Peabody Energy Corporation (BTU) Q3 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Peabody Energy Third Quarter Earnings Release. [Operator Instructions] As a reminder, today's call is being recorded. Now with that being said, I'll turn the conference over to the Senior Vice President, Investor Relations and Corporate Communications, Mr. Vic Svec. Please go ahead.

Well, thank you, John, and good morning, everyone. Thanks very much for taking part in the conference call for BTU. With us today are Chairman and CEO, Greg Boyce; Executive Vice President and CFO, Mike Crews; and President and Chief Commercial Officer, Rick Navarre. Today's format includes our traditional earnings call discussions, as well as a brief presentation on Macarthur Coal, given the significant milestone we've just achieved. You can find that presentation on peabodyenergy.com. We do have some forward-looking statements. They should be considered along with the risk factors that we note at the end of our release, as well as the MD&A section of our filed documents. And I'll now turn the call over to Mike.

Thanks, Vic, and good morning, everyone. This quarter, Peabody posted record revenues for the second quarter in a row, increased contributions from U.S. and Trading and Brokerage operations and generated substantial cash flow. Even with a significant event in Australia, Peabody turned in a solid quarter and we're looking to finish 2011 with our best quarter of the year. We continue to benefit from a diverse portfolio that can mitigate downside and access the best markets. I'll discuss our third quarter results beginning with the income statement. We delivered revenues of $2.04 billion, rising 9% over the prior year. This was driven by higher volumes in the U.S., improved realizations across the platform and increased Trading and Brokerage results. EBITDA rose 10% at U.S. Mining operations and would have increased year-over-year in Australia, but for the roof fall of our North Goonyella Mine that we previously announced. The EBITDA impact of the fall and longwall startup was approximately $120 million for the quarter, in line with our prior estimates. EBITDA also benefited from a 30% improvement in Trading and Brokerage contributions on both higher pricing and increased exports. All in, consolidated EBITDA for the quarter totaled $504 million and included $9 million of transaction costs related to the Macarthur track acquisition. We also incurred approximately $13 million in interest expense to secure bridge financing. In total, these items reduced earnings by $0.07 per share. Diluted earnings per share from continuing operations totaled $1.01 compared with $0.83 last year. Excluding the noncash measurement of income taxes, our adjusted diluted EPS was $0.87. Our effective tax rate was 24% for the quarter, excluding the effects of income tax remeasurement and we continue to target a mid-20% range for the full year. Turning now to the additional detail within our supplemental income statement. In the U.S., our volumes increased 8% in the Midwest and 4% in the West over the prior year. While flooding remained an issue, both regions recovered well from the second quarter and boosted output, and the West benefited from resumed shipments of Twentymile. Revenues also rose in both U.S. regions. Cost increases were driven primarily by the timing of repairs and higher fuel expenses, along with increased compliance cost in the Midwest and sales-related expenses in the West. Average revenues were up 7% and gross margins per ton increased 5% in the U.S. In Australia, volumes of 6.6 million tons were below the prior year, primarily due to 550,000 tons of lost shipments related to North Goonyella and related blending. Revenue per ton rose 15% to $115 per short ton on higher realizations. During the quarter, we shipped 1.6 million tons of met coal at an average price of $251 per short ton. We also sold 3.4 million tons of seaborne thermal coal at a realized average price of $99 per short ton. Regarding Australia cost increases, more than $8 per ton was driven by higher currency rates. The roof fall at North Goonyella and 2 longwall moves also contributed $8 per ton. And higher royalties due to increased pricing added another $2 per ton. We are now targeting full year Australia cost in the low $70 per ton range. Turning to the balance sheet. We have $1.4 billion in cash driven by a 34% increase in cash flow from operations, which totaled $575 million. Our debt-to-capitalization ratio has declined to 32%. And we continue to target full year capital spending for 2011 at $900 million to $950 million, excluding acquisitions. I'd like to close with a review of our outlook. In the fourth quarter, we expect to see improving production from Australia, which will be partly offset by impacts from North Goonyella, which is still ramping up following the roof fall. We still expect to be within our original guidance of up to $175 million in EBITDA impact for the year from the roof fall. For the full year 2011, we continue to target EBITDA of $2.125 billion to $2.325 billion and adjusted diluted EPS of $3.70 to $4.15. These targets exclude additional acquisition cost, as well as Macarthur's consolidated results. I would also refer you to our Reg G schedule in the release regarding our target ranges for DD&A, taxes and other line items. That's a brief review of our quarter and outlook. For a further discussion of the coal markets, Peabody's position and initiatives, I'll now turn the call over to Greg.

