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Peabody Energy Corp (NYSE:BTU)
Q2 2019 Earnings Call
Jul 31, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to Peabody's Second Quarter Earnings Call. [Operator Instructions] Later, we will conduct a question-and-answer session. [Operator Instructions]. I'd now like to turn the call over to Mr. Vic Svec. Senior Vice president, Global Investor and Corporate Relations. Please go ahead sir.

Unidentified Speaker

Okay, thank you, Ebony. And good morning, everyone. Welcome to the BTU Second Quarter Earnings Call. And with us today, our President and Chief Executive Officer; Glenn Kellow and Executive Vice President and Chief Financial Officer Amy Schwetz. During our formal remarks this morning, we'll reference a supplemental presentation and that's available on our website at peabodyenergy.com.

Now, on slide two of the deck, you'll find our statement on forward looking information.

And with that, I'll now turn the call over to Glenn.

Nick

Thanks, Vic, and good morning, everyone. Peabody had yet another active quarter with several positive steps taken in both the operational and portfolio levels. We are also conducting a review of the project path for North Goonyella and I'll talk more about that later.

Let's start with a few of the highlights. Once again, we had strong performance in our Seaborne thermal business with 34% adjusted EBITDA margins. Our seaborne metallurgical segment also generated healthy adjusted EBITDA margins of 29% when excluding project costs related to North Goonyella. These results were aided in part by our Shoal Creek Mine, which are remains a standout performer. Cash flows from that mine continue to be on price for less than two year payback period.

As we strive for operational excellence, I'm pleased to note the multiple operating segments improved costs compared to the prior year. We also continue to shape our portfolio to create value for our shareholders. In June, we announced a joint venture of our via PRB in Colorado assets with Arch. This combination is aimed at unlocking extraordinary synergies and creating exceptional value for customers and shareholders by strengthening the competitiveness of call against natural gas and renewables.

We remain firmly committed to executing on our shareholder return program. Here today through June, we have returned more than a 120% of our free cash flow shareholders through our share repurchase program, ongoing quarterly dividend and supplemental dividend. And we plan to accelerate our share repurchases in the second half of 2019 following the record blackout period related to the JV transaction.

With that, Amy will now cover the financials in more detail.

Amy Schwetz -- Executive Vice President and Chief Financial Officer

Thanks, Glenn and good morning, everyone. Second quarter revenues totaled 1.15 billion, reflecting the combined impact of reduced metallurgical coal volumes and lower realized seaborne pricing compared to the prior year. In the second quarter, DD&A totaled approximately 165 million in line with the prior year and below the first quarter of 2019. We expect this downward trend to continue through the back half of the year. Second quarter SG&A was also in line with our expectations declining 12% to $39 million of lower outside services.

Income from continuing operations, net of income taxes totaled 43 million compared to 120 million in the prior year. Diluted earnings per share declined $0.56 from the prior year to $0.37 per share. Adjusted EBITDA in the second quarter was $228 million versus $370 million in the prior year. Adjusted EBITDA includes 2.3 million in charges associated with voluntary employee reductions at North Goonyella and 1.6 million in transaction costs related to the PRB/Colorado joint venture.

As reflected on Slide 4, our seaborne segments delivered over half of our total mining adjusted EBITDA on the second quarter. Excluding North Goonyella project costs, our Seaborne Met segment led the company and adjusted EBITDA contributions of $86 million with second quarter shipments of 2.1 million tonnes and an average realized price of $138.42 per tonne. Shipments in the quarter were impacted by a planned longwall move at the Metropolitan Mine and ramp down of the Millennium mine as well as lower-than-ratable volumes from the Coppabella Mine

Coppabella continues to improve from challenging conditions experienced in the first quarter of 2019 as evidenced by some $50 per tonne of cost improvements in the second quarter at the mine. Seaborne met costs excluding the impact of North Goonyella totaled $97.61 per ton year over year met costs rose $8 per tonne, largely attributable to the timing of the Metropolitan longwall move. This impact was muted by the inclusion of lower cost Shoal Creek volume. In regards to North Goonyella project costs totaled $28 million and we're below the quarterly guidance range of 30 to 35 million given activity levels at the mine. This is even with 2.3 million in charges related to a voluntary reduction program extended at the mine.

Adjusted EBITDA contributions were driven by another quarter of exceptional performance from the Shoal Creek mine which delivered costs below the low end of the prior annual guidance range for the mine. During the first six months of the year, the mine has generated $110 million in adjusted EBITDA.

I'd also note that our share of the Middlemount. added another $10 million to adjusted EBITDA this quarter. As a reminder, this includes DD&A, asset retirement obligations expense, net interest expense and income taxes which totaled about $9.5 million in the second quarter.

