Peabody Energy Corporation
Q4 2020 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Peabody Energy Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will be given at that time. . This conference is being recorded. I'd now like to turn the conference over to your host, Julie Gates. Please go ahead, ma'am.

[Julie Gates:]

Good morning and thanks for joining Peabody's earnings call for the fourth quarter of 2020. With me today are President and CEO, Glenn Kellow; and CFO, Mark Spurbeck. Within the earnings release, you will find our statement on forward-looking information as well as a reconciliation of non-GAAP measures. We encourage you to consider the Risk Factors referenced there along with our public filings with the SEC.

[Glenn Kellow:]

Thanks, Julie, and good morning everyone. As you all know, 2020 brought immense challenges here in the U.S. and across the globe. For the coal industry, and Peabody in particular, it was no different. As the COVID pandemic came in full force in early 2020, so did lower natural gas prices, lower global energy prices, and the disruption of certain markets throughout most of the year. These unrelenting impacts contributed to significant financial headwinds for the industry and for Peabody. Operational results was really impacted by true threats of both depressed demand and pricing levels. Surety markets requested significant additional collateral in the third quarter, and we were at risk of breaching a key financial covenant based on fourth quarter results. Against this challenging backdrop, we engaged in negotiations with our surety bond providers, a group of 2022 noteholders, and our revolving credit lenders. As Mark will talk about in more detail here in a moment, we were successful in reaching an agreement that we closed on just last week. We accomplished our key objectives, extending a substantial portion of our debt maturities, signing financial covenant relief, and securing a deal with the sureties. We were not just busy on the financing front either. We had decided that we would continue to mind only when it would say an economic disease of ours. Over the course of 2020, we temporarily idled nine individual mines, spanning from one week to multiple months. We adjusted shifts to schedules, produced a number of production units in operation and further streamlined corporate and support functions. These actions unfortunately, led up to reduce our global headcount by approximately 2,000 employees. Early on, in 2020, when we announced our cost prepositioning program, we intentionally did not set a public target, as what we thought our results should speak for themselves. In that regard, I think they have. Three out of four of our operating segments reduced cost per ton compared to the prior-year despite a significant reduction in volumes. We reduced total SG&A costs by $46 million. That's not to say we don't have more to do, but it is a credit to the hard work of the Peabody team coming together in a unique and challenging circumstances to achieve those results. Despite the challenges surrounding us, these operations rightly kept safety at the forefront. In the broader context, that the U.S. coal industry had the safest year on record according to Intra, we had a consecutive view with no fatal accidents at any of our operated mines. Four U.S. thermal mines had zero reportable incidences demonstrating truly zero harm, and Australia had its lowest incidence rate since 2017.

[Mark Spurbeck:]

Thanks, Glenn, and good morning, everyone. I'd like to start today with an overview of our recent financing activities. Last week, we closed the previously announced exchange transaction. I'll hit on the major highlights now. Nearly 87% of the 2022 Senior secured notes were tendered in exchange offer. Noteholders who participated in the exchange receive a pro rata share of both the 10% senior note secured by Wilpinjong and a 8.5% senior secured notes issued by Peabody as well as additional cash consideration. This resulted in the issuance of $194 million of new senior secured Wilpinjong note and $195 million of new senior secured Peabody note, both due December 2024. The $60 million of 2022 notes that did not participate in exchange are now unsecured, and will continue to be paid a 6% coupon until March 2022. The $540 million revolving credit facility commitments were also exchanged for $206 million of senior term loans secured by Wilpinjong, a $324 million letter of credit facility, and $10 million of cash consideration. With the completion of the exchange transactions, the global surety agreement has also been locked in. For the terms of that agreement, we posted $75 million of additional collateral in December in the form of letters of credit, and will post an additional $25 million per annum through 2024, subject to an increase to the extent that company generates more than $100 million of free cash flow in any 12-month period, or as assets sales greater than $10 million. In turn, the Surety providers dropped outstanding collateral requests, and have further agreed not to request additional collateral on existing bonds, or cancel any bonds throughout the duration of the agreement.

[Operator:]

Thank you. . And we'll go first to David Gagliano with BMO Capital Markets.

[David Gagliano:]

All right, great. Thanks for taking my questions. Hopefully I can get a few in because it's kind of a series of questions and I need to get cut off in the middle of that if possible. I know there's limitation, so I'll try to keep it relatively tight but I think it's important keeping together. So along those lines, I wanted to talk a little about repricing leverage which maybe pressing that a little bit and I was wondering, if you could help me quantify some of this? For example, the seaborne thermal business, we're coming up with an estimate for 2021 volumes. Let's call about 17 million tons. Can you just remind us again, how much of that is available to reprice in the seaborne export market? And also, if prices in that market stay where they're today, what would the $47 number that was reported in the fourth quarter look like on a forward-looking basis?

