Peabody Energy Corp (BTU)

F2 Q10 Earnings Call

July20th, 2010 11:00 a.m. EST


Gregory Boyce-CEO

Michael Crews-CFO

Rick Navarre-President and Chief Commercial Officer


Pearce Hammond of Simmons & Company

Brian Singer of Goldman, Sachs

Kuni Chen of Bank of America Merrill Lynch

Jeremy Sussman of Brean Murray, Carret & Co.

David Gagliano of Credit Suisse

Garrett Nelson of Davenport & Company

Brian Singer of Goldman Sachs & Co

Michael Dudas of Jefferies & Company

Mark Liinamaa of Morgan Stanley & Company

Paul Forward of Stifel, Nicolaus & Co. Inc.


Ladies and gentlemen, thank you for standing by and welcome to the Peabody Energy second quarter earnings release conference call, at this time all participants are in a listen only mode and later we will conduct a question-and –answer session, with instructions being given at that time, if you should require any assistance during today’s call [operator instructions] as a reminder this conference is being recorded and now I would like to turn the conference over to your host Mr. Vic Svec. Please go ahead Sir.

Vic Svec

Okay, thank you, and good morning every one. Thanks very much for taking part in the conference call for BTU and with us today are our Chairman and CEO Greg Boyce, Executive vice president and CFO Mike Crews as well as President and chief commercial officer Rick Navarre, we will make some forward looking statements today and they should be considered along with the risk factors that we note at the end of our release as well as the MBNA section of our file documents and we also refer you to for additional information, with that I’ll turn the call over to Greg.

Greg Boyce

Thanks Vic and good morning everyone. It’s clear that Peabody had another outstanding quarter on the strength of our U.S. and Australian mining platforms with our underlying cost control and strong top line lift, in addition I would say our financial position is better than ever. It is also apparent to me that we are just beginning to reap the benefits from our portfolio optimization programs and the long term cycle for coal. Our operating initiatives are yielding results, both the U.S. and International markets have much more upside and we have the leverage to rising volumes and pricing as we kept capitalize on the fastest growing coal markets

First, I meant to review the coal fundamentals and our position in these markets In the Asia Pacific region we have seen a two point growth driver in the first half led by China’s (inaudible) energy and particularly coal imports as well as recovering generation and steel production in a developed economy such as Japan, Korea, and Taiwan. Peabody expects specific thermo-coal inputs to rise more than 10% in 2010 while global med imports may soar some 30%

Now, one area I would like to discuss is Chinese growth, you know there is a certain de- javu element to this roller coaster views about china’s economy, we have long observed the recurring syndrome China announced it’s targeted growth rate of 8%, the economy outpaces that growth leading to investors skittishness, the government then announces cooling measures to ensure sustainability of growth, but nervousness increases and finally when the accounting is finished GDP is growing 9 or 10% and then the cycle repeats itself, so we regularly expect 8 to 10% plus GDP growth out of China and haven’t been disappointed in any of the past 10 years, amid the global financial crisis China even managed 9% growth in the first half of 2010 GDP grew 11.1%, now as China lets it’s foot of the gas just a bit 2010 GDP estimates have been revised to 10% The U.S. should even be one third so lucky

I want to offer a few key China data points which we think support the long term energy and coal demand trends, first of all the simple fact is that yesterday’s announcement that China has become the world’s largest energy consumer is profound. The U.S. held that position for over 100 years and underneath this some have been concerned that China’s auto sales are easy, but consider that June sales are up 25% from a prior year which itself was up 40% over 2008. GM has announced that it is selling more cars in China than in the U.S. and this year China will sell more cars than any nation ever. The China’s steel intensity per capita is increasing but remains just half or less than of the U.S., Japan, and South Korea and China will ultimately pass these nations in steel intensity as housing is being built up versus out, there are hundreds of millions who need air conditioning and appliances that take steel to make and power to run Also this year China will pass the U.S. as a leading manufacturer.

China has also just announced a 30 billion dollar investment in the nation’s trade mission group system to further expand electricity availability. China’s power demand growth in June was double digit again and year to date generation is up a robust 19%, so all of this translates into China’s coal demand growing at a rapid cliff and coal imports continuing at a record pace. The June numbers just out show another impressive month with China net imports totaling 11 million tons, so now back to the markets, while we have seen some moderation in the growth of global met coal demand this has occurred primarily in the lower quality products, some of the newer steel mills have struggled with blending and have forced greater reliance on high quality hard-cooking coal products and expanding the spread among met coal qualities, but overall consumption of met coal remains strong, during the second quarter the bench mark met coal price is settled at the second highest price ever at 225 dollars per metric ton for the reference price and if you look at electricity generation we see continued demand growth, power plants starting operation this year represent 340 million tons of annual coal demand and thermo-coal from New Castle is in the triple digit price range for future years so the bottom line we are justifiably bullish in the near term and feel stronger than ever about the long term super cycle for coal driven by Asia Pacific growth, now on the U.S. economic activity is yet to fully recover, with much more upside potential in the future but even so coal supply demand fundamentals are solid in 2010, on the demand side coal is gaining market share for power generation and coal consumption for power generation and coal consumption is up 6% this year. Power plants are running at high utilization rate was cooling degree days 30% above the average and 49% above last year. Meanwhile U.S. coal production is down some 3% driven by 12% decrease in Appalachia. Coal stockpiles have declined below prior year levels. The stockpile draw over the past five weeks has been nearly 15 million tons, and that is 8 million tons more than normal. So as a result there will be Illinois basin inventories will be at near normal level by year end. So you can see why coal prices have marched up in the quarter and continued to set post recession high in the Powder River and Illinois Basins particularly.

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