Peabody Energy Corporation (BTU)

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Peabody Energy (BTU)

Q2 2010 Earnings Call

July 20, 2010 11:00 a.m. EST

Executives

Vic Svec - SVP, Investor Relations and Corporate Communications

Gregory Boyce - CEO

Michael Crews - CFO

Rick Navarre - President and Chief Commercial Officer

Analysts

Pearce Hammond - Simmons & Company

Brian Singer - Goldman Sachs

Jeremy Sussman - Brean Murray

Mark Liinamaa - Morgan Stanley

David Khani – FBR Capital Markets

Paul Forward - Stifel, Nicolaus

Kuni Chen - Bank of America Merill Lynch

David Gagliano - Credit Suisse

Curt Woodworth - Macquarie

Michael Dudas - Jefferies & Company

Shneur Gershuni - UBS

Garrett Nelson - Davenport & Company

John Bridges - J.P Morgan

James Rollyson - Raymond James & Associates

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Peabody Energy second quarter earnings release conference call, at this time all participants are in a listen only mode and later we will conduct a question-and-answer session, with instructions being given at that time. (Operator instructions) As a reminder this conference is being recorded, and now I would like to turn the conference over to your host Mr. Vic Svec. Please go ahead Sir.

Vic Svec

Okay, thank you, and good morning every one. Thanks very much for taking part in the conference call for BTU. And with us today are our Chairman and CEO, Greg Boyce, Executive Vice President and CFO, Michael Crews, as well as President and Chief Commercial Officer, Rick Navarre. We will make some forward looking statements today 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 file documents. And we also refer you to peabodyenergy.com for additional information. With that I’ll turn the call over to Greg.

Gregory Boyce

Thanks, Vic, and good morning everyone. It’s clear that Peabody had another outstanding quarter on the strength of our U.S. and Australian mining platforms with our underlying cost control and strong top line lift. In addition, I would say our financial position is better than ever. It is also apparent to me that we are just beginning to reap the benefits from our portfolio optimization programs and the long-term cycle for coal. Our operating initiatives are yielding results, both the U.S. and International markets have much more upside and we have the leverage to rising volumes and pricing as we capitalize on the fastest growing coal markets.

Let’s take a moment to review the coal fundamentals and our position in these markets. In the Asia Pacific region, we have seen a two pronged growth driver in the first half, led by China’s appetite for energy and particularly coal imports, as well as recovering generation in steel production in the developed economies such as Japan, Korea, and Taiwan. Peabody expects specific thermo-coal inputs to rise more than 10% in 2010 while global med imports may soar some 30%.

Now, one area I would like to discuss is Chinese growth. You know there is a certain deja vu element to this roller coaster views about China’s economy. We have long observed the recurring syndrome. China announced it’s targeted growth rate of 8%, the economy outpaces that growth leading to investor skittishness. The government then announces cooling measures to ensure sustainability of growth, but nervousness increases. And finally when the accounting is finished, GDP is growing 9 or 10%, and then the cycle repeats itself. So we regularly expect 8 to 10% plus GDP growth out of China and haven’t been disappointed in any of the past 10 years. Amid the global financial crisis, China even managed 9% growth. In the first half of 2010, GDP grew 11.1%. Now as China lets its foot off the gas just a bit, 2010 GDP estimates have been revised to 10% The U.S. should even be one third so lucky.

Let me offer a few key China data points which we think support the long term energy and coal demand trends. First of all, the simple fact is that yesterday’s announcement that China has become the world’s largest energy consumer is profound. The U.S. held that position for over 100 years. And underneath this some have been concerned that China’s auto sales are easy, but consider that June sales are up 25% from a prior year which itself was up 40% over 2008. GM has announced that it is selling more cars in China than in the U.S. and this year China will sell more cars than any nation ever. The China’s steel intensity per capita is increasing but remains at just half or less than of the U.S., Japan, and South Korea. And China will ultimately pass these nations in steel intensity as housing is being built up versus out. There are hundreds of millions who need air conditioning and appliances that take steel to make and power to run. Also this year, China will pass the U.S. as a leading manufacturer.

China has also just announced a 30 billion dollar investment in the nation’s transmission grid system to further expand electricity availability. China’s power demand growth in June was double digit again and year to date generation is up a robust 19%. So all of this translates into China’s coal demand growing at a rapid clip and coal imports continuing at a record pace. The June numbers just out show another impressive month with China net imports totaling 11 million tons.

So now back to the markets. While we have seen some moderation in the growth of global met coal demand, this has occurred primarily in the lower quality products. Some of the newer steel mills have struggled with blending and have forced greater reliance on high quality hard-coking coal products and expanding the spread among met coal qualities. But overall consumption of met coal remains strong. During the second quarter, the benchmark met coal prices settled at the second highest price ever at $225 per metric ton for the reference price.

And if you look at electricity generation, we see continued demand growth. Power plants starting operation this year represent 340 million tons of annual coal demand. And thermal coal from Newcastle is in the triple digit price range for future years. So the bottom line, we are justifiably bullish in the near term and feel stronger than ever about the long term super cycle for coal driven by Asia Pacific growth.

Read the rest of this transcript for free on seekingalpha.com