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Peabody Energy Corporation (NYSE:BTU)

Q3 2010 Earnings Conference Call

October 19, 2010 11 AM ET

Executives

Vic Svec – Senior Vice President, Investor Relations

Greg Boyce – Chairman and Chief Executive Officer

Mike Crews – Executive Vice President and Chief Financial Officer

Rick Navarre – President and Chief Commercial Officer

Analysts

Shneur Gershuni – UBS

Pearce Hammond – Simmons & Company

Michael Dudas – Jefferies

Paul Forward – Stifel Nicolaus

Brian Singer – Goldman Sachs

Brett Levy – Jefferies & Company

Jim Rollyson – Raymond James

John Bridges – J.P. Morgan

Sunil Dapshadar – Sentinel Investments

Curt Woodworth – Macquarie

Natesh Natar – FBR

Brandon Blossman – Tudor, Pickering, Holt

Jeremy Sussman – Brean Murray

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Peabody Energy Third Quarter Earnings Release. (Operator Instructions)

With that being said, I’ll turn the conference on over to the Senior Vice President, Investor Relations and Corporate Communications, Mr. Vic Svec. Please go ahead.

Vic Svec

Well, thank you, John, and good morning, everyone. Thanks very much for taking part in the conference call for BTU. With us today are Chairman and CEO, Greg Boyce; Executive Vice President and Chief Financial Officer, Mike Crews; and President and Chief Commercial Officer, Rick Navarre.

We do have some forward-looking statements, and 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. I’ll now turn the call over to Mike.

Michael Crews

Thanks, Vic. Peabody again delivered exceptional financial results, posting our third quarter in a row of increasing EBITDA. Top line growth and solid operational performance drove margin expansion in all regions. Year-to-date operating cash flows reached a record $884 million, and we are again raising the midpoint of our annual targets.

I’ll begin with a review of our income statement and operational highlights. Our third quarter sales totaled 64 million tons, exceeding last year on higher volumes from our Australia, Trading and Brokerage segments. Revenues were nearly $1.9 billion for the quarter on the combination of higher sales volumes and increased realized prices in each of our operating regions. Australia was again a key driver, with revenues significantly above both last quarter and last year.

Consolidated EBITDA reached $571 million for the quarter or 67% above the prior year on a near tripling of Australia results and improved U.S. performance. Trading and Brokerage also turned in a solid quarter, contributing $44 million.

Let me take you through the performance drivers in more detail, beginning with Australia. During the third quarter, we sold 7.4 million tons in Australia, including 2.4 million tons of met coal and more than 3 million tons of seaborne thermal coal.

Our met coal prices averaged $192 per ton, significantly above both last quarter and last year. Third quarter’s realized prices illustrate the benefits of both business price in line with the quarterly industry benchmark and more than 200,000 tons of carryover volume.

On the seaborne thermal side, our sales price per ton averaged $79 versus $72 last year.

Turning now to costs. The results were better than both last quarter and last year. A higher ratio of thermal volumes, combined with ongoing cost containment, delivered cost of $56 per ton.

Let me take this opportunity to touch on our currency exposure. The Australian dollar appreciated 13% during the third quarter. Fortunately, we are approximately 85% hedged for the remainder of 2010, and we’re currently 75% hedged for 2011, both at approximately $0.80. Our program has been an effective tool for minimizing the EBITDA volatility associated with currency movements.

For the full year, we continue to target Australia cost in a range of $55 to $60 per ton. The combination of higher prices and volumes and costs in line with expectations raised our Australian gross margins to 44%.

Turning now to the U.S. Our quarterly results benefited from higher prices and ongoing cost control. Realized prices in the Midwest were 5% higher than last year, and costs were flat even with the startup costs at Bear Run.

As a result, third quarter margins rose more than $2 per ton, and now average nearly $11 per ton. In the West, our margins continue to exceed $5 per ton, benefiting from higher realized prices in each of our regions, as well as a change in sales mix toward more Southwestern and Colorado volumes.

On the cost side, the effect of that same change of mix was minimized by a 5% improvement in our PRB productivity.

And looking ahead, fourth quarter’s Western cost will reflect a longwall move in Colorado.

Rounding out the EBITDA discussion, Trading and Brokerage delivered $44 million, which exceeded last quarter on a higher volume of physically settled transactions.

Moving on to taxes. Our effective tax rate, excluding currency remeasurement, was 27% and continues to be in line with our full year expectations of 25 to 30%. I’d also note that expense associated with non-controlling interest totaled $12 million this quarter or $0.05 per share. As the profitability of our joint ventures increases, so does the portion that is allocated to our partners.

Excluding the impact of $43 million of non-cash currency remeasurement, our adjusted income from continuing operations totaled more than $280 million with adjusted diluted EPS of $0.99, both more than double last year’s level. As a result of our strong third quarter operational performance, cash flows from operations totaled $427 million, and helped to drive the cash balance to nearly $1.4 billion.

Our third quarter capital expenditures were $126 million. Fourth quarter spending is expected to be the highest of the year, as we begin finalizing Bear Run, ramp up spending on Australian growth projects at Wilpinjong, Burton and Metropolitan and take delivery of production equipment in the U.S. and Australia. For the full year, our CapEx target remains $600 million to $650 million.

As we turn our attention forward, targeted EBITDA for 2010 is now $1.85 billion to $1.9 billion, with adjusted EPS of $2.95 to $3.15 per share. At these higher levels, 2010 EBITDA may rival our record year in 2008. So with that review of our outstanding third quarter results and view for the year, I’ll now turn the call over to Greg.

Gregory Boyce

Thanks, Mike, and good morning, everyone. Peabody is again reporting excellent results, driven by an operating portfolio that’s both broad and deep. Nowhere has such a platform and this was again evident in the range of production announcements we saw prior to the start of this earnings season.

