Peabody Energy's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.17.13 | About: Peabody Energy (BTUUQ)

Peabody Energy Corporation (BTU) Q3 2013 Earnings Conference Call October 17, 2013 11:00 AM ET

Executives

Vic Svec - Senior Vice President, Investor Relations and Corporate Communications

Greg Boyce - Chairman and Chief Executive Officer

Mike Crews - Executive Vice President and Chief Financial Officer

Analysts

Michael Dudas - Sterne, Agee & Leach

Brandon Blossman - Tudor, Pickering, Holt

Paul Forward - Stifel

Jim Rollyson - Raymond James

Mitesh Thakkar - FBR

Meredith Bandy - BMO Capital Markets

Neil Mehta - Goldman Sachs

Lucas Pipes - Brean Capital

Brett Levy - Jefferies

Caleb Dorfman - Simmons & Company

Evan Kurtz - Morgan Stanley

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Peabody Energy Q3 2013 Earnings Call. For the conference, all participant lines are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. (Operator Instructions) As a reminder, today’s call is being recorded.

I’ll turn the conference now over to the Senior Vice President, Global Investor Relations and Corporate Relations, Mr. Vic Svec. Please go ahead sir.

Vic Svec

Okay, thanks so much John and good morning everyone. Thanks for taking part in the conference call for BTU. And with us today are Chairman and CEO, Greg Boyce and Executive Vice President and Chief Financial Officer, Mike Crews.

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 we also refer you to peabodyenergy.com for additional information.

And with that, I will turn the call over to Mike.

Mike Crews

Thanks Vic and good morning everyone. Peabody is pleased to be reporting strong results for the third quarter. Our operations ran very well with solid volumes and improved cost performance in all regions. In particular, Australian costs were at their lowest level since the first quarter of 2011. We continue to execute on our plan and remain focused on controlling those factors that position us to succeed in all market conditions.

Let’s review the quarterly results in more detail beginning with the income statement. Third quarter revenues totaled $1.8 billion as volumes increased 4% to 69 million tons on higher Australian and trading and brokerage shipments. Adjusted EBITDA of $312 million exceeded the high end of our guidance range on our cost containment initiatives, higher Australian volumes and solid U.S. performance. Adjusted EBITDA from U.S. mining operations reached $306 million on seasonally higher volumes and good margins and reduced Australia cost fell to mitigate the impact of lower pricing.

I’d like to take a moment to discuss the impact of our cost improvement efforts. Operating cost declined compared to the year ago period driven by year-over-year and sequential improvements in every region. In addition, reductions in corporate spending led to a 9% decrease in SG&A on a year-to-date basis.

Turning to taxes, the $16 million income tax benefit was lower than our guidance as the majority of the anticipated benefit has shifted to the fourth quarter due to better than expected third quarter earnings. Diluted earnings per share totaled $0.06 with adjusted diluted earnings per share of $0.05, which included a $0.03 charge related to early debt extinguishment. Now, in December, we chose to refinance our credit facility based on the favorable capital market conditions and upcoming maturities. We completed an upsized five-year $1.65 billion revolver as well as a seven-year $1.2 billion term loan. The refinancing allows us to extend maturities, increase our liquidity and gain additional financial flexibility by extending the term of the credit facility. And we benefit from low annual amortization of $12 million per year related to the new pre-payable term loan.

Now, let’s turn to the additional detail within our supplemental schedules. In the U.S., third quarter volumes of nearly 50 million tons reflect seasonal increases, particularly in the PRB. Revenues per ton were 5% lower than the prior year in line with our guidance as higher priced legacy contracts expire. Cost improved by over a $1 per ton compared to the second quarter driving a 4% increase in U.S. gross margin per ton. We continue to target whole year U.S. unit cost 2% to 3% lower than the prior year on cost reduction actions and shipping volumes to our most productive operations. These efforts drove U.S. cost per ton down to the lowest level in three years. In Australia, volumes rose 6% to 9 million tons on increased out from several mines including the PCI operations. During the quarter we shipped 4 million tons of met coal at an average price of $110 per short ton and we sold 3.1 million tons of seaborne thermal coal at an average price of $78 per short ton.

Third quarter cost per ton were below $70 due to the success of the owner operator conversions, improved productivity of our PCI mines and more favorable exchange rates. Based on our year-to-date performance we’re pleased to be reducing our Australian cost guidance to the low to mid $70 per ton range for the full year. Trading and brokerage adjusted EBITDA improved over the second quarter but reflects continued low market volatility and limited structured transaction opportunities.

