substantial shareholder returns in the past 10 quarters, which by themselves nearly total our entire market cap.

Turning to Slide 6. We are updating our full year guidance ranges for a number of items. Starting with our seaborne thermal export volumes, we now expect about 11.5 million to 12 million tons for 2019 on increased required domestic shipments. This reflects the lower end of the initial range we gave at the beginning of the year. Our cost guidance remains unchanged. Met coal sales for the full year are now expected to be between 8.5 million and 9 million tons. This reflects the softer PCI spot market as well as production challenges. We've seen some recent interesting pricing dynamics between imported and domestic coal in China and are keeping a close eye on the arbitrage between December and January pricing, and will defer volumes if it's economically rational. As a result, we anticipate full year met coal costs of about $100 per ton.

In the U.S., we have tightened our ranges for PRB volumes and lowered Midwest volumes. The midpoint of our PRB volume guidance remains at 110 million tons, reflecting strong third quarter and October shipments. Given the events of the summer, the majority of shipments for the remainder of the year represent lower-quality coal for customer requests.

In the Midwest, we are now expecting volumes of about 16 million tons due to production declines at several mines on lower customer requirements along with negotiated deferrals. We have lowered the higher end of our overall U.S. cost guidance and now expect costs to be between $13.95 and $14.45 per ton. We also continue to refine our capital requirements and are reducing our 2019 CapEx range to $300 million to $325 million.

Fourth quarter adjusted EBITDA is expected to be lower than the third quarter primarily as a result of the closure of the Kayenta Mine, which contributed $30 million in the quarter. We also expect higher volumes across multiple segments, an increase in required Australian domestic thermal shipments and lower pricing to impact results.

Looking ahead to next year, about 75% of our PRB volumes are now committed for 2020. Current mine plans show increasing volumes of higher BTU coal in 2020 than in 2019.

We continue to have a strong contracted position in the Midwest. We have about 13 million tons of Midwest volumes priced for 2020 at an average of $39 per ton, with some 11 million tons priced at a similar level for 2021. This reduced volume reflects portfolio changes made during 2019 as well as an already fully priced book for 2020. In a basin with significant swings in export demand, we see this committed position as a significant competitive strength.

From a seaborne perspective, we are now anticipating closure of Millennium in early 2020 as we've been quite successful at highwall mining, which has continued to extend its life by multiple months. We are anticipating some 900,000 tons to be sold this year from Millennium. And we've also extended the lives of our seaborne thermal open-cut operations through both the Wilpinjong extension and United Wambo JV, and therefore we'd expect similar volumes as 2019.

Let's now look at the industry fundamentals that have been at play, beginning on Slide 7. Recently, we've seen a rebounding in met prices, following a 20% decline in the average prices from the second to the third quarter of 2019. Chinese met coal imports remained strong, with August marking a new monthly met coal import record of more than 9 million tons. We expect the pricing spread between domestic Chinese coking coal and imports to create tension with import restrictions and incentivize imports as we move into the new year.

In addition, rising India met coal imports are projected to maintain momentum on growing steel needs, which India is unable to source at home.

Growth in met exports by Australia, Russia and Mongolia have been muted by declining U.S. shipments. And as we look ahead, capital investment in both metallurgical and thermal coal has declined in recent years as coal use continues to rise. From 2011 through 2013, $154 billion of capital investment was deployed by major coal-producing regions. In the last 3 years, only $72 billion was deployed, representing less than half the capital that was invested during the last peak cycle.

Moving to seaborne thermal. Prices have lifted from their September lows in recent weeks. As expected, ASEAN import demand continues to drive seaborne thermal growth. Vietnam imports have more than doubled year-to-date through September. China and India have continued to show strength, with imports rising some 20 million tons.

On the supply front, both U.S. and Colombia exports have declined sharply through August in response to unfavorable netback pricing. And as we look ahead, we would expect ASEAN countries to continue to offset declines in Atlantic demands over time as urbanization and new coal fuel capacity creates greater need for imports. It's no coincidence that Peabody is positioned in Australia as we expect to observe these growing demand centers.

Glenn?

--------------------------------------------------------------------------------

Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [5]

--------------------------------------------------------------------------------

Thanks, Amy. Okay, and that's the industry backdrop. And now I'd like to walk through a full agenda of business updates, starting on Slide 8. We're taking aggressive near-term actions centered on our 3 strategies targeted towards long-term success and creating value for shareholders. Activities in each of these areas are well under way to seize opportunities as well as combat pricing pressures, rising overburden ratios and reduce scale. We also believe these actions will be enhanced by steps to streamline the organization and strengthen the portfolio.

