Peabody Energy Corporation (BTU) Earnings Call Transcript & Summary

Good day, and welcome to the Peabody's presentation on the development of its Centurion mine. [Operator Instructions] Please note, this event is being recorded. Following a short video, Karla Kimrey, will introduce our speakers for prepared remarks. [Presentation]

Good afternoon, and thank you for joining today to listen to Peabody's organic growth project Centurion. Formal remarks today will be from Peabody's President and CEO, Jim Grech; CFO, Mark Spurbeck; CMO, Malcolm Roberts; and our President of Global Operations, Marc Hathhorn. Also with us today for Q&A is Mike Carter, our Vice President of Australia Underground Operations. Today, we are excited to share a comprehensive update on Peabody's development at Centurion. After comments from our executive leadership team, we will take questions about this presentation and the Centurion project. You will 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 SEC. I will now turn the call over to Jim.

Well, thanks, Karla, and good afternoon, everyone, and thank you for taking the time to join us today and for your interest in Peabody and our Centurion Mine Complex. When I look at our company, we started back in 1883 in Chicago, and here we are 140 years later, ready to start the next chapter for our company and starting out with the Centurion Mine complex. The timing of bringing this mine online is one that I feel is going to create significant value for our shareholders. And why is that? Because we're feeding into a market that has growing demand but decreasing supply. And this supply/demand dynamic is going to go well into the next decade. And we're feeding into this supply shortage and growing demand with a supply source that has the highest quality coal. It's very low cost and due to the Wards Well acquisition that we did has a very long reserve life. On top of that, you take the favorable logistics from the Bowen Basin, where our mind is at, the best suited to feed into where the demand is growing globally in Asia and India. You combine all these factors of the supply/demand, the quality of our resource, the timing of it coming online. In combination, I think it creates significant value for our shareholders. So to get into the detail in all of these areas, I'm going to now start with turning it over to Malcolm Roberts, our Chief Marketing Officer; who's going to discuss the steelmaking coal markets and Centurion's place within it. Malcolm?

