Whitehaven Coal Limited (WHC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Whitehaven Coal Half Year Financial Results FY '21 Webcast. [Operator Instructions] I would now like to hand the conference over to Mr. Paul Flynn, Managing Director and Chief Executive Officer. Please go ahead.

Good morning, everybody, and thanks, everyone, for taking the time to dial in or participate through the webcast for Whitehaven Coal's half year results presentation for financial year 2021. Thanks very much, operator, for those instructions, just in case we do have some technical nuances to deal with. Not that we're foreshadowing any, but as we know, when you're using a number of different platforms, there's always interesting intersections of these various technologies. With me this morning, I've got Kevin, as you know, Kevin Ball, our CFO, who will assist with the presentation of the financial results. We've got Ian Humphris, our EGM Operations here, really willing and able to answer any questions from the ops side of things. And of course, of course, Sarah McNally is here, who heads our Investor Relations. I'll just move over to the slides. So that's me manipulating this, so there's always a risk of doing that. It's not particularly responsive, but there we go. I'll bring us over to disclosure statement. There's always a compliance obligation to do that. It does deal predominantly with our reserves and resources, but always important to highlight that. As usual, we'll go through the highlights, and we'll deal with our markets, and we'll definitely have a discussion about guidance as we get to the back of the presentation. For those who are less au fait with the company, I'll just give you a quick overview of Whitehaven and its customer base. We do, as you know, sell into the high-premium markets of Asia. And our business is divided currently about 80-20 metallurgic -- thermal to met, 20 being the met side of things. All our thermal coal, very high quality, low in impurities, as typified by the Gunnedah Basin coals, as you know, sold into nothing less than a HELE power station. And all our customers, jurisdictions and countries are holders of NDCs that underpin the Paris accord. So we do certainly feel very much aligned to the emissions reductions efforts of our customers and those nations. Of course, the steelmaking side of our business is about 20% at the moment. And there's also a boutique element of our premium products that we sell into the nickel smelting and other industrial activities, where we do actually receive met coal-like pricing for those uses. As I said, I'm sure we're going to have some discussion around markets more generally. There's so much going on in this space, be that infrastructure anomalies as far as NCIG, and we'll talk about that. Weather. Whether it's localized issues or whether La Niña sort of patterns more generally, there's trade nuances going on. And obviously, COVID is an important factor, which is driving lots of change, and in a post-COVID period. I'm sure the Q&A session will turn to that. What does that look like? We're certainly seeing positive outcomes across the entire energy complex, which is good. And certainly, coal, certainly experiencing a tight market and the beneficiary of a rising tide from an economic perspective across all of our customer jurisdictions. These charts will be no surprise to you. I'm over on Page 7, which is the forecast of seaborne thermal coal pricing. The market obviously is taking a dip, and you can see the numbers here from CRU, I think a very good source of data. You can see from 2020 mapped out to 2025, just on the left-hand side here, and you look at the positives and negatives. But overall, during that period, we're certainly seeing growth. And as I mentioned to you just now, this year -- and our half year results, and we'll get on to the actual granularity of the half year itself. But of course, I think everybody accepts that FY '21 is going to be a tale of 2 very distinct and vastly different halves. This half that we're presenting today, clearly reflective of, you can see that trough in terms of pricing just on the right-hand side of the chart in front of you. And -- but the second half clearly is very different from that. And this forecast bears that out. If we look at what was happening back in August, September and the run rate from a coal price perspective and cash generation perspective from our business is concerned, that is just poles apart from what we've been experiencing in succeeding months. And that has continued on in solid form through January and February. And the outlook for the closure of this financial year, a world away from what we experienced in the first 6 months of this year. So it definitely will be 2 different halves. Slightly bipolar, I think this financial year, if you break it into the one half to the other. Over on to Page 8, and this really is just about the benefits of our coal. I mean, we've got high CV coal with very low impurities, be that ash, sulfur, phosphorus, lends itself almost exclusively to the use from a thermal side in HELE power stations, which is fantastic. It does underpin our customers' efforts to reduce their own emissions profiles and also air quality concerns that they may have in their jurisdictions. And it certainly drives demand for the premium products that we sell. Now the highlights of our results, I'll just go through quickly. Now some of this is old news to you, obviously, because you've been through the quarterly process. Our safety at 5.41 is off our best. We're certainly looking to reinvigorate our efforts to try and continue that improvement momentum. Solid result, no doubt, but still, we know we can do better, and we should continue on with that push. Production, as we