Whitehaven Coal Limited (WHC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Whitehaven Coal's March Quarter 2022 Production Report Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Paul Flynn, Managing Director and CEO of Whitehaven Coal. Please go ahead.

Good morning, everybody. Thanks very much for taking the time, and welcome to our March 2022 quarter production report. As usual, I'll just go through the highlights and then cover off the performance for each of the mines. And I'm sure there'll be plenty of questions to go through the market and so on in the Q&A section. So I'll try to get that -- to get to that in orderly fashion. So the highlights for you. Sorry, I'm just joined by a cohort of regular participants in this call with Ian Humphris, Head of Ops; Kevin Ball, our CFO; and Kylie FitzGerald, Head of IR. So I'll move on into the highlights. Look, we had -- as you know, it's a strong market. So calling out these sorts of numbers will be no surprise to anybody too much. But in Aussie dollar terms, we've had a record average coal price for the quarter of $315 per tonne. The production itself has been pretty solid. So we're very pleased with the return to form in that regard, 5.2 million tonnes, significantly up on the December quarter and 5% down on the previous corresponding. The saleable coal production at 4.5 million tonnes, 50% up on December and similarly balanced as far as the previous corresponding period goes as well. Managed coal -- sales of produced coal at 4.4 million and equity coal sales produced coal of 3.5 million, similarly aligned to the previous corresponding period. Stock is in a reasonable position going into the last quarter of the year. And as everybody has known since the beginning of this year, we are in the midst of a larger second half. So we will be building some stocks as we gravitate towards the end of the financial year as well. Cash generation has been significant. And so after deploying $67 million in our buyback program and $80 million in our dividend, we are net cash to the tune of $161 million as of yesterday. And our guidance remains as it was previously stated, so no change in that regard. Safety performance. I'll call that out that 5.3 is heading in the right direction but not a cause for celebration because we think there's plenty more work for us to do here. And all shareholders need to be turned to the wheel in order to be able to turn that intent into a better result on our TRIFR measure. I'm over the page, and we've got some context just in terms of the opening paragraphs before the tables and numbers that you all have now seen with the release of the numbers this morning. But I think it's worthwhile just calling out a couple of important aspects for the context, the backdrop, if you like, of this quarter and also the next in that regard. And in the March quarter, of course, we've been saying that our thermal coal sales would return to a gC NEW normal type average, and it certainly has done that at 94% of our thermal sales have done that as being the high CV market, which is very positive. And I'll get to the split between that and thermal a little bit later on. As far as the operational rhythm of the business goes, well, the good numbers have certainly come out for this quarter. So we're pleased with that. But that's not without the pain of COVID absenteeism, which has been a feature since about December with this last wave. And then, of course, the variable weather, obviously, the bad impacts that we had in November and December just for flooding in our region. But then on the other side of the divide, the great dividing range that is, there's obviously been consistent disruption of weather, which has caused less impact on our operations as such relative to the severe impacts we had in November, December. But certainly, it's had some impacts down the line from us, and logistics has been interrupted in that regard. Despite that, we've managed to table some decent numbers. The production numbers, I won't go through those in detail. But you can see that they're all tabulated for you there. It's been a very solid result for us. The only real variation from a magnitude perspective has really just been the managed coal sales and equity coal sales numbers being a significant variation. The numbers are low anyway, but 62% period-on-period, that's the big change if you're looking on period-on-period comparisons. But really, that's really just driven by the fact that we've had to buy less coal to replace out-of-seam dilution coal that we were producing some time ago at Narrabri. And so there's been less purchases required in order to do that. In fact, this purchasing level is much more similar to the rhythm that