We expect earnings from this segment to be largely in line with recent performance until volatility increases. At the view of our income statement and key earnings drivers, you will note that operating cash flow totaled $213 million during the quarter; we ended the quarter with $551 million of cash flow and over $2.2 billion in total liquidity. The third quarter reflects $90 million of LBA payments and fourth quarter cash requirements include $185 million of LBA payments along with our semi-annual bond interest payments.

Capital expenditures totaled 62 million, 80% below prior year levels as we continue to trim our sustaining capital needs and reduce project spending and our capital targets for the full year have been further reduced to $350 million to $400 million as we continue to manage spending for the remainder of the year.

Turning to our outlook, we’re targeting full year 2013 adjusted EBITDA of 1.07 billion to 1.15 billion with adjusted diluted earnings per share of $0.27 to $0.45. These ranges reflect the commissioning of a new long wall top coal caving system at North Goonyella and a long, [indiscernible] in the fourth quarter. Financial targets exclude any impact from tentative settlement agreement with Patriot Coal and the United Mine Workers Of America which is still subject to definitive agreements and court approval. I also refer you to our Reg G schedule in the release for additional details regarding DD&A, taxes and other line items.

As a brief review of our third quarter performance and outlook, for discussion of the coal markets and other updates I will now turn the call over to Greg.

Greg Boyce

Thanks Mike and good morning everyone. Mike has recounted our strong quarter results which clearly exceeded expectations. The Peabody team has done a great job executing our key priorities, operational excellence, capital discipline and cost containment and our third quarter results reflect ongoing success in all these areas. These accomplishments combined with the increased certainty from recent events such as the Patriot agreement and our successful refinancing provide Peabody value with tremendous upside potential as market fundamentals continue to improve. I will review the current state of the coal markets and then discuss how Peabody’s platform is positioned for success. Within the global coal markets metallurgical coal prices have rebounded some 15% to 20% off third quarter lows on increasing steel demand and continued production cuts, while the addition of new coal fuel generation is driving a 50 million ton increase in seaborne imports this year. In recent months we have seen improving macroeconomic conditions that support continued coal demand growth including expanding global PMI and arising GDP from both developed economies in China.

Coal generation in the three largest coal import markets, China, India and Japan, surged by over 20% in recent months. India’s thermal coal imports are up 37% this year and the rupee’s recent rise will support more imports. Japan is adding new coal field plants and coal generation has risen from nine straight months requiring additional coal imports. German coal generation has risen 10% this year due to its low cost and reliability advantages over renewables resulting in a 19% increase in coal imports through June. And the World Steel Association recently increased its forecast on global steel use projecting a rise of more than 3% this year with further growth in 2014. All of this increased demand has not yet been fully reflected in current coal pricing due to strong supplies. We are encouraged though by rationalization of marginal production and reduced capital spending on new coal projects, which is helping to balance the markets.

In China, production is down over 85 million tons this year as higher cost mines are shut down and some 2000 small coal mines are now targeted for closure by 2015. The U.S. metallurgical coal exports have fallen 9% year-to-date declining even more sharply this quarter and reductions are expected to continue as legacy contracts roll off. Longer term, Asian economies are expected to account for the majority of coal demand growth as urbanization and industrialization drive increased consumption. In China, coal demand is expected to continue to grow some 200 million tons each year over the next five years. When consumption patterns shifting as older plants are closed, emissions technology is deployed on the existing fleet and advanced hypocritical coal plants are built away from major population centers.

China also is investing in at least 20 coal-to-gas projects as international gas prices remained four to five times that of the U.S. It is clear from China’s recently announced air quality initiatives that the result will be lower emissions, but higher coal use and patterns similar to the U.S. over the last 30 years. As direct localized coal use has reduced, more coal will be used for generation coal-to-chemicals and coal-to-gas and plans to build outside of major cities. The coal-based electricity and gas produced from coal will then be brought into the cities to supply energy.

Now, let’s turn to the U.S. market, where coal fundamentals are improving on greater supply demand balance. Coal demand increased 8% in September and accounted for 41% at U.S. electricity generation. Coal production has declined 20 million tons this year as over 150 mines have been idled with much of the reduction coming from smaller mining operations. Production reductions are expected to continue into 2014. Customer inventories of PRB coal are 30% below their peak levels from 2012 and expected to move into the upper 50-day range by the end of the year. Some power plants are close to 10-days use and actively contracting for additional volumes. The excess mining capacity in the Powder River Basin continue to be constrained by parked equipment with deferred maintenance, increasing overburden ratios and no new investments over the last several years.

Now, longer term, we have evaluated the regulatory landscape in the U.S. including the recent EPA proposals. We still see the Powder River and Illinois Basins benefiting from rising U.S. coal demand for backfilling for Eastern plants and higher capacity utilization rates within the remaining coal fleet yielding annual use growing some 135 million tons for the five years through 2017. So that’s the market backup – backdrop.

