Good morning, ladies and gentlemen, and welcome to the Peabody Q1 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following today’s presentation instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, April 28, 2022. I would now like to turn the conference over to Alice Tharenos. Please go ahead.

Good morning, and thanks for joining Peabody’s earnings call for the first quarter of 2022. With me today are President and CEO, Jim Grech; and CFO, Mark Spurbeck. Within the earnings release, you’ll find our statement on forward-looking information as well as a reconciliation of non-GAAP financial measures. We encourage you to consider the risk factors referenced there, along with our public filings with the SEC. I’ll now turn the call over to Jim.

Thanks, Alice, and good morning, everyone. In the first quarter, we set the stage to realize strong results for the remainder of the year. Our operations performed well given the operational and logistical issues faced. And with strong market dynamics persisting for our products globally, we are poised to deliver a strong 2022. During the quarter, we overcame production and logistic challenges in Australia related to record rainfall and COVID-induced labor shortages and instituted a recovery plan to recapture volumes over the remainder of the year. While progressing efforts to increase volumes at our U.S. mines, we strengthened the balance sheet and mitigated financial risks. And we advanced several strategic initiatives with the launch of R3 Renewables, progression of our U.S. sales strategies and expansion plans for the seaborne platform. Our focus remains to advance actions to position the Company to be resilient in all market cycles by capturing expanded margins through production and sales strategies, while remaining long-term cost competitive and reducing our debt levels. Before I expand on the quarter, I would like to thank our global employees for their continued focus on working safely and efficiently, particularly given distractions from weather, COVID, labor shortages and logistical challenges. Our success is a result of the dedication and efforts of our talented workforce. I’d like to specifically highlight the significant achievement of the Shoal Creek and Francisco prep plant teams, who both have now gone over four years without a reportable injury. Turning to the market. Across the globe, all coal price indices and demand in each of our market segments continues to be strong. The near-term outlook for all our operating segments continues to be favorable with strong market indicators, increased global demand and continued supply constraints. Seaborne coal market fundamentals remain robust with significant volatility in the…

Thanks, Jim, and good morning, everyone. First quarter coal sales were over $1 billion, a 58% increase from the prior year, a result of substantially higher realized prices from each of our operating segments. Costs were impacted by higher sales-sensitive costs, broad inflationary pressures and investments in the U.S. thermal platform to meet full-year production volumes in response to strong customer demand. We recorded a net loss attributable to common shareholders of $120 million or $0.88 per share. This included a $301 million charge for unrealized mark-to-market losses from coal hedging activities and a $24 million loss on early debt extinguishment. Absent these items, net income would have been substantially higher than the prior year period. We reported adjusted EBITDA of $327 million, more than 5 times the $61 million reported in the prior year quarter. Turning now to segment results. The seaborne thermal segment generated EBITDA of $91 million, less than the fourth quarter due to lower volumes and higher costs, and the delivery of 264,000 metric tons of Wambo coal at $84 per ton under the hedge program and 215,000 metric tons priced in 2021 on average at $116. The segment sold 3.8 million tons in the first quarter, about 575,000 tons lower than full-year ratable production, as expected. Both production and cost per ton were impacted by record rainfall, COVID-related staffing shortages, higher overburden removal and the start of the longwall move at Wambo Underground. As part of the seaborne thermal segment, Wilpinjong shipped 3 million tons, including 1 million export tons. Costs increased to $28 per ton due to higher overburden removal costs and staffing shortages. Wilpinjong realized an average sales price of $50 per ton, higher than the prior quarter, despite lower export sales, generating an EBITDA margin of approximately 43%. Wilpinjong recorded $64 million…

Thank you. [Operator Instructions] Mr. David Gagliano with BMO Capital Markets, please go ahead with your question.

Okay. Thanks for taking my questions. Obviously, there’s quite a bit going on within the company with regards to the Wambo hedges and PRB costs that should come down and all that stuff. So, we’re still weaving through it on our side. So, I’m going to actually cut right to the cash flow question. Cash from operations was a negative $273 million in the quarter. Can you just -- we don’t have a full, I don’t believe, cash flow statement. I think that comes in the Q in a few days. Can you just give us a sense as to what were the main drivers for the big negative in there? I think, there’s some fairly meaningful onetime cash outflows. That’s my first question.