you normally have with the blending that we have within the business in any event. So I'm not trying to mitigate some shortage in quality that one of the mines may be producing from time to time. So I'll go on to Maules Creek. Maules Creek has been running at about a pretty good rate at 3.16 million for the quarter. It's very good. And on an annualized basis, we've made the comment there that it's approaching the level that the mine is approved to perform at, which has been pretty good despite the issues we've had with COVID absenteeism, as I say, and also inclement weather challenges. Saleable coal production at 2.6 million is predictable, that's a good result, as well as sales volume of 2.5 million were 4% above the previous period and I suppose a predictable event given the amount of ROM that's been coming up. Met sales of 24% of the total, 400,000, that's a decent result. There is more interest in the met, and we can talk about that in Q&A. So I do think that will start to reenliven a little bit. But it has to compete pretty hard with the thermal and its premiums at the prices we're seeing today. Stocks are returning to a better level. But at 1.3 million, we're obviously going to be shipping a hell a lot in this month, April, and in the coming months just to make sure that we achieve the levels that we want to with our guidance. Moving over to Narrabri. It's a return to some decent consistent production there from Narrabri, as we said we will have seen when we reported last quarter. But it's certainly more evident in these numbers that we tabled here today. And 1.4 million tonnes for the quarter is a pretty solid result. It was a slow ramp-up as we've acknowledged previously. Once we'd commenced production in 100A, that party is moving along consistently, which is much more reassuring from our perspective and I'm sure not lost on the audience as well. In terms of the saleable, that translates pretty directly, as you would expect it does, with a high-yielding mine such as Narrabri. And then -- and the sales volume is consistent as well. A key thing here, I suppose, for us is that we have been shipping every tonne essentially we've got on the deck. So the stocks are relatively modest there. So we will continue to do that. And we've been keeping the trains up for all of our sites, given the production. We did have a little bit of disruption from that -- the previous flooding period and also the logistical team issues more recently. So we've been keeping the trains up as much as we can just to make sure we hit these targets at the end of the year. In terms of completion of 110A, we think that will be all done by 30 June. And so the step around really falls into July. And then, of course, reinitiation of the 110 will continue on until such time that we move to 203, which we're saying is in the half, as we said before, the second half of FY '23. But overall, pretty good performance from Narrabri. Coal quality is doing what it should be doing, which is very, very welcome, underpinning that 94% of thermal sales that hit the high CV market. At Gunnedah Open Cuts, it's probably -- if you like, it's probably got the biggest ask in the proportion -- proportionately for the last quarter of the year. It certainly has been a little bit more variable given the weather impacts that these 2 smaller mines have experienced. And they're also having their turn now with COVID absenteeism, which is expected but annoying, nonetheless. Tarra at 400,000 tonnes, a little bit below the previous corresponding period. Saleable production, about the same. But we are, as everybody knows, watching harder there in order to make sure we maximize the opportunity of high CV sales. And that manifests itself most there at Tarrawonga. Werris, it does what it does. Obviously, no washing opportunity to maximize sales there, given this is 100% bypass mine. And 300,000 tonnes produced during the quarter, sales being obviously the same as well. Stocks are relatively modest. But again, trains are being kept right up to each of these sites to make sure we can hit our targets. Over to the table just on realized pricing. And this is always an interesting table and people tend to focus on that. So we've -- again, we've added in here the average Aussie dollar coal price for the quarter that we've achieved, the $315. So you can see a nice pathway there from the $189 to $211, $315. And of course, prices continue to stay high. The realizations haven't moderated the percentage, if you like, of the average index for the quarter. And that is because we're in the high-quality situation of having rising prices. So we wouldn't be talking about this realization lag if we had a stable market. But we were obviously benefiting