Peabody Energy Corporation (BTU) Earnings Call Transcript & Summary

Good day, and welcome to the Peabody Quarter 2 2026 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kala Finklang. Please go ahead.

Thanks, operator, and good morning, everyone. We appreciate you joining us for Peabody's Second Quarter 2026 Earnings Call. Joining me today are Peabody's President and CEO, Jim Grech; Chief Financial Officer, Mark Spurbeck; and Chief Commercial Officer, Malcolm Roberts. After our prepared remarks, we will open up the call for questions. Before we begin, I want to remind you that our remarks today will include forward-looking statements. Please review the full statement contained in our earnings release and consider the risk factors referenced there, along with our filings with the SEC. I'll now turn the call over to Jim.

Thanks, Kala, and good morning, everyone. Peabody delivered on a number of important accomplishments during the second quarter while continuing to manage through some near-term operating and cost challenges. Most importantly, we maintained our focus on safety across the portfolio, which remains the foundation of everything we do. During the quarter, we also made meaningful progress on a number of key priorities. At the Centurion Mine, we are now approaching targeted production levels. I'll provide [Technical Difficulty] Centurion in a moment. Our seaborne thermal operations delivered on volumes and costs, supported by strong execution despite the higher fuel cost environment. We completed multiple strategic financial actions that further strengthened our capital structure, lowered our interest expense, freed up restricted cash and effectively returned cash to shareholders. Mark will provide more detail on these actions shortly, but I'll steal part of his thunder and note that we have effectively repurchased 5 million shares. In addition, Peabody was selected by the Department of Energy for a grant to advance rare earth element and critical mineral development opportunities in the Powder River Basin. This recognition reinforces the strategic value of our existing asset base and the opportunities to unlock value beyond our core coal mining business. At the same time, the quarter included several challenges. In U.S. thermal, volumes were impacted by the extended shoulder season in the Powder River Basin and heavy rainfall across the Midwest. In seaborne metallurgical, costs were temporarily elevated by commissioning-related spend at Centurion. And as expected, we faced some of the highest fuel costs in years. Bottom line, $24 million of adjusted EBITDA is nowhere near the type of quarter that this platform is capable of or that we expect going forward. And overall, we exited the quarter with improving operational momentum, a stronger financial foundation and continued confidence in the long-term value of our diversified portfolio. With that, let me provide a more detailed update on Centurion. The primary challenge that we addressed was realignment of shields that have been impacted by the roof conditions we encountered due to the longer-than-planned commissioning period. This shield alignment process was laborious and time-consuming and more expensive than we expected, but it is now behind us. The longwall is in excellent shape and remaining roof control issues are largely limited to a rock faulting zone spanning about 20% of the longwall face that we will continue to work through during the third quarter. I'll also note that run-of-mine production, prep plant yields and rail shipments have all strengthened in recent weeks. Given where we are against plan, we are targeting 1.5 million to 2 million tons of sales in the second half with 500,000 to 700,000 tons expected this quarter, factoring in anticipated shipping schedules. Our focus now is on safely accelerating production rates and improving consistency. As this occurs, we expect the elevated cost of the first half to begin to trend more in line with long-range projections as we move through the second half of the year. It's worth recounting the extraordinary potential represented by Centurion. It's the highest quality coking coal product in the world. Its projected long-term cost structure is first quartile for this type of coal, further expanding margins and has a 25-year mine life that further solidifies Centurion's role as Peabody's cornerstone asset in Australia. That's a summary of Centurion's progress. Given the importance of the mine to the portfolio, we'll look to provide updates to the market in both August and September, ahead of the next earnings review. Beyond our core business, our Peabody Development Group continues to advance multiple initiatives and opportunities we have to develop rare earth elements and critical minerals from our extensive asset base. We were honored to receive a conditional award from the U.S. Department of Energy to demonstrate the feasibility of recovering rare earth elements from coal-related feedstocks. Our work on rare earth elements extends across multiple mining operations and includes several initiatives beyond the projects supported by the DOE award. In critical minerals, we continue to make encouraging progress in our expanded exploration and evaluation of germanium across our existing operations. We're working with leading process technology partners and an industrial consumer of germanium to demonstrate technical and commercial feasibility with the objective of establishing domestic production and creating a new high-value revenue stream for Peabody. Each of these opportunities is viewed through a capital-light prism aiming to work with partners, create new pathways for Peabody growth and further monetize our resource base. While we are highly focused on near-term execution, I'd also like to take a step back for a minute and note that we have spent the last several years building a platform from which to generate meaningful shareholder returns for many years to come. This platform includes flagship operations in our seaborne met, seaborne thermal and U.S. thermal businesses, sustainable operations with a number of capital-light extension projects progressing in Australia, a fortress balance sheet with a capital structure built for the long haul, a portfolio positioned to benefit from mid-cycle seaborne thermal and metallurgical pricing and several early-stage initiatives within Peabody development that add important growth optionality. We look forward to delivering the earnings and cash flow generation capabilities of our platform in the future. With that, I'll turn it over to Malcolm for a discussion of U.S. and global market fundamentals.