Good morning, David. It’s Mark. Yes, negative operating cash flow. That is largely due to mark-to-market -- unrealized mark-to-market on the Wambo coal hedges that you referenced. It was $352 million for the quarter of additional margin that’s been posted. There’s also working capital charges, building inventory. It’s timing of AP, which is about $110 million included in that.

Okay. Sorry, it was $352 million of an actual cash outflow, which is the previously disclosed cash outflow from the hedges. Is that correct? And then, there was $110 million working capital build as well on top of that?

That is correct.

Okay. All right. That’s helpful. And then, just along those lines, I know you’ve been asked this question, not just by me but by me and others. You mentioned capital allocation focus is debt reduction. Setting aside the first quarter for a second here, can you give us as a sense as to additional plans regarding shareholder returns, addressing surety bond covenants and updated thoughts there?

Yes. Dave, a couple of things. We’ve been very transparent that we want to reduce the level of debt the Company has outstanding. We are very pleased with the 3.25% convertible note that we completed in the quarter. And I would look at further debt reduction going down to eliminate all the other senior secured debt and just leaving that convertible debt outstanding. So, that’s job number one and getting that done. Once we have senior secured debt repaid, we’ll look to address the $325 million letter of credit facility, which backstops the surety bonds, as you mentioned. So, we’re going to continue to look at funding, the surety obligations for future reclamation. And once we are comfortable with that, certainly, everything we do is in the interest of shareholder value. We would be looking at opportunities to invest in organic opportunities. North Goonyella, that Jim mentioned, is one prime example of that. Also, return of capital to shareholders would be on the table. All things considered, we need to take care of the senior secured debt, which would prohibit those shareholder returns first.

Okay. That’s helpful. And then, in terms of the 2023 PRB commitments, there’s a bullet, I think, in the press release, it says increased 2023 PRB committed sales to 59 million tons. Can you give us more information on just an average price for that 59 million tons that’s committed for 2023?

Yes. Hey Dave, Jim Grech here. The 59 million tons for next year, which is ahead of our, I’ll say, our usual pace for selling coal for the following year at this point in time. And we also have active RFPs in front of us for more potential sales for ‘23 and ‘24. It’s -- we’re seeing from the RFP, the willingness from the customers to go out for multiple years. So, that is a change from what we’ve seen in the past, and it led to that strong sold position for us at this time of the year. The specific pricing, Dave, we’re not going to give out at this moment, but I will say that our average pricing so far is higher than what our average PRB pricing is for this year. So, if that helps some and give you some directional guidance as to where we’re going. And I know you know the complexity of our PRB with the different qualities. We run about a -- average Btu of about 86.70 overall with our portfolio, too. I just wanted to point that out. So on average, we’re seeing numbers higher than we have for our average prices for this year.

Okay. That’s actually helpful. Thank you. And then just on the volumes for the PRB next year, target volume this year, 88 million to 95 million. What’s the early read on volume growth for 2023 in PRB for Peabody, given quite a dynamic U.S. thermal coal market all of a sudden?

Well, I would say, there’s two factors into that, Dave. One is the demand there, and the demand is very strong for us this year and next year. The second piece of that is the ability for all PRB producers to deliver the coal with the rail challenges that we have and continue to have. I feel good about both of those areas over the long run of this year, later this year. The railroad is staffing up. It’s going to take time for them to get the crews in and get them trained, but that capacity will be there later in the year, which should lead us to have the opportunity to ship as much coal or more this year, and the demand is there for next year. So, we’re not giving guidance on ranges for next year. But if things keep lining up as they are, strong demand, our operations with the first quarter investment that we’ve done are in good position to produce and the railroad coming on stronger as the year goes on, I think next year could be a very good year for tonnage for us in the PRB.