I would like to take a minute to discuss Peabody’s recent successes. This quarter punctuates a year in which we have driven clear sustaining cost improvements across every region of our operations. The U.S. cost has declined more than a dollar per ton over the second quarter while Australian costs dipped below $70 per ton as we reset the cost base. Within Australia, cost at our PCI mines are down 20% compared to the last year and we have recently set new driveline performance and overburden removal records at our Coppabella mine. Also the success of the owner operated conversions continues to exceed our expectation with cost down 30% compared to the first quarter of this year.

Our North Goonyella mine is expected to benefit from the commissioning of long-wall top coal caving technology this quarter with larger permit, better tailored to the mine’s geology. All of this occurs against the backdrop where Australia has reemerged as the go-to supply source for high-quality coals in the Asia Pacific region. The new Australian government is working to improve the competitive landscape for mining companies including the targeted repeal of the carbon tax. Inflation rates in Australia have fallen and the Australian dollar has eased while the rise in global freight rates favors Australian coal in Asia. Peabody is well-capitalized platform reflects major investments made in recent years which have internal allows us to make substantial cost reductions without major spending and we have a large portfolio of development projects that help provide us with meaningful upside to improving coal markets. So with that review of the global markets conditions and Peabody’s position, operator we’re happy to take questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions). First we’re going to go to Michael Dudas with Sterne, Agee & Leach. Please go ahead.

Michael Dudas - Sterne, Agee & Leach

First my one question is I guess for Greg as you characterize the outlook for the met coals that you ship into the Pacific Basin, over the next 6 to 12 months are you more confident about demand side of the equation or finally seeing some supply rationalization and apparently is needed to get pricing to move into a better direction.

Greg Boyce

I guess I would say I feel better about both sides of the equation Michael but if you just take the demand side for a minute we see China really establishing a good set of legs underneath their economic, their steel industry continues to grow, they are spending on infrastructure and their economic seems to be in our view beginning to get steam again. All of that is continuing to put pressure on the demand side and then when you look at what's happened with whether it's East Coast U.S., whether it's even some of the marginal production out of Australia and our view is what's been happening is there was a significant number of projects that were started back in the 2010 timeframe, 2011 when prices have gotten very high that we’re coming into the market over the last six months even some of them just being commissioned within the last quarter and they have been offsetting the production that was coming out of the market that was high cost. Now that those have come into the market we’re still now going to see in our view actions [ph] from the market from high-cost production as we continue to rationalize in these prices. So as you look at both demand and continued rationalization we’re feeling better about both of those bringing the market in the balance during the course of the next 6 to 12 months and that's absent, any disruption that we would normally see over the last five years in the met market whether in Australia or infrastructure or anything of those nature.

Michael Dudas - Sterne, Agee & Leach

That's very helpful but just one quick follow-up, you highlighted in your comments about Chinese production falling year-to-date and the plants have closed couple thousand unsafe higher cost more mines, how much - if you could like how much of that will be thermal versus met and is there an opportunity for met imports to increase even further over the next year and half to two years because of what's happening internally on the production side in China? Thank you.

Greg Boyce

Well I think you know exact percentages are pretty tough to come up with, I will just say that the Shanxi province is heavy metallurgical coal producing province, you know reports that 40% plus of those operation are struggling and a lot of the small operations are in that region. So we think that their met coal production is going to be under more pressure than their thermal coal production, but as with anything in China, it's tough to put definitive numbers around it.

Operator

And the next question is from Brandon Blossman with Tudor, Pickering, Holt. Please go ahead.

Brandon Blossman - Tudor, Pickering, Holt

Greg, big picture question for you, say that over the next 2 or 3 years what is the focus for Peabody going to be? Is it going to be increasing efficiencies sweeping out that extra margin with lower cost or is there going to be some growth within that time period?

Greg Boyce

Well, obviously the path that we are on now to continue to optimize our portfolio is one that we are not going to let up on. What we are seeing – what we saw on the second and really in the third quarter was a combination of about five years’ worth of portfolio strategy investments starting new low cost operations whether it’s in the U.S. at Bear Run or El Segundo focusing our Powder River Basin operations on our North Antelope Rochelle operation, be the expansion and the new properties and the rehabilitation work that we did at the Macarthur Coppabella mines, all of that was designed and we are seeing the strength of all of that strategy in the results of the third quarter. But as we go forward, you talk about a two-year or three-year time horizon based on the sheer magnitude of the capital projects that have been cancelled in this – in coal both on the thermal side as well as metallurgical coal side, our focus is going to be what are the next couple of projects that we can bring to market. When this market sharply changes because there is going to be – now there is a continuous demand drive, 30 million tons a year of additional met coal, 50 million tons a year of additional thermal coal that’s going to have to be met and existing capacity is not there to meet it. So it’s going to be what are the best opportunities that we have with this great portfolio of undeveloped properties, particularly in Australia to bring a couple of those to market and grow?