Now, looking forward, we see our operating base expanding, our multiple growth initiatives accelerating and the global economy strengthening. And this has great implications for Peabody’s financial strength, earnings growth and ability to create value.

We recently returned from China where Peabody’s leadership reviewed both the long-term energy outlook and our many Asian initiatives.

Let me first set the context for the demand super cycle that coal has entered. The demographics and resulting trends are overwhelming.

Today, 3.6 billion people lack adequate access to electricity, and another 2 billion people over the next two decades will need electricity access. China now forecasts that 290 gigawatts of coal-fueled generation will come online between 2011 through 2015. This alone represents over 1 billion tons of coal per year at full operation.

Also, this occurs as major steel plants are built along the coast to attract even more met coal imports. And everything we have seen to date in China is just the beginning, as Chinese leaders continue to believe the nation will still be in development mode 30 or 40 years from now. And beyond China are nations such as India and Indonesia with large fast-growing economies and populations that will quickly raise their market share of global energy demand. So that’s the long view.

But the near-term dynamics are also compelling and striking that the coal markets are as solid as they are, with only one leg of the global economic stool providing meaningful support. Asia is driving demand growth, while the U.S. and Europe still lag.

Global generation is growing at a double-digit pace in places such as China and South Korea, while global steel production is up 22% and running at an all-time record.

And contrary to bearish sentiment, steel prices continued to increase in the third quarter.

China’s met coal imports are running at 140 million ton annualized rate. An initial data out today suggests that China was a met importer of 13 million to 14 million tons in September. While this surprises some who continue to underestimate China’s growth, in our mind, this is just new business as usual. Yet China represents less than 20% of the global seaborne coal market.

The other 80% of the global market has been rebounding in 2010, with large Asian economies performing particularly well. Global met markets have been routinely settling above $200 per metric ton. Newcastle thermal coal has exceeded $95 per ton and now passes $110 per ton just three years out. The near-term fundamentals will continue to tighten, as seasonal rains have come early to Indonesia and industrial demand is picking up again in China.

And while Asian nations are holding up the global economy today, European and U.S. energy demand growth remains more challenging. This summer saw record reduction in U.S. stockpiles, more than twice the average, on the strength of stable production and significantly higher cooling degree days. We’ve also regained a portion of the 2009 coal-to-gas switching in 2010, though the weak economy has once again brought down gas prices.

We now expect U.S. GDP and industrial production to remain muted in 2011, and believes the U.S. recovery will be more pronounced in 2012.

I would also note we’re very comfortable with our U.S. contracting strategy as we look out over the next several years. With the U.S. economic growth still lagging, natural gas prices low and a return to normal weather patterns, we believe it’s wise to have contracted significant volumes for 2011. On the other hand, we have more volumes open from 2012 and beyond than any other producer.

Now, Peabody’s operating base is very well positioned to capitalize on the near and long-term global demand trends.

In Australia, we’ve made progress in our multiple expansions in metallurgical and thermal coal mines. We approved the capital for the low-cost Wilpinjong Mine expansion and began the extension of the Burton metallurgical coal mine. And as we grow on Australia, we continue to ensure that we have transportation capabilities, such as a new contract with Queensland Rail and our 18% participation in NCIG, including the second phase of expansion.

In the U.S., we began expanded operations at the major Bear Run surface mine in Indiana last month with the arrival of a second dragline. We announced the new Gateway North expansion in the Midwest, and we made additional progress in siting and detailed planning for a West Coast port. All of this occurs as we see the Illinois and Powder River Basins capturing demand growth as central Appalachia continues to decline.

And in Asia, we have advanced multiple initiatives to develop joint-venture mining and supply agreements. During the quarter for instance, the GreenGen business licenses were approved in China and construction is on track towards a 2011 start. We have a number of other projects in the works in China and Mongolia, and we’re advancing plans to source coal from Indonesia and supply coal to India.

In summary, Peabody had an outstanding quarter. Our financial position is strong. And our status as a growth company has never been better, with projects advancing on multiple continents. I thank our 7,000 employees around the world for their continued focus on safety and operational excellence. I began by noting that Peabody continues to distinguish itself through our results, and we remain confident that BTU’s multiple will expand to its historic level and premium over our peers.

So that’s a brief review of our outstanding quarter and our favorable outlook. And at this time, Rick, Mike and I would be pleased to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And first from the line of Shneur Gershuni with UBS.

Shneur Gershuni – UBS

Hi, good morning.

Michael Crews

Good morning, Shneur.

Gregory Boyce

Good morning, Shneur.

Shneur Gershuni – UBS

I guess I’ve got two questions. One is with respect to Australia production given the well-recorded weather issues that are out there, how confident are you at hitting your target for the end of the year? And then second – and as part of that question, if you can talk about where you think the next met settlement will go for the first quarter, whether you think it trends upwards or downwards?

Gregory Boyce

Well, maybe I’ll just talk a bit our Australian production for the fourth quarter. I mean, as you look at the third quarter, there’s no question there’s been a fair bit of weather-related impacts across the Australian region, both in Newcastle and Queensland. And if you recall, historically, we operate our business in Australia with a fair bit of stock on the ground so that we can be opportunistic when others have production problems.

But that same strategy helps us at times during this, when there are weather-related production impacts, other producers struggle more than we do. We were capable and able to ship out of stocks during periods of times when our operations have some weather-related interruptions.

So for us, the third quarter impacts were very muted. Any impacts will be more related to transportation and/or port issues rather than production for us. Not to say we don’t have some, but they were very muted. And we would expect that would occur in the fourth quarter as well.

You know, we still have a wide range for our fourth quarter production out of Australia. Our forecast of volumes for the year across our entire platform, U.S. and Australia, remain intact.

All I would say, we probably will see a stronger performance out of the U.S. and a more muted year-end performance out of Australia relative to midpoints in our various guidance ranges. Maybe I’ll have Rick talk a bit about met coal trends and at least the dynamics in the met coal markets.