Thanks, Jim. The second quarter saw continued strength in both seaborne metallurgical and thermal coal markets amid some softness in U.S. thermal coal. Starting with seaborne metallurgical coal, prices reached a several year high in the second quarter with premium hard coking coal averaging $238 a ton, a 29% improvement over year ago levels. Driving that was steel demand that was good, but not great and a met coal supply picture that saw sharp tightening due to a tragic mine accident in China's Shanxi province. That accident has led to widespread safety inspections and curtailed production in Shanxi, along with several other Chinese provinces that experienced a similar dynamic from less widely reported safety incidents. The actions of one province in China may not appear to be significant in the world market, but Shanxi produces more met coal than the entire seaborne met market and in fact, twice as much coal in total as the entire United States. The effects of production constraints have been stark. We estimate that 30 million tons of production were already taken out of supply in the second quarter compared with the seaborne market that only totals 85 million tons a quarter. Continued supply reductions are expected throughout the second half of the year. Switching to seaborne thermal coal markets. Demand remained strong throughout the second quarter due to strong coal fuel generation across multiple countries in Asia. Liquefied natural gas, the key competitor to seaborne thermal coal saw prices move higher because of ongoing conflict in the Middle East. Japan, Korea market LNG prices started the year in the $10 to $11 per MMBtu range. This soared to $24 to $25 per MMBtu and even now remain just below that mark. As we've seen so often, major events remind numerous countries why coal fuel generation is so reliable and affordable. The Iran conflict is no different. Seaborne thermal prices have responded to strong coal fuel generation. Newcastle 6,000 kcal product averaged $137 in the second quarter, more than 35% above prior year levels. We've also seen the lower heat API 5 product respond in a similar fashion. While seaborne thermal demand looks to remain strong as we move through the summer in the northern hemisphere, supply is likely to be constrained by Indonesian policy settings. Indonesia continues to tweak its policies relating to coal production, exports and domestic market obligations. Indonesia is the largest seaborne thermal coal exporter, yet we are hearing of rolling blackouts in Indonesia as coal fuel generators run short of coal. Indonesia's 2026 coal output is expected to be meaningfully lower than prior year levels. Shifting to U.S. thermal coal markets. The demand picture was impacted by what seemed to be a 4 to 5 month spring in many parts of the country. 18 degree days were off sharply in the first quarter with a second quarter that was also mild. That led to natural gas prices that averaged 13% lower than the strong first half of 2025, driving some coal to gas switching. I will also note, though, that we've seen a return to what I would call longevity maintenance actions by a number of coal fuel plants in the U.S. In prior years, maintenance outages were more modest given expected retirements. Why maintain a plant that's going out of service? Now though, we've seen a trend of plants taking longer seasonal outages to enable more comprehensive repairs and maintenance. Customers recognize that these plants may be operating for longer than originally expected. While those longer outages dampened the springtime coal loadings, they also set up for a stronger long-term thesis. Summer, of course, has now settled in across the U.S. and grid statistics are showing the important role of coal-fired generation in meeting grid demand loads. We've begun to see an increased level of offtake in line with the established trend of recent years when July to December is the period where coal burn is at its strongest. That's a quick review of the markets. Now over to Mark for a discussion of the financials.