Moving on, approximately $74 million of adjusted EBITDA was contributed by our Seaborne thermal segment which sold 2.7 million tonnes of export thermal coal at an average realized price of $68.53 per short term during the quarter. As expected, export volumes were muted by a scheduled longwall move at the Wambo mine. The longwall move also impacted our mix with Newcastle spec products representing only 58% of shipments during the quarter.

With the longwall move now complete, we still expect to be within our guidance range of 60% to 70% for Newcastle spec shipments for the year. Even with the longwall move, cost per tonne for this segment improved 4% compared to the prior year. Cost came in below the low end of our annual guidance range, thanks to strong performance from our low cost Wilpinjong mine, improved mining conditions and favorable FX.

Within our U.S. thermal operations, cost per tonne improved 4% versus the prior year due to fewer repairs and favorable pit sequencing at the Kayenta and El Segundo mines even with lower volumes. Overall, U.S. thermal adjusted EBITDA totaled $123 million compared to 138 million in the prior year.

Moving to slide 5, I'd like to walk through some key points on the balance sheet and cash flow. Second quarter operating cash flows of $179 million and capex of $61 million led to a $154 million in free cash flow. As of quarter end, cash and cash equivalents totaled 853 million with $1.2 billion and available liquidity. Year-to-date through July, Peabody has returned $436 million of cash to shareholders.

Share repurchases during the second quarter totaled 57 million, reflecting limitations on buying due to relatively low trading volumes and required blackout period in relation to the joint venture announcement in mid-June. We have since resumed buyback activities with an additional $51 million repurchase in July.

I'm pleased to note that since the initiation of that program, we have repurchased 25% of our initial shares outstanding. That's a total of $1.2 billion brought back with approximately $283 million remaining under the current program. Furthermore, in May, we announced the third increase to our quarterly dividend per share in just one year. Dividends year-to-date have totaled 229 million, including our $200 million supplemental dividend announced in February.

With that, I'll now turn the call back to Glenn.

Glenn Kellow -- President and Chief Executive Officer

Thanks, Amy. I'd now like to focus on the three strategies that were executing great value for our shareholders. First, we are continuing to rewrite Peabody's investments to have greater access to seaborne thermal and seaborne metallurgical coal to capture high growth demand. Chasing point, Shell Cribbage, which has been a tremendous addition to our seaborne met borne portfolio of over the past six months. Second, in the US, we are focused on maximizing cash generation in a low capital fashion through our low cost high margin operations.

Our recently announced joint venture is a prime example of industrial logic putting to meaningful action. And finally, for some time now, we've been advancing our stated financial approach of generating cash, maintaining financial strength, investing wisely and returning cash to shareholders. The result some 1.5 billion has been returned to shareholders in less than two years.

Let's now consider the industry fundamentals deploying to each of these strategies and the actions we are advancing in response beginning on Slide 7. Within Seaborne Met, we saw resilience in both hard cooking coal and High-Vol A pricing on stable demand growth and mere supply responses during the quarter.

Pricing has been ceased largely due to global concerns around trade and economic growth. In China, seaborne metallurgical coal demand was up 7 million tons a year-to-date through June an increase still needs and stimulus measures. In addition, India's seaborne demand increased some 7% year over year and we would expect India continue to be the major growth driver over the longer term.

Given this backdrop, we continue to capture value from our high quality, low cost Shoal Creek Mine. We're also paving the way to expand volumes for existing sources in the near term. This will include opportunities to extend the life of the mobile mine beyond 2025, with increased quality as early as 2020 as well as reducing mid costs in the back half of the year.

Turning to North Goonyella, major progress has been made to date including reventilation and reentry in the mine. We've also learned a substantial amount since we commenced activities underground earlier this month. All the milestones achieved in recent weeks have been significant, we also have progressed at a much slower rate than originally contemplated. We have recognized that this work is unprecedented in Queensland

all advancement during the recovery phase has been subject to the discretion of the regulatory authority, special protocols and substantial related administrative requirements.

As you recall last quarter, we noted that further delays would have occur the company would reevaluate our plans for the mine. We did in fact, experienced greater delays than we would have anticipated. We continue to take action to appropriately scale onsite activities based on geographic conditions and external factors. We assured that all work has been and is currently being undertaken, including the highest regard for safety as required to preserve value. These actions included the completion of a voluntary redundancy program as well as further engagement with the Queensland Mines Inspectorate on the evolving recovered protocols. Because this new information likely influences our future progress, now is the right time to review the project and determine if delays can be overcome, current plans should be advanced or other alternatives should be pursued to create the most value out of this significant asset.

Let's focus a moment on the prospective path we are assessing. Right now, our team is performing extensive value engineering activities aimed at maximizing returns on a risk adjusted NPV basis and payback period as well as reducing spending on non-critical items. Path we are pursuing includes determining the base case to access the 10N panel remains the most attractive given timing costs and project risk. We are also evaluating an alternative route through the second zone to the southern panels of the mine among other scenarios.