Thanks, Mike, and good morning, everyone. I plan to make brief remarks about the markets and Peabody's project activities, and then we'll spend some time reviewing the Macarthur acquisition and next steps. Now in a time when one can receive mixed signals from the equity and asset markets, I'm pleased to report that our business is not only sound but set for significant growth with our organic platform and the successful acquisition of Macarthur Coal. Peabody's on track for record revenues and EBITDA this year. Demand and pricing for our products is favorable, our pipeline of projects is strong and for every caution light we see in macroeconomic data, there are multiple favorable signals at the coal market level. So if you consider these following data points in the global markets, global GDP is still expected to come in at more than 3% growth in 2011. Global scale production is up 9% year-to-date, and projections continue to call for more than 5% growth in steel production for 2012, equaling a rise of 50 million tons of met coal use just next year. China net coal imports just hit an all-time high in September, and net imports ran at nearly 50 million tons for the third quarter. And China thermal generation in September increased nearly 20% over 2010. South Korea's coal imports also have set records recently, and India's thermal coal imports are up more than 40% year-to-date. Coal generation has risen 8% in India and 6% in South Korea year-to-date. And even in Europe, September coal generation was up 5% over the prior year due to high gas prices and following nuclear generation. Coal prices remain favorable. Met coal prices settled at $285 per metric ton for the benchmark, and low-vol PCI sells at $208 per metric ton and the Newcastle Thermal Coal recently settled for one-year contracts at $126.50 per metric ton, some 30% above prior year levels. Now in the United States, the coal supply-demand equation has been balanced despite a dormant economy that has resulted in reduced electricity generation from gas, nuclear and coal. With a very strong summer burn, increasing U.S. export demand and reduced western shipments due to rail flooding issues, coal inventories have declined the most since 1993. And PRB stockpiles are currently at target levels. So while such our Appalachia prices have declined since the start of the year, coal pricing in the PRB and Illinois Basin have continued to increase. Tightening standards on SO2 from the so-called Casper rules are also in flux, but are likely to further the shift toward PRB coal and the ultralow sulphur coal from our North Antelope Rochelle mine. This mine accounts for more than half our U.S. output and has a sulfur content 40% below the benchmark product. This ultralow sulfur content can translate to a several dollar premium over the benchmark. So in this mixed economic environment, coal should continue to do well in the near term. I say this for several reasons. Globally, the baseload nature of power generation insulates coal from the severity of downdrafts and other commodities. Coal also has a cost advantage to sources such as LNG into Asia and Europe and is a logical backfill for declining nuclear use in Germany and Japan. And of course, Peabody's positioned in the fastest-growing coal regions through Australia, the PRB and the Illinois Basin. Now in the longer term, global electricity and steel demand from China, India, Brazil and other developing countries will ensure that coal fundamentals will be strong for decades. Now let me mention several of our developments to serve long-term demand growth. I'll review the Macarthur Coal takeover in a moment, given the significance in reshaping our operations and growth portfolio. But we're also reaching several milestones in our Australian mine expansion. We have first coal coming from our expanded Wilpinjong, Millennium and Wambo open cut mines in the fourth quarter, bringing us added met and thermal coal for 2012 from these operations. And we're continuing to work with the Xinjiang government on the reserve allocation regarding our planned 50 million ton per year surface mine in the province. So in summary and contrast to broader commodity and equity movements, coal fundamentals remain solid. In the U.S. and Europe, Peabody is well insulated against economic uncertainties with a large price position and low-cost production. And in Asia and Australia where markets are strongest, Peabody continues to invest in development projects to satisfy significant long-term demand growth. So I'd now like to turn my attention to our acquisition of Macarthur Coal and the many favorable implications that has for Peabody.

And today, we will be discussing the Macarthur presentation that's available from the homepage of peabodyenergy.com. Just a few housekeeping notes. To the extent we have forward-looking statements, we'd refer you to our SEC filed documents. We also note that Macarthur data and forward-looking statements are based on representations made by Macarthur prior to Peabody's acquisition. We will form our own view over time, of course, and actual results may differ. There are several translations to be mindful of. Reserve data from Macarthur is based on York [ph] standards, whereas Peabody reports using SEC standards. Macarthur also reports in Australian dollars, of course, as well as metric tons and where possible in the presentation, we've converted those into short tons. Now with that, Greg, I'll turn the call back to you beginning on Slide 3 of the presentation.

Thanks, Vic. We'll briefly take you through an overview of the transaction looking at markets, Macarthur's profile, the new Australian platform, financing arrangements and planned next steps. So turning to Slide 4 and looking at the Macarthur acquisition at the highest level. We have offered to purchase up to 100% of Macarthur Coal. Control has now been achieved as we've now obtained an interest in more than 60% of MacArthur shares. The offer is still open and has been declared unconditional. The price is AUD $16 per share and would rise to AUD $16.25 per share should we achieve a 90% relevant interest by November 11. Peabody has been notified by ArcelorMittal that it's exercising its option to sell its shares and joint venture interest to Peabody. This is good news for Peabody. We partnered with ArcelorMittal to increase the likelihood of achieving control of Macarthur. We always preferred increased ownership of Macarthur. We believe Arcelor's decision will accelerate our ability to realize synergies, to integrate the operations and to realize the benefits of the acquisition. We intend to finance our interest through a combination of cash and debt, and Mike will review our financing plan in a moment. Now looking at Slide 5. Macarthur is the world's largest seaborne producer of low-vol PCI coal. For Peabody, this transaction accomplishes a number of objectives. It creates synergies with our existing base, expands our Australian platform to serve high-growth regions, adds benchmark low-vol PCI supply to our product mix, significantly expands our pipeline of growth opportunities and extends our resource base to provide years of future development projects. We are targeting the transaction to be accretive within a year. Now as you'll see on Slide 6, this acquisition is valued very competitively with comparable Australian transactions involving producing and development companies, either on the basis of enterprise value per ton of resource or EBITDA ratios. Slide 7. Turning to the markets, we see global steel demand growing some 60% by 2020, requiring a proportionate increase in metallurgical coal. Much of the new steelmaking capacity accommodates PCI-type coal, which we see growing at a 5% annual compound rate. Slide 8. PCI is in growing demand from global steel producers as a lower cost coke replacement. Low-vol PCI is typically priced at 70% to 80% of high-quality hard coking coal. As I mentioned earlier, recent settlements of $280 -- $208 per metric ton. Now looking at Macarthur's assets on Slide 9, you see an active production base and a major growth pipeline. From approximately 4 million tons of production, there is strong long-term growth potential. Macarthur has 260 million tons of reserves and 2.6 billion tons of resources. Slide 10 indicates Macarthur owns 73% of Coppabella and Moorvale, 2 active surface mines. Macarthur also is a 50% owner of Middlemount, which ramps up to full-scale production beginning in January. The company has targeted sales for its 2012 fiscal year of 5.5 million to 5.8 million tons from these 3 operations. Turning to Slide 11. Macarthur expands Peabody's Australian reserve base, bringing pro forma Australian reserves to nearly 1.4 billion tons. This represents a significant base to enable growth within our project portfolios, as well as future development capabilities. And Slide 12, looking at production, Peabody's pro forma 2010 production with Macarthur represents 32 million tons, growing to 45 million to 50 million tons by 2014 to 2015. Should those pro forma volumes be in place today, Peabody would be the second-largest metallurgical coal producer in Australia and in the top tier of global met coal producers. Slides 13 and 14 show the significant development pipeline the Macarthur has identified. It includes Codrilla, which has been selected as the company's fourth mine and is expected to come online by 2014. And you'll see a number of other projects that are at exploration and pre-feasibility stage. For Peabody, this acquisition echoes our experience with Excel Coal in 2006. Excel is a company with several active mines and multiple expansions and development. Since our purchase in 2006, we have driven a 62% improvement in safety, a six-fold increase in volumes, 7% improvement in operating cost and a fivefold increase in related EBITDA. So Mike, would you take a minute to walk us through Slide 15 regarding our financing plans?