from a good and active and strong market. So the realization lag will stay with us for a little while longer. But again, that is a high-quality problem, and the numbers at $315 or $229 average for the quarter is very positive. The high CV mark averaged $264 for the quarter itself, and that's 43% up on the December quarter. So it's certainly nice increments that we are seeing. As I say, our realized number at USD 229, AUD 315 is certainly very strong. Demand in the market looks pretty good as well. So we're not seeing any notable change there. So that seems to underpin, and I'm sure everybody is observing the continued increase in firmness in the pricing in the market. So -- and if you look at the pathway of pricing over January, February, $225, $239, March at $326 and just over $300 in April now, so that's certainly a good situation to see. And there have been, as we talked about in previous quarters, quite a number of supply-side disruptions that we've seen in various markets. And of course, Russia and its aggression towards Ukraine is causing further concerns in the marketplace. And as a result, the market is tightening again. And that's caused, obviously, a lot of uncertainty as to whether or not there's a long-term position here, a structural position that changes as it relates to the 110 million-odd tonnes that Russia tends to tip into the seaborne trade on a regular basis. I think it's yet to be fully understood. But in the meantime, what we're seeing is lots of discussions, as you are, around formal sanctions. But we're also seeing informal positions being taken already by various customers where tenders are excluding Russian coal. And so that's obviously driving the coal price up, especially in the high CV market. On the logistics side, I won't go into it too much. I think I mentioned that there has been -- this variable weather has caused the logistics change, some interruptions. But despite that, we are managing to get our coal through into the market. Hedging there -- is there for you to note. On the development projects themselves, a welcome change there and seeing another approval milestone being met, and that is the Narrabri Stage 3 now past the IPC hurdle with conditions that we're happy to move forward with. And so that's a very positive advancement for that project and nice to see the IPC turning that around in a reasonable time frame. The piece of the puzzle yet to be finalized now for us, we move on now to EPBC, the federal overlay. And so our team are working with the federal government in that regard. From a Vickery perspective, obviously, we've made our way through the various approvals hurdles there. And you will note that the minister's appeal of the original Sharma case, in fact, was successful. So that -- the additional duty of care that the original judgment attempted to put into a longer-term position has now been removed. And in the meantime, we're just getting on with the secondary approvals associated with the mine and some geotechnical drilling that we'll do in this quarter just to better understand the ground conditions that underpin the assumptions that we made for the capital cost, particularly in the mine infrastructure area and in rail corridor. Winchester South continues to move through the EIS process. So we have closed the first round of public submissions. We're working through that with the government. The government would like to ventilate the responses to those public submissions publicly. So the second round of consultation would be permitted. That's not the first time this has happened. But then again, it's -- we would have preferred only going through that once, but it is what it is, and we're just working through the process with the Office of the Coordinator General. Guidance remains unchanged. We do -- as you can tell, we always plan to have a solid fourth quarter, and we're going to have that, about the size of what we just had, in fact, if not a little bit better. And so subject to COVID absenteeism and weather, we see that as being a position that was planned, I suppose, from the beginning of the year. And we just got to execute that over the coming 2-and-a-bit months. So overall, from our perspective, nice to see a good quarter with little, if any, of note to cause anyone concerns from a production perspective despite the weather and COVID. But an excellent market and great realized prices, certainly filling the cash tin. And we're moving now obviously to a cash accumulation phase in addition to, obviously, the capital management initiatives that we've already announced. And with that, I might close that off from the report perspective, operator. And we might open up the call and the lines for Q&A, please.