Thanks, Malcolm, and good morning to all. For the second quarter, we reported a net loss attributable to common stockholders of $90.6 million or $0.74 per diluted share and adjusted EBITDA of $24 million. The quarter reflected significant progress at Centurion, strong seaborne thermal results and lower U.S. thermal volumes. We also completed several strategic financial transactions to unlock shareholder value, which I will discuss in more detail after walking through the segment results. The seaborne thermal platform shipped 3 million tons, in line with expectations and consistent with the first quarter. Export shipments totaled 1.9 million tons and the average realized export price of $95.87, increased 11.2% quarter-over-quarter and 31.6% compared to the prior year period. Segment costs of $58 per ton were at the low end of guidance, resulting in a 23% adjusted EBITDA margin and over $52 million of adjusted EBITDA. Seaborne metallurgical shipments totaled 2.5 million tons, exceeding expectations by 200,000 tons due to higher volumes from Metropolitan and the CMJV. Costs were above guidance at $155 per ton, primarily reflecting higher commissioning costs at Centurion. The segment reported an adjusted EBITDA loss of $17 million as higher Centurion costs were only partially offset by a 7% quarter-over-quarter improvement in realized pricing. Our U.S. thermal business reported $19.8 million of adjusted EBITDA in the second quarter, marked by the extended shoulder season, which resulted in lower volumes across the platform. In the Powder River Basin, shipments totaled 16.4 million tons, significantly below our 19 million ton expectation as mild weather extended into June and coal generation plants undertook the extensive longevity maintenance that Malcolm noted. We kept a keen eye on labor efficiency and equipment utilization, moving an additional 11 million cubic meters of overburden uncovering additional coal. The related costs naturally ran through second quarter results and temporarily increased unit cost to $14 per ton, but they will provide a significant benefit to costs for the rest of the year. In fact, we expect cost to be $2 lower or about $12 per ton in the third quarter. Other U.S. thermal shipped 3 million tons, 400,000 tons below guidance, reflecting the extended shoulder season and heavy rainfall across the Midwest late in the quarter that delayed shipments. Despite lower volumes, costs were kept in line at $46 per ton, demonstrating focused disciplined cost control. The segment contributed $26.9 million of adjusted EBITDA in the quarter. Turning to the balance sheet and capital structure. At June 30, the company had over $500 million in cash and total liquidity over $900 million. In the second quarter, we completed several strategic financial transactions that unlock shareholder value, jump-start shareholder returns, lower borrowing costs and increased financial flexibility. First, we issued $250 million of convertible notes due 2031 with a 0.5% coupon and together with the related capped call transaction, established a conversion price of $50.61 per share. Second, we utilized the net proceeds together with cash from the balance sheet to redeem $241.2 million of the 2028 convertible notes with a 3.25% coupon for cash consideration of $386.8 million. The $145.6 million premium paid with cash represents a share repurchase of more than 5 million shares using a weighted average price of $28.92 per share. The convertible note transactions increased the average conversion price on the convertible notes from $18.99 to $38.31 per share, reduced the diluted share count by 6.2 million shares and lower annual interest expense by $6.6 million. Third, we significantly enhanced our global surety program. The financial profile built over the last several years provided for a transition to standard indemnification agreements, lower collateral requirements and the replacement of cash collateral with asset-backed facilities. These changes unlocked $350 million of restricted cash and collateral while maintaining one of the best well-collateralized reclamation bonding programs in the industry. Lastly, we increased our revolving credit facility to $400 million, extended the maturity to June 2030 and lowered borrowing costs by 25 bps. Year-to-date, we've generated $145.3 million of available free cash flow, including the reduction in restricted cash and collateral. We used $145.6 million for the convertible note repurchase premium and have also paid cash dividends of $18.3 million, bringing our payout ratio to greater than 100% through the first half of the year. Now for a quick look at the third quarter. We expect seaborne thermal volume of 3.0 million tons, including 1.9 million tons of export coal with a product mix of 1.1 million tons of Newcastle benchmark coal and 800,000 tons of higher ash coal that we sell at about a 10% discount to API 5. We expect costs of $52 to $57 per ton, a nice improvement quarter-over-quarter. For seaborne metallurgical, we expect volume of 1.9 million to 2.1 million tons as Metropolitan has a longwall move and a scheduled lock outage will reduce sales at Shoal Creek. Costs are expected to improve to $130 to $140 per ton, a $20 improvement compared to the second quarter as Centurion volumes increase. In the PRB, we anticipate shipments of 22 million tons at cost of $12, substantially improving margins and free cash flow from the segment. Other U.S. thermal shipments are expected to increase to 3.7 million tons at an average price of $58.20 with costs at $45 to $49 per ton, in line with full year expectations. In closing, Peabody exits the quarter with an even stronger financial foundation and tighter capital structure, poised to generate significant free cash flow as Centurion advances to expected production rates. Anticipation for a better second half and strong market fundamentals points to further support for our shareholder return program. With that, I'll turn the call back over to you, Jim.