Note that all paths we preserve the opportunity to access more than 40 million tonnes of high-quality hard coking coal in the lower-seam reserves over time as well as potential for commercial alternatives. Given our ongoing activities, we are suspending North Goonyella related targets at this time and intend to resume targets around production timetables and costs when the preferred path is chosen and we would expect to complete the evaluation within the next three months. I would note the costs related to activities conducted in July were consistent with our previous run rate of 30 million to 35 million per quarter, our preferred path will ultimately determine our cost going forward. The underlying goal of our approach is simple to create the most value from this asset over time.

Moving to seaborne thermal on slide 9, quarter after quarter this segment achieves adjusted EBITDA margins well in excess of 30% while seaborne thermal pricing declined due to weaker planning demand, strong supply and temporary low cost G Newcastle spot pricing has since rebounded from the lows observed in the second quarter.API 5 pricing for Asia-Pacific demand has sold in nicely compared to other benchmarks such as API 2,which is tied to imports in North Western Europe. As you see in the graph to the right, the spread between the Newcastle and API 5 has compressed over the last year.

As we look closer at demand fundamentals, we've seen a surge in thermal imports into China in the second quarter. In addition, India thermal imports were up some 13 million tonnes a year-to-date through June driven by strong industrial sector demand. Strong demand from Asian countries including Vietnam and Malaysia continues as well. Through the first half of the year, increased generation a new coal fueled capacity led to an $11 million tonne increase in the ASEAN seaborne demand.

Refocusing now on Peabody, we benefit from strong contracting strategies, particularly on the seaborne thermal side of the business. Let's consider our positioning for a moment. In the second quarter average spot Newcastle pricing decline 23% compared to the prior year. In contrast, Peabody's realized seaborne thermal pricing declined only 14% as we previously locked in contracts at more favorable pricing and that's with only 58% of our volumes equivalent to Newcastle spec product in the quarter.

We believe we are well positioned with $3.6 million export tonnes priced in an average price of about $83 per short tonne for 2019. We also have 2.1 million tonnes of both Newcastle and API 5 coal price for 2020 and an average price which is currently about the Newcastle forward curve.

In regard to our thermal portfolio, we are tier 1 assets and it continues to enhance these operations through revenues such as the United Wambo Joint Venture with Glencore. The JV is anticipated to form later this year with production expected in 2020.

Let's now move to US thermal which continues to face headwinds through June total of electricity generation declined 2% year-over-year on fuel cooling and heating degree days in the demand heavy months of January and June. Year-to-date, coal accounted for just 24% percent of the generation mix as natural gas pricing decline to a 3 year low and captured additional share. Also during the quarter flooding in across the US again impacted rail shipments and contributed in a 6% reduction in production year-to-date. In addition,the Peabody has had more activity during the past quarter than we've seen in years between the Chapter 11 filings as well as our JV announcement. On the regulatory front, the implementation of the Affordable Clean Energy or ACE Rule offers individual states greater flexibility in the development and timing of state implementation plans avoiding a one size fits all approach to managing distinct and diverse needs while early days Wood Mack suggests that this new rule could potentially increase coal consumption by about 3% annually all other things being equal.

So given the challenges that remain in the current U.S. environment, Peabody is taking what we believe to be the appropriate actions to improve our competitiveness within an oil fuels market. To start, we are continuing to operate complexes where possible allowing us to move contracts, people and equipment as needed to make customer demand. And as mentioned, we're executing a highly synergistic joint venture to allow us to better compete against natural gas and subsidize renewables for the benefit of many, including our customers and our shareholders. Let's talk about those synergies in more detail on Slide 11.

The JV expects to unlock synergies with a pre-tax NPV of $820 million. We expect the average synergies on a 100% basis to be approximately 120 million per year over initial 10 years. Perhaps the greatest synergies can be achieved through optimization of mine plants, particularly at the North Goonyella Shell mine and Black undermine. These two adjacent operations, a well capitalized and share a common border that stretches more than 7 miles. There are 4 load-out facilities and numerous mining pits with multiple products and cost profiles. Additional synergies include better deployment of fleets and more efficient procurement. Through the transaction, we believe we will be able to enhance our blending capabilities to more closely meet the requirements of our customers. We also expect to improve utilization of the combined rail up system, among other rail efficiencies.

With more efficient mine planning and deployment, we also expect to reduce long term capital requirements while leveraging our scalable shared services model. Since our announcement in June, necessary Hart-Scott-Rodino filings have been submitted to advance regulatory approval and the transaction is under review by the US Federal Trade Commission. To date, we've received early support from multiple stakeholders. At this time, synergies are continuing to be refined and evaluated the further opportunities.