Thanks, Jim. As Jim said, I'm going to talk about steelmaking coal and the role of Centurion coal will play. I imagine that wherever you are listening or watching this call, you are surrounded by steel in the high-rise office building on the trade or even in your home with numerous household appliances. Metallurgical coal was an essential ingredient in blast furnace production of steel, making it one of the most widely used industrial materials on earth. Centurion coal quality attributes today with efficient coke and steel production and when it is processed into coke, it is very low impurities, excellent strength both in low and high temperatures, resulting in higher reduction efficiency in the blast furnace. The higher utilization value of Centurion product means this coal was expected to achieve a high price point relative to other metallurgical coals. Seaborne metallurgical coal annual demand is expected to grow by 44 million tonnes during the next 25 years. This growth in Seaborne demand is predominantly attributable to a significant increase in blast furnace production of steel in India. As you can see on the slide, India's global share of blast furnace steel production grows from 5% in 2024 and to 25% in 2050, requiring a 132% increase in the annual rate of India's Seaborne metallurgical coal imports from 74 million tonnes in 2024 and to 172 million tonnes in 2050. This shift in anticipated blast furnace production share is primarily attributable to a forecast decrease in the proportion of blast furnace steel production in China. Currently, China is essentially self-sufficient with approximately 80% of metallurgical coal consumption coming from domestic mines. The inverse is true for India, where India is well endowed with iron ore, However, suitable indigenous resources of metallurgical coal are scarce. When demand growth of metallurgical coal is broken out by grade, growth is most prevalent in hard coke -- in the hard coking coal grade, forecast suggests that by early next decade, we'll start to see a shortfall of available hard coking coal volumes relative to month, which is a result of resource depletion of some mines that are currently operating coupled with growing Seaborne import demand. The market will require new production capacity to meet the forecast demand profile, around 45 million tonnes of new supply is required that's per annum by 2040. This is equivalent to a new project of Centurion scale coming to production every year during the 2030s. This growth to over 100 million tonnes by 2050. Within this context, high-quality coking coal projects are anticipated to become increasingly rare with new projects currently weighted towards weaker coking costs, enhancing the value of centurion coking coal properties. As explained earlier, the center of demand growth will come from India and Asia more generally. This demand dynamic will result in Australian homes being benefited by proximity relative to other supply regions, such as the U.S.A. and Canada. Considering ocean freight rates to India over the past 5 years, U.S.A. and Canadian hot-coking coals would face $21 per tonne and $8 per tonne of additional ocean freight costs relative to Australia, making Australian coals more competitive on a landed cost basis. Centurion product is well within the premium low-volatile hard coking coal category. Premium low-volatile hard coking coal is known as PLV HCC, and it is high yielding when converted to coke, compared to U.S.A. high-volatile hard coking coals. PLV HCC is essential for coke makers to blend to the target range when they work to balance coke trength and yield as part of their blending activities. Furthermore, high strength coal is essential for a high productivity blast furnace and a high productivity cokemaking, enabling lower CO2 emissions per tonne of hot metal produced. High-quality, premium low-volatile high coking coal are primarily exported from Australia and in Canada. Allow me to go into the weeds a little bit over here and provide some details of the compelling quality attributes of Centurion coal, which include very high coal strength, which is primarily measured by a test called coke strength after reaction, CSR. CSR is important because it measures the ability of coke to sustain forces that causes degradation of coke in the blast furnace because of friction and collision between bulk burden materials, such as iron ore splinter, iron ore pellet and cokes. A stronger coke enables a higher rate of reduction and less losses to funds, resulting in the highest utilization rate. Low ash, one of the lowest ash for this grain of coal. Cokes produced from lower ash and more efficient and higher value. Furthermore, it results in less waste disposal. Low in Phosphorus is another highly desirable characteristic with Centurion product containing amongst the lowest levels in coking coals globally. This attribute is vitally important to steelmakers as phosphorus is a key contaminant in steelmaking that results in making steel brittle. In most cases, this phosphorus must be removed in steelmaking processes and the removal is expensive and capability is limited. Centurion product is low in sulphur, assisting steel mills in meeting environmental standards while reducing treatment costs. Centurion coal contains very high fluidity for the high level of net effective carbon. Fluidity is a property that is defined as a plastic property that is best explained as a binder that enables coke makers to blend lesser grade carbon, which directly improves quality during the coking process. These attributes enhance the steelmaker's value and use when consuming this coal as a cornerstone of their blends. Furthermore, customers are able to pay premiums for coals with such desirable characteristics. Centurion is the newest house on the [ Best Street ] in the premium low volatile hard coking coal neighborhood. The map shows most of the premium low volatile hard coking coal comes from the same corridor located in the Bowen Basin, which contains the [ Marimba coal measures ] and places Centurion in a prestigious location next to BHP and Anglo American operations that mine the same things, which contain arguably the best hard coking coals. Open mining tenures adjacent to the Centurion mine, the only operating mine is BHP Mitsubishi Alliance Goonyella Riverside open cut line and Broad Meadow to the south. So you can see when it comes to steelmaking. Centurion premium hard coking coal possesses highly operable attributes, a favored low [ production ] and compelling market fundamentals, making it an extremely attractive asset. Now I'll turn over to Mark Hathhorn to talk about project development.