Thanks, Mark. As we move into the second half of the year, our focus is on execution, Centurion reaching targeted longwall production rates, U.S. thermal positioned for stronger seasonal demand and our seaborne platform well placed amid constructive global markets. With improving operational momentum and a strong financial foundation, we believe our Peabody platform is well positioned to deliver improved results and create long-term value for shareholders. With that, operator, we are pleased to open up the call to questions.

[Operator Instructions] Our first question comes from Nick Giles with B. Riley Securities.

Maybe just starting with Centurion. I was just hoping for more color to what extent the longwall is running today? I mean, how much stoppage is this rock faulting causing? Or how are advance rates ultimately impacted here?

Jim here. Yes. So first, I'll give you a little background on the longwall and where it's at and then how it's running today. So the issue that we had that we talked about was the shields being out of alignment or sometimes it's called racking. And we have that issue behind us now. The longwall, the shields are straight and they're squared to the face. And so it's in good shape. And it took a little longer than we thought it was going to be to address this issue. And again, just to give you maybe a little explanation what it is, a picture of what it is, is the shields themselves, if you can look at it as like a row of dominoes and then some of those dominoes got knocked over on top of each other, not all of them, but some of them. But each one of those dominoes weighs 53 tons. And so to straighten them out and do it safely, which is a hard thing to do with the weight of those shields underground, it took a little bit longer than we thought and through the month of June. So now that's done, a longwall square and it's running. So we're running right now when running -- it's running back and forth this year. And at times, we have stoppages to address the faulting that we have. Now to address the faulting, we've taken 4 different actions to address the faulting ahead of us. So we either do underground in-seam drilling to -- ahead of the fault inserting grout that way. We have drilling from the surface further away from the longwall face addressing the faulting that way. And then right at the face, if it's needed, there's a localized faulting at the face, we can do some geo-flexing right at the face or some rock sill right above the shield. s So the first 2 things that we do for the faulting are more in advance of the longwall and the other 2 with the geo-flex and rock sill are sort of like active mining zone with the longwall. So with that, and over the last 2 weeks, we've really picked up the pace on the longwall. We have some days where we've run 7, 8 shears a day and some days where we're running 3 or 4 shears a day because we have that faulting to address. And that's where that consistency is that we're looking for to go forward is running at a steadier rate. And as we keep advancing through this faulted zone and running at a steadier rate, it really solves itself. The quicker you can move through it, the more shears per day that you can get done. And so with that, looking at the faulting, the rate that we're going forward, having to stop occasionally to address the faults in front of us, that's where we've given that projection, that 500,000 to 700,000 tons for the third quarter because there is some variability not only on the speed or the number of shares per day, Nick, but also on the yield because when we hit in the faulting area, the yield goes down, we get more rock. So there's variability in both of those. And so we take that all into account, and that's how we came up with that projection. But again, the longwall phase has been in the best shape that it has been in since we started the mine, and we're out of the commissioning phase, and we're in the production phase now.

Jim, I really appreciate all that color. Apologies for my ignorance, but just to clarify. So the racking issue, was that ultimately caused by the faulting that you're running into? And then my second question was just, I think you answered it already, but how much visibility do you have quarters down the line that you won't run into this faulting zone again?