I'll now turn the call back to Amy to discuss our further strategy which emphasizes our financial approach.

Amy Schwetz -- Executive Vice President and Chief Financial Officer

Strong operational performance drives our cash generation and prudent deployment ensures our financial strength. In fact, we converted two-thirds of our adjusted EBITDA into free cash flow in the second quarter, in part due to our substantial. NOI well positioned in both the US and Australia. Within that context, I'd like to focus on the last two components of the approach and that's likely and return cash to shareholders. In terms of investment whether that be investment in our current portfolio of assets or M&A, our investment filters remain the center-piece of all activity. The hurdles for investment are considerable but not impossible as demonstrated by transactions over the past year. Our dollars also continue to be spent on the investment in the company that we believe represents the best value, BTU. As such, we have continued to execute a robust share repurchase program in addition to a quarterly and supplemental dividend. To date we have returned more than $1.5 billion to our shareholders in just under two years. And in 2019 we intend to return to our shareholders an amount greater than our free cash flow with second half share buybacks expected to accelerate relative to the first six months of the year.

Turning to slide 13, I'd like to discuss our outlook for the second half of 2019. First, based on current pricing levels, we expect second half adjusted EBITDA contributions to be largely in line with first half results and would expect the fourth quarter to be stronger than the third. Second half adjusted EBITDA reflects North Goonyella and JV related expenses as well as two mines reaching the end of their economic life. We would anticipate a progressive increase in our seaborne thermal and met coal volumes in the third and fourth quarters. In addition, Kayenta Mine is scheduled to cease production and sales early in the third quarter of 2019 despite strong year-to-date demand from the Navajo Generating Station.

As we talk about the timing of shipments, I'd also note that Shoal Creek shipments will generally be ratable throughout the year. Given the seamless nature of longwall moves at the mine and inventory levels that are expected to offset any planned reductions in yield. Third, we continue to believe our share price represents a compelling investment and we are committed to accelerating our share repurchase activity in the second half of the year. Glen?

Glenn Kellow -- President and Chief Executive Officer

On slide 13. I will note that we've launched a review of the company's organizational structure and functional support activities. The aim is to further enhance our capabilities while streamlining processes across a number of fronts. We are also working to ensure our operational leadership continues to focus on key value drivers within those portfolios and have the best resources about readily available. We have retained the process improvement arm [Indecipherable] to assist us in this comprehensive review. We've also made several. Changes to the company's leadership. Charles Meintjes has been named Executive Vice President and Chief Operating Officer with the responsibility for operations, sales and marketing and technical services as well as the responsibility of achieving the Peabody Colorado joint venture synergies. As some of you may recall, Charles has led both business units in the past and has received operational experience on three continents. In addition, Amy's role as Executive Vice President and Chief Financial Officer has been expanded to include responsibility for corporate development and information technology, shared services and coal generation emissions technology. The aim of these changes also allows for Amy and Charles to guide their respective operational and functional areas as part of the organizational review. Also, current group executive of US operations Mark [Indecipherable] has been main head of our Australian operations bringing shop operating focus to these important assets.

To wrap up today Peabody is defined by our diverse set of assets and our ability to continue to shape the portfolio like the PRB Colorado JV as well as Shoal Creek which by the way contributed more adjusted EBITDA this quarter than North Goonyella did in quarter two 2018. Add to that, our commitment to sharing our returns with shareholders in a tangible way, I believe the result is a compelling value opportunity. With that, I'd like to turn the call over for questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions]. We'll take our first question from Daniel Scott with Clarkson. Please go ahead.

Daniel Scott

Thanks. Good morning, Glenn. Looks like a real good quarter. Shares are getting hit a little bit I assume, on the North Goonyella developments. Is there a scenario where potentially this mine would be closed or is this are you really just trying to find the most optimal way to continue production?

Glenn Kellow -- President and Chief Executive Officer

From our perspective, we're looking at the most optimum way to create value and to continue to capture value. So that's the scenarios around which was a base case of accessing 10 North. We talked in the past about alternatives and at this point we're continuing to evaluate an alternative path moving through the second zone and optimizing or accessing those southern panels and in any scenario, having. Having reentered the mine and particularly having opened up now zone A, opens up the lowest seams available to us. So this is about seeking to maximize the value given what we now know about the operating conditions particularly the regulatory environment, the protocols that we're operating under.

Daniel Scott

But given the reserve life. It sounds like it's highly unlikely that this mine would be closed. It's just defining to a way to get to the goal most economically.

Glenn Kellow -- President and Chief Executive Officer

That's exactly right from our perspective. We believe this is a tremendous mine with great infrastructure and significant reserves of high quality, hard cooking coal. We want to make sure that we execute the right path, using effective evaluation.

