Peabody Energy Corporation (BTU) Earnings Call Transcript & Summary

Good day, and welcome to the Peabody Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kala Finklang, Vice President, Investor Relations and Corporate Communications. Please go ahead.

Thanks, operator, and good morning, everyone. We appreciate you joining us for Peabody's Third 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 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. The third quarter marked a meaningful step forward for Peabody. We continue to advance Centurion, generated positive adjusted EBITDA across each operating segment and benefited from improved seaborne markets. Underpinning everything we do is our commitment to safety. Our teams maintained their focus on safe execution while delivering on the strategic priorities that will help position the company for stronger performance heading into year-end. Our #1 priority is Centurion, which met its third quarter sales volume target. However, late in the quarter and into October, the longwall encountered faulting across multiple locations that proved more problematic than anticipated and constrained production. October production was just over 45,000 tons, and we have revised our fourth quarter sales volume expectations to a range of 300,000 to 500,000 tons. The challenge is not a single fault or a isolated geological event. The longwall has encountered multiple complex geological structures across the tailgate, face and headgate areas, and the combination was more complex than our mine plan assumed. Mechanical downtime while navigating these faulted zones allowed additional ground pressure and roof conditions to develop ahead of the phase. Under these circumstances, elements of the current longwall design were less effective at managing changing conditions than expected, which further slowed progress. Importantly, we do not view these challenges as a resource quality, reserve or long-term mine plan issue. Faulting and structural complexity are common characteristics of Bowen Basin operations. What this first panel has shown us is where our equipment and operating practices need to adapt to operating efficiently in these conditions. In the current panel, we have approximately 110 meters to go before the major fault structure is behind the longwall. We still expect some geological interruptions throughout the remainder of the panel. Our team has identified targeted engineering modifications and operating adjustments that will give us greater flexibility when mining through similar conditions in future panels. For each longwall shield, there are 2 key equipment upgrades being scheduled around planned downtime to limit disruption to production. The first is a base-lift power increase estimated at $1.5 million to $2 million total for all shields, which we plan to complete in the current panel during scheduled maintenance. The second is improvements to the shield extension flipper estimated at $5 million to $10 million total for all shields, which we plan to install during the next longwall move in 2027. We have also worked to mitigate the risk of the next panel with an extensive pre-consolidation plan for the faulted zone. Where we do encounter faulting, we will be better prepared with improved longwall positioning, both equipment upgrades in place and steps to stabilize and strengthen the ground ahead of the fault. Together, these steps are designed to deliver more consistent longwall performance at Centurion, while our focus continues to be on safe execution. Beyond our current operating priorities, responsible stewardship remains central to how we manage our assets throughout their life cycle. Peabody received the Office of Surface Mining Reclamation and Enforcement's National Award for Excellence in Reclamation, the highest honor in this field for work at the former Seneca II West Mine in Colorado. Since the mine's closure in 2009, reclamation has transformed the site. This national recognition underscores the lasting impact of our commitment to responsible reclamation. That same focus extends to Peabody development, which is pursuing new ways to create value from our land and resources. Based on promising germanium concentrations, we are nearing agreements with a major customer and a processing partner. Through our R3 joint venture with RWE, we are advancing solar and battery storage projects on reclaimed mine land with potential success fees beginning in 2027. We're also evaluating opportunities to pair mine-mouth generation with data centers. Our approach remains capital-light and partnership-driven, positioning us for new revenue streams and long-term growth. Turning to the U.S. regulatory environment. As the nation faces rising electricity demand, EPA's partial repeal of the power plant carbon rule, which required unproven and uneconomical technology and its proposal to resent the engagement finding represent important steps toward restoring a more common sense energy policy for our country. I commend the DOE, EPA and the Trump administration for recognizing the critical role of reliable, dispatchable and affordable energy. With that perspective on our operations and the regulatory environment, I'll turn the call over to Malcolm to discuss the U.S. and global market fundamentals.