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

First one's around the Stage 3 extension. Firstly, congratulations on that achievement. I just wanted to touch upon perhaps the IPC condition in relation to CO2 emissions. Just wanted to understand, I mean, what is that exactly? You've clearly said that you're comfortable with the conditions placed. But does that require you to have special equipment or different equipment? And then second part of that question would be the federal side of things. How do you envision that to unfold? And how long do you think that would take typically?

Yes. Thanks, Rahul. Look, I think the IPC documentation is a public document. So you can go in there and have a bit a look for yourself. But when I say we're happy with it, I mean, there are conditions which we think are workable, and they essentially cover a couple of dimensions. Firstly, they wanted us to study mitigation-type measures over time, and we're certainly looking at that. That was always our plan and part, in fact, of the original conditions of the mine as well. They'd like to look at -- we know that going into the South does generate a little bit more methane, whereas the already approved mining lease is relatively methane light. In fact, CO2 is the only real gas to manage. But we do acknowledge the exploration license does bring with it a little bit more methane concentration. So they're -- they want us -- and they acknowledge the concentrations are pretty low, but they want us to have a look at flaring where possible. So we are looking at -- those are studies that we need to do as well. So that's the nature of it. And then there's -- overall, there's an emissions intensity-type metric that sits across the top of production for what will be the enlarged mine. And as an intensity metric, that's embodied in those documents. And again, those numbers, we feel comfortable with the intensity metric that they put there. So from that perspective, we think we can live with all of that and work cooperatively with the government to look at ways in which we might reduce our emissions over time and that intensity measure over time as well. From an EPBC perspective, well, this is an existing mine. It's just a life extension. So there's nothing particularly controversial that comes with this area. So we don't think -- and given that it's not something that -- if we look at the EPBC concerns, generally, water is obviously a key one. This is not controversial at any level from a water perspective. And there's no sensitive land there that we'll be disturbing from any great biodiversity sensitivity perspective. So we don't think it will be controversial in that regard, but we'd allocate -- we'd want to allocate 6 months to make sure we go through the various aspects of that referral to the EPBC approval. So I think at least 6 months is the way to think about getting that finalized. But we're already working with them and have been, if you like, shadowing -- a shadow process to the IPC process just to make sure that when the flag finally fell with the IPC process, the EPBC process could then kick off in earnest.

Okay. Perfect. That's very helpful. Look, second question is around the met coal split. So obviously, you mentioned that you've restated the splits for December, and that went from 11% to 18%. And now you're at 24%. First up, perhaps if you can help me understand the motivation behind the restatement. I mean, are you getting a better price? Or what do you actually achieve from this restatement?

Yes. Yes. Thanks, Rahul. Look, nothing too exciting there. It's really just the original restatement was really just calling out what was otherwise, call it, the PCI-based material that was being used for nickel smelting activities in Indonesia. People asked us, "Why are you selling coal to Indonesia?" And so it was allocated in the thermal bucket where we just put it into the met bucket, which is what it is. And then -- so that doesn't -- that generally doesn't affect Maules Creek at all, which we've called out, obviously, which have done better from the met coal side of things. So -- and that's not involved in those sales in any event.

Okay. And then in terms of the pricing, it is what it is, right? I mean, you're achieving pricing in line with that last quarter. And there's no change or no restatement of the pricing achieved?

No. No. No, it's not controversial in that sense. There are different pricing mechanisms, as you well understand, in the metallurgical bucket. So it's not just quarterly JSM pricing. That's the only way in which we sell met coal. And so there's a range of indices that we've been using, an average of a couple of indices, in case, in some instances. And so -- but the realization that we're giving you there, the 11% is the price of those -- just the simple arithmetics of those indices. It's not anything particularly controversial. That's driven that from 19% to 11%. That's just the movement in the indices themselves.

Perfect. Okay. And then I guess a bigger picture question around high CV tilt. So obviously, you've done a bit more high CV this time. That's driven partly by Narrabri also. But first question would be, how much more can you talk that to the high CV side as you see that pricing gap emerge, i.e., how much more capacity do you have to be at that higher end? And then is there perhaps an opportunity here to start shifting Maules towards more met as well as the market opens up there?

Yes. Yes, I mean, all those -- well, at 94% of thermal sales, there's not a lot of capacity left to go to further high CV than that. So that's very strong. So your question more is about met to thermal arbitrage. And all of what you say is possible, but you obviously need to bear in mind the contractual positions that we have with longer-term customers that need to be managed as well. So if we're a spot seller for 100% of our production, people will be worrying about other things. And so it is obviously positive to have some longer-term positions with customers, with reputable long-standing customers like the POSCOs as well and Nippon Steels. So it's not as simple just to tick them out of existing contracts and move in an arbitrage across the 2 different sales formats. So the thermal, not a lot of extra capacity, as I say. But you quite rightly point out that Narrabri's return to form moves that number pretty quickly. There was never an issue with Maules' or Tarra's quality. We are just washing more at Tarra, almost all of it to get to what we want, and that is to maximize the margins in the high CV market. But as I say, 94%, there's only 6% left.