Brandon Blossman - Tudor, Pickering, Holt

Right, interesting and a good context for that. And then going to kind of the opposite end of the spectrum, Mike, quarter-over-quarter three months ago you put out guidance, you hit that out of the park, what was the biggest driver of that change from what you expected to see in third quarter and what actually happened?

Mike Crews

Yes. As I mentioned in my remarks, I mean, I think it really comes down to for this quarter, we said volume guidance, we said cost guidance and we really ran on all cylinders in terms of where we were on the upper end of those volumes when you look at the U.S., you look at Australia, trading came in pretty well in line and it’s just that it’s that focus on getting the operations in a position to succeed. And I think that coupled with the cost reductions have really been driving it, at the sub – just under sub-70 on the cost side, on the Australia platform provides significant benefit, but also we also had good volume out of all the business units.

Greg Boyce

Yes, I think just to add to that, we have talked a lot over the years about trying to eliminate variability in this business. Operating variability is always – is tough to predict, had been tough to predict. It was always an issue for us and particularly before we went to owner operated conversions, our destiny in Australia wasn’t in our own hands per se. And so I think again what we are seeing in the third quarter, particularly is our ability to continue to drive that variability out of our operating platform. The team did a great job in terms of delivering the operating results which drove volume, drove cost reductions and expanded the margins.

Brandon Blossman - Tudor, Pickering, Holt

Great. Thank you very much guys.

Operator

Our next question is from Paul Forward with Stifel. Please go ahead.

Paul Forward - Stifel

Thanks and all good morning. On the, I guess a couple of things, one is on the – we saw some snow impact on the Powder River Basin over the last couple of weeks. I wondered if you can give us an update on what you are seeing out there and has there been any kind of change one way or the other in the outlook for either pricing or volumes from 2014 when you think about kind of as you have wrapped up the remaining uncommitted tons for ‘14?

Greg Boyce

Yes, Paul just in terms of – we had a very early and very unusual blizzard in the plains first week of October. I haven’t seen the actual final numbers yet, but my sense is it’s probably going to be one of the lowest first week of October numbers that Powder River Basin has seen not only the impact at the mines, but the rail impacts because of the snow. But having said that, the Powder River Basin recovers very quickly and at this point in time is running at normalized rates, I think in terms of you will notice that we priced a bit of coal this quarter. You know we continually do that particularly when we’re putting together long-term multi-year deals out of the Powder River Basin and so we saw a little bit of that but it wasn't much I think we priced 5 million tons of new business and total price of about 3 million, another 3 million per total of eight and that was really [indiscernible] reopen or so. So we indicated on the last call I mean we’re being very judicious in terms of how we sell and price that coal and are comfortable with our current position relative to the 2014 sales and open position.

Paul Forward - Stifel

Great and you’ve given us some positive data points about recent news on Asian import demand and at the same times you have backed off on you’re the high end of your guidance for capital spending for this year. I was just wondering if you give us a little sense of as your stance changed it's all about project development out of Australia and maybe as you think about ‘14 can you think about uses of cash along those lines? Do you have better returns internally or do you think more about uses of cash being more directed towards debt reduction for next year?

Mike Crews

Yeah, when you look at the capital reduction targets we've brought that down a couple of times. You know there is two components to it obviously, there is sustaining capital and there is project capital and as we work through the first nine months of the year, the project capital whether it's made us down to owner [indiscernible] operated conversions the monetization Metropolitan that's there behind us but we've been very tight in terms of what our sustaining capital spending levels will be. We have traditionally throughout these quarters tracked below just through capital discipline and that's why we continue to bring those capital targets down. What I will tell you is we spend a lot of time as we are working through our annual budget and five year operating plant process to understand okay on a sustaining capital side let’s leverage the benefits we have on condition based margin or driving our repairs. We’re extending equipment lives that should have a positive impact on sustaining capital. As we have said we’re below the $1.25 to a $1.75 per ton range for that component of our capital but at the same time we want to make sure that we’re not making short-term decisions that are going to impact us on a long-term basis. So we're continuing to allocate dollars in order to position ourselves for some of the permitting and other work that we do to allow for us to bring projects on at the appropriate times. So while it's come down in total we think we’re striking the appropriate balance between short-term capital discipline cost to cost reductions in that area but also planning for the future.

Operator

And next we’re going to Jim Rollyson with Raymond James. Please go ahead.