Daniel Scott

Okay, great. Interesting comment. Obviously, Shoal Creek has been a real positive and having it outperformed the year ago levels of North Goonyella is impressive. It's still kind of looks like a one of asset given its, whatever, 13000 miles away from the next cooking coal asset in the portfolio. You talked in the slides about rewaiting investment toward greater seaborne met and thermal, at some point does that mean more add-on? Is it North America or Is it Australia on both sides, really thermal in that?

Glenn Kellow -- President and Chief Executive Officer

Well we've talked about our strategy willing about really wanting to Seaborne met seaborne thermal, as you've indicated, I think Shoal Creek has been an example of that and what we talked about, although Shoal Creek is closer to St. Lewis than some of our U.S. thermal operations, really what we talked about Shoal Creek other than the quality of the coal, the cost structure was its access to those seaborne markets. And we talked previously about the fact that we actually share common customers with some of our Australian portfolio. So -that indicates that if we could do a Shoal Creek, if Shoal Creek comes a lot, we'd certainly be highly interested in it but as we've said, we've also articulated a pretty strict set of investment filters to which you've seen as being disciplined by operating within that. It could lead that the US portfolio, because you can see we've been highly active on that front as well and what I think and believe it can potentially be a transformational transaction in the Powder River Basin with the objective of that thing about increasing the competitiveness against coal against natural gas or renewables.

Operator

We'll take our next question from Michael Dudas with Vertical Research. Please go ahead.

Michael Dudas -- Vertical Research

Good morning, Everybody.

Amy Schwetz -- Executive Vice President and Chief Financial Officer

Good morning, Mike.

Glenn Kellow -- President and Chief Executive Officer

Good morning.

Michael Dudas -- Vertical Research

First question is you talk about a joint venture that was announced last. In the slide, you talk about stakeholder support. So maybe you can elaborate a little bit like what type of stakeholders, what's been some of the feedback, positive and even some negative you can share that from what you had for the last five to six weeks?

Glenn Kellow -- President and Chief Executive Officer

Sure, Michael, We've been pleased from the reaction from a variety of stakeholders. Government organizations, the state authorities, representative organizations, suppliers. We've certainly had some positive comments from some customers. Probably the negative not unexpected is we've seen some criticism being directed us from environmental agencies. But overall, I'd say to date we've been pleased by the reaction that we've received.

Michael Dudas -- Vertical Research

And do you think that some of the difficulties you have seen a [Indecipherable] with some of the bankruptcies etc. helped supported detriment from the opportunity to drive this forward?

Glenn Kellow -- President and Chief Executive Officer

Well, there's no doubt I think what we've seen in some of the challenges in the last quarter have really underlined the fact the transaction of this nature in order being out of shape, the competitiveness of coal against natural gas and renewables really does highlight that objective. I think and obviously what's been going on in that in that basin has attracted a lot of publicity in the last several weeks. And there's no doubt that we have recognized the impact that has occurred on the workforce, on their families and on the community in that area and so certainly we appreciate and understand how tough it is in that county. We've actually taken on 30 employees I believe, highly skilled to about a fairly existing positions but we do recognize how tough it has been. Having said that, I think we brought the plane on the filing. There's really been no change in pricing following either announcement as far as we can tell. And I think that just underscores the fact that for us, this is about day in and day out competition versus natural gas and renewables.

Operator

Our next question will come from Chris Terry with Deutsche Bank. Please go ahead.

Chris Terry -- Deutsche Bank

Hi Glenn and Amy, a couple of questions for me. Just following on JV, do you have enough data on when you might potentially expect the deal to close?

Amy Schwetz -- Executive Vice President and Chief Financial Officer

So Chris, at this point in time, I think we're doing everything that we can to move the process forward and as we indicated we have made the necessary regulatory filing this month and we're continuing to see that process play out. We understand that it is fluid in nature and we'll continue to update as we hear back from those agencies. I would only just highlight what Glenn pointed out which is we think that the market backdrop that we're having these discussions and certainly highlights the need for a transaction of this nature to increase competitiveness and ensure surety of supply and out of what is a very important basin for electricity generation.

Chris Terry -- Deutsche Bank

Okay, thanks Amy and just another one for you, on the buyback so you said you'll accelerate from here, is that taking the July rate of 51 million? Is that you are talking about accelerating from the second quarter run rate or accelerating from the July run rate? Thanks.

Amy Schwetz -- Executive Vice President and Chief Financial Officer

Looking at really accelerating from that first half of the year run rate we experienced that first part of the year and where we were under blackout under numerous situations and also saw some lower trading volumes over that period of time which which hampered our ability to execute buybacks quickly. And we have been back in the market late in June and into July and we would expect to see that program continue throughout the remainder of the year.