Okay. That’s helpful. Thanks. And sorry, just one quick last one. Just really wanted to give the opportunity again to clarify. Perhaps there may be some confusion out there regarding how the cash outflow works for the unrealized hedge that you flagged earlier. Can you just clarify that that will all -- I mean, that should come -- all come back to you once the volume is produced, correct?

Yes. Dave, that’s right. So essentially, today, we have 1.4 million tons outstanding. With regard to the Wambo hedges at an average of $84 per metric ton, think of $1 per ton for $1.4 million or whatever above that -- dollar for dollar as the prices are above that $84 level, we have to post that margin. It’s very important that we keep the trade book open and we post this margin. And if we were to close it, we lock in those losses, is something we won’t do. And when we do deliver that coal, we will be selling it for the spot prices, which will make up the difference between the $84 and what we posted in March.

And we have Lucas Pipes with B. Riley Securities with our next question.

Hey. Good morning, everyone. I want to talk a little bit about Q2. So, on the seaborne thermal coal side, you expect sales of 2.2 million tons. You have 1.2 million booked at $95, so that leaves least 1 million tons. And I think you said that 700,000 tons, Wilpinjong, and 300,000 tons Newcastle. And the Wilpinjong price is not the most transparent for investors to observe, given that’s the API 5, I believe. So, could you maybe point as to a reasonable range for Wilpinjong prices in today’s market, so we have a good outlook there on Q2 realizations? Thank you.

Good morning, Lucas. Yes. So, on the -- you’re right, for seaborne thermal, there’s 2.2 million tons of export tons for the quarter. 1.2 million of that is priced at $95, as you said, with the 1 million tons that are unpriced, 700,000 relates to the high ash Wilpinjong product. That price is at a discount to API 5. API 5 today is roughly $190 a ton. You need to take about a 10% to 20% discount off of that to get to the Wilpi product. And if it’s higher ash, it could be even a little bit higher discount to that. And then, there are 300,000 tons of Newcastle, essentially benchmark product that should price in line with the forward curve.

Got it. And all the prices you mentioned are metric tons. So, for your 1 million tons of short tons, you do the metric short ton conversion as well?

Exactly.

That’s helpful. Got it. And, would you sell on the prompt month for the Newcastle tons or prompt quarter? What’s a good benchmark there to look at?

Probably a lot of those tons will be on the JRP, or Japanese reference price for those 300,000 tons. That has not yet been settled for this year. As a reference point, it was only $110 last year, but it should be in line with kind of a forward view for the year off of that $325 current price.

Okay. That’s helpful. Very helpful. Thank you. I appreciate that. And a similar question for met coal. So you expect 1.6 million tons, you have 200,000 tons hedged at $418. What’s a realistic composition for the sales price of that open 1.4 million tons of met?

At Wambo, yes, it’s -- it’s essentially about 85% of premium hard coking coal. We look at our -- at a met platform and about an 85% discount to premium hard coking coal.

Sorry. You said that was 85% hard coking coal? And pricing at 85% -- pricing also at 85% of the benchmark?

Now, to be clear, on a portfolio level for met coal, we achieved 85% of the premium hard coking coal benchmark price. There’s various -- there’s half a dozen different products or more.

Got it. That’s helpful. So, the $418 that you booked on the 200,000 tons, that would be -- in this market, could be -- even a conservative indication of where you’d sell the remaining 1.4 million, given where prices have been quarter-to-date?

Yes. It’s $418 on 200,000 tons priced, and you got that 1.4 million or whatever unpriced at a discount to premium hard coking coal. I don’t think you’d be much above the price position, but it’s completely price-dependent, as you said.

Lucas, hi. Jim here. As an example, maybe on the pricing that we’re seeing at the moment. In our remarks, we mentioned that Shoal Creek had produced 270,000 tons, but we’d only sold 70,000 of it. So, we have some inventory move. And so far month-to-date in April, we moved about 127,000, 129,000 tons of it at numbers in the $420 range month-to-date in April. So, that’s the type of pricing we’re seeing on the Shoal Creek product right now.

Very, very helpful. I really appreciate the color.

That’s on a short-term basis -- that’s on a short-term basis, too, just so keep it clear.