announced in the quarter, you know these numbers, 9.6 million tonnes in terms of managed ROM. The bits that are new, cost, of course, at $70, we've had a pretty solid effort to get our costs down. And I'm sure we'll go into that in the Q&A process. But AUD 70 per tonne for the first 6 months is a pretty solid outcome. Earnings at $37 million is less flattering. There's no doubt about that, with an average price of AUD 80 during the period, vastly different from the previous corresponding period of $108. So EBITDA, as you would all expect, is a lot lower than what we would like. But again, the second half of the year is going to see a transformation of that, as we're already seeing with the months that have passed. Liquidity, broadly stable at $411 million, in decent form there. And that's a combination of the cash we have on hand and the undrawn capacity of our facility. Over to safety, as I say, 5.41, not our best. I think our best is about 4.3. So we do need to recapture a little bit of momentum, but there are swings and roundabouts, as you can see, historically over time with the company. The downward trajectory, as we've grown our company, certainly is the right direction, and we want to continue to move that forward. So that is all with a positive result, no doubt, compared to our industry peers and the average of our industry and particularly with COVID as a backdrop as well. But again, effort needs to go into this to make sure we continue to drive our workforce into an ever-safer environment. These numbers, no surprise to you, the amalgam of the 2 quarters we've already published. You'll have received these numbers. In terms of Whitehaven's managed ROM coal production, 9.6 million. Our sales during the same period in aggregate was 10.5 million. Our own sales were about 9.5 million, if you look at that stripping out the purchased coal for that period. So I won't dwell on this too much given that you've seen these some time ago. Our products are well received in the marketplace. Demand at the moment, I'm sure we'll get to this in the Q&A process, is very solid. So we've not experienced during COVID at all, but for lockdowns in India, which were very temporary. Underlying demand has been very strong, and our customer footprint here has been vibrant during this period. And in this new year, the market is very tight, and I'm sure that will be part of the Q&A when we get to that. But no problem at all in selling our coal. We'll talk about met, I'm sure, having seen the market improve considerably in the very short period of time. Not necessarily reflective yet in terms of the semi-soft side of our business, but I'm sure that will flow through in the months to come. Maules Creek, as you know, again, across the production of stats has had a good period. So 24% up at 5.2 million tonnes period-on-period. So a good result there. Maules is responding nicely to a better mine plan and better executed. And our guidance remains the same at 11.8 million and the range to 12.4 million. But good to see positive momentum there, and that continues on into this half of the year. And we feel we're in a much better position with Maules Creek from all the things that would have been concerning a year ago in terms of weather, lack of water, manning, all those things behind us now. And the mine is performing in a very positive manner. Narrabri, as we spoke about in the last quarter, has had a difficult time in this last few months. It was navigating its way through some challenged geotechnical areas where faulted ground has delivered us lower productivity and increased the out-of-seam dilution that we've experienced. So product quality has suffered during that period. And we are focused on just delivering the balance of this existing panel before we have a change-out scheduled for Q4 in this year. Our guidance range sits at 6 -- at 5.4 million to 6 million, as we previously revised. Our Gunnedah ops, doing quite well. We've highlighted here, obviously, the now discontinued part of those operations in terms of Rocglen and Sunnyside, so you can see the continuing piece of it. The period-on-period, 35% up. And like Maules Creek, the open cuts continue to operate well. Our guidance at 3.8 million to 4.1 million, the same as previous. In terms of how the business looks to the future, there's a combination, as you all know, between brownfields and greenfields. Maules Creek has the capacity to grow further. Narrabri Stage 3 is similarly positioned to do that life extension out to 2045. We have lodged the EIS. It's been on public exhibition. We've had little interest in that from the market other than positive sentiment from that public exhibition period, and we look forward to working with the government through the balance of the approvals process for that. It's likely that we'll end up referring that to the IPC. We'll do that willingly. I think that's the right answer rather than trying to go through the alternate process, which does expose you to legal challenge. The IPC generally is a forum which will avoid merits appeal opportunities being utilized by people who are not particularly excited by coal mining. So I think that's the better route for it. On Vickery, as you know, we have received our state-based approvals, and that's very positive. We are working with the government to deal with the litigation that the Federal Minister has received dealing with EPBC approval, and that will unfold in the coming months. Winchester South published its reserves and resources, as you've noted, $1 billion in resource -- 1 billion tonnes in resources and 350 million tonnes in reserves. That was an important milestone for us to cross with that inaugural statement of the reserves. So I'll hand over the mouse and hand you over to Kevin.