Thanks, Greg. Again the deal is still alive. Our ultimate ownership percentage of Macarthur remains open. We are prepared to finance this acquisition solely through cash and debt, and at debt levels that are very manageable. Peabody has $1.4 billion in cash. We have a current revolver with $1.5 billion of capacity. We have a bridge loan in place and a $1 billion term loan being finalized. And we have access to the debt markets for permanent financing. We have consistently said that our target leverage ratio was 40% to 60%. Today we're at 32%. If we're able to secure 100% ownership of Macarthur, our debt-to-cap ratio is expected to be in the mid-50% range and at or below the level we were at when we purchased Excel Coal in 2006 when coal markets were far less robust than today. So bottom line, we have sufficient cash and financing capacity to fund the Macarthur acquisition.

Thanks, Mike. From here, we move to Slide 16 to discuss a number of next steps. We will finalize the acceptances of shares with the goal of achieving 100% ownership and privatization. As we take control of Macarthur operations and complete the acquisition, we are implementing a detailed transition plan. We will look to achieve synergies over time in areas such as operational performance, supply-chain management, marketing and blending. We will work to improve the mining plan and equipment efficiency at Coppabella where Macarthur has acknowledged it is working through ongoing issues from the global financial crisis in 2008 and flooding earlier this year. And of course, we will further evaluate the growth projects now that control has been established. Slide 17, in summary, the Macarthur acquisition expands Peabody's presence with quality met products that target a high-growth region. It provides major growth opportunities, a large reserve base and significant potential synergies. And it continues a global buildout and expanded earnings contribution from our international assets. So that's a brief overview of the Macarthur transaction. We look forward to providing more information once the transaction closes and we further evaluate Macarthur's operations and development projects. So following that review, as well as a look at our third quarter earnings, we'd be pleased to take your questions.

[Operator Instructions] First, we go to Shneur Gershuni with UBS.

I've got 2 questions. One on financing, one on low-vol PCI. First question on financing, you've noted in your presentation and comments that you're comfortable in mid-50s debt-to-cap level. I was wondering if you can talk about kind of how you think about it on a net debt-to-EBITDA basis, whether you'll be well below 3x. And if you can talk about kind of the mix of maturities that you're looking at or if you're considering converts, when do you think about permanent steps?

Yes, as you look at the -- I did mention the debt to capitalization. As you look to the debt-to-EBITDA, we've got the max trigger in our credit facility is at 4, which we would be well inside. In the current projections that we have, we would be under 3x on the debt-to-EBITDA. As we look at the mix, first thing we start with -- this is at the current set of maturities. So we've got a credit facility in term loan that matures in 2015. We have $650 million of debt related to the Excel acquisition that matures in 2016. So we'll take those into account as we start to look at the level of maturities when we go out to the market, looking to get probably beyond 2016 for the bulk of that financing.

Okay. And then just turning to low-vol PCI. This is kind of the second attempt of Macarthur, looks like more successful than the first. How are you thinking about the low-vol PCI market longer term? Do you expect pricing to narrow with respect to hard coking coal? And then given that all the Asian blast furnaces, most of them were built to take PCI, do you expect them to be able to increase the amount of PCI that they're taking and so forth as you think about it over the next couple of years?

Well as we look at it in any way, we obviously continue to see a structural shortage in the availability of coking coal and low-vol PCI is continuing to grow in utilization and it's used in more and more blast furnaces as a substitute for coke in the process. So we see that continuing to happen. It lowers the cost. And if we look forward, we see probably a 50-million ton growth each year in met coal demand, and PCI will be a component of that, probably still in the 5% to 6% compound annual growth rate. So we feel pretty good about it. And obviously, that's why we've continued to pursue these assets because they have high quality, the benchmark quality PCI product.