Last quarter, I noted that we're advancing a review of the company's organizational structure with the assistance of outside advisers. Currently, we are continuing to transition from a business unit structure and are reshaping the organization to ensure the operations are squarely focused on safety, cost and volume. This centers our operations on the basics while streamlining the typical corporate functions of finance, IT, supply chain, among others. We believe this new structure will increase efficiencies and lower costs in 2020 and beyond.

In the broader project, we have identified annualized cost improvements totaling $50 million, and further analysis is underway to capture additional savings over time.

Let's now look at our seaborne strategy on Slide 9. We offer Tier 1 seaborne thermal coal operations and are actively exploring means to upgrade a met coal platform we have always characterized as mid-tier. Any changes to our seaborne portfolio would include both organic and inorganic growth opportunities over time.

Some examples of this. Firstly, with Peabody and our partners, we've approved the Moorvale South extension project. This extends the mine life to 2029, and we also expect increased coal quality. We will transition from a greater mix of PCI to an enhanced coking coal profile as early as next year. The project also provides optionality for future extensions and allows continued blending with Coppabella coal. Moorvale South will utilize equipment transferred from our Millennium mine, which leads to low capital requirements of about $30 million for the project.

Next, we are planning to operate 2 longwall kits at Shoal Creek in November. The mine is transitioning to a new district, which provides an opportunistic window to run both longwalls at once for a brief time. We expect this will result in increased fourth quarter production over muted third quarter levels. We are also upgrading the conveyor system to improve long-term reliability. Other activities include improving equipment utilization and mining methodology at the Coppabella mine given a several-year elevation in overburdened ratios.

Our progress continues at North Goonyella. To date, we've stabilized the mine, ventilated and reentered Zone A, preserved the opportunities to excess reserves and ensured the safety of every individual on site. In July, we noted we're evaluating paths to recognize value from this asset given the long delays where tasks that should have taken days were taking weeks and even months. We have since completed our detailed review and assessment and we'll forego attempts to access the 10 North panel that would have required us to explore and mediate the most impacted areas of the mine under unusual and protracted measures. Overall, we believe the highly restrictive approach from QMI has required a greatly disciplined approach from Peabody. As such, we have identified a preferred path, which is to mine the southern middle seam reserves, beginning with the 6 South panel. We believe this path represents significantly lower risk, the best path to return to regular way of mining and maximizes the value of a mine with a potential life of several decades.

Peabody's preferred path will include the ventilation of Zone B using boreholes from the surface. Incremental spending for ventilation is contingent on obtaining pre-approval from QMI, and that process is underway. Following plant ventilation, we intend to reenter Zone B and assess conditions with the target of developing the southern panels. These panels include approximately 20 million tons of high-quality hard coking coal. At this point, we have completed most of the essential work needed in Zone A. Let me be clear, all steps we've taken thus far have not only been necessary but beneficial to preserve access to an additional 65 million tons of hard coking coal in the lower seam. Development of that longer-term project is now in the pre-feasibility stage.

During our review, we considered a host of options, including the mine -- to mine the southern panels from the surface to access multiple seams. Given current variants such as the cost of the box cut, timing of permits and cash flows, this was determined not to be the preferred path. At this point, we believe it's far easier to control money than time. Given the expected length of time to ventilate Zone B, we are significantly lowering labor requirements and planned holding costs. As such, we reduced most of the remaining salaried and hourly workforce and are looking to offer potential employment opportunities to fill vacancies at other Peabody mines where practical.

We are also reducing our quarterly run-rate estimates for 2020 to approximately half that of recent levels. In addition, steps are being taken to market our take-or-pay commitments as well as our use of our prep plant and loadout infrastructure, which could further reduce quarterly costs by a further half again. Only if we gain preapproval, we would then expect to incur additional costs of $12 million to $15 million to ventilate Zone B over a multi-month period. Assuming the successful ventilation or reentry at Zone B, we estimate 2020 project capital costs of approximately $50 million to $75 million beginning in the second half of the year with development of 6 South. A panel of this length should require about 18 to 24 months to develop based on typical development rates, and then we would have been in a position to begin longwall production. As you would expect, we will continue to refine capital and cost estimates as work progresses through Zone B. I'll reiterate that we are not committing to incremental capital until we've ventilated and explored Zone B. We will also look to mitigate cash outlays by selling development tons into the market.