Okay. I had a final one on Maules Creek, and that's basically perhaps to talk a bit about the first quarter run rate. Now you have obviously performed well, and it's in line with the 13 million tonnes per annum. But typically, if you compare it to last year, at least, you did -- had a very strong quarter. I just wanted to understand, is this part of the mine plan? Are you seeing any specific COVID-related issues there that have led to that performance at all? Or is it all in line with the mine plan and we shouldn't really be reading too much into that number?

Yes. Thanks, Rahul. And that's number 4. So normally, that's a meeting when you ask 4 questions. So we'll have to hand over to somebody else after that. But what you say is important to point out. I mean, the -- we are trying to spread the production more evenly over time, over the year. Now -- and you all know in the case of Maules Creek that, that does have -- it does have its nuances because that big Braymont Seam is such a big, thick one, and you fall away to much smaller seams as a proportion of the total reserve. So when the big Braymont Seam pops up, you get a lot of coal quickly. So that's great note, but it is unhelpful from a scheduling perspective. So we are trying to smooth that out over time, which takes a little bit of work. So we're not doing anything in particular. We've got to produce around about the same sort of Maules Creek effort in the last quarter in order to hit Maules' targets. And we feel pretty comfortable in doing that, subject to, as I say, I sound like a broken record, I suppose, with COVID and weather. But that has been consistent and persistent in a fashion that's pretty unhelpful. But otherwise, look, we think we're able to keep -- to track for this -- the balance for this financial year.

Your next question comes from Paul Young from Goldman Sachs.

Paul, first question is on the thermal market. Obviously, a lot has changed in the last 4 weeks, particularly with the disruptions around Russian coal. Can you maybe just add to some of those comments you made around interest levels from those customers that might have been buying Russian coal? And particularly, are you seeing any interest from European utilities? And then also, from a -- what you've committed on volumes for the year, is there any scope to potentially divert spare cargoes into higher prices?

Yes. Yes. Thanks, Paul. Look, it's fluid, isn't it, this situation. And like you say and as you've noted, in such a short period of time, things have changed quite dramatically in that regard in a negative way for the world and obviously positively from a supply/demand perspective for our product, which is nobody's sort of high-fiving over that because it's come out of such an unfortunate set of events. But we are seeing customers excluding Russian coal from tenders. So that's without formal sanctions being obviously applied. So they are self-sanctioning, if you like, in that sense. And so the question I was raising before just covering over the report was really how long does that last? We don't know. They are -- many of the customers seem to be taking their existing contractual commitments fulfilling that. And so no one seems to be turning off Russian coal right now. But obviously, new contracts, and that doesn't take long before that new coal -- signed-up coal starts to get fed into blast furnaces and boilers, it will happen quite quickly. So what's the long-term position? You can't lose 110 million tonnes out of seaborne trade without seeing an impact. So that's -- I think that's just going to add further pressure to what we're already seeing is a very, very tight market. Customers are asking for coal to be brought forward, and I suspect we're going to have customers also asking for the upside tonnage in a lot of our contracts. As you know, Paul, the contracts come with a positive and negative variation, depending on -- at the customer's election, often not our own. So they can take -- if you've got 1 million tonnes, it might be 10% up or down. We suspect that the individual customers will start to invoke the plus side option just to make sure they've got the physical supply in hand. So I expect that's what's going to happen here as well. But that tendering behavior I've mentioned is certainly evident in Korea, excluding Russian coal. And we're starting to see a bit of that in Japan as well now.

Okay. And then maybe a question on Narrabri, just looking at what it needs to achieve in the June quarter to hit guidance. It looks pretty achievable. I'm a little bit out of touch with what this operation and the longwall can actually punch out on a monthly basis, and you can annualize obviously the longwall changes and maintenance within that. But how did it perform in the March quarter when it was running at full tilt from a -- like how much sort of punch out in a month?

Yes. I might jump in and answer that. So I mean, look, the longwall in good conditions is capable of over 1 million tonnes in a month. But in March, it was around about the 750,000, and that's able to maintain when we've got reasonable conditions.