Our next question is from Jim Rollyson with Raymond James. James M. Rollyson - Raymond James & Associates, Inc., Research Division: Greg, when you sit back and take a look at your Macarthur transaction and kind of think about that relative to when you were sitting at this stage with the Excel transaction, kind of how does this rank relative to Excel? I mean, I recognize Excel in retrospect was a home run, but just when you think about it going into it, kind of where does this sit in your thought process?

Well, we'd like to believe all our acquisitions have been home runs. Certainly, Excel was. I mean when we did the Excel acquisition, it was the largest acquisition we had done to that point in time. Obviously, we were a smaller company. Excel had a platform of reserves and resources that was underutilized. They were just beginning production at a couple of properties, and they had major development and expansion programs in a number of others. So we bought into that program, bringing all of our skills to deliver projects and to optimize those operations and ramp those up into the marketplace. And you've seen a significant growth in the volumes that we have from our Excel properties that we purchased at that point in time. This is very much the same situation. You've got a very large reserve base and an even larger resource base. You've got emerging production from 2 operations today, growing to third and fourth with a pipeline of projects right behind it. So as we look at the ability to kind of work the magic we did with the Excel assets with the Macarthur assets, integrate those into our platform which is already much bigger than Australia than it was at the time that we bought Excel, we feel very good about bringing this acquisition in. It's a large acquisition but given the size of the company, it fits right within our ballpark. James M. Rollyson - Raymond James & Associates, Inc., Research Division: That's a great answer. And then as a kind of totally unrelated follow-up, just switching gears back to the U.S. maybe for a minute, a bunch of rumblings in some of the trade publications lately about School Creek. Just kind of wondering, or maybe a little update on School Creek and/or kind of how you guys are feeling about the PRB market just over the next couple of years, given the new regulations, given where you stand on possible development on the export facility, et cetera?

Well, maybe I'll talk about School Creek for a minute and then let Rick talk about the markets in the fourth. But what we've got in process right now is we are in the process of shifting. We've always talked about School Creek or the facilities at School Creek being available to us for margin enhancement out of the Powder River Basin. We are starting the marketing, North Antelope Rochelle product, which is a part of the reserve base from North Antelope Rochelle and part beginnings of opening up the reserve at School Creek. In order to optimize our ability to use infrastructure that we own, we will be shipping that product out of the School Creek facilities. We're not, in essence, starting up School Creek. We're beginning to market a North Antelope product and optimize our ability to shift all of that North Antelope Rochelle production between 2 rail load-out facilities. So you're going to see that as we go forward.

And as it relates to the Powder River Basin market, obviously you referred earlier to the potential future impacts of the Casper regulations. And as we've seen that, it has had an impact on the forward curves. Obviously, it's substantially pulling up the steeper contango on the forward pricing in the PRB. We've been able to capture some of that. I would tell you today that I'm not sure that they've been fully valued as to how high the value might be for the differentiation between North Antelope Rochelle product in a 0.5 versus the benchmark 0.8. It could be as high as $1 to $4 depending upon the price of the credits going forward. So while we're excited about that, we're not excited about the enhanced regulations on U.S. coal fleet, but it is -- something does have an impact on the pricing for PRB products. James M. Rollyson - Raymond James & Associates, Inc., Research Division: And Rick, maybe the latest on the export plans?

Export plans continue to move forward. I mean obviously, as we said before, it was going to take a couple of years to permit. That was probably our optimistic case and we're still running on that pace right now and then it will take about 18 months to build once we got permitting. We're still continuing to move forward with that process, and we're looking at other alternative and other options because we think the market is certainly -- really wants that product.

Our next question is from Michael Dudas with Sterne Agee. Michael S. Dudas - Sterne Agee & Leach Inc., Research Division: Two questions. First, relative to Macarthur and Peabody Australia, can you characterize the level of synergies that you might get from the operating aspect of running a larger company? Or is it more a blending customer mix that might add a lot more value to Peabody going forward?

Sure. I mean, if you look at the synergies in the areas of synergies that are available to us, as you point out they're everywhere from operating synergies and that's everything from equipment use, capital expenditures within the operations and how we deploy capital and equipment. You have technical and other services to the operations like supply chain, synergies that we can pull together. And then once you move outside of the operations themselves, you've got rail, port, blending, marketing, all of those types of synergies that we will be looking at. How do we fully assess and bring across to finish line. The timing as to how quickly we can capture those will be somewhat related to the ultimate ownership of -- and where Macarthur stands vis-à-vis the public listing versus going to privatization. Clearly, one of the benefits of ArcelorMittal's decision is that it certainly simplifies the process that we had in place as part of that joint venture agreement with ArcelorMittal. So that in itself will accelerate and ease our ability to capture those synergies. Now it's a matter of the final ownership structure of Macarthur. Michael S. Dudas - Sterne Agee & Leach Inc., Research Division: I assume everything's on positive terms relative to Mittal in this transaction?

Absolutely. We had a great relationship, still have a great relationship with ArcelorMittal. The teams work together fabulously. I think as their release indicated at the end of the day, success breeds people to make other decisions and given that we were looking at achieving 100% ownership, they've looked at deploying their capital within their core business rather than having as much as now as anticipated deployed in a noncontrol, noncore business. So I think from our perspective, they're a great customer and we look forward to having other opportunities to work with them. Michael S. Dudas - Sterne Agee & Leach Inc., Research Division: And to follow up, my second question is relative to Mongolia, could you share with us the current timeline situation relative to top end and other opportunities that you might be focusing on there, given the focus with Macarthur, possibly investments in the U.S., will that maybe delay or pull back a little bit on your opportunities to exploit that market?