Thanks, Malcolm. I'm on Slide 14. I just want to reflect on that picture. What a beautiful picture. Why? Beautiful blue sky, a world-class team and a huge chunk of some of the best coal or metallurgical coal in the world, and it's our first development call from in June. We're making great progress with our development activities at Centurion. In the first half of the year, we successfully commissioned two continuous miner units and produced diverse development coal. Thus far in the second half, we processed our first development coal through the preparation plant and expect the first coal shipment by the end of the quarter. We also expect to commission our third continuous miner in coming weeks to further accelerate our development activities. We continue to advance on time and on budget towards full-scale long-haul production in March 2026. At Peabody, we strive for safety and excellence in every aspect of our operations. and this is driven by the world-class team we've assembled at Centurion. Centurion's General Manager and our VP of Australia Underground operations, each have over 25 years of underground mining and major project development experience, bringing a wealth of knowledge and expertise to Centurion. Having the right management team and support team is the difference maker. As we ramp up to full-scale longwall production, we continue to onboard operators and maintenance personnel to support underground development in preparation for longwall mining. With the new exciting world-class project like Centurion, the buzz in the region and targeted recruitment have allowed for all key positions to be filled and we continue to hire experienced miners to continue our development work ahead of schedule. All required licenses and permits are in place for our longwall start in Centurion South District. Coal mining from Centurion North is approved by existing mining leases but will require an amendment to the existing environmental permit. These amendments are fairly routine exercise for our activities. We don't see any problems for that amendment. Centurion has a large reserve of premier hard coking coal with approximately 140 million tonnes and a long mine life of over 25 years. With a coal seam in excess of 4 meters, the GM Seam is known for its geological stability, providing a consistent and continuous coal face that minimizes operational disruptions. The uniformity of the scene, combined with the state-of-the-art, fit-for-purpose longwall reduces the risks of operational variability. All of this allows for efficient mining and first quartile production costs. To date, we're developing ahead of schedule month after month. In August and September, we broke the mine record for the most meters from two continuous miners at any given point in the history of the mine back to 2015. We're also more than double the number of meters we were scheduled to mine in those respective months, very encouraging. To put that in perspective, in August, we were scheduled -- we were forecast or schedule to produce 427 meters of [ drivage ] and we -- the team exceeded over 1,100 meters. In September, with a power outage, a plant power outage with the power provider, the team has still managed to get 967 meters. So we've got 2 months where we've averaged spread at 1,040 meters and substantially beat our forecast. We don't foresee any unexpected delays to get the first longwall coal. We're on track and on budget to date. We have all the existing infrastructure in place that we will talk about shortly. The only potential delay would potentially be equipment delivery or unexpected maintenance. We've mitigated delays in late equipment delivery through the higher of an extra continuous miner plus what I talked about before, the achievement of the development rates being way ahead of schedule. Centurion as designated districts, the southern panels are the northern panels. In the south, we have five panels extracted, they range in length from 1,100 to 2,900 meters and around 20 million tonnes of reserves. The Northern district consists of 24 panels with links ranging from 1,100 to 3,800 meters in length, and this is over 120 million tonnes of mineable reserve. Further, there are significant additional reserves in the area with the [ GLB-2 ] seen below us, not even included in these numbers. Also a premium hard coking coal underneath as I stated underneath the GMC. On Slide 16, I'd like to stop and reflect on those pictures real quickly because the infrastructure is really key to what we have here. The first picture there is our prep plant I'd tell you, I would really -- with the prices deal, I hate to try to replace that thing. It's a real luxury we have to have that prep plant, mostly galvanized and it's a solid plan. So it's a minor refurbishment for that plant. You see the picture of our new longwall there to the right, the new CAT longwall system, 153 shields. You see our camper, our accommodation village for over 400 workers. They might get nicer camp out there, but I haven't stayed in it in Queensland and we have a dedicated rail loop connected to the Goonyella rail system. All personnel are either from nearby towns, and they drive Interoute to the operations or FIFO, fly in and fly out from Brisbane, Queensland. Both employees reside at the Centurion and accommodation village, which is located 19 kilometers east of the mine. The type of mining equipment utilized is fit for purpose for the geologic -- geology and mining conditions expected at Centurion based on a long history of operating in the basin. The major mining equipment to be utilized includes the new CAT longwall, as I mentioned, with 153 shields and 3 Komatsu continuous miners and support equipment. The slide includes a list of key equipment there also at the mine. Whilst Centurion South is being developed, two development units will concurrently commence development of the main headings to access Centurion North longwall panels in 2025. [ Coal ] Mining 101, continuous miners are used to cut the entries for the mains and the gate roads. The coal is transported by shuttle cars to a feeder breaker, which reduces the size mined and gets it in a consistent form to be easily handled on the conveyor system. The continuous miner cuts and bolts if it's a minor bulk arrangement. It cuts in both simultaneously increasing productivity and safety for the operators. Centurion has one set of Caterpillar longwall mining equipment, which is currently being stored on the surface in that picture I referenced. Following the development of southern panels, the longwall will be transported underground and installed to commence production, as I stated before, in March of 2026. Let's talk about the infrastructure that's in place, Slide 18. It's very key. Centurion's geographical proximity provides a significant logistical advantage with key supporting infrastructure. The infrastructure includes road access via highways and improved roads, access to both the Goonyella and [ Newland ] rail systems. Coal export terminals through Dalrymple Bay and Abbott Point, connection to high-voltage electricity grid that provides electricity to our existing facilities, and water supplied from the 15 gigaliter capacity at the Burton Gorge Dam. Trains will be loaded at the mine and will travel 217 kilometers to DBCT terminal then loaded onto a conveyor or stockpiled. Surface logistics infrastructure are in place and long-term transportation arrangements are covered under Peabody's current contracts. The port and rail have a proven track record and they are also used by our existing other Queensland operations. On Slide 19, let's talk about safety. It's all about safety. It's a value to us, and it's also about the lessons we've learned. Centurion is committed to investing in the best people and setting the highest safety standards in the industry. Given the recent fire at a nearby mine in the history of ensuring the company has taken the lessons from past incidents incorporated them into our management plans for longwall operations, including gas drainage design and active [ inertization ]. Peabody has spent considerable time, effort and funds to mitigate future risks. Some of these implemented improved plans include the following: extracting the gas in advance to allow for maximum range of the reserve before we cut into the coal with longwall or continuous miners. This is especially important as the depth of the seam increases. Centurion is working on plans to monetize the gas and mitigate extraction and emission costs. The longwall move planning includes rapid recovery, which means a quick move a longwall when we finish a panel to allow for quick seating of the extracted panels. This is to prevent exposure to potential heating in the Gulf or the [indiscernible]. Centurion has committed to not commencing longwall operations until proper nitrogen energization units are on the property in place for backup if we need that or as we finish long wall panels. The spontaneous combustion management plan stresses the exclusion of oxygen from the Gulf. This is really important. And this requires discipline and automation and real-time observation of gas at the face in the control room. It's really about discipline on the ventilation standards, minimizing the amount of oxygen that gets back in the gulf. We now have the best-in-class monitoring that picks up when we have carbon monoxide, which is a critical indicator of a heating event. We're on time, on budget and credit goes to our Centurion team. I will now turn it over to the other Mark to discuss the project economics.