Richard Navarre

Yes, Shneur, obviously – I mean obviously we’ve just – we’ve faced the settlement last time at about $209 for the hard coking coal. And as we look right now, there’s a couple of things that start to give you some positive indications that, that number might be a little bit low going into the next quarter. Obviously, it’s a little bit early yet.

But as Greg said, with all the weather disruptions, there’s a bit more tightness in the market, particularly in Queensland, so that’s going to have an impact. We’ll probably hearing that you know spot pricing now, it’s probably inched up to about $220 from $209.

And I’d also say that from our viewpoint where we sit, with what’s happened with currency, we would fully expect again the change in currency, which has been about 13% in the quarter, should plow back into the price settlements.

Shneur Gershuni – UBS

OK. And I was wondering if I can have one follow-up with respect to the Powder River Basin. I’m not sure but based on my accounts, it looks like you may have contracted some Powder River Basin for 2011. There’s been some commentary out there by other producers about a $15 market or higher and so forth. I was wondering if you guys have seen some similar trends as well, too?

Richard Navarre

I mean, certainly, in the earlier part of the quarter, the market was $15-plus for you know in the OTC, and we were able to capture sales in that range. We didn’t have a lot to sell as Greg mentioned in his remarks. We probably sold 10 million tons for ‘11; still have a bit log to sell but not a lot.

I think it’s a position that we are happy to be in. I mean, leverage is a good thing in the right doses and at the right time. But most of our leverage is geared towards the recovery period in ‘12 and ‘13. And when we look to ‘11 and as we did in ‘10, we think it’s going to be a bit slower. And I think we’re pretty happy that we’re pretty well sold out for ‘11. But we were able to capture some of the higher prices. That’s the reason we are sold where we are because it allows us to be selective in making our sales.

Shneur Gershuni – UBS

Do you feel the market is still close to that area right now?

Richard Navarre

I think it is right now. I think there’s – if I look out for the next quarter where our position is I wouldn’t want to very long in PRB coal in the next quarter. I don’t see a lot of catalysts in the next three to four months. They’re going to change that. That’s why you see a flat price curve. It’s in the $14 to $15 range. But if there’s a lot of supply out there chasing the market, it could come down a little bit for at least in the near term.

Shneur Gershuni – UBS

And great, thank you very much.

Operator

Our next question is from Pearce Hammond with Simmons & Company.

Pearce Hammond – Simmons & Company

Yes, good morning. I was curious if you can provide a little bit more color on your Mongolian strategy, specifically a little bit more about Winsway, and then how you see the Tavan Tolgoi process developing?

Richard Navarre

Yes, Pearce, this is Rick. I’ll take that. Just on our overall strategy on Mongolia, first, and then I’ll break it down into the two components.

But overall, obviously, we look at that as a strong market opportunity with its proximity to China. It’s a large open-cut reserve base of high quality, both thermal coals as well as clearly high-quality metallurgical coal.

The Winsway partnership is an interesting opportunity for Peabody. We currently have a significant number of licenses that we purchased about almost two years ago now that we have in Winsway. It becomes a very good partner for us because they control or operate significant amount of the logistics chain. They’re responsible for about 60 to 70% of the export into China today that go through Winsway changing stations and tollgates.

So, it’s a good partnership for us long term. They’re a strong company. They just finished their IPOs, as you may be aware. They’re a well-managed organization. So, we’ve got a 50/50 joint venture with Winsway to develop resources outside our strategic resources, which would be Tavan Tolgoi.

Tavan Tolgoi, on the other hand, large, 5 to 6 billion ton deposit of high-quality metallurgical coal. We continue to look at that as an opportunity down the road. I’d say it’s a very fluid situation with the government as it always has been. But ultimately, that reserve will get developed, and Peabody hopes to be there when it does get developed and be one of the winners on the ultimate auction process.

Pearce Hammond – Simmons & Company

Great. And then the follow-up is have you seen any impact from the Chinese provinces scrambling to reach the energy efficiency and emission targets that are tied in the ‘11 five-year plan?

Richard Navarre

We did actually. And we talked about that on our last call that we expected that China would slow down a bit in the third and fourth quarter as they try to reach that five-year target. And they did basically do that. They shut down some of the higher energy intensive businesses, some of the older steel mills and other factories. And they did shut down a lot of things in trying to reduce their energy intensity to make that five-year goal that they committed to.

Gregory Boyce

And the other thing, Pearce, though, I think part of what we’ve seen with the import numbers, early import numbers for September is I think the expectation is the October quarter is going to come run back in China now that they’ve met their targets through the first nine months of the year.

Pearce Hammond – Simmons & Company

And you share the same sentiment?

Gregory Boyce

Yes, we see the fourth quarter, I think, being the strong quarter in China, no reason, certainly from a coal prospective. There’s still stockpiles that need to be replenished. There’s still transportation constraints internal to China. And there’s still a massive restructuring program going on both on the met coal and steam coal side in China with their production base. And all of that continues to put pressure, and as we saw in the September import numbers for coal coming into China.

Richard Navarre

And they had a little bit of weather as well. The winter has hit a little bit earlier than normal, so they’re starting to feel that as well.

Pearce Hammond – Simmons & Company

Thank you very much.

Operator

The next question is from Michael Dudas with Jefferies.

Michael Dudas – Jefferies

Good morning, everybody.

Gregory Boyce

OK, Michael.

Michael Dudas – Jefferies

My first question is there are some reports in the marketplace about shipments of some of your coal to Europe from the Powder River Basin. Can you talk a little bit about what the customers’ thinking about there? And is it the concern of the lack of potential supply from, say, Poland/Russia or Colombia, that’s driving more thoughts towards the sub between this part of the U.S?

Richard Navarre

Yes, Mike, I think it’s the consistency of supply. The Powder Basin getting coal from Peabody out of the PRB, it’s going to be consistent supply. Obviously, the European suppliers are not going to be as dependable as what we see out of the U.S. And it is a mix issue. They mix it into their blend. It’s the right cost.