[Mark Spurbeck:]

Dave, I'll start that 17 million seaborne thermal tons, obviously, Wilpinjong has that domestic contract. And there's about 7 million to 8 million tons that are delivered domestically. The remainder of that 17 million tons would be available for export.

[Julie Gates:]

And then I would just add on there, Dave, we -- we've got a very small volume of that of that price, which is our typical practice there. And then we've got, I'd say just over about a million tons that would typically be committed to that Japanese fiscal year price. So the rest would be subject to spot or some sort of indexed pricing throughout the year.

[David Gagliano:]

Okay. So is it reasonable based on what you just said, the $47 number that was reported, if we look at it versus the $80 now, is there any -- what's sort of a reasonable discount on average to assume versus the $80 number that that's also out there now?

[Julie Gates:]

So it'll largely be a function of mix right, and of course, that $47 includes the domestic volumes as well. So if we think about from what we have for 2021, based on Wambo open cut, and underground, obviously as we signal with the Wambo open cut being down, compared to the prior-year, that mix of higher, higher Newcastle shipments will be a bit lower, as opposed to what it would have been in 2020. Obviously, given we haven't given kind of specific guidance, it's a little hard to get into specifics are mixed. But apples-to-apples, we will have more of a lower quality product, simply because of that Wambo product coming out by 2 million tons.

[Glenn Kellow:]

I would also say, David, as part of our trading activity is actually that looked at what's going on in those various markets and try to adjust the mix where relevant in order to capture the best, the best margin and meet customer requirements. So the same would be looking to have some flexibility, depending on what was going on in different quality markets within that mix.

[David Gagliano:]

Okay. And then sorry just one last clarification question on that one. You said the $47 included the domestic lines, I thought there were two numbers reported in the press release. And I thought the $47 was actually just the export number. I'm just trying to clarify that number.

[Julie Gates:]

Oh, sorry. I may have misspoke. You're right. The $47.84 was just the export price for the quarter.

[David Gagliano:]

Okay, thanks. And then just if you could also on the met side, I have two questions related, idled mine costs on a quarterly basis, for example, at Shoal Creek, what are those on a millions of dollars basis? And then also, if you could also give us a sense, similar setup for met that I just mentioned for thermal on our numbers, we got about let's say 5.5 million tons for 2021. How much of that, I'm assuming all of it, but is there any of that volume that's not open for repricing and can you give us a sense as to what you're seeing in the met -- seaborne met market for that product right now in terms of pricing, we're seeing a lot of different prices. That's it.

[Mark Spurbeck:]

Dave, it's Mark. On the idled mine, Shoal Creek in particular, it's approximately $4 million a month, $12 million a quarter.

[Julie Gates:]

And then just on your second point that was on pricing for Shoal Creek is that right?

[David Gagliano:]

No, actually my second point was really asking if we assume 5.5 million tons of volumes in 2021, for seaborne met in total, how much of that is priced if any at this point, and what are kind of current market prices for kind of the blends that you have out there for that 5.5 million tons?

[Julie Gates:]

So in general, and this would apply for 2021 as well. We don't price in advance a whole lot from our met platform but we will have volumes committed, but they won't be locked in the pricing until further on in the quarter. And so as we look at that, we look at what is operational, certainly for the full-year would be Coppabella and Moorvale, obviously Coppabella is that kind of premium TCI product, or Moorvale would be at a bit of a discount to that. So as we think about realizations that will ultimately depend on what those volumes are and the timing of any production plans at Shoal Creek and Metrop.

[Operator:]

Next we'll go to Nick Jarmoszuk with Stifel.

[Nick Jarmoszuk:]

Hi, good morning, I was hoping to talk a little bit on Shoal Creek and Metropolitan, just trying to get a better sense for what are you looking forward to restart that, is it a function of price, is it a function of getting the volumes contracted? And then could you remind us on the volumes costs with the two and then what your realizations are relative to the index?