Jim Rollyson - Raymond James

Just following backup on Paul's last question on the CapEx given you’ve pressed that down and continue to press that down and when you kind of think about your longer-term needs and just the short-term market situation do you think you continue to keep pressure on CapEx at least for next year while things are still depressed depending on obviously how fast things start to recover but I mean are you thinking in that direction that you’re going to be pressed down here or how long can you keep us CapEx depressed.

Greg Boyce

Well certainly on the sustaining side of our capital spend, our view is we’re going to be able to maintain these kind of levels for another year or two based on the cycles of our equipment and our capital base that we have and as Mike indicated we're in the process right now looking at what amount of capital we want to spend for a project development and by that I mean you know drilling degasification of some of our, the underground research, some feasibility study work and those types of things but so we haven't finalized exactly what that level is going to be but suffice it to say our intent is to make sure that we’re spending enough capital to maintain our optionality to move very quickly on these development projects when the market does take that turn because the last thing we want to do is be behind the curve.

Jim Rollyson - Raymond James

Sure makes perfect sense and Greg you talked lot about some of the cuts that have happened over the last few quarters at high cost mines and more you expect to continue? When you think about the market and you laid out pretty good big picture maybe positive thoughts that things are improving in the right direction, when you think about some price recovery that happens as some of these mines go offline and hopefully as demand continues to improve, how do you think about those mines staying offline or maybe put a better way as we start seeing prices recover. How fast do you think that supply can come back to the market and to maybe keep a lid on pricing or not, what’s your view?

Greg Boyce

Well, I think it certainly varies. And then I think for a lot of this production, it’s going to be difficult for it to come back, particularly for all of the small mines and probably the U.S. is more difficult than other places, because you have got such a changing regulatory environment, particularly in the eastern part of the U.S. So I think a significant amount of that operation that that production probably won’t come back unless we saw massive price spikes for a period of time. The international stuff say out of Australia, again we are going to need substantive price increases. I think before you are going to see people commit new capital to even get their existing operations backup to their nameplate capacity and then you are going to need a level of pricing well above that before you are going to see any Greenfield capital go in to either thermal coal or met coal. So there is some capacity that will come back, but it’s going to come back at much higher prices than it would have previously, because I think people are going to be very, very careful before they start committing 5-year to 10-year capital expenditures on a short-term movement in the price. So we are going to have to see high sustained pricing at two levels. First level is incremental capital of existing operations and then the higher level of the Greenfield operations.

Jim Rollyson - Raymond James

Very helpful color. Thanks Greg.

Operator

Our next question is from Mitesh Thakkar with FBR. Please go ahead. Mitesh, your line is open if you are on mute possibly.

Mitesh Thakkar - FBR

Good morning guys. Congratulations on the quarter.

Greg Boyce

Thank you. Good morning Mitesh.

Mitesh Thakkar - FBR

Just some thoughts on the PRB side, we recently saw very limited interest on one of the LBAs, I think one of the concerns is that we are not seeing the pricing response and so how to think about potential falloff in supply if we continue to see kind of these kind of choppier prices and subdued contracting levels. I think it’s more of an issue for 8400 coal, but we would love your thoughts on that?

Greg Boyce

Yes, I think we would agree with your analysis. There is going to be at the current price horizons, there has been discussion going around, around what is the – what’s the lane capacity out in the Powder River Basin that can come back in as prices continue to increase. As we have talked before, our view is it’s fairly limited. You are going to get a bit of over time bump where people can run existing equipment harder. Once you go through that, which is a small component, then people are going to have to start spending real cash to repair equipment that’s been parked, replace engines, rear motors and the like. That will provide a bit of an increment, but then in reality, people have not spent capital to replace equipment that ultimately reached the end of its useful life or spent capital to overcome the annual increase in stripping ratio that naturally occurs in the Powder River Basin.

So the mining capacity overhang in the Powder River Basin is significantly lower than what the nameplate or infrastructure, loading infrastructure and rail infrastructure capacity would be. So I think we are seeing the longer this goes on we are seeing long-term lower productive capacity out of the Powder River Basin until again we see significantly higher price horizons, where people feel like they can make adequate returns for the cost of leasing, developing and buying new equipment for the Powder River Basin

Mitesh Thakkar - FBR

Okay and what is the price you think replacement CapEx starts coming back in the PRB?

Greg Boyce

Well let`s just say it's higher than it is today.

Operator

And we will go to Jeremy Sussman with Clarkson. Please go ahead.

Jeremy Sussman - Clarkson

Excellent cost control and Greg on the back of that I want to get a sense of how we should think about how this flows through into 2014 specifically for this year obviously U.S. cost guidance remaining in kind of the down 2% to 3% range Australia in the low 70s low to mid 70s. So given kind of the trend how much more I guess can we see as we head into the next year or through next year?