And it’s something that they can certainly, I think, have seen us doing in the United States. Why can’t they do what we’re doing in the U.S., with blending high-BTU coal or low-BTU coal, why can’t they do that in Europe? And we’ve got a long discussion with this particular customer, and we’re going to convince them to do that. And we think it’s going to be a win-win for both of us.

Gregory Boyce

Yes, I think just to add to that. I think they look at it as a diversity of the supply base. I mean, historically, Europe had South African and Colombian coal all to itself. And met coal is just strongly being pulled into the Pacific Rim. And I think the U.K. and some of the other European consumers are starting to say, "Well, we probably really need to test what other opportunities are, particularly PRB, for coals into Europe."

Michael Dudas – Jefferies

And I guess, following up a little bit on that with securities supply turning towards Powder River Basin. Do you think the market is paying a bit too much attention to some of the discussions and opportunities for developing the West Coast port for shipping PRB coal west? Is that way too far in the future for people to be concerned about? Is that something that could find some more support acceleration as we move into 2011 that could turn the PRB to a little bit more of a dynamic market than what we’ve seen in the past?

Gregory Boyce

Well, obviously, it’s an issue that we’re spending a lot of time and significant effort on because we think it can make a major difference in terms of the PRB dynamics. But that doesn’t mean it’s the only avenue for exporting PRB coal. And the Gulf continues to be an opportunity, particularly as the Atlantic Basin gets shorted from traditional coal sources into the Pacific Rim. But there’s no question that a major new port out of the West Coast could possibly impact the PRB dynamics.

Michael Dudas – Jefferies

I appreciate your answers. Thank you.

Operator

Next from the line of Paul Forward with Stifel, Nicolaus.

Paul Forward – Stifel, Nicolaus

Yes, thanks. You noted the big inventory drawdowns we’ve seen this year in the U.S. until about August. But I guess from what we’ve seen weak demand over the past few weeks and a little bit of pickup in volumes, particularly in the PRB, we’ve started to see some building again.

Would you consider actually taking some of that or stalling some of the growth that you’d expect in the PRB in 2011, if these markets don’t hold up? I know, Rick, you talked about PRB pricing fading over the past couple of months. What’s your view on 2011 and whether you might need to exert a little bit more discipline?

Gregory Boyce

Paul, you just gave a good segue way as to why we like our 90% sold position out of PRB for next year because we didn’t want to go into next year or into the end of this year having to play significant volumes out of the PRB. So, we’re very happy with where we’re at and fortunately don’t have to face those decisions because essentially we’re sold under contracts.

But I think that will be a question for others as they look at where that market goes next year for – as Rick said, the catalyst for additional major volumes seemed to be pretty slight for next year.

Paul Forward – Stifel, Nicolaus

All right. And just one last point on this. You reported $40 million of other operating cost in the third quarter. Just curious, what’s the likelihood that we’ll see that level going forward? Or were there some specific items that boosted that number?

Michael Crews

You know when you look at – this is Mike. When you look at that versus last year, we’re up a bit. And some of that just has to do with higher retiree health care costs on lower discount rates, so it’s some amortization. There was another, there was a litigation settlement, small enough in $5 million in this quarter. So, the run rate for the rest of the year would be, I would expect it to be a bit lower, mainly due to that litigation settlement we had in the third quarter.

Paul Forward – Stifel, Nicolaus

All right. Thanks very much.

Operator

Our next question is from Brian Singer with Goldman Sachs.

Brian Singer – Goldman Sachs

Thank you. Thank you, good morning.

Gregory Boyce

Good morning, Brian.

Brian Singer – Goldman Sachs

You mentioned earlier on Mongolia, wanted to follow-up on two additional expansion initiatives. First, where you stand in getting an upstream position in China? And second, maybe a little bit more color on your comments on how to best position to take coal out of Indonesia and into India?

Richard Navarre

This is Rick. I’ll start with the Indonesian first.

In Indonesia, obviously, there’s a lot of opportunities there that we’re continuing to look at. And that’s a – you know, it’s a good market. It’s a good production market for us to – mostly, it’s all open-cast coal mining. And we’re looking at probably four to five initiatives that will allow us to take a meaningful position, but not a majority position, in some coal properties that will allow us to participate and have coal to sell into India and into the rest of the Asian market. So, more to come on that is what I can basically tell you on that. So, you’ll hear more about that in the future.

As it relates to China, the same thing. We’ve got a number of opportunities that we are working with. They take time. We’re working with partners. And you have to work with the government agencies to get the properties online, get them drilled and get all the permits. And it just takes a bit of time.

But I think that once again, we hope to continue to update you on that and give you some meaningful advancements on both of those areas in the next 12 months for sure.

Brian Singer – Goldman Sachs

Great, thanks. And as a follow-up, switching to Australia, if you look at margin trends there, can you talk to – (NYSE:A), how you see costs trending and the FX impacts there; and (NYSE:B), any color on the spread between some of the weaker methylenes relative to the benchmark?

Richard Navarre

Yes, when you look at the cost profile we’ve had in Australia, we’ve been extremely pleased. Now, on a year-over-year basis, you’ll see a significant decline.

If you’ll recall we had the delay on met settlements last year, so we had a lot of met coal that shipped from the – that should have been in the second quarter that was in the third quarter as well. So, some of that is a mix issue.

Sequentially, we are also down, and that’s a function a little bit more of thermal mix. But also it’s that thermal volume comes up, it’s coming out of the lower cost mines that we have in Australia. So, we’re very pleased with that.

And then looking forward on for the rest of the year, we continue to target $55 to $60. We do have some currency risk there, although we are 85% hedged, so that’s muted somewhat. And when you look at the cost trends inside of that range, you’ve got potentially higher demerge. We talked about FX, a little bit higher sales-related costs. But we’ve also had very good performance of our long haul operations, and that’s been a tremendous impact on our cost this year.