Thanks, Paul. So I think Paul has shown you some of these numbers to begin with. You can see the EBITDA at $37.2 million. We'll come and give you a waterfall chart in a moment that will take you through that. But clearly, COVID-19's half has affected price, and we'll get to that. You'd see the biggest impact there is the price, costs down $6. We did go reasonably well there on cash generation from operations at $55 million as opposed to the EBITDA. And our net debt finished the period at $823 million, up a touch, but really, that's a function of coal sales that slipped from December to January and the final production issues there in the December quarter with Narrabri. I'll go into the net debt a little bit further on. So let me just understand how to operate this now. Where am I going, Sarah? There we go. So in here, you've got profit and loss. Sorry about the technical difficulties there. This is just a more detailed breakdown of the P&L. And if you really want a little bit more detail, I'd direct your attention to the actual financial statements themselves, which spell these out and break this out a little bit further. But you can see that the revenue line there is down about $180 million. And clearly, that is price because our volume is up. Our operating expenses are up a touch, which is really a function of increased production. Coal purchases are down. We bought less coal this year. It was about 1.4 million tonnes last year as opposed to 1 million this year. And the price that we were paying for it, not surprisingly, because our revenue line is down, the price for that is down. You'll also see that rail, port, marketing and royalties are down about $18 million, $19 million. And that, predominantly, we've shipped a bit more coal, but it's largely to fixed costs. So we've used our -- utilized our rail and port a lot better than the previous year or previous half year. And the royalties number, when you look at the detailed financials, you'll see that's down a touch. On the admin side, up, but I think you're going to find that, that's FX, as you saw the dollar rise to $0.72, I think, on average, up from $0.68 in the previous period. EBITDA margin on own coal sales at $5, clearly compressed because of coal price, but improved because of decreased costs and the earnings per share at $0.095. What you do see -- we'll go through the depreciation and the interest expense in a little bit more detail for people because I think from the reports I've seen today, there's a little bit of a gap there. So we'll just try and improve our explanation on that. Here's the bridge that I referred to earlier. And quite clearly, what you're seeing here is realized thermal prices half-on-half, $70 plays $55; and metallurgic coal, down about $20, $94 plays $75; and the Aussie dollar's up from $0.68 to $0.72. But as Paul talked about, operationally, what we see is increased sales volumes. We carried a little more stock into the beginning of the year, but we've had a good run of production through this period has been relatively consistent, and we've done better on costs. So the $197 million impact of price change over that period has been mitigated by close to $66 million of improved operational performance over that period. The other element there is really got to do with a decrease in the coal trading result from one period to the next. And clearly, that is a function of really some coal pricing that was out of whack with normal trends. But our half year EBITDA at $37 million was a positive number, and that is a good start. I did want to draw your attention. Between Ian -- Ian and I are running this program, or the sponsors on this program called STRIVE, which really is a 2-year program. If you look across it, we've got 46 projects. We're targeting about $50 million a year. We've started to implement initiatives in there that will deliver about $20 million on an annualized basis. Now clearly, because that started in the middle of this year or at the beginning of this year, we won't get the full impact of that over this year. That's why you see $0.70 as a year 1 initiative, then $1.50 in year 2, then in year 3 when the full things are out there, it's $2 a tonne. But it's 46 different projects across underground and open cut, mainly starting at Maules. And the buy-in from site, I'd say, is pretty good. All those initiatives were developed by people at site with the help of an external consulting firm in Deloitte. And we're excited by the opportunity that, that's going to bring us over this next year. I did want to talk to you about the drivers of D&A and net interest expense. Clearly, we're up $22 million in depreciation over this period. We're also up a little bit in sales. But on a unit basis, we're up from about $17.20 to about $17.80. And across our mines, there are different depreciation rates. So you'd understand that Maules Creek was acquired in 2012, and that came with an acquisition cost. The actual depreciation cost out of Maules is around that $22 a tonne, whereas the other mines are about $13 or $14. So as we bring more Maules Creek tonnes into the mix in years to come, that will play a component here. The other thing that you see coming in here is we've -- we were -- we've got major fleet rentals coming through, and that's costing us a little bit of money there in the depreciation. On the net interest expense, what you see is $20 million plays $30 million. The average balance of the drawn senior debt was about $300 million in the first half of fiscal year '20, and the average balance in fiscal year '21 is about $620 million. So clearly, with the reduction in interest rates and the reduction in base rates from the government and increased volume of debt outstanding, that's driven an increase in there. You'd also find that there's a little bit of increased amortization fees. If you go to Note 4 of the financial statements, we refinanced the debt in 2020 in February, and with that comes the upfront fees that we're amortizing over the life of the facility. On the financing side, no real news in this. We were $688 million drawn on the facility, leaving us $312 million undrawn, together with $100 million in cash, gives us $400 million in liquidity. But across the business, what we seek to construct is a variety of sources of capital. ECA facility, which was the expansion of Tarrawonga that took place towards the back end of fiscal year '20, that's about $60 million. And we've got leased equipment, which is a combination of IFRS 16 leases for about $112 million and other leases there for about $195 million. That gets you to $307 million, the finance leases that are in there. And again, what you'll see from our banking community is about $450 million worth of guarantees which underpin operations used in port and logistics and in rehabilitation and biodiversities. So we do have quite a large relationship with a number of finance providers and guarantee providers, but we also have a diversified source of capital. In more detail for that slide, this is the details of the breakup of the drawn debt. And I don't think there's anything more in there. We've talked about that before. You see that the gearing ratio at 21% is up 20%, and the liquidity is down because, as I said, because of the slippage of coal from the December period out into the first of the second half. We have drafted a compliance certificate to go to the banks. We'll give that to the banks. And that will say that the covenant for ICR was above the unadjusted ratio. So even though we went to the banks last year and sought relief, we weren't ultimately forced to rely upon that relief, which is a good sign that this is a strong business underneath it. And the support of the banks tells us that we have the strong support of the banks in that group. Investing in capital expenditure, I think there's probably no news in this. The total of this is about $55 million. It's -- we've revised the guidance, and Paul will get to that CapEx guidance. So we've been very hard in this first half or been hard in this first half on spending money on projects, and certainly, Ian can attest to that. But we've been seeking to preserve capital in this first half because it was always going to be a tough half. Right. I'll hand back to Paul.