Mike Crews

When you look at the cost position we were guiding to a 2% to 3% lower for this year. We’re on track on that in the U.S., you know very pleased with our cost reduction initiatives in Australia but going back to the U.S., first as we look at these cost reduction initiatives we still think we're in the early innings. There are things that have implemented this year that can provide some full-year benefit next year. And the potential offsetting fact of that is that where we can route [ph] in volumes, we haven't provided volume guidance for next year but that's a positive indicator. On the Australian side as you look through the results for the quarter we had cost-reduction initiatives, we got a bit of a benefit on currency but on a year-to-date basis currency has actually has been unfavorable and on a full-year basis currency is really not been an impact.

So Australia has really been driven by these cost reductions initiatives. We’re extremely pleased with the progress that they have been able to make. So ultimately we think there is some sustainability as you get full year benefits out of cost-reduction initiatives and have been implemented this year going into next year, how that gets mitigated somewhat by a higher mix of met coal particularly as we look at the end of this year and then you got a potential for carbon tax relief really next year hopefully as well so there is some positive indicators. We've had a bit of lower sales related costs, it ultimately just depends upon what our ultimate volumes is going to be and our mix within those volumes as we set out targets for 2014.

Jeremy Sussman - Clarkson

So just a follow-up I mean it sounds like without putting words in your mouth I know you haven't given guidance but it's conceivable with the initiatives that would take that we could see given let’s just assume of the U.S. dollar stays at current levels that both in the U.S. and Australia, it is conceivable that we can see some further reductions next year?

Mike Crews

I mean it's something we will certainly be targeting for continuous improvement in terms of cost-reduction but there are other factors in place and FX is one that you know as well and we will just have to wait and see as where we come out ultimately but that’s something we’re certainly focused on building on the momentum and the successes we have been able to achieve this year.

Operator

And we will go to David Gagliano with Barclays. Please go ahead.

David Gagliano - Barclays

My question relates to sales volumes in 2015 I believe this was the first time you indicated 40% to 50% report in 2015. Can you give us some prices in the mid-west and the west associated with those committed volumes?

Mike Crews

We as you know Dave we typically do not do that for a couple of reasons first is proprietary versus our peers from a competitive perspective, the other is that we have different mines of course with different qualities and so you're not always on the same-store basis depending on the timing of those but did one, two ways you noted initiate our view and that is based really on how much is committed. I would note based on anticipated 2013 production volumes so of course by the time we get to ‘15 we will see what actual production looks like also.

David Gagliano - Barclays

Okay how about this, to make it apples to apples can you give us directional indication versus what was just recorded in the mid-west and the west a few dollars?

Mike Crews

We did not Mike, we don't give or Dave I'm sorry. We did not give forward views on booked business from a pricing perspective.

David Gagliano - Barclays

Okay my follow-up question real quick, the fourth quarter the guidance for the year we’re trying to update our models over here and to get it to work we have to make some rather odd assumptions for sales prices per ton in the fourth quarter in the U.S. Is there any reason that sales prices per ton should change meaningfully sequentially in Q4 versus what was just reported?

Greg Boyce

Maybe we can now follow on with you on that, David. There is nothing that comes to mind that would give you that result.

Operator

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

Meredith Bandy - BMO Capital Markets

Hey, good morning. Thanks for taking my question. Most of my questions have been asked, but I just wanted to see if I could get an update on metrop and also are there other union negotiations coming up that we should know about?

Greg Boyce

Yes, just to tell you where we are at with metrop. I mean, we have been negotiating with the team at metrop over the course of number of weeks going back probably eight weeks or so now. And we are still optimistic obviously that we will come to a resolution that works for the workforce as well as for us. The whole industry is rebasing. The discussions are all around what that rebasing ought to look like. We have had historically a good relationship with our workforce at metrop. And so we don’t see and we are not anticipating that this is going to be a long-term situation and we are hopeful to get a resolution that works for them as well as for us.

Meredith Bandy - BMO Capital Markets

And other contracts that are coming up, if any?

Greg Boyce

We are in the process of having discussions with our workforce at Coppabella and that will create both of those EVAs that come due this year. And I remind everyone we went through 2012 with several of these EVAs and we are able to successfully negotiate those as well. So again don’t see where this will be a long-term issue and look forward to coming to a conclusion.

Meredith Bandy - BMO Capital Markets

Okay, thank you very much.

Operator

And next we go to Neil Mehta with Goldman Sachs. Please go ahead.

Neil Mehta - Goldman Sachs

Good morning and congratulations on the quarter.

Greg Boyce

Good morning. Thank you.