Volume and price, respectively?

Yes.

Super. On the hedge side, it seems like you’ve been having to deal with that last October, so -- and earlier this year and now, possibly again today, but hopefully, that noise is starting to get cleared up. So, you have 900,000 tons for 2022, 500,000 tons for 2023, should we think about kind of 300,000 tons per quarter for the rest of the year rolling off for the 2022 hedge?

Yes. Lucas, it’s not exactly flat. So, you’re right on the tons for the rest of the year. Just under 450,000 tons are going to roll off in the second quarter of this year. So, that will leave us with less than 1 million tons remaining at June 30. And just for reference, I’d like to -- if we go back, it’s important to remember, we place -- we put these hedges in place early in 2021 to extend the life of the Wambo Underground mine. Without it, we would have sent the cruise home last year. And as you saw today, we just announced that we’re developing the next three panels to extend that mine life out for several more years. So, while we’d love to give the spot prices for coal this year, we’re going to be profitable this year even with those hedges. And we’ve extended -- we kept that optionality open. Now, we’ve been able to extend that life for several more years.

Nathan Martin with The Benchmark Company has our next question.

Hey. Good morning, everybody. Thanks for taking my questions. Maybe just a follow-up on that last one that Lucas -- with the conversions on the hedges to fixed price, do you guys expect to possibly convert any more of those hedged tons to fixed prices in the near future?

It’s something that we continue to look at, Nate. It is challenging. If there’s an opportunity to do it at favorable terms, we will continue to do that, finding counterparties that want to lock in essentially today’s prices or the forward prices. And there is a premium for physical to the forward. So, we want to maintain all of our optionality for that P&L. So, we continue to look at it. We’re going to maximize shareholder value and maximize returns of the Company. We do feel with the remaining hedge position in the Company’s current liquidity that we’re in a good spot from a liquidity perspective.

And just to clarify, I think you said that the 750,000 you converted reduced future margin requirements by about $50 million. Is that right?

Yes. So, it eliminated any future margin requirements from changes in prices on those tons. And then, there’s $50 million of exchange related to initial margin, just to open the positions. That was returned once we converted the fixed physical sales and don’t have an open hedge position, then we got about $50 million of margin return back to us.

Okay. Got it. Got it. Maybe shifting over to the cost side. I mean, you guys -- despite the challenge in the start of the year, maintained all your buyer cost guidance ranges it looks like across the segments. Maybe just talk about your confidence to get within those ranges. Is it a function of higher sales volume as we move towards the back half of the year? Obviously, pricing should be higher, some advantage of the headwind, inflationary pressures you talked about. And then maybe on the transportation side with rail service, hopefully, that will start cooperating as well. So just how do we think about that and maybe any additional onetime costs similar to what we saw here in the first quarter? Thank you.

Yes. Maybe I’ll start and work backwards from your questions. On the onetime costs, really that’s our investments in the U.S. platform, about $1.08 in the U.S. Really, that was to again set room on pit inventory, so a lot of overburden, removal costs as well as some equipment refurbishments and onetime kind of contractor mobilization costs. That goes away essentially going forward. So, we expect a reduction there. Similar in the other U.S. thermal portfolio. There was some headcount and some pit development and a dragline refurbishment. So, really drove up some costs here in the first quarter. Again, those are behind us. Obviously, volume in the PRB is critical. And as Jim mentioned, rail is a key issue there, getting those volumes out with the rail is going to be important to achieving those overall costs. On the seaborne platform, wet weather and the record rainfall and COVID-related absenteeism or just staff shortages, really drove up costs significantly in the first quarter. There’s also a longwall move at Wambo that started, and that will be finished up here in the second quarter. So, those costs all in probably drove up costs $8 or $9 in the seaborne platform this quarter. We do expect cost to continue to be elevated in the second quarter as we kind of reestablish mine sequencing at Wilpinjong and recover from the record rainfall. And I think we -- and that was a really good performance in the first quarter. We do expect that to tick up with a higher proportion of Shoal Creek coal in the second quarter as it continues to ramp up and finish out a real low-yielding panel right now. But, when I look for the rest of the year and getting those guidance, I mean -- and we mentioned it in my earlier remarks, but certainly, the COVID impacts, the staffing as well as supply chain logistics continues to be a wildcard and hopefully rain. I mean, we’re still not completely out of the wet season and rain could have an impact on the seaborne platform.