Thanks, Kevin. And I'll leave the mouse with you rather than trying to transfer it over and have it wobble around.

That will be dangerous.

Now just in terms of our guidance, broadly, just the confirmation of our previous guidance for you. These numbers you'll be well familiar with and unchanged from that, which has previously been advised to the market, as I say, our cost guidance, which is probably the new actual number that you didn't have from the previous quarterly announcements. Doing well, 8% down period-on-period. And so we're confident that with the full year, we'll bring in a cost result consistent with the range that we've got here of $69 to $72. I'll add some commentary into that just by saying, I think absent a little bit of disruption with NCIG and NCI -- and Narrabri with it traversing a couple of faulted areas in the last quarter, we probably would have carried a bit more momentum into the second half. But we're certainly happy with the results as they come out to date. And we continue to look at a number of different ways, as Kevin has outlined in project STRIVE, to bring our cost base down even further. So just onto the capital slide, which Kevin has alluded to already. We do have -- we have said previously that when the half year -- we turn into the second half of the year, we'll give some revised guidance on the capital. We're not spending money at the rate on capital that we had originally budgeted to at the beginning of the year for all the obvious reasons that we've discussed at various points. And so broadly, over the course of the year, we've certainly not spent at the half year point, and we don't plan to be spending the full amount in the second half. And generally, about $20 million to $25 million less than what we planned across the aggregate of our capital spend for the business. So just onto our focus for the balance of the year. Obviously, safety and environmental performance continues to be up there on highlights, as you would imagine. Safety, we do need to recapture that downward trajectory that we've been priding ourselves on in recent times. Environmental performance has been good, but that's never done that one either. You need to -- the scrutiny on our industry is ever increasing, and we need to rise to that challenge and ensure that, that focus is as prominent as our safety. The operational side of thing's moving well, particularly in the open cuts. Narrabri has had a difficult quarter, but in this new quarter, it is certainly doing better. And our view is just to drive consistency of that outcome across the balance of the year and then in subsequent years as well. STRIVE is a good opportunity for us, as Kevin outlined. There's lots of interesting opportunities there for us. And so it will take some time to liberate the savings there that we think that are possible. And as he said, that's a couple year program. But again, this is a point of focus for us. We think there's low-hanging fruit, which we can draw out in the second half, and let's see what FY '22 brings from this initiative as well. No surprises in the statement there about retiring debt. The balance sheet has been stable. We are entering a period of better pricing. No doubt about that cash generation currently. And for the balance of the year, we expect to be strong. And our first priority will be to retire our debt. The Board obviously has looked at the dividend position and made the decision that we won't be paying an interim dividend in this year. I'm sure that's no surprise to anyone, given that our policy of 20% to 50% of NPAT. Having booked a loss for first half of the year, we won't be paying that interim dividend. But the Board is focused on ensuring that when circumstances permit, that we'll return to dividend-paying status again as that's possible. So with that, we'll close the presentation down, and we'll throw ourselves into the technological conundrum of trying to balance the dial-in and the webcast at the same time. I think just in terms of the mechanics of this, our operator will deal with the people who dialed in and the questions that are posed there, and you know the normal process to put your questions into the queue. And to the extent that there are questions coming through the webcast, I'll go through and read those questions just for the benefit of everybody on the phone. And then we'll attempt to answer those. We'll just switch from one to the other as the questions flow. So thanks for your patience in advance of using those 2 converging technologies, and let's get into the Q&A.

