Good day, and welcome to the Peabody Third Quarter Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. And at this time, I would like to turn the call over to Ms. Alice Tharenos, Vice President of Investor Relations. Please go ahead, ma'am.

Good morning, and thanks for joining Peabody's earnings call for the third 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 third quarter, our diversified assets delivered strong performance results, generating free cash flow of over $460 million and adjusted EBITDA of $439 million, while recovering from significant weather events in Australia in the early part of the third quarter. We have set the stage to finish the year even stronger, with higher projected volume compared to prior quarters and markets supporting continued strong margins. With the cash generated, we continue to strengthen our balance sheet by advancing our debt reduction strategy with voluntary repurchases, bringing us closer to eliminating all senior secured debt, which will allow us greater financial flexibility in the future. And I am pleased to share that we have commenced the redevelopment efforts at North Goonyella. Before I expand on the quarter and the range of some of our Australian operations, I would like to sincerely thank our global employees for continuing to work safely and efficiently and keeping us focused in the face of adverse events and distractions. Dedication and commitment of our talented workforce allows us to deliver strong results. I would also like to congratulate the teams at both Twentymile and Shoal Creek for winning the 2021 Sentinels of Safety Award for their outstanding safety performance, United States most prestigious award recognizing mining safety. I'm extremely proud of this accomplishment and the commitment to safety that this exemplifies. Now, turning to global coal markets. Across the globe, all coal price indices remain at strong levels. The outlook for all our operating segments continue to be favorable with the constrained supply base serving a market that is reallocating the scarce availability of coal. Seaborne coal markets remain volatile with near-term markets being driven by continued energy supply security issues caused by the Russia-Ukraine conflict, the global inflationary…

Thanks, Jim and good morning, everyone. In the third quarter, we recorded net income attributable to common shareholders of $375 million or $2.33 per diluted share and adjusted EBITDA of $439 million. Year-to-date, adjusted EBITDA was $1.3 billion, nearly three times the prior year results. For the quarter, we reported free cash flow of $461 million, the best result in 18 quarters and had approximately $1.4 billion of cash and cash equivalents at September 30. Our unique best-in-class diversified portfolio continues to set Peabody apart. Our Seaborne Thermal segment led the way with premium Australian thermal coal priced on average above $420 per metric ton, substantially higher than the premium hard coking coal average price of about $250. Together with higher demand in the US, each of our operating segments reported higher per ton margins compared to the second quarter, except seaborne metallurgical coal, which despite achieving $30 per ton in lower cost, realized lower market pricing. Turning now to the third quarter segment results. Seaborne Thermal generated $171 million of adjusted EBITDA and benefited from higher realized prices, resulting in a 48% adjusted EBITDA margin. The segment exported 1.6 million tons at an average realized price of $188, approximately $45 higher than the second quarter. Costs were $5 per ton higher, impacted by both lower weather-related production at the Wambo Open-Cut joint venture and higher sales price-sensitive costs. Included in the Seaborne Thermal segment is the Wilpinjong Mine, which shipped 2.8 million tons, including over 700,000 export tons. Wilpinjong realized an average sales price of $72 per ton, about 15% lower than the prior quarter due to less tons available for export. Wilpinjong recorded $115 million of adjusted EBITDA for the quarter, repaid $136 million of its debt, and had over $200 million of cash at September 30. Seaborne…

Thank you. We will now begin the question-and-answer session [Operator Instructions] And the first question will come from Nathan Martin with Benchmark. Please go ahead

Thanks, operator. Good morning, everyone. Congrats on the quarter and thanks for taking my questions. I guess we'll start moving forward with North Goonyella redevelopment, obviously, a high-quality met coal project there, confirmed discussions with Coronado, which is obviously a net levered producer. So -- and maybe it would be great to get your thoughts on kind of the met markets as you see them going forward as they seem to be getting your attention as of late. Thanks.

Nate, the metallurgical seaborne markets, as we've said in the past, have been a focus area for growth for us, particularly in the Asian markets, which we serve. And they continue to be a focus for us and areas that we would look to strategically grow into the future. The North Goonyella project is a part of fulfilling that strategy and our outlook on these markets. And we're very, very bullish on that project because we think it's unique metallurgical coal product versus any other opportunity like that in the world. And that is because of two reasons. One, it's a high-quality metallurgical coal. And two, because we have such substantial infrastructure in place already with the rail route, the longwall, the accommodation village. There's a significant amount of investment already just sitting there. And to put the incremental investment that we need to, to bring that mine, enter back into the mine and bring it back into service to us is just an outstanding opportunity that we've obviously taken steps to embark upon. So again, it fits right in with our view that the seaborne met markets are a potential growth area for us in the future.