Thanks, Marc. It is great to be here with everyone today. Centurion will be the cornerstone metallurgical coal asset and Peabody's portfolio for decades to come. Centurion significantly increases Peabody's coking coal exposure, producing 4.7 million short tonnes per year at an all-in cost of $105 per tonne. Assuming a $210 long-term benchmark price, the mine will generate nearly $900 million in annual revenue re-weight Peabody's EBITDA to better than 50% from metallurgical coal and transformed Peabody into a primarily met coal producer. A $210 benchmark price ensuring has an estimated net present value of $1.6 billion or about half of Peabody's current market capitalization. The Centurion Mine Complex has 140 million tonnes of reserves in the Goonyella Middle Seam, yielding some of the most sought after premium low-vol hard coking coal on the planet. The mine will start in the southern panels and simultaneously continued development of the longer Northern panels. Production is a little less favorable than the life of mine average in the initial southern panels but costs will be at the $105 per tonne average as the private royalty in the South is not anticipated to be payable in the early years. We expect production to be approximately 3.5 million tonnes in the first 2 years before ramping up to the long-term production rate beginning in 2028. As Mark mentioned, early underground development rates are ahead of schedule, and I'm pleased to say that capital costs remain on budget. As a reminder, Centurion benefits from $1 billion of existing infrastructure, resulting in comparably lower development capital for nearly 5 million tonne a year mine with 25-plus years of life. Consistent with our long-time estimate, we expect $489 million of capital investment to refurbish existing infrastructure and develop the southern panels ahead of longwall production in March 2026, of which $250 million has been spent to date. We expect $430 million of incremental development capital to reach the 120 million tonnes of reserves in the northern panels and begin longwall production. From a timing perspective, $130 million of that will be spent concurrent with the development of the southern panels, leaving approximately $300 million of remaining development capital over the initial 3 years of longwall mining in the South. After commencing longwall production in the North in 2029, annual sustaining capital is expected to be $60 million for the next 10 years. Seaborne metallurgical coal segment will experience a step change as Centurion begins longwall production in just 18 months. Met coal production increased significantly and puts Peabody solidly into double-digit tonnes of annual production. Peabody's metallurgical coal sales will not only increase the production mix dramatically shifts towards higher quality coal, materially increasing anticipated price realizations for the segment. Looking forward, our metallurgical coal segment production will essentially become 1/3 benchmark Australian premium low-vol hard coking coal. 1/3 will be a combination of the other Australian hard coking coals in U.S. high-vol A and 1/3 PCI coals. Peabody's net segment EBITDA was more than doubled to $950 million on a pro forma basis when compared to full year 2023 results. Centurion's leverage to met coal prices is substantial with a nearly 90% increase in expected EBITDA over a little more than the $100 price improvement. This leverage to coal price is underpinned by Centurion's projected cost of $105 per short ton at the low end of the first quartile Australian met coal producer costs, ensuring the mine's profitability throughout the price cycle. Together with Centurion's large reserves and 25-plus year mine life, we're developing a premier hard coking coal mine with geographic favorability to supply growing Asian demand for premium low-vol coking coal. I will close by saying we believe Centurion provides Peabody shareholders with unmatched optionality to tightening net coal markets in the coming decades. Jim, I'll turn it back over to you for closing remarks.