[Operator Instructions] The first phone question comes from Rahul Anand from Morgan Stanley.

Can I please start with the cost, like you said in your presentation? Perhaps the strong performance for the first half, any impacts here, Kevin, from inventory movements? And then for you, Paul, given the second half is going to have better volumes, is this fair to say that you could perform to the low end or even better than guidance as it stands?

You can start with that, Kevin.

I can start with that. Rahul, the -- I think the real issue in the -- not the real issue, the real point about the first half was a pretty strong sales program. I mean, that saw us use our port and rail much better. But we were -- when NCIG lost its shiploader in November, clearly, we've lost something like 700,000 tonnes at the managed level, and that does have an impact on the cost of operations because we're expensing overheads in a period cost, and if we have more tonnes to go through, then we have less cost. Now our estimate on that is that's probably -- we would have printed a number with the 6 in front of it rather than a 7 in front of it, but we're at the margin between, say, early 70s and probably mid- to late 60s, I think, would have been the outcome on that. You probably also noticed, Rahul, we've had COVID-19 running through this year, but we haven't pulled anything out as being significant or -- I mean, it's probably costing us somewhere between $3 million and $5 million in that half. But I wouldn't want to try and pull that out and try and improve numbers off the back of that. Just leave it in the costs and go from there. Second question from you was in the second half. Look, clearly, our second half, we have better production coming out of open cuts, I think, than in the first half. We're expecting, on the bottom of that guidance with Narrabri, to finish the block and get those tonnes out. At this point, we're holding the guidance at $69 to $72. And we're focused on doing better than what we've got in there in the guidance. So let's work at delivering it rather than putting it there to begin with.

I think there are a number of factors there in the second half which are yet to play out. As Kevin said, there's slippage, and we've talked to that slippage from December into January. The team is doing a very good job in recovering that slippage, and this is slippage just from NCIG I'm referring to. So obviously, we had lots of stock on the ground when that event occurred. And so with only one loader, then that stock is going to be able to manage its way on to a ship a little slower than what we would expect. So the slippage into the first month of this second half has been reduced in the second -- in February. And we'll be -- and we think we'll be actually back to tours, that's why we've held our sales guidance where it is by the end of March. And we are able to secure the surplus capacity at PWCS as and when we require it. We don't see -- we're not predicting any issues there in terms of being able to procure the additional capacity that we need, and there's plenty of people offering us capacity, in fact, interestingly at both ports, as the rectification work and assessments proceed for NCIG. So I think at this point, I think the $70 that we booked is a very solid outcome given the backdrop. And our challenge is to not just hold that, but see what we can do in the second half. But the range is -- we've left the range the way it is. It gives us a little bit of room, but we're certainly expecting to continue the momentum into the second half with a strong, strong production outcome. As you know, we are weighted to the second half, and -- but similarly, a very strong sales position through the balance of this financial year as well.

Okay. So just as a quick follow-up then perhaps for Kevin. Obviously, working capital running at around $80 million due to the stocks, et cetera, that you're going to draw down. What's the normalized level? And where do you think you can get to by the end of the fiscal?