Appreciate those comments, Jim. Maybe kind of looking ahead, first, you guys raised CapEx, obviously, around looks like $20 million for this year, $210 million, again, driven by the North Goonyella project. Any early thoughts on what CapEx could look like in 2023. I think maintenance this year was about $110 million. Is that still kind of a fair number to use? And what do you expect spending to look like in 2023 on North Goonyella as you move forward? Thanks.

Nate, it's Mark. We're not providing any guidance for 2023 yet, specific to North Goonyella, though we announced the essentially $136 million, that's going to be spent over the next six quarters, really through the end of the first quarter of 2024. So that's kind of the spend North Goonyella for that first chunk. We also noted that there's about $230 million or $240 million of additional development at North Goonyella, above what we've announced and approved, that would be spent over the following two years after that first $136 million. So you're really looking at about $370 million total for – for North Goonyella now, really over the next 3.5 years, pretty proportionately or on a straight line.

Got it. Thanks for that information, Mark. And then maybe just coming back to the quarter for a second. I noticed other operating cost line item was higher lease than I had expected. I know that tends to be a little lumpy, as I think it's largely driven by trading and brokerage activities, as you guys have noted in the past, but -- could we get some color there? And maybe even more importantly, how do you see that line item shaping up in the fourth quarter and beyond? Thanks.

Yeah. Thanks for that question. Two things, that's mostly that other. We do run through the former North Goonyella holding cost event running through there, but that is primarily the trading activities that you mentioned. We typically use that to maximize our blending opportunities and generally make a modest yet meaningful profit for the company. Particularly this quarter, though, it's a good question because as a reminder, we realized some hedge losses in the first quarter of this year as weather-related production delays, deferred shipment of about 180,000 hedge tons at spot prices, when we delivered into other fixed price contracts, other physical contracts that we had delivered to a fixed prices. That loss was reported through coal trade in the first quarter and the result simply from the timing difference of delivering that physical coal and the hedge contracts. Now if you recall, first quarter average prices was about $264 per metric ton, now here in the third quarter, we delivered some of those tons when the average price was $420 a metric ton. So we realized about $27 million in coal trading profits during the quarter just from that timing difference. But those truly are real earnings based on selling that coal at $420 million versus $2.64.

And any thoughts, Mark, on how that might look like going forward or how to model that?

Yeah. So there's still about 900,000 tons that we have on that program that are rolling off. I would say we probably recovered about half of those deferred tons from the first quarter. So I'd expect a similar -- at same prices as to-date, I expect a similar coal-trading profit in that ballpark for the fourth quarter.

Got it. That's very helpful. Appreciate that. And then, I guess just maybe one final item, if I could. We've seen, obviously, the heavy rains you guys spoke about in your prepared remarks in October, sounds like you've kind of incorporated in your guidance as best as possible. What else are you guys doing to kind of deal with those heavy rains? And how comfortable are you with the 2.4 million tons of fourth quarter exports you're guiding to at this point? Thanks.

Yeah, Nathan and the -- like I said, we've incorporated our best estimates into the forecast for the impacts of those rains and even we have in our forecast, some allowance for other rain events. So we feel good about the forecast we have out there, pending anything that I would call it, extensive or out of the ordinary occurring, we do have some allowances for that already in the numbers. What we've been doing is on our -- on the site each site is distinctly different ways to manage the water with the much larger volumes if they are to reoccur and treating the water. So eventually, we can remove it from site. So each of the different sites have put in plans in place to handle these larger amounts of water that we already have on-site currently, and that may be coming again in the future. So again, we're taking the steps that we can take to be ready for this -- these types of events occurring again.

Thank you, Jim. I'll pass it on. Appreciate the time. And best of luck during the fourth quarter.

Yeah. Thank you, Nathan.

The next question will come from Lucas Pipes with B. Riley Securities. Please go ahead.

Thank you. Thank you very much, operator. Good morning, everyone, and good job in the quarter.