Within seaborne thermal coal, the United Wambo Joint Venture received a key approval from the New South Wales Planning Commission in late August. The final step is a federal permit that we expect to be granted later this year. Sharing of production is projected to begin by the end of 2020. The JV is expected to optimize mine planning and improve strip ratios, enhance quality and has the potential to extend the life of this mine beyond 2040.

We are also working to improve fourth quarter production volumes at Wambo Open-Cut and Wilpinjong through the use of additional equipment from Millennium. Equipment was transferred to Wambo and Wilpinjong later in the second quarter of this year to improve second half production volumes.

Turning to Slide 10. Within the U.S., we are continuing to take necessary actions to adjust to challenging industry conditions through a combination of optimizing mine plans, paring back operations and matching our workforce with customer demand. Our focus is on maximizing cash generation. And Amy noted earlier how U.S. adjusted EBITDA has outpaced cash outlays by 5.5x in recent years, demonstrating the significant benefits of this business even at a time of declining demand.

First, the centerpiece of activities in the U.S. is certainly the pending PRB/Colorado joint venture with Arch. The JV is continuing to progress through the regulatory approval process. Recently, Peabody and Arch agreed to a time line with the FTC, with a review anticipated to include [sic] [conclude] during the first half of 2020. Assessment continues to validate that the JV is expected to unlock synergies with a pretax NPV of $820 million.

Next, in the Illinois Basin, we are centering the portfolio around our core mines to maximize value. We are shifting contracts to more productive mines, extending contracted volumes into future years and scaling back production and workforces at several mines. Just this month, we announced the likely closure of the Wildcat Hills Mine, which was essentially breakeven on a year-to-date perspective.

Finally, we are continuing commercial negotiations with the power plant owner regarding the final closing obligations at the Kayenta Mine. As a result, we'd expect potential incremental near-term cash flows.

I'll turn it back to Amy to cover our third strategy around our financial approach.

--------------------------------------------------------------------------------

Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [6]

--------------------------------------------------------------------------------

Our financial approach was one of our earliest commitments upon emergence, and I believe we have made tremendous progress.

On Slide 11, to briefly recap our actions since mid-2017, the company has generated $2.5 billion in free cash flow and reduced total liabilities by approximately $1.3 billion. We've reinvested $1 billion in the business through sustaining capital expenditures, life extension projects and the acquisition of a highly profitable Shoal Creek Mine. We've advanced the PRB/Colorado JV and returned $1.6 billion to shareholders. As you can see, we've been quite holistic in our approach and still have over $1.3 billion in liquidity at quarter end.

During the third quarter, we initiated an opportunistic refinancing initiative with key requirements and a robust set of objectives. Through this process, the company successfully upsized its revolving credit facility from $350 million to $565 million, and extended the duration of $540 million of the capacity to 2023. We also obtained amendments to the credit facility as a necessary step to enable the pending PRB/Colorado JV, while leaving the company's existing 2022 and 2025 notes outstanding at this time.

We are planning to move to the lower end of our gross debt range of $1.2 billion to $1.4 billion, while maintaining our liquidity target of $800 million. With our increased revolver capacity, we can move to a lower debt level in a liquidity-neutral manner.

In addition, a lower debt target better accommodates future portfolio changes and lowers fixed charges, in turn, further -- and in turn, further enables cash returns to shareholders. We will continue to evaluate appropriate gross leverage targets, taking into consideration company-specific and industry-related factors as we move into 2020.

That's a review of the quarter, the industry and our steps to create value. With that, I'd like to turn the call over for questions. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We'll go to Lucas Pipes with B. Riley FBR.

--------------------------------------------------------------------------------

Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [2]

--------------------------------------------------------------------------------

I want to follow up a little bit more about the pathway for North Goonyella. So the way I understand it, you will have ongoing quarterly costs, call it, $10 million after the reductions you announced, then 10 -- and then $12 million to $15 million to ventilate Zone B. And if that's successful, $50 million to $75 million to develop 6 South. What could come after that? I think the market is really looking for some holistic guidance on what the total costs could be to bring this operation back into production. So if there's anything else that would have to be spent, I think that would be really helpful to know now.

--------------------------------------------------------------------------------

Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [3]

--------------------------------------------------------------------------------

So Lucas, I'll start, and I'm sure Glenn will jump in. I guess to start with, we've talked about reducing that holding costs essentially by half, and that is in part due to the labor reductions that are underway in Australia right now. And we're looking at ways to reduce that by another 50% through reduction in take-or-pay costs, in the costs associated with idling the prep plant.