Operator

Our next question will come from Mark Levin with Seaport Global. Please go ahead.

Mark Levin -- Seaport Global

Great. Just a quick question on capital. So I think the budget is 350 million to 375 million and then maybe to the first half of the year, you guys have spend a little less than 100 million. So I guess two questions related to that. One is, I realize the capex is back end loaded but do you feel like there's more --there's more of a likelihood of cutting that budget or keeping it where it is and then second related to the buyback question. I guess you guys are guiding to EBITDA in the second half, it is roughly the same as the first half. But there is still, I guess, a lot of capital to spend. So how should we think about that in terms of buyback activity second half versus first half that there's still a lot of capital to spend?

Amy Schwetz -- Executive Vice President and Chief Financial Officer

Sure. Maybe starting with your question on on capital. We did anticipate that capital would be back end loaded. We had some some progress payments that we'll be making on the longwall at North Goonyella throughout the remainder of 2019. And we also have some project capital associated with the extension of the life of Open John in the. open cut JV that fall in the back half of the year and you can rest assured that capital discipline is something that we employ a Peabody and that relates not just to the dollars that we're spending but the timing of the dollars that we're spending and if there's no impact on on operations we view that later is better. So we'll continue to look at that capital budget and make the right decision for our operations over time. We will not not accepting incremental risk at the operating level.

As we look at that at the back half of the year certainly capex is something that will impact our free cash flow as we move into the back half but I'd also note that we are operating well above our current liquidity target and so as we approach the back half of the year we would anticipate drawing down our cash balances to get us closer to that liquidity target as we close out 2019.

Operator

And we'll take our next question from Lucas Pipes with B. Riley FBR. Please go ahead.

Lucas Pipes -- B. Riley FBR

Hey, good morning, everyone and Amy and Charles congratulations on the additional responsibilities. I wanted to ask Glenn a follow up question on North Goonyella. It sounds like you look at a couple of different options there keeping the mine open. And I understand it's early and we'll get an update within three months but could you share kind of rough figures in terms of ballpark for capex of the various options that you're looking at? I would appreciate your thoughts.

Glenn Kellow -- President and Chief Executive Officer

Well, Lucas I think those sorts of things are still under review as we evaluate prospective path. Our original approach to access 10 North is something that we're considering as to whether it still remains attractive based on timing costs and what we reflect now as risk, I mentioned the alternative which would probably be accessing through that second zone and accessing the southern panels through that zone. And they're all things that we've got under evaluation at this point in time. And really, we will get back to you as soon as we can, but we'd expect that evaluation within the next three months.

Amy Schwetz -- Executive Vice President and Chief Financial Officer

Lucas, the only thing that I would point out is that the mix of those costs between capital and OpEx would look different under the two scenarios as we've gone down the path that we're under currently which is as Glenn has pointed out is the path that we need under any scenario to sort of recover to recover zone A and moving into the Zone B, the costs associated with that have all been included in our operating expenses. If we look at options toward the southern panel of the mine that's mixed between OpEx and capital would look different and we would anticipate there would be more capitalization of the costs associated and with the project as we would focus on development. But still early days on that and and we'll look forward to providing an update as soon as we can.

Lucas Pipes -- B. Riley FBR

I appreciate that. Thank you then one quick follow up question on North Goonyella and then another one on on the domestic market. On North Goonyella. could you explain a little bit more the voluntary reduction program? Labor in Australia has a reputation for being pretty tight. So how long would those folks be kind of away from Peabody before potentially being hired back? I assume when the mines are up and running again for that program to be economical. That's question number one. And then question two on the JV, obviously very exciting in terms of the synergies. Do you think that is the blueprint for potentially other JV's in other regions of the country? So those are my two follow ups.Thank you.

Glenn Kellow -- President and Chief Executive Officer

Yes. I think we would expect the voluntary reduction program, which had about 20 people participating that program to have a relatively quick payback on that activity. As you indicated. w'd expect to rehire as appropriate as we continue to rephase production. But at this point in time, we want to make sure that we're appropriately matching our expenses with the level of work required as we progress along the path.

With respect to the joint venture, I think it's it's an extraordinary combination of assets which has been put together as part of the Powder River Basin in Colorado between ourselves and Arch but this type of methodology as you can imagine is not is not uncommon outside of the United States. We participate in a number of joint ventures in Australia. and when you mentioned the joint venture between ourselves and Glencore related to the one by one United Mine mine combinations. So it's not it's not unusual in that sense and really it;s a template that we thought was appropriate in bring together this unique set of assets in a unique combination that will enable competitors against natural gas or renewables.

Amy Schwetz -- Executive Vice President and Chief Financial Officer

And if we look at our investment filters that that include and highlight payback period in that the idea and the concept of cashless transaction. and like this joint venture continue to be extremely compelling when there are synergies involved in them.