Rahul, the question there is, in that working capital, there's a range of things which includes the debtors. We sell coal at a managed level and then distribute that back into joint venture partners, and so we've got payables and receivables. My expectation is we'll be a lot closer on working capital management moving forward than we have been in the past and trying to keep and hold those numbers that we've got there. Because in the past, the variability in free cash flow generation has largely been around working capital movements, which traditionally, we haven't terribly focused on because it's been a week-to-week thing would be the way I'd say it. But importantly, it's caused people some questions around the difference between EBITDA and free cash flow. So with 5% rule, assume it stays roughly where it is, aside from running down coal stocks. And we're working on that in the second half to generate strong cash flows.

Right. So the inventory drawdown will come through, but then the other items stay constant?

You should plan on that. Yes.

Okay. Final question for me then. I noticed the renewal of the term met coal contracts, so obviously flagging that the met coal markets are coming back, which is good. Any sort of takeaways through those contracts that you've done for FY '22, perhaps as to how we should think about at the group level met coal sales, whether they arise from the typical -- or the last 2 years of around 20% and perhaps go to around 30%?

Yes. Rahul, I don't think we should be predicting a material change in that regard. We'd rather see $150-odd, $160 manifest itself in better semi-soft pricing than the late 90s, $100 that we're seeing at the moment. The renewal of the customers -- the renewal or the signing of the sales that we've had both in Korea and India, in particular, have been very positive. And we've been desirous of pricing on the quarterly basis or other arrangements that are attractive to us rather than spot sales. So we haven't been chasing this. We will be a little bit up in FY '22 over '21 met coal-wise, simply because we took a break from Korea in this year. So the first half of this year, we took a break from sales there because it was largely spot-based sales that they were looking for rather than on a quarterly basis. And so we said, well, whilst we don't have an abundance of semi-soft laying around, we're not really willing to chase those spot sales. So with the mine producing a good level of volume at the moment, we feel more comfortable to enter that market, particularly if it's going to be on a quarterly basis. So that's -- you will see '22 lift up a little bit over '21.

The next phone question comes from Sam Webb from Crédit Suisse.

First one, just a few moving parts post period end. So I wonder if you could give us where your net debt stands of today, if possible. And then second question is just with regards to the dividend. I note your comments, obviously, on retiring debts but keeping the dividend policy unchanged. Do you need to see the balance sheet in a certain position before your reconsidering dividends? Or is it as simple as your retained earnings and you return to that payout policy? So just understanding how the Board will think about that.

Yes. I'll deal with the dividend first, and I'll hand to you, Kevin. The dividends, look, the Board is really only acknowledging that we've not made a profit in the first half. So there's -- we're just operating within compliance with that policy. Of course, when the flexibility was requested from our banking syndicate, that came with some conditions for that relief. We didn't end up using the relief, as you now know, and Kevin's spoken to, and we can expand on that. But still -- you still actually have some conditions on you, but we've left the door open when we negotiated that with our banking syndicate. To the extent that things did rebound in a positive way, we would return back and have that conversation. We do want to put some more headroom in the balance sheet as we've stated repeatedly. So that is definitely the first point of -- point to focus on. But secondly, I think the question -- let's assume we have a very strong second half, which I think we're all predicting, and you can see you've got a reasonable line of sight of. That will be an open conversation when we get to the year-end results.

And Sam, I think the question around net debt, the second half, I think, is going to be a lot stronger. You can see that in the current gC NEWC price, which is around $87 for February. Aussie dollar is strengthening a touch, so $0.77, $0.78, or probably U.S. dollar is weakening I think it's a better way of saying it. That's probably not going to go away. But certainly over calendar 2021, our expectations are that we'll focus on retiring debt, and that's really dollar-for-dollar on EV. So net debt today is roughly where it was at 31 December. The slippage from January or from December into January has slipped a little bit into February. We're expecting that to be fixed in the -- as Paul said, in the March quarter. And clearly, we're expecting to see a lower net debt number by the time we come to 30 June. That is our focus at this point. That's why we've revised capital guidance down, and that's why we're focused on moving tonnes that are coming out in the second half.