We've talked about -- you're right about the $12 million to $15 million that would be incremental to ventilate Zone B. And then in the back half of the year, we'd anticipate moving into development of those southern panels. The first panel we're going to develop is quite a large panel, longer than the one that we would have developed from the other end of the mine had we progressed further into the affected zones. And so we'd anticipate, depending on when development starts, that we would spend between $50 million and $75 million of capital in 2020.

We've not commented before that or beyond that for a couple of reasons. One, the amount of capitalization will depend on when we switch over to development. So some of the costs that we're spending today if we were in development mode would be part of the capital expense of the project. And the other element of this is that we need to get our labor strategy firmed up in terms of what the labor will be employed on-site during these processes, and also what the revenue is that we'll generate from the development tons that we produce during that period of time. That won't necessarily impact the cost or the capital deployed to the project, but it will impact the net cash outflows from that project as we move through that period of development.

The one comment that I would make, and one of the reasons why we feel confident moving forward with this preferred path, is as we look at the southern panels of the mine, we've become more and more confident that the cost structure in the south is at or lower than the cost structure that North Goonyella was at previously, and the returns under a range of options that we've looked at have appeared robust.

--------------------------------------------------------------------------------

Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [4]

--------------------------------------------------------------------------------

And maybe just a few other things there. And obviously, what we're talking about is a stage and de-risk approach. And Step 1 is to get the cost structure down, which Amy indicated, by half and then a further half being targeted. We're then not going to commit to additional capital, which, in part, increases the -- well has the potential to increase in time, but I think is a more prudent and de-risked approach. The first initial milestone will be getting -- which is unusual but based on discussions and negotiations, attempting to get a preapproval of our plan with QMI prior to undertaking and committing to the reentry of Zone B. Based on whether we assess that, as Amy's -- and move our way through, it's our intention then that we move into development. This is a 3,200-kilometer panel initially. And -- sorry [length of] kilometer, length of panel initially, and that would require about an 18- to 24-month development. Now you would get development tons or significant development tons out through that process, but longwall production wouldn't occur until the end of that 24 months or 18- to 24-month period.

--------------------------------------------------------------------------------

Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [5]

--------------------------------------------------------------------------------

Okay. That's helpful. I think it would still be helpful to know if there's ballpark additional capital required beyond the $50 million to $75 million, especially given the duration of that development and the uncertainty we've seen to date.

But I'll switch over to my second question. On September 5, you confirmed full year targets. And I think at the time, your met coal -- and this does not include North Goonyella -- met coal production cost guidance was $90 to $95. Now it's about $100. And I think you alluded to it in terms of cost drivers, but that's still a very significant cost increase in 2 months. What happened? And if you could put a dollar sign next to the unanticipated cost increases, I would very much appreciate it.

--------------------------------------------------------------------------------

Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [6]

--------------------------------------------------------------------------------

So as we look at the increase from the -- from what we had indicated would be at the high end of the range of about $95 to around $100 in this release, I'd really -- I'd characterize that in 2 components. The first is some unplanned outages and some changes that we have in volumes from Shoal Creek. Shoal Creek has had a fantastic start to the year in our portfolio this quarter. This quarter, we saw that performance change a bit for 2 reasons, one of which we had anticipated, changing yields. We had anticipated it a flag, as something that, from time to time, will generate volatility in their costs. But some unplanned downtime on the belt system at the mines was not factored in our cost and our volume guidance ranges for the back half of the year.

And then the second piece of this is really the performance out of the CM JV in the back half of the year. And I would characterize that as 2 things: one, we're moving through areas of higher overburden. We've talked about that at length. But impacting that as well is just overall demand for that product as we look to move spot volumes in the back half of the year, so some of those deferrals of shipments. And when we say shipments, you're talking about sort of 5 boats, maybe, or 5 shipments in the back half of the year that we see will likely be deferred as we move forward. And that impact of volumes is likewise impacting costs and pushing us -- pushing that to that $100 a ton level.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Moving on, we'll go to Chris Terry with Deutsche Bank.

--------------------------------------------------------------------------------

Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [8]

--------------------------------------------------------------------------------

A few for me. Yes, maybe just starting on North Goonyella. I appreciate all the detail you've given on that first answer. But just maybe reflecting on what you -- how you're seeing things now versus when you first started to go back into the mine. Would you say that the majority of it has just been the time delays that has meant that you've had to change the approach? Or has it been technical, has it been cost-driven? Maybe if you could just summarize where you got to in the review, and what the key findings were for the change in tact at the moment? Or is it somewhat market-driven as well?