Good morning, Lucas. Thank you.

I do want to follow-up on the North Goonyella decision. And specifically, you know that the market puts a very significant premium on capital returns. So how do you think about pursuing this organic growth project, while also meeting market expectations for ongoing capital returns, especially as we look out to 2023? Thank you very much for your perspective.

Thanks, Lucas. It's Mark. I'll take a crack at that. We've talked here for a few quarters now about our strategy. First, deleveraging the balance sheet. As you know, shareholder returns are restricted with our secured debt as well as our surety agreement. Since the start of '21, we repaid about $700 million of debt. And at the same time, we've increased our cash balance from about $700 million to $1.4 billion. With the classification, the current liabilities of all of our secured debt, it's a clear signal that we will eliminate that remaining $550 million over the next 12 months. Specifically, Wilken Yang has about $195 million of debt outstanding. We have offers, as I mentioned in my remarks, outstanding to repurchase that debt -- to date, we have received tenders into those offers for substantially all of that debt. So I expect that to be cleared up in short order. We're also addressing the unfunded $300 million LC facility that cost about $20 million a year to maintain -- that matures in 2024 and will not be renewed. Currently, that facility is providing noncash collateral for future reclamation liabilities. As you may recall, our shared agreement also requires some additional collateral based on free cash flow. And as noted, $62 million of collateral has been posted here in the fourth quarter. bringing our total prepaid reclamation fund to 150 million. So the last part is the street agreement. So let me just add here that we continue to have really good discussions with our surety partners. We've discovered a lot of common ground. We're certainly aligned on the company's continued deleveraging efforts, and we are seeking a final reclamation surety agreement to cash collateralize that future reclamation to a reasonable level relative to the actual liability and then remove those restrictions from shareholder returns as well. We expect to continue to finalize that here in the coming months. So, with that -- with those shackles as they removed, we have an opportunity to do a couple of things. We regain that financial flexibility, we can reinvest in organic projects like North Genial. Jim mentioned, world-class premium hard coking coal that can deliver 3 million to 4 million tonnes a year of that coal for an investment of $370 million over the next -- the investment of $370 million over the next 3.5 years. That's a 25% return, and that's only utilizing 28% of the existing reserves in that project. So while we have a great organic portfolio opportunities, we're also looking to do that side-by-side with shareholder returns and elimination of this debt.

Mark, really appreciate that comprehensive answer. That is very helpful. one of the pieces in all of this is also M&A. When you think about capital returns in North Goela -- and then also M&A, how do those pieces -- how do those pieces fit together? Thank you very much for your perspective.

Lucas, as Mark said, given the strong cash generation projects after we look at strengthening our balance sheet, and as Mark said, removing those shackles for us, we then can look at different things that aren't mutually exclusive, whether it's shareholder returns, organic growth or M&A. So participating one doesn't necessarily preclude participating in the other -- what we do have a focus on now is what is the best overall decisions for our shareholders. And that overrides anything that we're doing as far as what we're going to be doing with the capital once we have these shackles in this financial flexibility to do some more maneuvering with the cash in the company.

Helpful. And given that you've signaled the go ahead here in North Goonyella, is it fair to conclude that, that is clearly better than what you're seeing available on the M&A front?

Again, I'm not going to comment on any M&A activities. As I said, with the shareholder returns, organic growth or M&A, they don't have to be mutually exclusive. The North Goonyella project stands alone on its own merits. Again, with the returns that Mark mentioned, and I would say the lower execution risk of a project like that versus something that's greenfield, because there's so much infrastructure in place, we know the reserves. We look at it as a very low-risk organic growth opportunity, the stand-alone is a very, very good decision for our company.

Okay. Thank you. And the last one for me, unfortunately, also on the capital structure allocation front, I'll maybe jump back in with operational questions later. But in terms of -- Mark, you -- again, really appreciate response earlier, very helpful. You mentioned paying off all the secured debt over the next 12 months. You're in discussions with the sureties. Would it be possible to provide a little bit more granularity on the potential timing of the secured debt payments? Would you expect that to be early 2023 first quarter and then with the sureties, would you expect to arrive at a conclusion to those discussions around the same time. Thank you very much for your perspective.