Gregory Boyce

Yes, I think the second part to your question had to do with the spread between the high-quality coking coals and the semi-soft and the PCIs. And as Rick mentioned earlier, I mean we view all of the met coal market dynamics right now as providing you know, upward pressure on the full range; clearly much stronger pressure on the high quality coking coals, whether it’s a combination of the exchange rate, increasing demand across the globe going into next year, some weather-related impacts across the Australian platform. I mean all of those things are going to put in our view upward pressure across that full suite, but no question much more strongly on the high quality coals which favor our platform.

Brian Singer – Goldman Sachs

Great, thank you.

Operator

The next question’s from Wes Sconce with Morgan Stanley. Please go ahead.

Wes Sconce – Morgan Stanley

Hi guys, good morning. Where do we sit with the School Creek expansion? And given your outlook for continued supply pressures in Appalachia and demand recovery, how much additional PRB and Illinois Basin tonnage do you think will be called on say by 2012?

Gregory Boyce

Well, maybe start with the overall view. We have always felt and still believe that Illinois Basin and the Powder River Basin will be the supply to back up the increasing decline in central App., and we see that central App. decline being exacerbated by the regulatory environment that they’re operating under. As it relates to School Creek, we have always said that School Creek production, as we look at School Creek we look at it as a margin enhancement play for our PRB platform. And to the extent that you know, sometime over the next several years we start to see some volumes coming out of School Creek it would be as an ability to improve our margins out of the PRB; not necessarily as an attempt to increase our overall volumes.

Wes Sconce – Morgan Stanley

Thanks. And as a follow-up, do you expect your current mix of met coal quality to change in 2011 and ‘12? And I’m curious if there’s any upside to your forecast today on the unplaced volumes and what would drive that? If it was additional contribution from semi-soft or PCI out of Wambo?

Gregory Boyce

Yeah, I think we’re still working through the details of our operating plans over the next couple of years, particularly the timing of some of the additional volumes that we have coming in with our expansion programs down there, but there’s the potential for a slight increase in the lower quality met coals in the early part based on where those expansions might come into play. But I’m really not ready to give you any full number details on that yet, but that possibility exists.

Richard Navarre

You’ll continue to see swings when the markets are extremely tight you’ll be able to sell more of our Wambo product into the met market as a crossover coal than in the thermal market as we did this year early in the year. So I think some of that’s just going to be dependent on how tight the market is as well.

Wes Sconce – Morgan Stanley

But do you have tonnage in met and thermal exports booked for 2011 and ‘12?

Richard Navarre

Not very much.

Gregory Boyce

Not at all. Yeah, 2011 which is for some of the thermal would be under some of the semi-annual pricing contracts that reprice on April 1. Obviously on the met side it’s all quarterly business, or almost all quarterly business at this point in time.

Richard Navarre

Yeah, the met’s all open.

Wes Sconce – Morgan Stanley

Appreciate it, guys. Looking forward to the site visit next month.

Operator

Our next question is from Brett Levy with Jeffries & Company. Please go ahead.

Brett Levy – Jeffries & Company

Hey, guys. Can you talk about what you’re hearing in terms of the Australian super tax or you know, kind of the state of play leading up to 2012 and where you think it’s going to land at this point?

Michael Crews

Yeah, where we are with the Minerals Resource Rent Tax is the Australian government’s policy transition group just issued an issues paper last week as they start to move to the framework that was agreed to prior to the federal election into crafting legislation. So the key takeaways are it remains a very significant improvement over the original RSPT proposal. The majority of the provisions that were outlined in that framework still remain; there are a handful of issues that will need to be discussed that are points of clarification and to be reviewed.

So we’re very active in terms of we just started probably the first week of negotiations with the government through our contacts and directly through the industry groups, such as the Minerals Council of Australia. So I mean, having said that, you know, it remains to be seen what the final legislation is going to look like. It won’t kick in till 2012, and I think once we complete that process over the next several weeks we’ll have a little better clarity on what the ultimate impact will be.

Brett Levy – Jeffries & Company

And then as you look at that, does that impact the way you would view expansion or acquisition opportunities in that country?

Michael Crews

I mean you have to look at it in terms of directing our investments. I think with the conversion from the RSPT to the MMRT, while it clearly is an incremental tax to us we believe it’s manageable at this point relative to our organic growth profile.

Brett Levy – Jeffries & Company

Okay. And then other countries, do you see there’s a contagion at all at this point?

Michael Crews

You know, you see some rumblings here or there, but in terms of our operating portfolio that we have today, nothing really immediate on the horizon.

Brett Levy – Jeffries & Company

Thanks very much, guys.

Michael Crews

You’re welcome.

Operator

And we’ll go to Jim Rollyson with Raymond James. Please go ahead.

James Rollyson – Raymond James

Hey, good morning, everyone.

Michael Crews

Good morning, Jim.

James Rollyson – Raymond James

Weak natural gas prices here lately and kind of projected for a little while, and it obviously spurred a lot of talk about the impact on the coal business or demand domestically. On a short-term basis kind of looking into next year from a switching standpoint, I know a lot of guys have started talking about what the next several years looks like in terms of some of the older plants getting retired on the coal side and maybe being replaced by gas. Can you guys share maybe your thoughts on that subject? Just kind of where we stand today and how you’re viewing that as a threat to US coal burn.

Gregory Boyce

Sure. I mean obviously we recovered some of last year’s loss of burn to cheap gas. We didn’t recover as much as we would have liked based on where gas prices trended through the back half of the year and where they sit today. You know, as you go into next year I come back to our discussion earlier about where we sit relative to PRB Contracting. You know, the major impacts are in CAP and NAP for any type of gas switching, but to the extent that natural declines in CAP production perhaps are going to gas, you know, it would be preferable if all of that was going to Illinois Basin and PRB Basin on a 100% basis. It’s not today.