--------------------------------------------------------------------------------

Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [9]

--------------------------------------------------------------------------------

Yes. It's a good, great question, Chris. So a couple of dimensions to that. And I think I'd say it's been the approach as part of the regulatory protocols that we've been operating under that are different to what we envisaged when we started. I don't think we've seen anything significant as we described on the call last time that was unusual in what we were expecting versus what we would have anticipated as bad conditions. But tackling those conditions, and working our way through on what has been a highly -- well, an unprecedented process in Queensland, although it's not unprecedented globally, has meant the protocols that we're operating with under has just required a different technical approach. And that, in turn, has led to a significantly greater time.

As we look ahead, if we extrapolated that time, and to some degree the uncertainty of gaining approval for elements within that from QMI, it just became impossible to predict being able to reach the 10 North panels in a commercial way. That's enabled us to focus on the Zone B reentry process, which in turn is likely to give us a greater chance of success in gaining approval of QMI, which will then enable us to get into regular way of mining in terms of back to the regular way, gate-road development of the longwall operation. So -- but the long answer is the regulatory protocols, which we've described in the past have really necessitated, I think, a different approach and a de-risked-based approach as we work our way through.

Having said that, we are cognizant of the market conditions. And we're continuing to drive to lower holding costs through the immediate period.

--------------------------------------------------------------------------------

Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [10]

--------------------------------------------------------------------------------

Okay, thanks for the color. A question for you, Amy. Just on the total CapEx this year, the $300 million, $325 million. How do we think about the setup into 2020 for that number against the cost savings that you're trying to achieve? I assume you'll give guidance at a later date. But I just wondered directionally if you could talk through the moving parts?

--------------------------------------------------------------------------------

Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [11]

--------------------------------------------------------------------------------

Yes. So I think we generally talk -- we'll generally talk about sustaining capital across both the U.S. and Australia being around $200 million annually. We've talked about Wambo and Wilpinjong being about $100 million of spending. I will say a good portion of our deferrals have come from Wambo Open-Cut. But as we look at our reduced CapEx for the year, some of that has just been understanding what it is that we can afford and what their returns on in that mix as well. So our shifting of guidance involves both reductions and deferrals out of that amount.

And then, of course, we've talked about North Goonyella, potentially $50 million to $75 million next year, dependent on achieving the approvals that we've talked about.

--------------------------------------------------------------------------------

Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [12]

--------------------------------------------------------------------------------

Yes. I'd add Moorvale South -- sorry Chris, but I'd add Moorvale South into that as well. And as we to look to that project, we had over 100% returns associated with that. And so the mix -- changing the mix to a greater quality in there, as well as the significant life extensions. I would say, I think Amy was talking about indicative levels. We're obviously working through the capital budgeting process now. And those sustaining numbers, we'd expect to be able to manage.

--------------------------------------------------------------------------------

Christopher Michael Terry, Deutsche Bank AG, Research Division - Research Analyst [13]

--------------------------------------------------------------------------------

Okay. And just the last one for me. Just on the Arch JV, you said first half 2020 to provide an update. I just wondered if you could give some comments on the feedback you provided to-date, whether the existing framework is one that you think will still pass into next year.

--------------------------------------------------------------------------------

Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [14]

--------------------------------------------------------------------------------

Yes, I think what we've entered into is an agreement that outlines a time line for the completion of the review, which we'd expect to occur in the first half of this year. That's been entered into by both parties and the FTC.

I think the indications to-date, everything we see continues to support the fact that we believe that it's an oil fuels market, that coal is competing significantly against subsidized renewables and cheap natural gas. As we've looked at the synergies, and once again this is really a unique transaction by nature of the assets coming together, that everything we've done to date has reconfirmed those synergies and we feel comfortable about that. So we think we continue to have a very strong case. We've received a lot of support from stakeholders through that process. But it is one in which, as you can understand, is a methodical and rigorous process with the FTC. But I think the good news there is we have an agreed time table, and we're focused on delivering the transaction in the joint venture and the significant synergies that we've outlined.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Next, we'll go to David Gagliano with BMO Capital Markets.

--------------------------------------------------------------------------------

David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [16]

--------------------------------------------------------------------------------

Just regarding North Goonyella again. Are you exploring any other alternatives besides the development process, i.e., perhaps selling some or all of it to spread some of this longer-term development risk?