I think the other thing, just to add to that, relatedly, but it's probably deals with the previous question based on cost. We are not expecting -- and goes to this point of cash conversion in the second half. We're not expecting increased cost of working to be an issue from the NCIG issue in our second half. I mean, we have -- NCIG has insurance coverage to deal with that. And we have coverage as well, obviously, at a company level, which we don't think we need to rely on because NCIG is appropriately positioned there. But we are not factoring in increased cost of working in our second half in terms of what assumptions people are making for cash conversion in the second half of the year.

And Sam, if I can answer the question you haven't asked, which is really around NCIG, and when it comes back, because no doubt someone is going to ask that question. There was some -- that went down in November. By the end of December or by the 23rd of December, there was a meeting of directors there. And the management team have been able to gain access to the shiploader and determine what damage had been done. Early or long lead time items have been ordered for that. And expectation is that the coal loader will come back on stream in the fourth quarter of 2021, so in the December quarter of 2021. They're shooting to do better than that, but that's probably a date you should keep in mind at the current moment. And as things evolve, there was a heavy-lift vessel turned up in Newcastle Harbor, which prompted a few questions from Newcastle media. That vessel is there to move the shiploader down to the maintenance bay, and then once that's made -- or moved to the maintenance bay and stabilized, then people will be able to get into the shiploader and confirm the initial findings and timing. So we'll get better on that. I'd probably say, by the time we get the March quarter out, there will be a bit more information coming out of NCIG at that point in time. But as I said, I think the -- for everyone's modeling, you would be thinking -- I'd think you'd be planning on that shiploader being back in production in the fourth quarter of calendar year 2021.

The next phone question comes from Lyndon Fagan from JPMorgan.

Look, my question's on Narrabri Stage 3. I think that last guidance was $400 million CapEx starting in FY '22. I'm just wondering, is that still the case? And is there any scope to delay that project at all, given the state of the balance sheet?

Yes. Thanks, Lyndon. No change to our previous estimates on this. That number is staged over time. So it's not $400 million goes out the door in one lick, as you would imagine. And that number, there's -- there are works that are going on there now which will have benefits for Stage 3 as well. So -- but there's been no revision to the previous guidance we've given you on Stage 3.

And sorry, how many years is that $400 million spread over, Paul, please?

I don't have that sitting right in front of me, Lyndon. I'll have to come back to you on that, but it's a couple of years, at least. It's more like 3, I think.

Okay. Great. And I'm just wondering if you can give a bit more color on how Narrabri has been going this quarter. So we obviously got some surprised geological conditions last quarter, which were unexpected for the company. I'm just wondering if you can give us a bit of an update on how things have been going so far, given that we're almost 2 months into this year.

Yes. Okay. Yes, I'll just make some opening remarks, and Ian's here, he can respond in more detail. As we talked about in the quarter, we're obviously encountered an unexpected mid-phase fault, which was very, very unhelpful, particularly when you're -- none of our previous work and all the various drilling and so on that we do in there. And you know we do pepper these blocks pretty hard for degassing purposes. It wasn't identified in there. But I mean, that's the first one of all these blocks we've ever encountered like that unexpectedly, and we just had to deal with it. It's much better obviously when you know there's a fault and you plan for it and you set the flight plans and you just deal with it. This was obviously something a little bit more disruptive than that. But the question is, can you assure yourself that the balance of the panel doesn't have anything further like that. And your question's more about what's happened since that time. We've been operating well. That's not to say that the longwall hasn't got a few scars for having navigated through quite a lot of stone in the last 6 months, in particular. So there's a few maintenance issues that arise as a result of wear and tear. But broadly, we're proceeding well because we've got a few tonnes to catch up in this balance of this financial year, which we're -- our guidance is reflective of that task. Ian?

Yes. I think -- look, I think Paul has given a pretty good summary there, and we ran everyone through where we got to at the end of sort of H1. We knew in -- recently that we had in our mapping sort of one significant geological structure. And we've progressed through that, and we are currently grading back down into the seam to progress. So on that basis, we still -- the plan has us getting through to finish this block in this financial year and be into our longwall move. And as Paul touched on, I mean, there was some legacy issues we've experienced on that equipment damage as a consequence of that mining of the faults that we had in H1. But the various things that we've either had to do or need to do have been factored into the plan as we've got scheduled.