And as you look out through the course of next year, you know, the view on gas is we’re kind of in– Until the economy really begins to pick up more steam and until we see the gas producers reduce the amount of gas that they’re bringing to the market substantially below economic value for them, you know, we’re going to be in this oversupply situation on gas which is going to continue to provide opportunities in the CAP and NAP burn regions for gas to coal switching.

James Rollyson – Raymond James

Do you think, Greg, over time that the export side of the equation also picks up on the thermal side that maybe also helps offset some of what is going on with gas if in fact the gas situation lasts for a while?

Richard Navarre

This is Rick. It certainly can, obviously, because we have a disconnect between the gas prices in the US compared to the gas prices in Europe, so the European gas prices are certainly higher than what we’re seeing in the US. So at some point in time with reasonable transportation we can get back into the US thermal exports into Europe as the European demand picks back up. We’ve got soft European economies; they’ve had high stock piles and their gas prices have rebounded pretty nicely. So I think you’ll see some of that going into the European market but it’s not competitive today. But ultimately that’s the viewpoint.

James Rollyson – Raymond James

Yeah, over time. That’s what I was looking for. Thanks, guys. Good quarter.

Gregory Boyce

Thanks.

Operator

And we’ll go to John Bridges with JP Morgan. Please go ahead.

John Bridges – JP Morgan

Good morning, Greg, everybody.

Gregory Boyce

Hi, John.

John Bridges – JP Morgan

I just wanted to follow up on the PRB coal into Europe. Where do you see the opportunities for this coal going forward? Is it going to go more that way or might it go through an expanded Panama Canal into Asia if you can’t get the new port on the west coast?

Gregory Boyce

Well, I think our first view is that the port on the west coast is something we’re going to spend a lot of time in and we hope has got a high probability of eventually coming to pass. Suffice it to say we’ve got some coal going into Europe as evidenced by the UK landings, and we are also shipping some of our PRB coals out through the existing ports on the west coast to China and some all the way down to Chili.

So the coal can travel. And as the global seaborne market continues to tighten, the first beneficiary is going to be you know, the pricing horizon out of the New Castle production base that we have today. Secondary will then be volumes continuing to increase, both PRB volumes into that marketplace, but other US thermal volumes over time. So as Rick said it’s dependent on the pace of recovery in Europe as well as the fact that we continue to see a production disconnect or a supply/demand disconnect over time in the entire global seaborne thermal and met coal market, which will pull coals from anywhere they can.

John Bridges – JP Morgan

Yeah, yeah. We believe in that one, too. Just as a follow-up, with the privatization of the rail in Australia, does that encourage you to think about adding to your own rail infrastructure down there? Or how do you see that going forward?

Gregory Boyce

Well, I think what’s going to happen is the Queensland rail system will start to look more and more like what we have out of the Hunter Valley and New South Wales, where they went through their privatization a number of years ago. Overall while it’s a bit frustrating at times, the pace of the expansion of the rail system in Australia, we’ve been able to grow our business. Rates are fairly competitive; there’s competition among the providers. So I don’t see us making a significant change in the near term to how we contract for freight in Australia.

John Bridges – JP Morgan

Okay, many thanks. Congratulations on the results.

Gregory Boyce

Thank you.

Operator

And next one going to Sanil Daptardar with Sentinel Investments. Please go ahead.

Sanil Daptardar – Sentinel Investments

Yeah, thanks. On the Australian gas question, in fact, how are you thinking about 2011? Cause you did explain a bit of it. The mine results may report operations as you think, but where should it go to, in fact?

Gregory Boyce

You’re talking about costs across the entire platform?

Sanil Daptardar – Sentinel Investments

Yes.

Michael Crews

That was for 2000…

Gregory Boyce

‘11.

Michael Crews

For 2011. Yeah, as we think about going forward in Australia, there is some upward pressure on costs there. One would be currency on the un-hedged portion of our portfolio. The second, to the extent that you have higher sales prices you have higher sales-related costs. Another is, you know, when you look at the economy in the US relative to where they are in Australia, they never really went into a recession. Unemployment remains relatively low, so there’s some wage pressure there as well.

And when you look at that upward pressure balanced against where we think we’re going to be on the operating portfolio, that’s where we’re focused on our cost improvement initiatives, our investments in bigger gear, improved capital expenditures to lower our operating costs. And that’s some of the things that we’ll look to to try and temper that cost increase. I think as we work through the budget process, and we’ll be able to provide some better guidance in 2011 when we get a little closer, but some of those are the macro issues that may be impacting us on the Australian side.

Then on the US side, you’ve got increasing stripping ratios from year to year. The inflation is probably a bit tempered compared to where it is in Australia. You’ve seen the cost containment programs that we’ve had this year in terms of bringing our maintenance costs down, holding the other inflation items in check relative to labor and MNS spending, and we hope to continue that in the future.

Sanil Daptardar – Sentinel Investments

Okay. On the US side, you are just 10% unpriced. How should we think about the volumes for 2011, and if you go into 2012, if the regulations on environmental things hit the market, how would demand trend? Because you have a lot of unprized portion in 2012 if there are stringent regulations on the coal plant. And some of the coal plants might just die down and might just erode, and (inaudible). How should we be thinking about 2011 volumes, 2012 volumes given unprized portions?

Gregory Boyce

Well I think first of all, we’re not anticipating that 2012 is going to be as you describe it – clearly electricity needs to be produced and continue to be maintained. As we look forward you know, we think the US economy is going to be much stronger in 2012 by the time we get to 2012, then we see it today and perhaps the first half of 2011; which will not only bring back underlying coal demand but put the upward pressures on gas pricing that will bring that coal back into the marketplace.

I think the bigger concern on regulations would be the production out of central App. and northern App., which again on our platform, which again from our platform – Illinois Basin and Powder River Basin – will be a positive as we go into 2012. So as you look at how we think about how we should have contracted for 2011 versus 2012 and beyond, those are the things that we’re looking at and we see it in a much more of a positive environment for 2012 and beyond.