--------------------------------------------------------------------------------

Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [17]

--------------------------------------------------------------------------------

Yes. I'd say all options are on the table, David. We indicated previously that we would explore commercial options and alternatives and synergies. I think the other addition, which I called out is that we do have a project in pre-feasibility, which is about the lower seams.

But North Goonyella is a fantastic resource and reserve, of which this mine should have a multi-decade mine life with a high-quality, hard coking coal product. We have the infrastructure. And the returns on any of the projects that we see with respect to North Goonyella are extremely attractive, and that's why we continue to be focused on finding a way to bring North Goonyella back online in a way that's commercially prudent.

And this approach, which we believe is low-cost, de-risked, we think represents the best path to do that.

But all commercial alternatives are on the table, Dave, which we, in part, flagged 3 months ago.

--------------------------------------------------------------------------------

David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [18]

--------------------------------------------------------------------------------

Great. Okay. And okay, I'll leave it that for that question. Just on foregoing the 10 North path, how many reserves -- prudent probable reserves are impacted from that change?

--------------------------------------------------------------------------------

Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [19]

--------------------------------------------------------------------------------

Yes. I mean it's 3 million tons. There might have been a little bit in an adjacent panel, which we weren't mining beyond that. But I'm going to say 3 million tons.

--------------------------------------------------------------------------------

Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [20]

--------------------------------------------------------------------------------

About 1 year's worth of mining.

--------------------------------------------------------------------------------

Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [21]

--------------------------------------------------------------------------------

Yes, that's right.

--------------------------------------------------------------------------------

David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [22]

--------------------------------------------------------------------------------

Okay. All right. That's helpful. And then just on the CapEx question again. For 2020 or sort of indicative commentary, I guess, sustaining CapEx, you mentioned was $200 million annually, and then an additional $100 million for Wambo and Wilpinjong, and then $50 million to $75 million for North Goonyella. I heard all those numbers. Are there any other numbers we should be thinking about? And are those numbers...

--------------------------------------------------------------------------------

Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [23]

--------------------------------------------------------------------------------

So I think the -- yes, so I think the other number to think about is the $30 million on Moorvale South. And the one thing that I would comment on is the caveat that Glenn made is that we are working through our capital plans for 2020 as we speak. And certain numbers, particularly that sustaining number and the timing of project capital, continue to get quite a bit of scrutiny internally. So we'll work through that, particularly in light of volume profiles as we look at 2020.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Moving on, we'll go to Matthew Fields, Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [25]

--------------------------------------------------------------------------------

Glenn, Amy, can you give us on the project -- you got a timetable on the Arch JV finalization, hopefully. Can you give us an idea about how you plan to come back to holders of the '22s and '25s to affect the changes you need to complete the transaction?

--------------------------------------------------------------------------------

Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [26]

--------------------------------------------------------------------------------

Yes. So Matt, we're currently in process of developing plans for those bonds at this point in time. We got feedback from the market in September. We're taking a look at that feedback with our advisers and determining our next move.

Based on that feedback, and partially in part to that feedback, we've indicated in this release that we're moving towards the low end of our targeted debt range of $1.2 billion. We also referenced that we'll continue to evaluate those levels as we move into 2020 based on company-specific and industry factors. And I would say our strategy for those bonds, and maybe part of those company-specific factors that we look at going forward. Obviously, we have options to look at this as a partial refinance or the consent process, and we're still working through those details.

We do -- I would just reiterate with respect to this joint venture, that we definitely believe that this is a credit-positive transaction. And so it's something that we think is to the benefit of bondholders as we move forward.

--------------------------------------------------------------------------------

Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [27]

--------------------------------------------------------------------------------

And as a follow up -- I'm happy to hear that you're saying you continue to evaluate those gross debt targets. If met coal stays at $150 a ton, is that something that would sort of move the goalpost on where you think that gross debt number should be?

--------------------------------------------------------------------------------

Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [28]

--------------------------------------------------------------------------------

Certainly, as we shake out what 2020 looks like for us, we'll take a look at that. I'll comment that we believe that $150 for met coal is a price that we should be able to make money at. And we've talked about corrective actions that we want to take with respect to our met coal mines to bring our cost structure down. But you're absolutely spot on, not necessarily with met coal costs but with our overall view of the market and our overall view of cash flows that as we progress, we'll certainly take a look at those factors as we develop a debt -- our gross debt range.

