Peabody Energy Corp

NYSE:BTU

Earnings Call Analysis

Solid Q3 Earnings with Optimistic Outlook

In Q3 2023, the company displayed strong operational performance with a net income of $120 million and $0.82 earnings per share alongside an adjusted EBITDA of $270 million. The seaborne thermal and metallurgical markets showed volatility and growth, respectively, with significant advances in strategic initiatives like the Shoal Creek and North Goonyella projects. The fourth quarter projections are optimistic, with expectations to further lower seaborne thermal cost guidance and to maintain high export volumes. Additionally, various production segments saw positive results, with the US thermal segment acknowledging a 32% EBITDA increase and PRB shipments exceeding guidance. Investors could appreciate the disciplined capital allocation and commitment to returning significant free cash flow to shareholders.

Robust Earnings Per Share and Shareholder Returns

The company reported a net income of $120 million, or $0.82 per diluted share, and an adjusted EBITDA of $270 million for the third quarter of 2023. Management emphasized their continued drive to reward investors, having returned $307 million to shareholders by reducing the share count by 9.3% and with $713 million remaining authorized for share repurchases. The company also declared a third-quarter cash dividend of $0.075 per share and has an available $103 million for additional share repurchases.

Strong Operational Performance and Cost Management

The company delivered solid operational results, with seaborne thermal shipping 2.7 million tons and the seaborne metallurgical segment shipping 1.5 million tons. Seaborne thermal coal markets experienced modest pricing improvements, while the outlook for metallurgical coal remains positive due to constrained supply. Key strides were made at the Shoal Creek and North Goonyella projects, which are set to bolster the company's seaborne metallurgical portfolio. Improved production and cost efficiencies led to a 32% increase in US thermal adjusted EBITDA over the prior quarter, showing the company's ability to manage operations effectively.

Coal Market Outlook and Pricing Dynamics

Coal markets showed signs of volatility with modest pricing improvements. Seaborne trade for thermal coal is expected to see a year-on-year growth of 6%. Global crude steel output was variable, leading to some unpredictability in demand, yet metallurgical coal supply remained below historical levels, supporting a positive outlook for coal prices. The price indices for premium hard coking coal reached around $330 a ton, marking a 42% increase for the quarter.

Strategic Investments and Expansion

Significant capital has been invested in the redevelopment of North Goonyella, with substantial growth potential. The acquisition of a large portion of the Wards Well coal deposit adjacent to the existing North Goonyella mine presents an opportunity to capitalize on world-class coal reserves and leverage existing infrastructure, indicative of the company's strategic growth focus.

Financial Outlook and Guidance

Looking ahead, the company is lowering its full-year guidance for seaborne thermal costs to $45 to $50 per ton and has improved volume expectations. A reduction in reclamation costs also supports a healthier financial position. For the fourth quarter, thermal export volumes should increase, and metallurgical volumes are projected to rise by 45%. The company anticipates maintaining strong operating results and emphasizes cost controls and disciplined capital allocation going forward.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, and welcome to the Peabody's earnings call for the third quarter of 2023. [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, executive]

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, executive]

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 U.S. natural gas pricing currently at around $3 per MMBtu. 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 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 U.S., 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 U.S. 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, executive]

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, and 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 U.S. 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 U.S. 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 product are unpriced. 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 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 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 U.S. 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.

[Operator]

[Operator Instructions] Our first question comes from Lucas Pipes with B. Riley Securities.

[Lucas Pipes, analyst]

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?

[Jim Grech, executive]

Lucas, Jim Grech here. 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, analyst]

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

[Jim Grech, executive]

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 in 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 4 or 5 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.

[Lucas Pipes, analyst]

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

[Jim Grech, executive]

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

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 time frame 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 cost that we could see going forward.

[Lucas Pipes, analyst]

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 to ask for guidance. But just between development coal, that -- 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?

[Mark Spurbeck, executive]

Yes, Lucas, it's Mark. We're not giving guidance for '24 yet. Obviously, Shoal Creek has done a really good job with some of the continuous minor 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 a high point with 2 million tons. They're probably somewhere in the middle there for next year. That's the big change.

[Lucas Pipes, analyst]

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

[Mark Spurbeck, executive]

That's right.

[Operator]

The next question comes from Nathan Martin with Benchmark Company. .

[Nathan Martin, analyst]

Maybe just one last one on North Goonyella. Now the project is fully approved. We've got the CapEx update. Can you guys give us any idea on the cadence of that spend? It looks like roughly $400 million or so left between now and 2026. And then also, you mentioned something in the release about regulatory costs, that increase there. I know you previously said the reentry was the major approval needed. But is there anything else from a regulatory perspective that we need to be mindful of?

[Jim Grech, executive]

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 the legislation, I think it 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 to work into and do 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.

[Mark Spurbeck, executive]

Yes, Nate, we've got about $75 million spent left to date on the redevelopment at North Goonyella. I look at CapEx of about $150 million to $160 million for '24 and '25 million. The rest of that capital would come in after the longwall production begins at the beginning of '26.

[Nathan Martin, analyst]

Great color there, guys. I appreciate that. And then maybe shifting over to the seaborne thermal segment. Great job on the costs 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 '24? Or are there some other factors to consider?

[Mark Spurbeck, executive]

A couple of things, Nate. One, certainly hitting volumes on costs have been very helpful in seaborne thermal. The Aussie dollar is historically weak. That's also helping us on the costs. We saw costs come down quarter-over-quarter. Some of that was lower sales price, sensitive costs and the higher production. And we're not providing guidance for '24 just yet. We'll do that next quarter.

[Nathan Martin, analyst]

Okay. 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. Should we kind of assume you guys are close to sold out at those levels? I think you said PRB 80 million tons at $13.77 and other thermal at 15 million at $51.18.

[Jim Grech, executive]

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.

[Nathan Martin, analyst]

Okay. Just to be sure, so you're saying maybe somewhere within this year's guidance ranges for '24 is not a bad place to start.

[Jim Grech, executive]

Yes and maybe towards the higher end of the guidance ranges.

[Operator]

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

[Jim Grech, executive]

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.