Sanil Daptardar – Sentinel Investments

Yeah.

Richard Navarre

I think another couple points that I didn’t mention earlier

On our committed position that we sold during the quarter for ‘11 and ‘12, eight million tons in each of those years relates to a long-term coal supply agreement we’re hoping out of our Canta [ph] Mine in the southwest. So essentially when you look at us selling about 18 million or 19 million tons in a quarter for 2011 and 2012, almost half of that is related to a long-term contract in the southwest.

So we didn’t sell as much in the PRB, but you look at 2012, 2013, as Greg said at the outset – we have over 300 million tons of coal to sell across the entire platform. We feel that’s a great position to be in for what we see as the right time to have that leverage.

Sanil Daptardar – Sentinel Investments

Okay. Great, thanks.

Operator

And we’ll go to Steve Myers with Citizens’ Trust. Please go ahead.

Steve Myers – Citizens’ Trust

Good morning. Regarding your dividend policy, have you folks considered making meaningful entries in that at this time or is the expansion of the coal production taking the front seat of the driving wheel, so to speak?

Gregory Boyce

Well, I think you know, as we say, as we’ve talked in the past – as we look at uses of our cash we continue to look at all of our opportunities. Growth is always high on the list, whether that’s through organic growth or through the M&A activities that we continue to look at. We did a bit of financial and debt restructuring during the quarter and we continue to look at our dividends and our dividend policy.

So no, it’s not off the table by any stretch of the imagination, but it’s just one of the many things we look at in terms of how we balance our cash needs. And as we do that we do look out over a multi-year view of the business, both in terms of what our investment opportunities are as well as what our cash generation will be.

Steve Myers – Citizens’ Trust

Thank you for your time.

Operator

The next question is from Curt Woodworth with Macquarie. Please go ahead.

Curt Woodworth – Macquarie

Yes, good morning. I was wondering if you could comment on the capital costs for the Millennium Mine expansion?

Gregory Boyce

Well, I think in general, in terms of all of the work that we’ve got going on outside of the two projects that we’ve announced, which is Metropolitan and Wilpena [ph], we’ve kind of talked about that $50 to $70 a ton capital, per annual ton capital number for the remainder of those projects, and Millennium would kind of fall into that category.

Curt Woodworth – Macquarie

Great. And in terms of the capital costs for Indonesia and Mongolia, with some of the potential JV opportunities that you’re looking at, can you give us a sense for what type of levels those would be at?

Michael Crews

We’re still evaluating that, but they’re a bit lower than what you would see in the US. Obviously the equipment’s a bit, in many cases is going to be little less expensive. And in Indonesia, we’re probably talking about a $30 per annual ton rate; in Mongolia it’s going to be, depending on the nature of the project and the transportation infrastructure that you have to build, it’s probably going to be somewhere in the… If it doesn’t include any infrastructure, it’s probably $20 to $30 per annual ton, and then it’s going to be $40 to $50 if you’ve got to start including any significant amount of transportation infrastructure.

Curt Woodworth – Macquarie

Yep, okay. And then just given the fact that the infrastructure issues in Australia are improving, albeit slowly, near the NCIG capability now. Do you feel that making asset purchases in Australia maybe to maximize some of the throughput capacity would make sense? Or do you feel you have better investment opportunities outside of Australia going forward?

Michael Crews

We’re looking at all of the above.

Curt Woodworth – Macquarie

Yeah.

Michael Crews

We have capacity, and we’re going to venture that we fully utilize that capacity through our organic growth platform, or through joint ventures or other acquisitions in Australia to make sure we use that capacity. So it’s not an either/or for us.

Curt Woodworth – Macquarie

Yeah. And how much extra capacity do you have looking out say the next couple years? Do you feel like what your production base is going to be – you’ll be fully maximizing your port allocation or are you going to have upside?

Gregory Boyce

I guess right now the safest thing I can tell you is that I think we have certainly adequate capacity to meet the goals we have on the build-out of our platform. I’ll probably leave it at that for now, cause it’s going to take time as we see how fast and quickly NCIG comes on board and then ramps up. So I think it’s pretty safe to stay with that.

Curt Woodworth – Macquarie

Okay. Thanks very much.

Operator

Our next question is from Mitesh Thakkar with FBR. Please go ahead.

Mitesh Thakkar – FBR Capital Markets

Yeah, hi. My first question is on the met coal volumes, for the full year 2010 and 2011. If my math is correct, for 2011 it looks like unprized volumes run down about 0.5 million tons. Is that right?

Michael Crews

Shouldn’t have. The total unprized volumes right now for 2011 are roughly 9 million to 10 million tons.

Mitesh Thakkar – FBR Capital Markets

Yeah. Wasn’t it 9.5 million to 10.5 million earlier? I can read on, I just think that…

Michael Crews

That may be a tightening of the reins and we may have sold, you know, a little bit of that met coal that may have brought that down slightly from the previous quarter. Cause we do have a contract that’s domestic met inside Australia that does run over a different timeframe than just the quarterly pricing, so that’s probably what brought that down.

Mitesh Thakkar – FBR Capital Markets

Okay. Fair enough. And for the full year 2010, how should we think about met volumes for the full year 2010?

Richard Navarre

Yeah, say it’s about 9 million tons.

Mitesh Thakkar – FBR Capital Markets

About 9 million tons? Okay. And looking at the US, you mentioned earlier in the previous conference call that you are expecting a low double-digit kind of export number. Has that changed a little bit or just still hoping that kind of number?

Michael Crews

I’m sorry, what…

Gregory Boyce

Which number are you referring to?

Mitesh Thakkar – FBR Capital Markets

Met coal exports out of US?

Gregory Boyce

I think we were looking at, you know… I’m sorry, did you say met coal or total exports?