Yes, Mike, this is Rick. On Tavan Tolgoi, we continue to move forward with that process, and it's a long process and has been, as you know. It is a difficult process. We've been selected as one of the finalists and continue to be a moving target because of geopolitical issues. The government has tried to balance geopolitical issues with selection of the world-class mining partners to be able to bring the safest in the most environmentally sensitive mine and productive mine to bear. So we're still very much in favor in Mongolia, but this process will take time. So we're in no risk of spending a significant capital in the near term at this point in time. So I think we've -- there's no reason for us to slow the process down. I think they're doing a good enough job of doing that themselves. So I think it's pretty well balanced, and we are looking at other projects, of course, that I would consider -- that are outside of what they call strategic projects, which we can move a little bit quicker in Mongolia.

And next, go to Andre Benjamin with Goldman Sachs.

A couple of questions. First, I was wondering how you guys are thinking about the Macarthur growth profile beyond that amount, i.e. Codrilla and some of the other development projects and how that stacks up in prioritization versus you already discussed Australia's organic growth and how that might change if met coal pricing were to, say, fall below $200?

Well I think at the end of the day, we feel very strongly about the opportunity pipeline that Macarthur has beyond the 4 projects that they have in play right now. As we evaluated the Macarthur asset base, we see a number of those projects that we look very favorably on. We also obviously feel very good about the projects that we have currently going forward within our existing Australian asset base. And clearly, all of those projects look very healthy at the kind of target level for met coal pricing that you talked about. So at this point, once we fully get in and control Macarthur, we'll obviously do a full evaluation of their projects, we'll be able to rank our capital allocations, respectively, to our platform, their platform, as well as other opportunities and we'll make the logical decisions for the high-value projects going forward.

That's helpful. And then the separate follow-up on Casper. Is it possible you can give me a little bit of color on how much interest you're getting from customers today in contracting volumes that's related to the kind of the normal seasonal buying versus incremental interest from Casper? And then separately, I know that there's clearly going to be more people looking to blend, but how do you think about those that are already burning some PRB that may need to reduce their coal burn and how that impacts your PRB business versus Shell in the basin business?

Well, I think we're getting interest from -- most of our customers have the ability to today burn PRB coal, and even customers that aren't burning PRB coal. So it's really widespread interest to try to figure out what is their strategy to reduce their emissions. And we announced last couple of months ago that we signed a 91-million ton agreement with one of our large customers. And then surely, it was geared towards them saving the capital going forward. They will be required to comply with Casper and to do it in a fashion using low sulfur coal. So it is widespread. I think everybody is trying to get their arms around it and trying to figure out how quickly they're going to have to implement this thing because there are certainly a lot of lawsuits outstanding against this regulation as well. It's going to go into effect; the question is just how quickly.

What's the impact on the PRB, Rochelle Mine basin on your numbers?

We don't think that's material, frankly. We think there's going to be some PRB plants that are going to be orderly shutdown just like there will be some Illinois Basin plants earlier. For the most part, it doesn't have that much of an impact on the Illinois Basin plants because if they've got scrubbers on already, they're probably not going to be switching to PRB coal.

Our next question is from Brandon Blossman with Tudor, Pickering, Holt. Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: I guess let's just move back to Macarthur for a bit. You talked a bit about capital allocations, this is probably more for Mike. But looking over the next, say 3 or 4 years, are you moving to a capital-constrained environment as you look to kind of pay down your debt load? And will you actually do some capital rationing as you look to your development projects?

Yes, I think as it relates to the capital program, we're at $900 million to $950 million today, that's what we've guided to. We'll obviously have some additional debt service as we bring on this acquisition. And I don't know if rationalization is the right word as much as prioritization. So what we'll do is we'll get into Macarthur, we'll look at their existing operations, capital needs, we'll look at the development projects, we'll make our own assessment of the timing of those. They do have a good amount of cash on hand. They do generate cash flow from their existing operations. So we'll look at that and balance with our existing capital portfolio and look to make a determination at that time.

Yes, I think I would add to that. I mean we have always had a very strenuous capital allocation process. We obviously like to get substantial returns from the capital that we deploy. I think our track record has shown that we do that. And whether it was pre-Excel or after Excel or in the last couple of years pre the Macarthur acquisition. So we'll use that same model, that same level of discipline around how we deploy our capital to look at where the best opportunities are and what the priorities are for bringing new volumes into the growing marketplace. Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: And somewhat related on a go-forward basis, and this is as synergies build and development progresses at Macarthur, just directionally, top structure in Australia or Queensland?

Well I mean, we obviously -- we can talk a bit about the underlying cost pressures to all Australian platforms in terms of the exchange rate pressures, the issues related to low levels of unemployment and worker employee costs that continue to be challenging, which we try and offset with productivity changes. So all of those issues are going to be the same between our existing platform and the Macarthur platform. But it's a bit early to really look at what the full integration of the platform is going to be relative to a overall cost target. Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: And then just really briefly, FX as you're going forward, either for the deal itself or just for offset?

In terms of hedge positions that we have in place, is that the question? Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division: Yes.

In terms of our existing OpEx, our hedge position for '12, we're still working through the budget process, which will drive our ultimate operating expense need, but we're hedged in the high 60s and an average rate in the low 80s. Macarthur has a current hedge position in place, and it has a little more near term than we do, so that's one of the things that we would be looking at going forward, is how we address their hedge strategy relative to ours.

And next, go to Brian Yu with Citi.

