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Peabody Energy Corp Q1 2010 Earnings Conference Call

Peabody Energy Corp Q1 2010 Earnings Conference Call

Peabody Energy, Corp. (BTU)

Q1 2010 Earnings Call

April 22, 2010 11 AM ET


Vic Svec – SVP and IR of Corporate Communications

Greg Boyce – Chairman and CEO

Mike Crews – EVP and CFO

Rick Navarre

President and CCO


Brian Singer - Goldman Sachs

Michael Dudas – Jeffries

Kuni Chen – Bank of America, Merril Lynch

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Ladies and gentlemen thank you for standing by and welcome to the Peabody Energy first quarter earnings release. For the conference, all the participants are in the listen only mode. However, there will be an opportunity for your questions and instructions will be given at that time. If you need any assistance during the call, please press star then zero and then the operator will assist you offline.

As a reminder, today's call is being recorded with that being said, I'll turn the conference over to the Senior Vice President in Investor Relations and Corporate Communications, Mr. Vic Svec. Please go ahead Sir.

Vic Svec

Well thank you [John] and good morning to everyone. Thanks for taking part in the conference call for BTU. And with us today are Chairman and CEO, Greg Boyce, our Executive Vice President and CFO, Mike Crews as well as President and Chief Commercial Officer, Ric Navarre. We do have some forward looking statements today, they should be considered along with the risk factors that we know that the end of our release and the MBNA section of our final documents. And we also recorded at for additional information. I'll now turn the call over to Greg.

Greg Boyce

Thanks [Vic] and good morning to everyone. Peabody posted outstanding results in the first quarter as we expanded margins, drove higher EBITDA and operating profit, increased contributions in the US and Australia and improved our cost structure. We also signed new Australian contracts at higher prices. Begin shipping from our new NCIG port at advance multiple organic growth projects at one notable acquisition initiative.

[Michael] review the quarter more in a moment, but I'd like to take a few minutes to assess market fundamentals and update you on our growth programs. I'll begin with the global seaborne markets where the power of China, India, Australia connection continues to be the story and a quarter that began with concerns about China's economy, the nation posted 12% growth in GDP which may tell you all you need to know about the Pacific markets.

And eligible call where seeing growing tightness throughout about by a 10% plus increase in expected steel production. Global steel making is dominated by China. We saw a first quarter production of 25%, as infrastructure build up continues, its consumer class expands and its manufacturing exports start to recover.

With other steel making nations rebounding, we're calling for a 20% plus hike in seaborne metallurgical demand in 2010 and we also see growing headroom for metallurgical pricing from rising scale prices. This occurs even as the world structurally short of coke and coal supplies. Australia will again supply nearly two thirds of global seaborne met this year and a handful of other nations make up most of the remainder.

Any disruption caused by weather logistics or other issues stretches the rubber band of supply – demand even further. Now thermal coal markets are equally buoyant in the Pacific, China's electricity generation increase 24% in the first quarter. China and India are leading the world in the new coal field plants, this year alone globally coal plants that will use 375 million tons of coal per year will begin operation.

So far in 2010, China's coal imports are up 227% against the weak first quarter of 2009. But more importantly, China's net imports total nearly 39 million tons. That's a 156 million ton annualize pays some 50% better than the last year's record pace. Now while the Atlantic thermal market remains soft for US exporters, we expect the overall Pacific seaborne thermal demand to increase by more than 50 million tons this year.

So what did all this mean for Peabody? We're now targeting our Australian met coal output increases of up to – we're now targeting Australian met coal output increases of up to 50% in 2010. These new targets have increased 2 million tons from the last quarter due to strong performance from our met mines in upgrading of some of our thermal coal to met quality.

We've signed second quarter met coal contracts for high quality hard coke and coal at $200 per metric ton with semi hard to hard coke and coal at a type range of a $170 to a $190 per metric ton. That's significantly above the prior year settlements. We've also signed some annual contracts for hard coke and coal at leveled more than 20% above these quarterly contracts.

The met market has continue to improve since the bench market settlements, current spot met business is being priced in the $240 to $250 range which goes well for increase to third and fourth quarter quarterly settlements. Peabody's Australia seaborne and thermal shipments are also said to expand by up to 35% in 2010. We have signed annual contracts at $98 per metric ton and are encouraged by the Poland market that exceeds a $100 per ton for the next several years. For any thermal market in the world, a $100 price for multiple years is certainly a notable milestone.

Now moving to the domestic US markets, we've seen improvements in the first quarter, thanks to stockpile reduction well in excess of the North. TRB stockpiles at customers are far lower than those in Central left. And outside of Central left, coal to gas switching is not a concern at current gas levels. We now expect US coal demand recovery of approximately 60 to 80 million tons in 2010 with relatively flat production.

We expect more improvement in US coal fundamentals as the economy continues its recovery. So I guess it's the US market backdrop, Peabody has an excellent position. [Powder ever] based in prices have increased more than 75% over six months and the full of prices remain well ahead of spot. And the US, Peabody's contracting strategy remains sound. With 2010 production under contract as the economy begins to recover.

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