Mitesh Thakkar – FBR Capital Markets

Met coal, met coal.

Michael Crews

Met coal’s probably 55 million to 60 million tons out of the US this year.

Mitesh Thakkar – FBR Capital Markets

And steam coal?

Michael Crews

Total is going to be 75 million tons.

Gregory Boyce

Yeah, steam coal would be at most 20 million.

Mitesh Thakkar – FBR Capital Markets

Okay, sounds good.

Michael Crews

We can give you a range

55 to 60, 15 to 20 and you’ll get there.

Mitesh Thakkar – FBR Capital Markets

Okay. And one last question on the trading EBIDTA, $44 million in trading EBIDTA. How much is overseas? I know you mentioned that Australia was pretty strong. Can you quantify how much of that was overseas trading and brokerage EBIDTA?

Richard Navarre

It’s running roughly half. I don’t have, I’m not sure in specific for this particular quarter but for the year it’ll be about 50%.

Operator

Our next question’s from Brandon Glassman with Tudor Pickering Holt. Please go ahead.

Brandon Glassman – Tudor Pickering Holt

Hi guys, congrats on the solid quarter.

Gregory Boyce

Thanks.

Brandon Glassman – Tudor Pickering Holt

I guess just following up on the trading and brokerage, can you… Last quarter was somewhat of an anomaly, the Q2, as far as EBIDTA. Can you give some additional color around what the change was quarter to quarter? Was it just volatility as you kind of mentioned last quarter or is it something else there?

Michael Crews

It’s kind of, that’s certainly one of the issues, volatility, and we really just sat on the sidelines for the most part in the Q2 because the market wasn’t trading with the fundamentals and there wasn’t as much volatility. And the other issue that we mentioned last time is that we had a few vessels on some of our cruel export business out of the US that goes through our trading book that didn’t get shipped in the quarter, that got shipped in the Q3. So those rolled over into Q3, and that’s what helped a little bit in Q3. So that’s the two principal reasons.

Brandon Glassman – Tudor Pickering Holt

Okay. So it’s fair to expect that the Q2 is an anomaly going forward?

Michael Crews

I guess I would say I hope so. In the trading business it’s always a little bumpy at times, just based upon the volatility of the markets and the vessel timings and such. But as we said before we’re trying to shoot for that $30 million range per quarter, roughly $30 million to $40 million, and we’ve hit that two out of three.

Brandon Glassman – Tudor Pickering Holt

Thanks on that. And then Greg, super big picture question. M&A landscape – has there been any change in the last three or four months from your perspective on opportunities that are out there? Public equity markets probably a bit richer today than they have been in the recent past – does that change your view at all?

Gregory Boyce

Well, certainly my view of certain parts of the US hasn’t changed despite recent news stories. But I think in terms of overall M&A activity, you know, it’s about where it’s been. And you know, equities are, certainly the international equities have high values. Expectations are still high. I think anything that we see going forward is going to be done in a less than straightforward way, but that’s what Rick and the team are spending a lot of time on in terms of both asset and equity opportunities.

Operator

Our final question will come from Jeremy Sussman with Brean Murray. Go ahead please.

Jeremy Sussman – Brean Murray

Good morning, everyone.

Gregory Boyce

Good morning, Jeremy.

Jeremy Sussman – Brean Murray

Just to go back to what you said about the Powder River Basin a little bit earlier. So we’ve got 2011 prices in the $14.50 range right now, but that’s the curve and there’s always a question of how accurate the curve is. So I mean if you had, and I guess it’s not a problem for 2011 for you guys, but if you had to sell material tonnage, do you think we’d be looking at a price below the curve right now? How should we look at that?

Gregory Boyce

Yeah, Jeremy, all I can really answer in terms of that question is there’s a reason that we’re sitting here 90% sold out for next year, and I’ll let everybody kind on interpret what that means. We’re very, very comfortable with where we’re at for 2011 and we’re extremely comfortable that we’ve got much larger volumes for 2012 and beyond. And so that’s probably all I really should say.

Jeremy Sussman – Brean Murray

No, that’s great. And just up, just one quick follow-up to the last question. I think you said a little while ago that certainly you saw the spread widen between what most of your met coal is in Australia versus I guess sort of the lower end of the quality spectrum. So as you look at the M&A landscape, is that something that you think, you know, do you think the gap’s going to continue to stay fairly wide and you focus more on the higher quality under the spectrum? Or do you just kind of see the market as a whole staying tight going forward?

Gregory Boyce

Well, I think we’re always, I mean historically there’s always been an oscillation between the hard quality, high quality coking coals and the lower- and mid-range coking coals, and that gap kind of changes over time. It shrinks in extremely tight markets and it widens when the markets start to ease a little bit. But our view is the demand pull versus the supply capabilities on the seaborne business mean that all boats and all prices are going to rise over time.

And that’s really the focus of the M&A activity that we’re looking at, whether it’s high quality met, mid to low met, or thermal coals on the seaborne markets.

Jeremy Sussman – Brean Murray

Great, that’s very helpful as always. Thanks, guys.

Operator

And I’ll turn it back to you, Mr. Boyce, for any closing comments.

Gregory Boyce

Okay, well thank you all for your continued interest in Peabody and I want to assure you all that we’ll continue to focus on both value creation and operational excellence as evidenced by our performance over the last several quarters.

I guess I would want to end with just noting that in the past 24 hours we’re very pleased to have received two prestigious awards. Yesterday afternoon we were presented with the US Department of Labor’s highest safety honor, which is the Sentinels of Safety Award for our Farmersburg Mine in the Midwest in the largest surface mine category.

And then last night we were named the best coal mining company in the world for the past 30 years at Coaltrans’ 30th Anniversary Conference in Amsterdam – clearly a tribute to our world class employees. And on behalf of them we look forward to our continued success and of course continuing to keep all of you apprised of our progress. So thank you again.

Operator

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

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