I'm glad to hear that the transaction is expected to be accretive. I just want to put that statement in perspective. In the presentation on Slide 6, you kind of laid out what the estimates are at the point of the time transaction was announced. Would that hold true based on in the more recent estimates of what Macarthur would do or based on where spot PCI prices are from an earnings accretion standpoint?

Well, I guess when you look at Slide 6, those are really backward looking based on transactions that have occurred in the past. In terms of anticipation of being accretive within a year, I mean, that's our forward view of what we know today about the Macarthur asset base, what they have targeted, as well as our full review of pricing. So if the question is, is there something today that would change that view, that view is basically -- incorporates current information.

Okay. On the pricing side, so kind of like at 160s, 170s PCI, is that reflective of what current would be, definition of current?

We wouldn't anticipate what level of the pricing that they would use.

All right. On a different topic, rail cost in the U.S., what are you seeing in turns there out of the PRB? Are rail costs stabilizing, looking out?

I mean, I think they're continuing to be under cost pressure, just like any other business and they have fuel costs, obviously are higher for them, and so you're seeing that type of 3% to 4% escalation being embedded in what we're hearing from our customers who dearly pay for the rail costs out of the PRB. We're seeing 3% to 4% escalations in a lot of their contracts.

Our next question is from Lucas Pipes with Brean Murray, Carret. Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division: I know this is early on in the process here, but could you maybe give us a bit more color on what CapEx could look like going forward on the back of this acquisition?

The only information we could guide you to at this point is we've got -- what our capital spend is this year within our existing platform and Macarthur had a program in place, and I don't have that number off the top of my head. I want to be exact because obviously, they're still a public company.

I have roughly the number, but I don't want to tell you a rough number. I want to tell you the exact number [ph] because they're still listed.

But they've issued that number. So we'll just have to...

We'll have it here in just a second here. It's 170. Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division: Great. That's very helpful. And I mean, Macarthur was impacted pretty heavily by the floods this year. I mean I know that it's not your company yet, but do you have a sense on how well the company is prepared now for a similar event in the future?

Well, all I can -- if you look at their announcement from yesterday on their quarterly results, they're doing -- they continue to do significant work at Coppabella to put in place pumping and piping systems and water management systems in order to make sure that they can get through any future rain events, flooding events. And as they've indicated, they still have water that they're trying to manage from the events of early 2011, late 2010. So it's been a significant focus for the management team there. They acknowledge they've got work yet to do, but they put in place a fair bit of management systems. Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division: That's helpful. And really briefly looking at your fourth quarter out of Australia, could you give us a bit more color on where you expect met and thermal volumes, which mines you expect to really ramp up here in the fourth quarter?

Bear with me for just a second here. We are targeting fourth quarter met volumes within a range of 2.5 million to 3.5 million tons. And we expect a pickup obviously at North Goonyella after the -- we have to get back to normal after the roof fall and we had the longwall movement at metropolitan so that will have an uptick on met fraction as well.

And next, go to the line of Richard Garchitorena with Credit Suisse. Richard Garchitorena - Crédit Suisse AG, Research Division: One question just regarding the acquisition. Is there any preliminary estimate for DD&A related to the acquisition?

No, not at this point. Obviously when we get to our next quarter, hopefully we'll be able to provide significant more detail. Richard Garchitorena - Crédit Suisse AG, Research Division: Great. Okay. And then I just want to shift over to the markets in general. On the export side, can you give us some color, are you seeing any more added interest for some of your coal in the Illinois Basin, Western bid and anything other than I guess the met markets, obviously, and in thermal in the Australian market?

The export markets continue to be strong into Europe for pretty much our Colorado product down to the Western bituminous product and Illinois Basin product. And if we had more of it to sell, we could sell more. We just -- we can't produce it fast enough at this point in time. But there's challenges with respect to transportation. Is there enough and adequate rail transportation and port capacity as well, so lot of different moving pieces to get that coal all the way into Europe. But we expect to move a significant amount of export coal this year compared to last year. As a whole, the U.S. is going to set the record for export coal this year. Richard Garchitorena - Crédit Suisse AG, Research Division: Great. Finally, just can you give us a little more color on China? You mentioned a little bit about the surface you're currently in negotiations on the reserves.

That's on our project dragon that we've talked about, the 50 million ton per year agreement. We're working diligently with the province there to get the reserve data that they're going to provide the reserves to us to open the mine jointly together with them. And we expect to have that information by the end of October. They have 5,000 people and several hundred drill rigs out there right now working on the project.

Our next question is from Brian Gamble with Simmons & Company. Brian D. Gamble - Simmons & Company International, Research Division: Maybe we could hop on that topic a little bit more from the U.S. side since we've talked so much about Australia. Your views for the potential for increased exports for 2012, obviously you don't have an East Coast position but intimate knowledge of the Gulf of Mexico, both in the Illinois Basin and the PRB, and Western bid. What do you see from availability standpoint for growth for next year?

Well I think this year, we think we were predicting slightly in excess of 100 million tons of seaborne export to come out of the U.S. That's really all regions, of course. That's West, that's Gulf, that's East. As we look forward, I think we see that slight increase in that in '12. It would be -- as market conditions, if they stay strong where they are today, we'd probably expect a slight increase and it still takes -- obviously, we've still got to build out additional capacity in the Gulf and there's a little bit of vital capacity and, of course the West is pretty well full right now.

And just you indicated, we didn't have a position in the East, but I'll remind everyone we do have an ownership session in DTA and our coal trade organization ships significant amounts of coal through the East Coast terminals.

Yes, 38%. Brian D. Gamble - Simmons & Company International, Research Division: Sorry, Greg. Didn't mean to shortchange the trading position just from a production standpoint, obviously.