Yes. Lyndon, I think the other thing there is -- the follow-up question was generally being how do you feel about 10. And of course, we're taking extra measures to ensure that we don't have any other little surprises in panel 10 before we move on into the southern domain. The call to step around the fault in 10, those things are not easy things to make. But when you've got 2 faults in conversion 1, so down throw 1 up thrust, it was a simpler answer just to move around it. It does have the -- obviously, the benefit of not wearing the machinery out as hard as we have been doing by driving through continuous fault across 6, 7 and 8, 9, and product quality benefits, obviously, as well. We've had a few questions in the past quarters just about those low CV sales that we've been having a higher proportion than normal of. That's largely been dilution caused by driving through that faulted ground. So the step around will obviously limit our exposure to that outer seam dilution as well.

That's good color. And just to circle back on the southern domain, is there any scope to defer that by a small period of time?

Well, when I refer to southern domain, I just mean straight into panel 203, and we're very keen to get back into that, as you know, Lyndon, because that -- the southern panel is obviously in shallow ground, good coal quality, low gas, high production rates and low costs. So we're...

Sorry, I'm talking Stage 3, the big CapEx.

Yes. Well, Stage 3, that Stage 3 CapEx will have -- will occur over several years. And we'll have to refer you back to the presentation that we -- it's on our website, but I'll go back and find out when we send it out to you. But the CapEx will be spread over 3 years. We've obviously got panels 3, 4 and 5, 203, before we need to be into what's currently an exploration license. And we'll be Stage 3 as we submit it to the government. So you've got a multiyear period over which that capital will be expended. And we'll clearly be in terrain that we know and love as being shallow and highly productive and generally much cheaper than our current cost rate today.

And Lyndon, I mean there are obviously some critical path activities that have to occur for Stage 3. And I'll take, for example, ventilation shafts. So there's a necessary amount of work and prep work done to get that in, get contractors in, sink the shaft, et cetera. So some of those commitments will commence next year. And as Paul said, it will be a staged process depending on critical path activities.

The next question comes from Paul Young from Goldman Sachs.

Maybe a question for Kevin on the balance sheet. Kevin, you've been asked about balance sheet management metrics over the years, considering, I guess, the $1.5 billion, $2 billion potential capital spend going forward. Just curious about, again, how you think about your net debt in general and the strength of the balance sheet before you commit to spend, which I understand are dependent on permits. But you didn't de-gear in the half, but you would -- you'll now be de-gearing at current spot prices. So I know you've given us balance sheet metrics on leverage ratios and gearing. But do you have a net debt number in mind? I know it's an iterative process with coal prices, et cetera, but a net debt target that you'd like to get to before you commit to growth.

Thanks, Paul. I think that's a really good question. I think through the first half, we had no intentions or we had no plans to de-gear through the first half. We wanted to get through the first half because that was going to be a very difficult period with coal prices where they were. And little -- we had expectations that prices would improve. That was certainly all the information we had in front of us. But really, you wanted to see that turn up before you banked it. And I think that was probably the market's expectation as well. On net debt, across the business, we've got that ECA facility. If I deal with them pretty straightforward, that ECA facility is 7 years fully amortizing or 8 years fully amortizing. That will come off at about the rate of $8 million to $10 million a year and are really not in the business of trying to accelerate that. The drawn debt, I think we'll look to retire that drawn debt probably back down to about the $400 million level, Paul, and maybe a little bit lower. I think that's going to be a function -- when we go around and think about this capital, it's largely a function of what do we think the capital spend is going to be, where has the sell-down taken place and what -- does that mean our program will work as looking forward. And I think we'll err on the side of caution because at the moment, you'd look at the markets -- or I think we look at the markets and say, whilst they're good projects, you'd want to be a little bit cautious in how we go about using the balance sheet, given what we've seen come out of the blue in 2020.

And of course, we'll never try and do both of them at the same time.

No. No, not a cat's hope in hell we're doing both at the same time.

I understand. But Kevin, just on that, so you're saying the senior debt facility, which is $688 million drawn, you like to get that down to $400 million, so effectively, is that correct? Which means $300 million drop, which means you want to get your net debt down to the sort of $500 million, $600 million mark before you consider growth?

And in that over that time, you're going to see us retiring some of those leases, right? Because, again, they're fully amortizing over a period of time. So it's probably -- you're going to see some of that -- the leasing come down by probably another $100 million to $150 million, and you're going to see the drawn facility come down by that $288 million that's there. So I think you're probably talking about $300 million to $400 million off the debt before we start kicking the tires on projects.

Yes. Okay. So in that case, we're talking at a $500 million, give or take, sort of number?

In aggregate.