Thanks, Jim, and good morning, everyone. Building on Jim's overview, I'll discuss the market conditions shaping customer demand. The third quarter featured stronger seaborne pricing driven by continued supply constraints and steady demand. China remained the primary driver of metallurgical coal pricing. Seaborne Thermal coal market strengthened primarily because of healthy North Asian demand and supply constraints persisting in Indonesia and domestically in China. In the U.S., thermal demand improved during the quarter. However, it remains down year-over-year on a year-to-date basis. Starting with Seaborne Metallurgical coal. Premium hard coking coal averaged $248 per metric ton in the third quarter, up 35% year-over-year and the highest quarterly average since early 2024, with spot index prices peaking at $285. As lower Chinese production resulted in Chinese metallurgical coal imports increasing 25%. Chinese safety inspections and production restrictions in Shanxi following the major mine accident in May have particularly affected high-quality coking coal supply. An estimated 70 million tons of Chinese domestic metallurgical coal production have been removed from the market year-to-date. For context, the global Seaborne Metallurgical coal market is approximately 80 million tons per quarter. Supply is expected to remain constrained into 2027, supporting seaborne pricing. In India, metallurgical coal buying has been steady but remained selective. Stronger steel prices following the monsoon season slowdown leaves scope for higher imports during the fourth quarter. While tighter Russian PCI supply has renewed Indian buying interest in supply from Australia, through September, premium coking coal and PCI prices were up 31% and 19%, respectively, versus 2025. Against this backdrop, we completed additional spot sales to major Chinese steel producers, advanced 2027 term discussions and delivered an initial Centurion cargo to an Indian public sector steel producer. U.S. high-vol A coal prices have improved this year, but the price discount to Australian premium hard coking coal remains material as incremental supply and freight costs weigh on the delivered competitiveness in Asia. Renewed Chinese access with an anticipated lower Chinese import tariffs could improve demand when implemented. Recent U.S.-China trade discussions have outlined China's commitment to at least 11 million tons of U.S. origin imports in '27 and 2028. This import volume is anticipated to be primarily coking coal. Any resulting trade flow shifts are expected to be broadly neutral for Australian pricing. Turning to Seaborne Thermal coal. Newcastle pricing averaged approximately $135 per ton during Q3, trending higher to finish the quarter above $145 per ton. Price support came from several factors, elevated LNG prices, slower Chinese production and lower Indonesian exports. China has showed continued interest in Australian thermal coal, particularly for mid-calorific higher ash products looking to substitute constrained Russian and Indonesian supply. As a result, API 5 pricing increased through the quarter and October spot API 5 pricing accelerated even further, reaching $115 per ton, the highest level recorded for the index since May 2023. Shifting to the United States. Third quarter Powder River Basin sales fell below guidance as cooler weather early in the quarter, strong renewable generation and low natural gas prices weighed on coal demand. An unplanned extended customer plant outage also reduced shipments. This winter's demand profile will be particularly dependent on the El Nino weather pattern, gas prices and renewable output. Looking beyond the near term, data centers, manufacturing and electrification point to sustained electricity demand growth. That potential has yet to translate into materially higher coal purchases. Project timing will remain a risk. In summary, seaborne markets remain constructive with supply constraints and energy security considerations supporting both metallurgical coal and thermal coal. U.S. Thermal fundamentals are more mixed, but coal continues to provide reliable supply of electricity during periods of high demand. With that, I'll turn the call over to Mark for a review of the financial results and the fourth quarter outlook.