They have nice earnings to the portfolio. Brian D. Gamble - Simmons & Company International, Research Division: Of course. On the deal itself and the accounting for the deal, could you maybe run through, just quickly, the semantics on -- it's 90% by November 11 and how everything will work from an accounting standpoint, should we be trying to roll in Macarthur volumes into our fourth quarter numbers or should we wait for 2012 to finally assume?

Given the fact that we're over the 50%, we will take control of the point numbers to the board. From an accounting standpoint, we will have control, beginning consolidation in the fourth quarter. Brian D. Gamble - Simmons & Company International, Research Division: Okay. So we should try to roll those in as best we can, but we're not going to get any additional color from you guys until the official close of the deal. Would we expect a call post closing or would we not expect to hear from you again until Q4 results?

I think right now, we're looking at Q4 Results. We've reiterated our guidance for the existing platform because of the unknowns around not only when the date we would start to consolidate Macarthur, but also we want enough time. I mean it's one thing to do due diligence on a set of assets, another thing all of a sudden to be the owner. So when we do talk about it at the fourth quarter call, obviously, we'll have had ownership for several, 1.5 months, 2 months by that point in time. So we'll be in a position to give more color.

Our next question is from Mitesh Thakkar with FBR Capital Markets. Mitesh Thakkar - FBR Capital Markets & Co., Research Division: Most of my questions have been answered, but just looking at your current capital spending plan, can you just kind of give me a breakup between growth and maintenance and Australia and U.S.?

Yes. When you look at our sustaining capital, that's probably $1.50 to $1.80 per produced ton. That's probably in the -- off the top of my head, it's probably 350 to 400. I'd say roughly half is growth related and a substantial portion of this growth related is in Australia, particularly as we go forward. In the last part of last year and end of this year, we have some spending in Bear Run. We'll have some incremental capital going forward on School Creek, but bulk of that is going to be in Australia.

I think the other thing I would add to that if you go back and look at the time frame after the Excel acquisition, you'll see that we had some very low sustaining capital per ton numbers. That's part of our capital management process, and you can anticipate going forward for the next couple of years our sustaining capital spend per ton will be managed very, very tightly. Mitesh Thakkar - FBR Capital Markets & Co., Research Division: Excellent. And when you look at your current guidance number, it looks like you lowered steam coal volumes for 2011. Am I reading it right out of Australia?

We did. We lowered both met and thermal coal. The met obviously because of the North Goonyella roof fall and a few other issues. The thermal coal was both Wilkie Creek issues that remain for a period of time post the first quarter flooding, as well as our Wambo operations. We had bought some new equipment to expand Wambo. That equipment was delayed as a result of the tsunami. It was delayed longer than we had anticipated it was going to be delayed, and then the start-up of that equipment once it got on site was slower than expected. So it was really Wilkie Creek and Wambo thermal coal tons.

Our next question is from Meredith Bandy with BMO Capital Markets.

By far most of my questions have been answered, but I just want to do a quick follow-up. You mentioned when you were talking about export thermal that you continued with the Gateway Pacific terminal, but also looking at other options? Could you expand on what the other options might be?

Without getting into a lot of detail, obviously, we want to ship coal out of the Gulf Coast as well, and so we're looking at options there to expand our ability to move Colorado coal out of the Gulf.

Okay. And have you been shipping much out of West shore?

We are shipping. There's not a lot of excess capacity, but we are shipping PRB coal out of West shore.

Just like a few hundred thousand or...

No, it's more than that, but it's -- I don't want to get into a specific number, but it's more than 1 million and it's less than 5 million.

All right. Well, that narrows it down. All right.

I don't want to get much narrower than that.

And we'll go to Paul Forward with Stifel, Nicolaus. Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division: On the Macarthur financing, I was just wondering if you could talk about -- have you ruled out a possible convertible component to the debt that you'll take on with Macarthur? And also can you talk a little bit about how do you approach the decision to use a convertible versus straight debt with this transaction?

I guess at this point, I'd start by saying it's a large transaction. We're going to look at all components that we have in place for debt capacity or other types of -- other than equity because we are going with cash debt. But when you look back to the Excel transaction, we did have a hybrid. It gave us good equity credit. It was additional capacity. When you look at the markets today, you look at what we get out of that, you look at the potential dilution. I wouldn't rule it out, but certainly that we're not leaning toward it at this point. We think we've got adequate capacity in the debt markets. You look at interest rates on a historical basis are very low. So plain vanilla, that looks pretty attractive to us right now.

And we'll go to Dave Martin with Deutsche Bank.

Most of my questions have also been answered, but I had one remaining. Could you give us the latest and greatest on the mining resource tax in Australia? I believe there's a proposal due next month. What changes do you anticipate and what impact on your business?

The minerals resource tax has been out there for quite a while. There hasn't been a lot of movement. The last exposure draft came out after the policy transition group took or incorporated the comments from the mining industry. So that draft's out there expecting final legislation. It looks like it'd be read into law by the end of the year. That's what they're shooting for. So the structure has not really changed that much. Still seeing credit interstate royalties, which is a good thing for us. And as it relates to our business from what we know today, we think it's going to be very manageable. One of the attractive things that they changed from prior legislation was to the extent that you're making additional investments, it does help mitigate some of the MRRT impact upfront. So we obviously have a very active capital plan, and we think that's going to be manageable.

And we'll go to Lance Ettus with Touhy Brothers.