Operator

We'll take our next question from Matthew Fields with Bank of America. Please go ahead.

Matthew Fields -- Bank of America -- Analyst

Hi, everyone. I want to talk about the domestic market as well just a little bit. With difficulties at [Indecipherable]. Are you seeing potentially any opportunities for your Illinois basin mines to kind of get into some of these adjacent states that Powder River has gotten into like Illinois, Iowa, Missouri, where these guys are selling into and you'd have an extraordinary cost advantage?

Glenn Kellow -- President and Chief Executive Officer

I think obviously we believe that the customers that are being supplied through those types of operations and those types of activities would tend to be customers that came out of the Powder River Basin type areas. But they obviously manage wider portfolios with respect to having gas in their mix so having having other burn or other coal generation activities in their mix. So I would have thought that we'd probably look to supply out of the broader Powder River basin market.

Matthew Fields -- Bank of America -- Analyst

Okay. And then on the flip side, your fellow Illinois producers like Alliance and Foresight are taking down their export guidance and bringing some tonnes home. Are you seeing difficulties contracting with sort of competing additional domestic volumes that potentially weren't there last year?

Amy Schwetz -- Executive Vice President and Chief Financial Officer

So as we look at our Midwestern operations, we are fully committed for 2019, and that tends to be our strategy, particularly with the Midwest as we go into each year. But, also with our Powder River Basin operations that contracted position is really important going into any given year. So we're not heavily dependent. In fact, we export little to no coal out of the Illinois Basin that would factor into our sales plans. As we look at our export position into markets out of Australia, we continue to be extremely pleased with where we sit from a contracted position, not only for the remainder of 2019 but really going into 2020 with over 2 million tonnes price above that Newcastle forward curve currently going into 2020. And I also note that as we.. Look at export prices that have dipped a bit. We are benefiting from that corresponding dip in effects that we've seen over this period of time as well which highlights sort of the strength of that seaborne thermal position out of Australia.

Operator

We'll take our next question from Matt matorial with Jeffrey, pleas go ahead

Matt matorial -- Jeffrey

Good morning. Just in the context of accelerating returns to shareholders in the back half of the year. Could you comment on your ability to do so under the indentures of the existing or the outstanding secured bonds?

Amy Schwetz -- Executive Vice President and Chief Financial Officer

Sure. So with respect to our capacity, we believe that we have capacity to execute our current buyback program under the indenture and so that that has factored into our plans for the back half of the year.

Matt matorial -- Jeffrey

Is there any point where that starts to get tight? I mean, how do we think about the outstanding our peak capacity under the bonds? Is that something you can quantify for us?

Amy Schwetz -- Executive Vice President and Chief Financial Officer

So it's not something that we quantify but it is a calculation that's based on net income, that net income is is calculated on a quarterly basis. So it builds throughout the year as we generate net income with some adjustments that have been made for that. And as you probably recall, we put amendment in place back in 2018 to address that our capacity to give us a one time basket as well with an indication of that. So we don't see the bond indentures at this point as a constraint to our current program.

Operator

Our next question will comes from , Nick [Indecipherable] with Stifel please go ahead,

Nick

piggybacking on the indenture question, given that you need to go to bondholders for the consent for the JV. How do you balance an overall refinancing of the 22s and 25 so you can free up cash flows that have to go back to bondholders for additional or P baskets that have to go to bondholders for JV approvals versus having to go and take in some of these? Thanks

Amy Schwetz -- Executive Vice President and Chief Financial Officer

Sure. So we're going through we're working through our strategy right now with respect to refinancing. And I think you've pointed out a couple of options that are available to us as we do. Over time we would aspire to get to a more regular way bond indenture that would allow us at appropriate flexibility with respect to shareholder returns and we're also not insensitive to the pricing of these types of transactions. So the team is looking at the way to best execute that and to achieve what is really to. Separate objectives over time. The most urgent of one being to ensure that we've got the flexibility to complete the joint venture arrangement and secondarily making sure that we have the flexibility over time to execute our shareholder return program.

Nick

Thank you.

Operator

Our next question will come from Paul Quinlan with Morgan Stanley. Please go ahead.

Paul Quinlan -- Morgan Stanley

Sort of harp on the the IP issue, but correct me if I'm wrong but I think you had a onetime 650 basket and then 175 annually. Can you just clarify if anything's left on the 650? And then if you were in the sort of second year period where the new 175 kicks in?

Amy Schwetz -- Executive Vice President and Chief Financial Officer

So I wouldn't comment specifically what basket we are using. But I think the other piece that is missing from that equation is the fact that we have a builder basket as well that is based on that income that builds quarterly over time that also is included in that venture.

Paul Quinlan -- Morgan Stanley

Okay. Got it. Thanks.