Well, thank you, Mark and Mark and Malcolm, and I hope this presentation has given our listeners a better understanding of the Centurion project and its value to our shareholders. And we'd just like to hit upon a few of the points that the team made today. First off, this value proposition, and it all starts to me with looking at the markets and the supply demand dynamic and the growing demand with the decreasing supply. And you take the timing of our entry into this market with what I hope you've heard today is I consider to be a best-in-class asset. And why do I say that was based on a lot of factors, along reserve life, premium quality, Tier 1 costs, advantageous logistics, and really low execution risk to bring this coal to market. And this combination, I believe, is a very unique and attractive value proposition for our shareholders. But furthermore, this is transformational for Peabody as a whole. As I said, we've been around for 140 years. And for those 140 years for a large part of it, we've been viewed as a U.S. thermal coal producer. Now shen Centurion comes online, 85% of our EBITDA is going to be coming from the Seaborne metallurgical and thermal coal market, 85%. And that Seaborne markets have tremendous upside pricing potential. Let's not forget about the very stable and consistent cash generation we have from the U.S., where we have some very low cost and very well capitalized assets. You put this combination together, and I'll say it again, we have a very unique and attractive value proposition and matched by any other coal company in the world. So thank you for listening to us, and we look forward to answering your questions.

[Operator Instructions] And our first question today comes from Lucas Pipes with B. Riley Securities.

Thank you very much, operator. Thank you, everyone, for a very informative and thorough presentation. There's a lot of good information in there. My first question is on Centurion North CapEx of $430 million. I wondered if you could provide a little bit of color on kind of the breakdown of that $430 million, what are the key items there? And then looking at Slide 23, I wondered if it's maybe possible to break out kind of Centurion North CapEx by year?

Lucas, it's Mark. A couple of things. $250 million spent to date against the $489 million for the South and $20 million spent to date, really this year for Centurion North. As I mentioned in my remarks, for the North, we're going to spend -- we got $20 million. We had up to $50 million in the budget. We're probably going to -- for this year, we're going to spend a total of about $70 million in the fourth quarter on the total project, trying to accelerate that as much as we can. But as I mentioned in my remarks, there's -- between this year, 25 in the beginning of '26 before we started longwall coal production in the South. We expect to have about $130 million of that $430 million spent for the North. And then it's about $100 million a year. And you can see that '26, '27, '28. That's primarily for the North, and that will be really mostly underground development. You can see in a couple of slides back, the number of meters that we need to get to that first longwall coal production in the north. I think it's pretty helpful to see what we're going to do. There's been some of the initial capital as some for the plant and infrastructure and improvements that we need for the capacity that North will bring. But it's, by and large, underground development.