Nate, what I would say, though, is the investments that Mark referenced that we made in the first quarter and our fleet in general, our mines, whether it’s in Australia or the U.S. are in good shape and they’re ready to go in the second quarter and the rest of the year. We’ve increased our staffing. We’ve capitalized and got the equipment in good shape to run. We’ve got our development caught up and ready to go. So, our fleet in general is ready to go to meet the increased demand. And I would say the biggest potential headwind we have is the things that we can’t control being, as Mark just said, weather, COVID, and rail performance. But operationally, I said, the investments we’ve made have put us in a good position to produce well for the rest of the year.

Very helpful, guys. Thank you. And then, maybe Shoal Creek, just for a second, Jim, you mentioned shipments rolling out 71,000 tons, I think, on 270,000 of production, building some inventory there. As far as the ramp [ph] is concerned, does everything still seem on schedule to kind of hit that 1.5 million ton level this year? And when should we start to see the sales pick up to kind of match production, because obviously, some of you guys have great demand for that coal, given the current marketplace? Thanks.

Yes. Those sales were supposed to occur more into the first quarter. So, they slid into the second quarter. And so, that’s why we were off to such a good start in April at the mine because those are actually March sales. So, we expect the sales to be consistent over the rest of the year. And we expect mining conditions to improve. We’re in a panel right now that we’re going to get out of in May as some challenging yield and getting the better mining conditions. And so, we should see our cost structure stabilizing upon improving it as we get through the rest of the year. So, sales are good. The mine is coming along well from having been shut down. Like I said, we should be getting better mining conditions, say, June forward for the facility.

Just wondering, Jim, the slippage is at largely transportation related or something else? Was it a rail or barge, et cetera?

It’s just the congestion down the ports, down there in the Gulf just had things back up...

Got it. And then, just one final one. Again, Jim, to you, I think. North Goonyella, you touched on it very briefly in your prepared remarks. I think you said last call, hopefully you’d be in a position to give more info on that project by this call. So, I was just hoping if you could share your current thoughts, maybe any updates on time line, capital costs, volume, et cetera. That would be helpful. Thank you.

Yes, Nate. So right now, we are currently installing main mine fans to assist future underground operations and working on surface conveyors. So, all of the work is on the surface. And looking forward, we’re still finalizing our cost and estimates and engineering plans and looking at further reventilation leading to reentry into the mine. So, we’re making progress, but the specifics that you’re asking for, we still don’t have them settled. So, I’m just not going to -- not prepared to comment on time line and costs, other than the detail that I gave you. We are making progress. The reentry into the mine would take us down. We plan to go toward our southern reserves. We have about 70 million tons of reserves that are available to us. So, looking forward, that’s the goal.

Any expectation, Jim, at this time before you make a decision whether to move forward or not?

We have to refine the engineering plans and work with the QMI there to make sure that they’re acceptable and then we can make -- get better cost estimates. Just doing that process of making sure our engineering is sound, our cost estimates are sound before we would make those types of decisions.

And that does conclude our question-and-answer session. I’d like to turn the call back over to Mr. Jim Grech for any additional or closing comments.

Thank you. And as we stated here a few times in the call, we had some adversity in the first quarter with the weather and COVID and the railroads, and it was also a period of investment in our fleet getting ready to serve our customers and the demands that we have going forward in the rest of the year. So, we’ve been successful on that, and we are there. Our mines are ready to go. So, we’re looking forward to a good finish with the second, third and fourth quarter for this year. So, thank you all for joining us today. I’d especially like to thank our employees remaining focused on safety and for continuing to execute on our various initiatives. And I’d also like to thank our customers, investors, insurance providers and vendors for your continued support. Operator, that concludes our call.

Thank you. And this concludes the Peabody Q1 2022 earnings presentation. Thank you for participating.