Yes. I appreciate those questions, Lucas. Certainly, from a secured debt perspective, I mentioned the Wilpinjong debt, $195 million. So the big piece of that, we have offers outstanding substantially all of that's been tendered. So that should be cleaned up here, hopefully, in the next quarter -- in the fourth quarter here. The other secured debt, the term loan that can be repaid without penalty and premium at a time of our choosing and the 2025 notes are currently callable as well at a very small premium to part. So, we can take that out and we expect to do so in the next 12 months. As far as the sureties go, my partners, like I mentioned, we're having really productive conversations. We have a lot of common ground. So, I think the time line is the same. I'd expect to have that wrapped up here by the end of the first quarter of next year.

Very helpful. Again, I appreciate all the color and keep up the good work. Thank you.

Thanks Lucas.

The next question will come from David Gagliano with BMO Capital Markets. Please go ahead.

Hi. Thanks for taking my questions. I think a lot of the questions that I had on my mind have already been addressed. But I did want to just clarify a little bit on North Goonyella, just the timing here we have. Can you -- so CapEx is $140 million by 1Q 2024 and then total $370 million. Can you give us a sense as to the timing of the ramp-up of production? And also, it's earlier read on reasonable range for cash costs?

On the production, we will start seeing development coal coming in 2024, Dave. That's the plan for that and then, longwall coal coming sometime in the first half of 2026. So, that's the timing of when we see the production flowing. I'm sorry, what was the other question you had?

I mean I know, it's early days, and I know, we've been in and out of North Goonyella over the years. My other question was a reasonable range for cash costs in 2026 as best you can tell in 2022?

You're talking North Goonyella cash costs.

Right.

I think we're probably looking at $95 to $100 a ton.

All right. Perfect. And then on the M&A commentary and the commentary that North Goonyella M&A are not mutually exclusive. When you look at M&A, would you – are you considering – what's the more likely type of opportunities you're looking at? Is it full corporate activity or acquisitions, or is it asset by asset, or if you could just give us a sense as to what types of things are under consideration.

Dave, the – our strategy for growth, whether it's organic or M&A, if it were to occur, is to go to the seaborne markets with the markets being preferred over the thermal markets. But again, not to say we wouldn't look at it, but a high preference to expand in the seaborne metallurgical markets is the direction we'd like to go in the future. And we would look at any type of opportunity that would make sense to us. So, I would put any limits on what we would look at as far as the type of opportunity.

Okay. And then just along the same lines, in terms of incremental investments elsewhere geographically, can you comment a little bit about thoughts about the US thermal strategic plans. It wasn't too long ago, Peabody and Arch are trying to get together out there. Obviously, you didn't work out from an antitrust perspective. Obviously, things have changed a lot. And I'm just curious what the current thinking is with regards to future meaningful investments in the US Powder River Basin, for example, or just in the US normal business in general?

Yeah. So in regards to the -- an M&A question, I think if that's what you're asking, again, our focus is

Organic or inorganic both, actually. Yeah.

Yeah. So – our focus is the seaborne metallurgical growth. So in the domestic US thermal, we like the assets that we have. They're low-cost assets both in the PRB and in the Midwest. And earlier in the year, we've announced some investments in equipment for those mines. And we've also – in the first half of the year, we invested in uncovering some more coal in the PRB to be ready to meet some demand here. So our investments in our US assets, Dave, are to, I'd call it, small incremental growth off of our existing asset base, nothing significant or as far as capital investments there. It's basically taken what we have, putting some more of the equipment back into service, hiring people to man the equipment, and then that can fluctuate with demand, that would be how we're looking at our US assets – US thermal assets.

Understood. Okay. And then just the last one for me on the same topic, when you assess your existing portfolio, do you see divestment opportunities within that portfolio?

I don't like to comment on M&A or divestments. Again, whatever is makes some more sense for our shareholders. We're always open to looking at it and we'll look at for that opportunity.

Okay. Great. Thanks very much for taking my question.

Yes. Thank you, Dave.

As there are no further questions, I would like to turn the conference back over to Mr. Jim Grech for any closing remarks. Please go ahead. End of Q&A:

Well, thank you all for joining us today. I'd especially like to thank our employees for remaining focused on safety and for continuing to execute on all our various initiatives. I'd also like to thank our customers, investors, insurance providers and vendors for your continued support. Operator, that concludes our call.

This concludes today's teleconference. We do appreciate your participation. You may now disconnect.