I'd just comment overall that -- and we need to be more specific about this because I don't think that the capital markets fully understood this, that our financial targets are always what I would determine as flexible, meaning they are under review on a fairly continual basis. So we -- that's not something that we woke up in September and said, "Oh, we need to continually look at these," but it's something that I don't think we made clear to the market. So when we talk about our financial objectives being generate cash and maintain financial strength, we really do view those as sort of the tickets to entry to reinvesting in the business and allocating and providing shareholder returns. But that's something that we certainly understand, that we need to make that point clear to the markets as we move forward.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Next, we'll go to Matt Vittorioso with Jefferies.

--------------------------------------------------------------------------------

Matthew Vittorioso, Jefferies LLC, Research Division - Analyst [30]

--------------------------------------------------------------------------------

I guess, just on the back of Matt's question, maybe thinking about the capital allocation plan and how you've executed thus far. Obviously, no one can predict where equities are going to go and whatnot. But you've spent some cash on buying back equity in the quarter. I'm just wondering how you sort of weigh sort of the uncertainty of whether or not you'll get rewarded or not for buying back equity. And clearly, in this quarter, at least thus far, you've not been rewarded for buying back $150 million of equity versus, say, potentially looking at your 6.375% note due '25, trading at $0.95 on a dollar. You've also got to come back to those holders and potentially pay them a consent or do something to get them to go along with this JV. You can almost get a guaranteed positive return in addressing your debt here, and that return gets better and better every day. How do you weigh that against buying back equity while your EBITDA is coming down, which clearly, the equity market does not like?

--------------------------------------------------------------------------------

Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [31]

--------------------------------------------------------------------------------

So I think that we indicated how we feel about it because we've said that we're moving to a lower gross debt level as we progress forward here. So understand the math on that. We understand the cost of the debt that was sort of put out in front of us in the September time frame, and we made an economic decision at that point in time in terms of how we wanted to handle these things going forward. So as we think about our capital allocation approach, I'll just state again that generating cash and maintaining the strength of our balance sheet are the first 2 tenets of that approach. We're committed to those. As we think about moving forward, we've indicated that to maintain that financial strength, we want to move to the low end of that targeted debt range. We referenced company-specific factors is something that might change that moving forward. That would include reduced EBITDA levels. It would also include company-specific factors that are necessary to obtain approval for that joint venture going forward.

As we look at shareholder returns, there's a lot of work that we've done over the last couple of years. Our buyback program has certainly been the largest component of shareholder returns. But this year, you've seen us move to a more balanced approach between shareholder returns and dividends. And not quite 50-50, but not far off of that through the first 3 quarters of the year. And you've also seen us, at times, raise our sustaining dividends. So I think that -- I just want to reiterate first 2 steps of the financial approach, maintain -- are inflexible in terms of how we look at the second 2 pieces. But in terms of shareholder returns, we have and we will continue to exhibit flexibility in terms of that allocation between dividends and share buybacks.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Next, we'll go to Mark Levin with Seaport Global.

--------------------------------------------------------------------------------

Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [33]

--------------------------------------------------------------------------------

A couple of questions. First, on met coal cash cost. You mentioned some of the things that you may be working on to help drive down the cost. What do you think is a reasonable long-term met coal cash cost assumption at, let's say, today's met prices?

--------------------------------------------------------------------------------

Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [34]

--------------------------------------------------------------------------------

So Mark, I guess, as we move into 2020, I think it's fair to say that we're targeting improvement over the levels that we're operating at now. And so thinking about that $100, it's something below there. We've generally maintained a target of between $85 and $95 a ton, which has given us some leeway for generally operating issues and currency and pricing impact on royalties. And as we look at our production plans going into 2020, we're going to be working hard to reduce that $100 number down to those more historical levels.

--------------------------------------------------------------------------------

Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [35]

--------------------------------------------------------------------------------

Okay. Great. And then next question just has to do with volumes in 2020. And again, not looking for guidance per se, but just how you guys see the U.S. thermal market evolving in 2020 at, let's say, today's gas -- forward gas and power prices. When you think about what your volumes could or should look like in 2020, if we kind of have the same environment next year that we do in the last 6 months of this year, what do you think is a reasonable way to think about Peabody's thermal volumes in '20?

--------------------------------------------------------------------------------

Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [36]

--------------------------------------------------------------------------------

So first, starting with the PRB. As we talked about the 75% price in that basin, that's at the midpoint of our current range. So we actually are in a pretty decent committed position today out of that basin, probably better than what we were at last year at this time in terms of committed volume. So that would be my guide as we look at it.