I appreciate that. And Jim, I have a little bit more of a strategic question on the back of the value proposition of Centurion. In the past, you've spoken to kind of met coal as an avenue of growth, kind of follow-up by Seaborne thermal. With this project, does it make sense to supplement with M&A on the growth side? And if so, would you point to Australia first or would you also look at the U.S.? You noted some key attributes of Australia. And then also, in this context, -- how should we think about the U.S. met coal assets? Are those strategic or for that matter, some of your PCI operations?

Lucas, we -- as with past practice, we don't comment on any M&A activity at all whether we're active in it or not. So I won't make any comments on that. I will state that we have said in the past that as we look where we see the markets, growth being in the Seaborne metallurgical market, that's where we're looking to grow our portfolio and Centurion's a fine example of that and investing in our own assets is directed towards that market.

Okay. That's helpful. Maybe one last one on the commercial side. Do you have a view on how PLV would perform relative to PCI and [ High Vol A ] over the next couple of years, given the outlook you mentioned at the beginning of this call?

Yes. Look, it's Malcolm. Look, I think when you look at the demand and supply fundamentals of particular grades, which you need to answer your question, the prior low-volatile hard coking coal segment is the tightest. So if you think about HVA, there's probably an overhang of that grade of coal in the market at the moment. And really, the tightest segment is PLV followed by PCI. So as I said, in terms of demand and supply fundamentals, it's PLV HCC, PCI, then high-vol A.

Got it. Okay. Very helpful. Again, lots of really good information in here. I appreciate all that color, and Jim to you and the team continued best of luck.

And our next question comes from Nathan Martin with the Benchmark Company.

Just starting with a couple of clarification questions. On the CapEx side, Mark, you made some comments related to maintenance CapEx. I think for the overall business, maybe to start, maintenance CapEx has been around $140 million. I'm assuming that $60 million, Mark, you mentioned was going to be the main CapEx specifically for Centurion. I think you said for the next 10 years, once the project comes online. Can we just get some clarification there? I appreciate that.

Yes, Nate. You're right. When we look -- once you start longwall production in the North over the next 10 years, so really '29 and beyond for 10 years, it's about $60 million average for Centurion on a sustaining basis. I think your other question, and I know we're sticking to Centurion today, but what our sustaining capital is for the existing portfolio. And you're right, we've kind of said it's between that $125 million and $150 million per year basis. Centurion being new to the portfolio would be additional to that.

Okay, Mark. And you said that was Centurion North in '29, $60 million. Any thoughts on what Centurion sales, maintenance CapEx would be between that '26 to '29 period?

Yes. The $60 million is all in Centurion. We're going to -- we're still operating with 1 longwall. So it's either north or south. So it's -- once we start in the north, we'll stay in the north for a good 20 years, and that $60 million is all inclusive of Centurion.

Okay. Got it. And then related to the cost projections, the $105 per ton or short time that's life of mine, right? So you said that does include royalties. So what net price do you guys have baked into that $105 million assumption?

So the $105 million is based on the long-term real or flat price of $210 per metric tonne.

Okay. Got it. And then I also noticed you briefly touched on it, too, but any additional comments on the special royalty agreements, both for Centurion South and North and maybe how those are a little bit differentiated from some of the other items in Queensland?

Yes. I think in the appendix of the presentation, we included the slide that kind of mentions the Queensland royalty and the table in the various tiers in the Queensland royalty. But then in the south, there is a private royalty that has been existent really since about 2000. And that's paid after losses are recouped at a $210 price assumption. We don't pay on that royalty until about 2028 and 2029. We will be paying. But in our model, the economics, we're probably paying about $125 million in that royalty. And then when we move to the north, that comes from the recent Wards Well acquisition. And there is a -- there's kind of a cap and tiered royalty there as well. Once we recover all of the development capital that we've invested in Centurion. So again, at a $210 flat price assumption, we look to pay that really 2031 through 2034 is when they'd be applicable just for reference, that again is capped at $200 million. That's all included in the base $105 average life of mine cost.