Peabody Energy Corporation (BTU) Earnings

Management highlights

- **Safety and Core Operational Progress** - Safety remains the company's top core priority across all operations. - The Centurion coking coal mine in Australia has completed shield realignment work that was delayed by extended commissioning, and the longwall is now in good operating condition. Remaining roof issues are limited to a 20% of the face rock faulting zone that will be addressed in Q3 2026, and production rates and shipment volumes have strengthened in recent weeks. - Seaborne thermal operations delivered on planned volumes and cost targets despite a high fuel cost environment. U.S. thermal operations completed proactive overburden removal in PRB and extended maintenance outages that will support stronger results in the second half of the year. - **Strategic Financial and Capital Structure Actions** - Completed multiple transactions to strengthen the balance sheet, reduce interest expense, unlock restricted cash, and return capital to shareholders. This included issuing $250 million of 0.5% coupon 2031 convertible notes, redeeming $241.2 million of 3.25% coupon 2028 convertible notes, effectively repurchasing 5 million shares, and reducing the diluted share count by 6.2 million shares. - Unlocked $350 million of restricted cash via changes to the global surety program, which transitioned to asset-backed facilities with lower collateral requirements while maintaining a strong reclamation bonding program. - Increased the revolving credit facility to $400 million, extended its maturity to 2030, and lowered borrowing costs by 25 bps. Total liquidity exceeds $900 million as of quarter-end. - **New Growth and Diversification Initiatives** - Received a conditional U.S. Department of Energy grant to demonstrate rare earth element recovery from coal-related feedstocks in the Powder River Basin, unlocking additional value from the company's existing asset base. - Advancing germanium exploration and development across existing operations, working with technology partners and an industrial consumer to establish domestic production via a capital-light partnership model, creating a potential new high-value revenue stream. - All new development initiatives follow a capital-light framework that prioritizes partner collaboration to monetize existing resources without significant balance sheet risk. - **Market Fundamentals Summary** - Seaborne metallurgical coal prices reached multi-year highs in Q2 2026, with premium hard coking coal averaging $238 per tonne (29% higher year-over-year), driven by widespread Chinese production curbs following a major mine accident that removed 30 million tonnes of global supply in the quarter. - Seaborne thermal coal demand remained strong driven by high Asian coal generation and elevated LNG prices tied to Middle East conflict, with Newcastle benchmark coal averaging $137 per tonne (35% higher year-over-year). Supply is expected to remain constrained due to lower projected 2026 output from Indonesia, the world's largest exporter. - U.S. thermal demand was weak in H1 2026 due to an extended mild shoulder season and extended maintenance outages at coal-fired plants, but plants are now conducting more comprehensive maintenance as they are expected to operate longer than originally anticipated, setting up stronger second half demand.

Guidance

- Third quarter 2026 production and cost guidance: Seaborne Thermal is expected to ship 3.0 million tons (1.9 million tons export) with costs of $52-$57 per ton, an improvement from Q2. - Seaborne Metallurgical is expected to ship 1.9-2.1 million tons in Q3, with costs improving to $130-$140 per ton (a $25 per ton improvement from Q2) as Centurion volumes rise. Centurion is targeted to produce 500,000-700,000 tons of sales in Q3, with 1.5-2.0 million tons of total Centurion sales in H2 2026. - PRB U.S. thermal is expected to ship 22 million tons in Q3 at a cost of $12 per ton, a $2 per ton improvement from Q2 that will expand margins. Other U.S. thermal is expected to ship 3.7 million tons in Q3 with costs of $45-$49 per ton, in line with full-year expectations. - Management reaffirms that Centurion's long-term steady state target of 4.7 million tons per year and long-term first quartile cost structure remain achievable, with only a multi-month delay to the planned shift to the mine's northern reserves (still expected around 2029, not a multi-year delay). - Management expects to generate substantial free cash flow in the second half of 2026 as Centurion ramps to target production, supporting continued execution of the existing shareholder return program.