Yes. So your first question is, it was a continuation of the long commissioning, the slow start-up process. We started out with the electrical issues that were -- as we started the longwall, we had a series of electrical issues and had to shut down. It took us a while to address that. Then the longwall started running, we ran into a series of mechanical issues with belts and conveyors and transfer points. All of that delay in the start-up and the longwall stopping and starting, Nick, is not good, especially in a new longwall mine and a new panel like we were. That led to making the situation degrade where the faulting is. If we would have just started up and ran and not had the delays at the start-up and had the normal advance rate, we wouldn't have had the conditions leading to needing the shield realignment. And so now going forward, the conditions that we have are really specific to this panel and how we're looking at it. We have about 300 meters left in front of us of this faulted area, and it's in a very specific area between our Shields #20 to Shield #50. So we can see an end of sight to this faulting. It will be during the third quarter. And so we don't expect this in the fourth quarter. We have good geologic, good control, and we'll be out of this come the fourth quarter. Now because of that variability, Nick, in advance rates and yield because of the faulting is why we've said that we will also give out updates in August and September of how we're doing, right, to make it more accurate and to tighten those ranges up as we go forward.

Our next question comes from Matthew Key with Texas Capital Securities.

I had a question just kind of on PRB volume guidance. Based on where coal volume was in the first half of '26 and the guide in 3Q, it seems to achieve the midpoint of that range. It would imply a pretty impressive 4Q shipping quarter. Just given where natural gas prices are trading, is it safer to assume the lower end of that guidance? Or are you pretty confident kind of going into that 4Q will be a strong quarter?

Malcolm here. Look, as I said in my remarks, the second half of the year and what we're looking at here, it doesn't seem that different to prior years. Obviously, gas price is a little lower. But if you look at the grid at the moment, coal has been called upon very heavily. So what we're looking to do in the second half of the year, probably is not much different if you overlay the pattern from '23 through '25. And probably quite rightly, you should be assuming the midpoint of the guidance range that you spoke to. That would be my response to that question.

And I was wondering, and you mentioned this a little bit in the prepared remarks, but I just wanted to talk about kind of capital allocation plans over the coming quarters. Do you think buybacks make sense kind of on the back of this pullback? Or what are the major priorities for you in the second half of '26?

Yes, Matt, as I mentioned in the prepared remarks, continue to execute against our existing shareholder return program, pay out over 100% year-to-date, look to generate some substantial free cash flow in the second half of the year as Centurion achieves its targeted production rates. And we'll look to continue to execute against that shareholder return program. We'll look at outright share repurchases. We'll also look at the remaining stub of the convertible notes depending on where they trade. We were able to buy those 241 million back at a very small premium, less than 4 points, I believe. And was pretty opportunistic in the sense that they had traded down significantly. So I think going forward, we'll execute against the program, and we'll look at both of those avenues.

Our next question comes from Katja Jancic with BMO Capital Markets.

Maybe just quickly back to Centurion. Jim, you mentioned that you're going to provide updates in August and September. Can you maybe talk about when specifically we should be expecting those updates?

Well, in August, for certain, we have a site tour out at Centurion on August 11. And there will be an update given at that site tour, which again, of course, which would be filed and made public information, which, by the way, we still have 6 spots left open on that site tour of Centurion. We got a very good response. So a little bit of -- you gave me a chance, Katja, to push that out there. So at that site tour, we'll give an update. And then we have some Investor Day. I'm not sure the specific dates off the top of my head in September, and we'll also give updates then.

And maybe staying on the site visit, I guess, you're going to take investors and analysts to actually see the longwall?

Yes. It's a great tour. You can -- the site, we'll show the longwall. We'll show the surface facilities. You'll see every piece of the mine -- operating piece of the mine that we have there.

And maybe shifting gears to the $350 million of restricted cash that was unlocked. Is there -- is that fully available right now? Or are there any still restrictions to that -- to using that?

Katja, the $350 million that was returned, it was really reclassed from restricted cash and collateral. So to your question, it is fully available. It's included in our cash balances as of June 30. Look forward to seeing you at the Centurion visit, Katja.