Thank you, Malcolm, and good morning, everyone. With that backdrop, let's review our financial results, capital structure actions and outlook for the remainder of the year. Peabody reported a third quarter net loss attributable to common stockholders of $32.8 million or $0.27 per diluted share, a much narrower loss compared to $90.6 million or $0.74 per diluted share in the second quarter. Adjusted EBITDA increased to $97.5 million, still below the steady-state mid-cycle run rate as we await Centurion's full ramp-up. The improved results were driven by higher production at Centurion, higher average realized seaborne prices and better U.S. Thermal volumes. Costs per ton were higher than anticipated due to lower-than-expected third quarter U.S. Thermal volume and higher cost faulted conditions slowing production at Centurion. I'll now walk through the segment results. Seaborne Thermal shipped 3.1 million tons, exceeding expectations by 100,000. Export shipments were 2 million tons, also above guidance, and the average realized export price exceeded $100 per ton, further expanding margins. Compared to the prior year period, revenue per export ton increased nearly $24, while costs have increased about $7 per ton. The segment reported adjusted EBITDA of $65.5 million, increasing 26% from the second quarter and 60% from the prior year period. We are anticipating an even stronger fourth quarter with higher production from both Wilpinjong and Wambo selling into very strong seaborne energy coal markets. Seaborne Metallurgical shipped 2.2 million tons, exceeding company expectations, driven by higher production at Metropolitan following a quicker-than-planned longwall move. Revenue per ton increased 11% from the second quarter to $165. Costs were above target at $162 per ton, primarily reflecting higher cost faulted conditions and lower production at Centurion. The segment turned in its first positive EBITDA quarter of the year and with higher volume at Shoal Creek and Coppabella, we are expecting a stronger fourth quarter. Our U.S. Thermal business generated $40.5 million of adjusted EBITDA, more than double the second quarter result. In the Powder River Basin, shipments increased to 19.6 million tons. Together with cost-focused management, costs improved 8% to $12.94 per ton, but remained above target due to lower-than-anticipated volume as a result of lower coal burn. The segment generated adjusted EBITDA of $15 million. The other higher calorific value U.S. Thermal business shipped 3.4 million tons, 300,000 less than anticipated. Lower shipments at Bear Run are due to lower coal burn and a Twentymile customer had a generation unit down for an extended period. The resulting mix increased average cost per ton above expectations in the quarter, partially offset by higher average realized revenue per ton. The segment generated $25.5 million of adjusted EBITDA, broadly consistent with the second quarter. Turning to the balance sheet. We ended the quarter with $434 million of cash and $887 million of liquidity. In the third quarter, we repurchased $39 million of the remaining 2028 convertible notes for $58 million and issued a call for the remaining $40 million, electing cash settlement with an anticipated mid-November closing. The cash repurchase completed in the third quarter continued our return of capital to shareholders with a $19 million cash premium representing an additional 700,000 shares repurchased, bringing the year-to-date amount to 5.7 million shares. Together with $27.4 million of cash dividends, we have returned $192 million to shareholders in 2026 through September 30. Looking ahead to the fourth quarter, Seaborne Thermal volume is expected to be 3.6 million to 3.8 million tons, including 2.5 million to 2.7 million export tons. Approximately 1.6 million tons of Newcastle product and 0.8 million tons of higher ash Wilpinjong product remain unpriced. Costs are expected to be between $46 and $51 per ton. Significant improvement compared to the third quarter is driven by substantially higher volume from Wambo as a result of mine sequencing, improving quality mix to approximately 65% Newcastle, 35% higher ash coal. Strong performance through the first 9 months of the year has allowed us to increase full year Seaborne Thermal export volume guidance by 200,000 tons. Seaborne Metallurgical volume is expected to be 2.2 million to 2.4 million tons as higher volume at Shoal Creek and Coppabella offset lower volume at Centurion as we work through the difficult faulting conditions that Jim discussed. Realizations are expected to average approximately 70% of the premium hard coking coal index with cost of $150 to $160 per ton. Lower fourth quarter expectations at Centurion resulted in a reduction to full year Seaborne Metallurgical volume of 600,000 tons and increased costs $15 per ton. Powder River Basin shipments are expected to be 19.5 million to 21.5 million tons at an average price of approximately $13.75 per ton at cost of $13 to $13.50 per ton. With the lower coal burn during the third quarter and modest Q4 forecast, we have lowered full year volume by 7.5 million tons, increasing full year costs by $1 per ton. Other U.S. Thermal volume, which has an average calorific value greater than 11,000 Btu is expected to be 3.6 million to 4 million tons at an average price of approximately $59 and cost of $48 to $52 per ton. Similar to the PRB, we have lowered full year volume guidance by 200,000 tons due to lower anticipated coal burn. Capital expenditure guidance was reduced by $40 million, primarily related to opportunistic deferral of development at Centurion North. In closing, Peabody exits the quarter in strong financial position, poised to leverage our diversified assets to generate free cash flow from strong seaborne markets. With that, I'll turn the call back to Jim.

Thanks, Mark. Peabody's opportunity is clear; build on the strength of our thermal businesses, realize Centurion's long-term potential and unlock additional value from our asset base. Delivering on that opportunity starts with safe, reliable operations and disciplined cost management. We recognize the work ahead at Centurion and remain focused on demonstrating improved progress. Our responsibility is to translate the strength of this portfolio into lasting value for our shareholders. With that, operator, we are pleased to open the call for questions.

[Operator Instructions] The first question comes from Chris LaFemina with Jefferies.

I just want to ask you about Centurion. So the plan was to initially get through the complex faulting area, which you had hoped to achieve by mid-October. But now you've encountered additional faulting problems, and these seems to be spread throughout the mine. It sounds like this has gone from being getting through the complex faulting and then kind of going about on your prior mine plan to now trying to figure out how to manage through this faulting because it's more likely to be a potentially permanent feature in the mine. Is my interpretation of that correct?