Secondly, on the Illinois Basin, we highlighted a couple of portfolio moves that we have made in the Illinois Basin, potential closure of mines that were not necessarily generating cash flow and we're at near breakeven. So as we think about 13 million tons next year that we have priced at that $39 per ton, we certainly would have capacity at certain mining operations to go beyond that. But going into 2020, that's going to be pretty close to our production plans with upside if customer requirements would necessitate. I'd comment that as we look at that 13 million tons committed for 2020, we have 11 million tons committed for 2021. So we continue to have a pretty healthy committed level out of that basin, which we think is a key to success.

--------------------------------------------------------------------------------

Vic Svec, Peabody Energy Corporation - SVP, Global Investor and Corporate Relations [37]

--------------------------------------------------------------------------------

One element, Mark. A lot of the Powder River Basin and other regions, of course, are pretty highly sensitive to natural gas prices. So you've heard us say before that probably a $0.20 move in gas prices can be 25 million tons for the industry as a whole, and obviously we're a portion of that.

As you look right now, you see gas prices that are probably roughly in line, as you noted, with where we are today on the forward strip out there. So it gives you some indicator of where you start from.

--------------------------------------------------------------------------------

Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [38]

--------------------------------------------------------------------------------

Last question for me. The SG&A came down a lot. I think you guys were down maybe $8 million less than what we were thinking or what was in guidance. Is that the new quarterly run rate going forward, that $32 million? Or should we go back to something higher than that?

--------------------------------------------------------------------------------

Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [39]

--------------------------------------------------------------------------------

Well, as I'd indicated that we have an organizational review that's underway, that we've got quite an extensive activity of not only looking at streamlining our organization, adjusting the changes in the portfolio, but finding ways in which we can improve our processes, and at the same time strengthen the operating asset's focus on safety, volume and cost. So it is a comprehensive exercise. It's going down to each role in the nonoperational areas plus a range of improvement activities. I think you've started to see some of those benefits flow through.

As we look to firm up those plans, we'll be able to talk more about that impact. But you can assume a lower run rate, which is what we've indicated. The costs we've identified to date, which largely focused on SG&A or overhead areas, but would also touch on some of our OpEx as we've identified some $50 million in savings. And I think the team are looking to generate our own catalysts and things that we can do to improve our business that significantly add to cash flows.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

And our final question will come from Michael Dudas with Vertical Research.

--------------------------------------------------------------------------------

Michael Stephan Dudas, Vertical Research Partners, LLC - Partner [41]

--------------------------------------------------------------------------------

Just 2 quick ones, unless they've been addressed and answered. One, with regard to Shoal Creek, what you're doing there. Does that have any potential positive impact on productivity volumes, quality for 2020 and beyond?

And second question is, once you get approval from FTC or things go as according to expectation, what's the time frame of affecting the closure? And is this -- could potentially be done by the second half of the year? What's the -- and I don't recall, maybe you've said this before what the original plan is to affect that joint venture and get it completed.

--------------------------------------------------------------------------------

Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [42]

--------------------------------------------------------------------------------

Yes. So maybe on Shoal Creek. And as Amy said, Shoal Creek has been off to a great start with us in the portfolio. But we are working through what we had as some build outages, conveyor system outages that we're looking to upgrade. You're right, that improvement in availability and reliability, we would hope, would flow through into 2020 and beyond on what already, we believe, is a good mine, a strong mine.

The second part. We don't -- well, the conversation around the consents required with respect to financing has already been covered. But we would actually see that once we had approval in order to be able to proceed from a regulatory perspective, that this would be a reasonably quick execution, we believe. We operate within the region. We've got common -- a lot of commonality across the operations. And we believe that this can be completed within, I'll say, 90-day period of time. So certainly, first half of the year with FTC, I think within 3 months of gaining that approval, we'd be able to look to target to close.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

And Mr. Kellow, I'll turn it back over to you for any additional or closing comments.

--------------------------------------------------------------------------------

Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [44]

--------------------------------------------------------------------------------

No, thank you, and thank you for your questions and participating in today's call. I would like to express my appreciation to our employees who bring to the workplace dedication, skills and a commitment to safety each and every day. To all of our shareholders, thank you for your continued support as we work to build sustainable value. Operator, that concludes today's call.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

Thank you. And this concludes the Peabody Q3 2019 Earnings Presentation. Thank you for participating.