[Glenn Kellow:]

Yes. So with met markets in particular, as we've indicated, there's a lot of complexity that's occurring within those markets, as we look to clearly China has been extremely strong in terms of recovery. But unfortunately, in terms of what's occurring with Australian imports into China, and we've had a severe disruption in those markets, that's creating an imbalance, I guess in global flows. And for us, we're looking highly on the more traditional markets in terms of Japan, Korea, India in terms of recovery, and also some impact on what's occurring with respect to Europe. So that disruption that we're seeing across traditional flows, we believe, has led to the volatility that we're seeing in markets, and something we remain very cautious about in terms of analyzing ultimate movements. Specifically with respect to Shoal Creek, and Metrop, in addition to the market analysis, we're clearly engaging with our customers, and other stakeholders in order to determine the best plans with respect to production.

[Nick Jarmoszuk:]

So in terms of the cost structure, is there something that's able to occur between 2020 to set it lower for 2021?

[Glenn Kellow:]

Yes, and I think we've probably spoken about some of the steps that we had been taking across our activities and operations in general. But specifically on the met activities in those two mines in particular, there was a lot of work done around improvement in development rights that was taking place at Metropolitan. And the thing was, had actually been delivering on that and continuing to improve that that cost position and productivity across development. In Shoal Creek, 2020 was a challenging year with the disruption in markets. And really, as you've seen, we've had outstanding cost performance, particularly across our surface mines and our Wilpinjong mines here in the U.S., where we've had most challenges in adjustments to market disruption has been with respect to our longwall operations. At Shoal Creek, in addition to that disruption to our customer base, we had to deal with challenges as you may recall, and that did impact upon the overall cost position in 2020. We did indicate that we're working on an improvement plan with respect to Shoal Creek that was continuing through 2020 and we'd expect to continue to do those things into 2021.

[Nick Jarmoszuk:]

So what’s your cost per ton, can we see in terms of a year-over-year improvement?

[Julie Gates:]

Yes, we haven't provided any guidance on that front. I think certainly, for the full-year, our met segment in total at cost of about $109 per ton. You've heard us say before that as Glenn just mentioned that we're certainly focused on improving costs throughout the business. We've done a great job in the U.S. thermal segment in the seaborne thermal segment, still more work to do on the met side. But as far as specific mining costs, that's not something that we typically disclose.

[Nick Jarmoszuk:]

And does that $109 million include the $12 million of idle costs?

[Julie Gates:]

It does for Shoal Creek, that's right. What it does not include is parking idle process at mine is considered suspended. So it's down within EBITDA, just not within the segment results.

[Operator:]

We'll go to Matthew Fields with Bank of America.

[Matthew Fields:]

Yes, hi. I’m sorry; I just want to beat a dead horse. In the met market, you talked about the dynamic where China has been very strong, but the Australian imports were disrupted. So we've seen a very large disparity in the met price from Australia, and then what China is buying from other countries. So you would think from the outside looking in, but this will be an opportune time to have a met mine that's not in China. So just kind of help us understand what's keeping you from bringing Shoal Creek back online?

[Julie Gates:]

Yes, Matt, certainly, it seems very logical question. But as we look at those high volume prices, and any really non-Australian coals going into China, they certainly are higher. But as we look at our Shoal Creek customer base, those are we have contractual commitments with our traditional customers in Japan and Europe that we would first need to satisfy. So even if Shoal Creek we're operating right now, it sounds as though we could ship into those out of stock basis in China. So what we're really focused on is continuing those discussions with key stakeholders at Shoal Creek, positioning the mine as best as we can for the future. We obviously -- I'll go back to what Glenn had said, from a longwall performance responding to these demand conditions. We're certainly encouraged by positive signs in the met market, so we're going to be cautious as we evaluate future production plans.

[Matthew Fields:]

Okay. And then one more for me. What's going on with the North Goonyella commercial process, I know you started that about a year-ago, any update in terms of potential bidders, order of magnitude of proceeds, you expect kind of any updates you can give us?

[Glenn Kellow:]

I'm not sure exactly that was a year-ago but if you'll look at the site might be different to ours. But we certainly are continuing that process. It's been impacted as we expect not only by markets, but physical restrictions with respect to the protocols with COVID that exists, both in the country and within the state around diligence activities. But we continue the -- that that commercial process. And we continue to believe in the quality of that that mine, coking coal and the world-class infrastructure that we have there. But you're right to call it, it has been delayed. But similar to I guess other transaction processes that were throughout the industry in 2020.

[Glenn Kellow:]

Well, thank you all for joining us tonight. I'd like to especially thank our employees for the hard work and dedication, you show each and every day. We wouldn't be where we're without you. And to all of our investors, we appreciate your ongoing support and engagement. Operator that concludes our call.

[Operator:]

Thank you. This concludes the Peabody fourth quarter 2020 earnings presentation. Thank you for participating.