Segment performance

1. **Seaborne Thermal**: Shipped 3.0 million tons, in line with expectations. Average realized export price increased 11.2% quarter-over-quarter and 31.6% year-over-year to $95.87 per ton. Segment costs came in at $58 per ton at the low end of guidance, generating $52 million in adjusted EBITDA with a 23% adjusted EBITDA margin. This segment contributed approximately 42% of total positive adjusted EBITDA for the quarter. 2. **Seaborne Metallurgical**: Shipped 2.5 million tons, exceeding expectations by 200,000 tons driven by higher volumes from Metropolitan and CMJV. Segment costs were above guidance at $155 per ton, primarily due to elevated commissioning spend at the Centurion mine. Despite a 7% quarter-over-quarter improvement in realized pricing, higher costs led to an adjusted EBITDA loss of $17 million for the segment. 3. **U.S. Thermal**: Generated $19.8 million in adjusted EBITDA from Powder River Basin (PRB) operations and $26.9 million in total segment adjusted EBITDA. PRB shipments hit 16.4 million tons, significantly below the 19 million ton expectation due to an extended mild shoulder season and extended plant maintenance outages. Unit costs in PRB rose temporarily to $14 per ton, driven by overburden removal work that will benefit future costs. Other U.S. thermal shipments totaled 3.0 million tons, 400,000 tons below guidance due to the extended shoulder season and late-quarter heavy Midwest rainfall, but costs were held in line at $46 per ton. The segment contributed approximately 52% of total positive adjusted EBITDA for the quarter.

Risks & headwinds

- Centurion mine ramp-up has encountered unanticipated issues including initial electrical and mechanical delays, shield misalignment, and a larger-than-expected rock faulting zone in the first production panel, leading to higher-than-planned commissioning costs, delayed production, and variable output and yield in Q3 2026. - Persistently high global fuel prices have increased operating costs across all segments relative to historical levels. - U.S. thermal demand and volumes remain exposed to mild weather conditions and low natural gas prices that can drive coal-to-gas switching. - Global seaborne coal supply and demand are exposed to unpredictable policy changes in major exporting countries like Indonesia and major producing countries like China, which can create sharp price volatility. - Geopolitical conflict in the Middle East has driven elevated LNG prices, though this has currently increased demand for seaborne thermal coal, it creates broader macroeconomic and market uncertainty.

Analyst Q&A

• Q: What is the current operating status of the Centurion longwall, and how much does the remaining faulting zone impact advance rates? Is the faulting expected to persist beyond Q3? /

  A: The shield alignment issue from extended commissioning is fully resolved, and the longwall is now straight and in good operating shape. The remaining 20% of the face faulting zone causes occasional stoppages, leading to variable output of 3-8 shears per day, and reduces yield due to increased rock content. This faulting zone is limited to ~300 meters of the current panel between shields 20-50, and will be fully cleared by the end of Q3, with no issues expected in Q4 2026. The original shield alignment issue was caused by repeated startup delays from early electrical/mechanical issues, not the faulting itself.

• Q: Is it safe to assume lower-end PRB volume guidance for the second half, or can we expect performance around the midpoint even with lower natural gas prices? How does El Nino impact demand? /

  A: The second half demand pattern matches the historical trend from 2023-2025, and management expects performance around the midpoint of guidance even with current natural gas prices. The Super El Nino-driven hot summer has already increased coal burn across China, Europe, North Asia and the U.S., as lower hydro output in China and increased air conditioning use lift coal demand for power generation. This strong demand supports the midpoint PRB guidance.

• Q: Will management pursue additional opportunistic share buybacks in the second half of 2026, given the strong balance sheet and unlocked cash? What are the top capital allocation priorities? /

  A: Management will continue to execute against the existing shareholder return program, which has already delivered a >100% payout ratio year-to-date. Management will evaluate both outright open market share repurchases and additional opportunistic repurchases of remaining convertible notes depending on market pricing, as the prior convertible transaction delivered significant dilution reduction at an attractive price. No specific timing or size is foreshadowed ahead of market conditions.

• Q: Are there any additional opportunities to unlock more restricted cash after the $350 million release this quarter, and is the unlocked cash fully available for use? /

  A: The $350 million released from restricted cash collateral is fully available and included in the company's June 30 cash balance. Management has completed all major step changes to the surety and collateral program, transitioning to asset-backed facilities and significantly reducing required collateral. No additional large-scale releases of restricted cash are expected going forward, with the current remaining restricted cash balance representing a permanent long-term level.