Neil Mehta - Goldman Sachs

There has been a lot of attention on asset sales in the space, can you just kind of talk about your framework for thinking about that? You think the current business makes sense and are there opportunities to monetize assets as you have done in previous quarters?

Mike Crews

Yes. As part of our de-leveraging strategy, we have looked at portfolio optimization. So we will continue – it runs a gamut between non-strategic assets, potential development properties that may have better value in other people’s hands on the different timing basis. So those are some of the things that – things that we continue to look at. You will recall we had a reserve sale in the Midwest in the second quarter. It’s going to generate some good EBITDA in our resource management segment and will also generate $70 million of cash for the full year. So we have some efforts concentrated there. I mean, in terms of broader things we have been an active portfolio manager over the past 15 years. Current focus today is in the area that you have noted of things where we could find some things that are creative in order to generate cash with that repayment. And that’s something that we will continue to look at. It just – it depends on our market outlook, our view of the assets and our view of the market conditions and market receptivity for those types of transactions, but it is something that we are very focused on.

Neil Mehta - Goldman Sachs

Alright, thank you. Then a couple of macro questions that in your view, I know it’s always tough to quantify millions of metric tons, but in your view, how oversupplied is the met market as we stand today?

Greg Boyce

Well, I think we have seen third-party estimates that say we are 20 million tons or so give or take of oversupply. We wouldn’t necessarily quarrel with that estimate. And I would just say that’s balanced to get out of 3% world steel demand where demand for met coal is going up 30 million tons a year. So those are the numbers that we are kind of using in terms of the way we look at going forward to business.

Neil Mehta - Goldman Sachs

It makes sense. Last question if we see high precipitation levels again in Australia, how have Australian coal mines adapted over the last few years to make sure they are prepared to keep supply going in the event of another extreme rainy season?

Greg Boyce

Well, I think there has been some of the operations have probably done some things to improve their capability. I would say probably in the environment we have been in over the last 18 months, they probably haven’t done near as much as one would have expected they would have done. We did all of our work several years ago, so we feel very comfortable where we’re at relative to a wet season. We did some additional work at the Coppabella and [indiscernible] operation as part of the rehabilitation work that we did. So we feel like we are in pretty good shape. So we will see, I think I guess what I'm saying is there has probably been some improvements but I guess it's probably not the full amount given the nature of where the market was over the last 18 months.

Operator

On next question is from Lucas Pipes with Brean Capital. Please go ahead.

Lucas Pipes - Brean Capital

Greg you mentioned earlier that you have an attractive project pipeline in Australia for future growth especially on the met coal side, when you look at these projects what you think is the necessary price in order to earn an attractive return on these projects?

Greg Boyce

We’re not really reviewed to give any individual prices at what the return components are. I will just go back to what I’ve said previously, in our view prices have to be well north of $200 a ton to incentivize Greenfield Capital into the met coal space. And I think that's probably true for everybody. And that's probably I’ll leave it there in terms of specific pricing. I'll just would say that you know obviously Cleveland is the best zipcode in the world for metallurgical coal assets. The development portfolio and the properties that we bought as part of the Macarthur acquisition was clearly the best package available in the world. We've done a fair bit of work on that those assets since we bought them and we feel better about them now than we did when we did buy them and so we will have significant opportunities when the time is right.

Lucas Pipes - Brean Capital

And follow-up question on your Australian pricing, it has held up very well considering where spot prices were during the third quarter both on the met coal and on the thermal coal side if you could maybe elaborate on what’s been driving this and then what should we expect for the fourth quarter given where prices are right now.

Mike Crews

The realizations were down just a bit from the second quarter into the third quarter some of that's a mix of the met coal, the mix within met and then also the mix of met versus thermal. We talked about the implementation of small well [ph] topical caving system at inaudible caring North Goonyella in the fourth quarter so we would have an expectation that our met volumes would increase as a percent of the total and the high quality of our coking coal will go up as well which would have a corresponding uptick in realization.

Operator

And next go to Brett Levy with Jefferies. Please go ahead.

Brett Levy - Jefferies

Yes I know that you guys don't want to give information on prices I think on the previous call you had mentioned that the pricing that you have been able to achieve more recently is sort of above the forward curve and maybe I will try to sort of say has that continued and then also based on everything you've said sort of supply and demand in the next several years is it fair to say that you may wait a while before you sort of lock in additional pricing for ‘14 and ‘15?

Mike Crews

Yes two things you know obviously I continue to come back to the fact that I've got a significant number of folks in my marketing and sales department that you know I tell them that they need to deliver always deliver above the curve otherwise I can just sell the curve. And they are very successful at doing that. In terms of the '14, '15 pricing where we see they go as we mentioned on the last call and we repeat today we’re quite happy to be patient right now for ’14 and ’15 and we are doing small increments of business where it makes sense for us to do, where we’re happy with the price and more importantly happy with the multi-year volume components of the deal. But as I said we’re being patient right now.