Chris, the faulting that we have is still in this localized area that we're trying to get -- that we are getting through that we've talked about earlier. And once we get beyond this 110 meters in this panel, the majority of this faulting goes away. So our outlook on the faulting and the geology in this panel and the rest of the mine hasn't changed and our outlook for the ability to mine the coal as we get to the subsequent panels hasn't changed. There is faulting across the mine as it is in all the mines in the Bowen Basin. And what's occurring is, as we're getting through this first panel, we're learning how we have to adapt our equipment to handle this faulting better in some of our operating procedures. So nothing has changed in our outlook on the mine or the faulting. This faulting was known to be there. We had it mapped out. It just turned out to be more complex than we thought it was going to be.

So the faulting throughout the rest of the mine, how do we know that it's not more complex than you had initially assumed it to be? If you've had a problem with this particular area, how do we know what is going to happen with other faulting areas in the longwall?

Yes. What we've learned with both the equipment that we have and the modifications that we have and then the pre-consolidation where we have had the faulting and have done the pre-consolidation. We've had a lot better success at mining through that. This area here, though, we did not have the pre-consolidation done to it, but we have it in the rest of the panel here where we do have faulting and we'll be doing it in the panels going forward. So, the pre-consolidation and the equipment modifications to handle the conditions when we get them, when we encounter them, give us a lot higher degree of confidence of being able to mine through them efficiently in the future.

Okay. So your confidence in getting to full capacity at this mine has not changed even with these problems that you're encountering right now? That's my last question.

That's correct. Yes, Chris, we're 100% still going to get to full capacity. And again, this first panel has been a learning experience for us and what we need to do to get to that full capacity. And with the planned equipment modifications that I outlined in my comments, the pre-consolidation and the experience we're learning in this first panel, we're still 100% confident we're going to get to the full output capacity of this mine.

The next question is from Katja Jancic with BMO Capital Markets.

Maybe staying on Centurion. So Jim, you mentioned you're confident that you can get to full capacity. But can you maybe talk a bit more about when you could get there, what the time line is?

Yes. As we get through these faults in this quarter here and early next year, while we're finishing up this panel, we'll do these equipment modifications that I talked about. Some of them we can do during this -- while we're in this panel and some we'll do during the next longwall move. And we'll be doing the pre-consolidation in the next panel ahead of us getting there. So as we get through this panel, certainly, as we get into the next panel after this longwall move, we will be at that full capacity potential. But we still have to work through this right now as we do these equipment modifications while we're mining through this panel. But the next panel, we should be ready to go.

So if I understand correctly, when you get -- when you do the longwall move in 3Q of next year, that's when you could get to that 1 million ton run rate? Or how should we think about it?

Yes, that's when we -- with the modifications, we'll feel like we're much more consistently -- we'll be operating consistently and getting to that run rate. Now as we're in this panel and we get through this faulting area, we'll get to those high run rate levels once we get past the faulting, this 110 meters we have left. But we won't have those modifications then Katja. So in order to consistently keep that run rate, whether there's faulting or not, we need to get these modifications done.

The next question is from Nick Giles with B. Riley Securities.

Maybe just on 4Q specifically, I think 45,000 tons in October still implies something around 175,000 tons per month. So can you just kind of give us a picture of exactly where things stand today? Like is the longwall running? And if so, how many passes are you able to make given the faulting issues? And how much of these sales volumes would come from inventory that's on the ground?

Yes. Right now, the longwall is running, but not at the rates that we're hoping to get to once we get -- that we will get to once we get past this faulted area here, which we expect to be out of later this week. The problematic area, and we still have to get through the 110 meters that we have left. And we had coming into the quarter about 50,000 tons of inventory, and we've got another 125,000 tons that we know that we'll get from our CM units. And so the remainder would be coming from the longwall, and we feel pretty good about those numbers -- attaining that guidance range with the tons off the longwall for the rest of the quarter.

Understood. And I was hoping you could give us an early sense for how you're going to guide at Centurion in 2027. I mean, obviously, there's been a number of challenges. Guidance has been consistently downgraded. So it seems like you're still confident you can reach full capacity, but are you willing to set the bar lower just in case that some of these problems do persist?

Nick, it's Mark. Yes, we're not prepared to share what we're going to do with 2027 guidance for any of our mines yet. We're going to look at it. We're going through our budgeting process. Clearly, we want to see our progress here in the fourth quarter. But I think the most important point is what Jim mentioned earlier that our long-term outlook has not changed. But we'll work through these modifications with the equipment that Jim mentioned, and we'll come up with guidance in our next call.