Operator

We'll take our next question from Karl Blunden with Goldman Sachs. Go ahead.

Karl Blunden -- Goldman Sachs

I guess it's another for Amy. Just on the on the capital structure, interested in what you have there with regard to timing of a refinance, I understand you're monitoring the markets. Markets have performed pretty well. Do you need to see more progress toward getting the JV finalized for the market to give you credit for those savings and therefore a better interest rate? Or how do you how do you weigh those factors the strong credit markets today versus getting full credit for the operating initiatives that you're you're planning?

Amy Schwetz -- Executive Vice President and Chief Financial Officer

So I think that certainly we want to hit the market right. And we want to get the market to understand that this is a credit enhancing transaction that we're looking at, that we're looking at over time. We're working through that that strategy right now in terms of the right time to hit the market. But there again, maybe other objectives that we hope to that we would achieve as part of a broader transaction. So certainly weighing the benefits of trying to get a one off approval for a transaction like this to a larger scale transaction or a larger scale set of transactions that would achieve both flexibility around the joint venture but also move us to a more regular way of bond indenture over time. So I think that under any scenario that the second that regular way indenture is something that for a company with the strength of credit, that. That Peabody has should be doable, the timing of that though it's something that we've yet to determine.

Operator

We'll take our next question from Lucas Pipes with B. Riley FBR. Please go ahead.

Lucas Pipes -- B. Riley FBR

Thank you very much for taking my follow up question. A quick one in regards to the seaborne hedges for 2020, could you give us a breakdown of what is hedged against the API 5 and what is hedged against Newcastle?

Amy Schwetz -- Executive Vice President and Chief Financial Officer

So what I would say, Lucas is that blended cost of $77 per ton is a blend of Newcastle and API5 and that overall range of quality that we see in 2019 is consistent with the range of quality that we would expect to see in in 2020. So that blended rate would be consistent with our current portfolio.

Lucas Pipes -- B. Riley FBR

So essentially I should think about the hedge is being proportional to your to the quality of your sales book in 2020?

Amy Schwetz -- Executive Vice President and Chief Financial Officer

That's right.

Lucas Pipes -- B. Riley FBR

Very helpful. Thank you.

Operator

We take our next question from Matthew Fields with Bank of America. Please go ahead.

Matthew Fields -- Bank of America -- Analyst

Thanks for the follow up. I don't mean to sound rude here but you guys have spent about a $1 billion on share repurchases over the last year and the stock has gone from 40 to 20. So I know you're fighting a very difficult environment on multiple fronts but what are the other strategies for capital deployment to boost shareholder returns in a way that sort of works for all stakeholders?

Amy Schwetz -- Executive Vice President and Chief Financial Officer

So Matt I would say we've actually engaged in what is a very comprehensive approach to capital allocation throughout the year and frankly throughout the period since April of 2017, we've paid down over a half a billion dollars of debt. We've used cash and put that toward liability management in the form of pension and retiree healthcare. We've performed reclamation over that period of time.

Glenn Kellow -- President and Chief Executive Officer

I think the acquisition of Shoal Creek.

Amy Schwetz -- Executive Vice President and Chief Financial Officer

We've engaged in investing and reinvesting in our business. The acquisition of Shoal Creek and the transaction with Arch that we've announced, which is perhaps the most synergistic transaction and that could be pondered in the US coal space. On top of that, we've initiated a sustainable dividend which we've increased three times. We have announced a supplemental dividend of $200 million in the first quarter of the year. I can't control the share price, but I'm pretty. part of the actions that we've taken today to to provide value to shareholders. So you can you can question our methods. I'm not going to I think that we've been flexible, we've been comprehensive and the results have not yielded what we wanted them to but we don't think it's because it's the wrong path.

Operator

And ladies and gentlemen this concludes today's question and answer session. I'd like to turn the call back over to Mr. Glenn Kellow for additional or closing remarks.

Glenn Kellow -- President and Chief Executive Officer

Well, thank you for your questions and participating in today's call. At Peabody, our mission is predicated on creating superior value for our shareholders, that's our commitment and that's our focus every single day. And we look forward to keeping you apprised of our progress. Operator, that concludes today's call.

Operator

[Operator Closing Remarks].

Duration: 55 minutes

Call participants:

Unidentified Speaker

Amy Schwetz -- Executive Vice President and Chief Financial Officer

Glenn Kellow -- President and Chief Executive Officer

Nick

Daniel Scott

Michael Dudas -- Vertical Research

Chris Terry -- Deutsche Bank

Mark Levin -- Seaport Global

Lucas Pipes -- B. Riley FBR

Matthew Fields -- Bank of America -- Analyst

Matt matorial -- Jeffrey

Paul Quinlan -- Morgan Stanley

Karl Blunden -- Goldman Sachs

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