Quick follow-up on the Australian tax. Is there any way you could kind of quantify the potential here in dollars per ton or total dollars? And also wanted to see, I believe you said that you're going to keep -- should be able to keep debt under 3x EBITDA. I want to see, number one, what kind of met price -- what kind of benchmark met you're using to get to that? And two, I guess if you had -- I think when you originally announced the transaction, thought that your credit rating will be stable. I'm just wondering if you would be -- with Arcellor, whether you think the Arcellor share with the -- whether you think that will continue to be the case?

I guess I'd start out with a couple of items. In terms of the pricing that we use to make our forward estimates, obviously we don't provide those. In relationship to the MRRT, just to follow up on Mike's comments, this is a package that is yet to be introduced into Parliament. Looks like it's going to happen hopefully before year end, so we'll get some clarity. And until it's passed in final form, it's hard to really provide and we're reluctant to provide any ranges of numbers. Suffice it to say the way it's structured now, as Mike indicated, while it's a -- while it's a resource tax, it also recognizes that you can only have future taxes if you have robust investment in the industry. So it provides significant benefits to people that are growing their platform and investing in new projects. So in terms of the near-term or medium-term impacts to either our current platform or Macarthur platform, they're anticipated to be extremely muted because of the structure of the tax. We'll see if that holds when it gets to final passage, but that's currently the plan.

Our next question is from Mark Levin with BB&T Capital. Mark A. Levin - BB&T Capital Markets, Research Division: Just 2 quick questions. I mean it sounds to me just as point of clarification, Mike, that equity is out of the question and the convert is something that's -- something you look at, but well down the list. Is that fair?

It is fair. I mean even with the convert, you've ultimately got an eye toward equity, you look at where these equity markets are today. It doesn't look very attractive. Mark A. Levin - BB&T Capital Markets, Research Division: Great. That's perfect. Second question, just related to a question, it was earlier, in terms of like rolling Macarthur into our estimates and into our models. As the guidance that you guys provided for this year, meaning, I guess, Q4, does that include the impact of Macarthur or is that excluding Macarthur volumes at all?

Yes, the guidance that we have provided excludes any volume sales, EBITDA contributions from Macarthur for whatever days forward that we're able to consolidate. What we do have in the third quarter, as we noted in our release, some expenses for the transaction costs, we'll have some additional expenses in the fourth quarter. But there's no other contributions from Macarthur at this point in our guidance numbers either for volumes, for EBITDA, earnings per share or for capital. Mark A. Levin - BB&T Capital Markets, Research Division: Great. And then, Greg, your thoughts on just sort of the relative changes, maybe over the last 3 months, in the various grades of coking coal in terms of what's holding up the best, maybe where you're seeing the weakest pricing. Just maybe how we should think about some of those variations and how they've been evolving over the last several months?

Well, I think when you look at the highest quality hard coking coals, they have sustained at the best levels. It's clearly what's in the shortest supply. The PCI-type coals seem to have done reasonably well relative to that spread. The very lower quality coking coals have been -- that spread has widened even greater over the last several quarters, I would say. And I think that's just a reflection of -- there are parts of the steel sector that are very strong. China remains strong. India remains strong. Turkey, Brazil, there are parts of the steel sector like Europe that are down somewhat. So I think our view going forward is we may see the spread for a little while until we start to see that spread get back to more historic norms.

Our final question today will come from the line of Peter Ward with Jefferies. Peter D. Ward - Jefferies & Company, Inc., Research Division: Coal question back on the PRB. Historically, you guys had a formula in your contracts that made sure you get paid objectively for the value of ultralow sulfur with benchmark. Will that continually be the case or if they were to sell contract by contract?

Well Peter, as you know, we'll be entering into new contracts and then we will have that. It's what we'll -- we can sell this a couple of different ways. We can agree with the customers on what the value of sulfur is going forward and make that estimate or we can sell in the benchmark 0.8 and adjust for sulfur base upon the value of the credits. So the answer is we're going to -- we expect to get the value of our premium product in our contracts. Peter D. Ward - Jefferies & Company, Inc., Research Division: And as of today, do you know what the approximate premium to get forward is?

Well, each contract is going to be different, Peter. I mean, so -- we've signed contracts that are on an index basis, but basically because we're selling you 0.8 and we'll take the difference on what the index is. And we've sold them based upon a forward fixed price for SO2 credits. So that's what's best for the customer.

And Mr. Boyce, I'll turn it back to you for any closing comment.

Well thank you, John, and thanks everyone on the call for obviously your interest and your questions. I'd just point out the quarter was a sound quarter for us even with some of the moving parts that we had with the North Goonyella issues. The coal markets we serve, the fundamentals remain good. Our project pipeline is extremely robust; I would argue the best in the industry. The Macarthur transaction is moving rapidly to completion and offers a great potential for growth and value creation and addition to our portfolio. I would say all of this happens because of the employee base that we have. We've got a phrase we use around here, "you earn your right to grow," and we continue to deliver quarter after quarter. That's what allows us to have the opportunities to make these kinds of large acquisitions and bring them into the portfolio. So I thank them for all of their efforts and activities. And obviously, our next quarterly call will be a lot of new information. So we look forward to updating you on our progress and where we're at with Macarthur and our platform at that point in time. Thank you, all.

Ladies and gentlemen, this conference is available for replay. It starts today at 12:30 p.m. Central. It will last for one month until November 25 at midnight. You may access the replay at anytime by dialing (800) 475-6701 or (320) 365-3844. The access code, 215486. [Operator Instructions] That does conclude your conference for today. Thank you for your participation. You may now disconnect.