Operator

And we will go to Caleb Dorfman with Simmons & Company. Please go ahead.

Caleb Dorfman - Simmons & Company

Thanks for taking the question. I guess, first off, it’s really hard to point exactly without knowing how 2015 is going to shake out? But when you are thinking about 2014 in the United States, how do you think overall domestic coal volume could trend? And do you actually think that because we have been drawing down stockpiles this year, you are pointing to a 30 million stockpile draw? At what point do we sort of normalize and actually start having a supply demand balance again in the United States?

Greg Boyce

Well, I think when you look at the amount of production that has come off in the U.S. this year and the beginning of certainly in the major coal producing regions of Powder River Basin and Illinois Basin rebalancing of the inventories, I think we are going to see through the end of this year and first quarter of next year if we have a normalized winter, a rebalancing. The cap region is a region now unto all of itself in terms of their inventory and their burn, because they are still impacted by natural gas competition. I mean, our view is, is we will continue – we don’t see in ‘14 erosion of PRB or Illinois Basin markets due to gas based on the forward gas curve. And we see continued higher utilizations within those burning regions. So I think our view is ‘14 will be much more balanced, make some more inroads early in the year on inventories. And then we will start to test what additional volumes can come into the market in the back half of the year.

Caleb Dorfman - Simmons & Company

That’s helpful. So we have talked a lot about the seaborne met market. On the seaborne thermal market pricing continues to be a little weak, I guess, it’s helpful that shiny thermal pricing is starting to pick up. And what do you think and when do we start seeing the new capital pricing improved and when do we get that volatility back which really drives trading and brokerage?

Greg Boyce

Well, again, it’s been an unusual year in terms of all of the producing regions are having very good operating runs and there hasn’t been any really supply disruptions either due to weather or ports or we had a short strike down in Colombia which really didn’t impact the market, because the Russian coal sector was increasing their exports quite well. So right now, I think the seaborne markets had been affected mostly due to this fact that not that demand wasn’t growing it was growing, but that supply was healthy. I think one of the things that’s impacting the markets today is freight rates. We are starting to see much greater differential, because the freight cost is going to significantly enhance and improve the competitiveness of Australia both on the thermal and the met coal side. And I think we will see that continue through the end of this year and into 2014.

Caleb Dorfman - Simmons & Company

So do you think the price recovery is the 2014 event then?

Greg Boyce

I am sorry what’s the question?

Caleb Dorfman - Simmons & Company

Do you think the price recovery is actually going to be a 2014 event or do you think we will have to wait until end of 2014, early 2015?

Greg Boyce

Our view would be strengthening during 2014.

Operator

Our next question is from Evan Kurtz with Morgan Stanley. Please go ahead.

Evan Kurtz - Morgan Stanley

Hi, good morning everyone.

Greg Boyce

Good morning.

Evan Kurtz - Morgan Stanley

Just wanted an update on the carbon tax repeal, I know there has been a little bit of back and forth between the government and the Senate. How should we model that? Do you still see that kind of coming on the second half of next year or do you still see that kind of helping your cost out by a dollar or two?

Mike Crews

I guess, our recommendation will be that’s probably the best answer right now. There is a possibility it may occur early but that number of dynamics as you indicate are going to have to fall into place for that to happen. So we would give that mid-year and it is a $1 to $2 at time at that.

Evan Kurtz - Morgan Stanley

Great, thanks. And just one other quick question on Australian costs, Jeremy was kind of getting at this already, but Aussie dollar would have kind of stick around the $0.96 level here and just given your hedges right now and the timing I know you kind of split them over three years, is it fair to say that currency could actually become head wind or do we and we need to see currency go lower from here? Or how should we think about that for 2014?

Mike Crews

Yeah for 2014 our hedge position is in the low 60% range at about, in the low 90s. So the sensitivity is on a $0.05 change on the exchange rate for 2014 is about $60 million.

Operator

And that will conclude today's question-and-answer session. I’ll turn it back to you Mr. Boyce for any closing comments.

Greg Boyce

Well thank you operator and I guess in closing I just want to express my appreciation to the Peabody team for a really strong quarter. Their attention to safety, productive operations, the cost management, capital discipline has all really come to fruition very strongly in the quarter and then I thank all of you for your ongoing interest in BTU and we look forward to updating you after the close of the year. Thank you.

Operator

Ladies and gentlemen that does conclude the conference for today. Thank you for your participation. You may now disconnect.

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