Okay. That's perfect. And then last question is on the approvals -- or sorry, more on the growth projects and really around Vickery, Paul. Just again with what's happened in the last 6 weeks, have you had any sort of offtake or utilities approaching you just to chat around Vickery and maybe getting involved?

No. There's been nothing triggered by that as yet, Paul, that I could mention. I mean, there's been lots of interest in it. The government, in particular, is interested in our views on timing. So we're talking to them about that type of thing. But we've got more work to do, as I've said. The secondary approvals need to get sorted out. And I'd like to get this drilling done in this current quarter now just so we can firm our capital estimates for important pieces of infrastructure on the site. So there is a little bit of work to do. So -- and of course, we've only just recently cleared this other issue of this duty of care because the threat was also hanging over us that there'd be an injunction the minute we tried to do anything that essentially ticked the box as far as the project is concerned. Now the appeal of that decision period, I understand, has passed. So the original agitators are not challenging the removal of this duty of care. So I think that stands -- well, that's a great thing for the industry, for sure. And it's a great thing for any significant development that gets referred to the federal government. So I think that's very positive. So we think that as far as Narrabri goes and Stage 3 and its passage through EPBC, we think that will be -- that's better now that this thing -- this question has been removed from the EPBC environment.

Your next question comes from Peter O'Connor from Shaw and Partners.

Paul, Kevin, Ian, Kylie, great result. I love your use of the word rhythm, Paul, considering it sounds like things are going better. Good choice. My first question, cost pressures, cyclical, near-term, structural, what's the split and we're thinking beyond the current year and into the next year?

Yes. Yes. Look, that's a really good question, Peter. Yes, we haven't obviously given any color on that. We think we've obviously included reference in our report that we think given the aggregate of all those things you just mentioned, the temporary and the permanent, well, it might be permanent, that we think we'll be at the higher end of our range, unfortunately. This year will be anomalous in the sense that we've not had the production rhythm that we would have liked. The flood is, of course, quite a big issue there. And then obviously, the problems down the line in subsequent months from an infrastructure perspective has interrupted that, which has been -- which have been most annoying. So we've been dealing with the legacy of, obviously, sales which slipped into later months as a result of the floods and then the infrastructure disruptions. So we want to clear all that out within this year. In fact, this month, we should be the one that we clear those backlogs out. But that does bring with it a legacy of underabsorbed take-or-pay, which should be a temporary matter. So when you're performing on -- with the rhythm that you would like, then the underabsorbed take-or-pay goes away. Having said that, we did call out for the half year, the fuel costs, say, for instance. Now fuel prices have only gone one way since then. And so that's going to be a feature in the second half, and that's going to roll into the new financial year for sure. So we're obviously in our budgeting period now and careful consideration has been given to all these things in terms of what assumptions we make for the new year. But all the flood impacts, the unabsorbed take-or-pay, those things should unwind as we called them out at the half year, with volume flow returning to expected levels, which they are. But you can't -- all that went before in the first half we can't overcome in time in the second half. So there's a mix of those. With the full year results, we're speaking out again so that people can see what the temporary impacts were versus what we think is baked into the new year.

Could I ask a question about projects? On Narrabri, turning to a critical path in EPBC, what is the timing that it becomes critical, that approval process? And the second one on project, Winchester South the second round. Why did they get a second round, can you give any color? Was there opportunity to push back? Was it [ community ] pressure that drove that?

Yes. The deadline for EPBC approval, I don't have that at hand. We can get back to you, Peter. We'll have to take that one on notice. But we've got time. I don't recall us talking about any particular sensitivity and pressure there. We've got years in front of us, essentially, until we cross the boundary, if I can call it that. But there is -- there's one key -- well, there's a shaft that we'd like to put in, which services ventilation needs for the mine ongoing. And that's the key driver in the short to medium term that we want to meet. But I understand we've got plenty of float as far as time to be able to get the EPBC process tidied up. So I'm not concerned about that. As far as Winchester South goes, a couple of developments there. I'd remiss for me not to mention that the -- obviously, the reserve went out this morning, adjusted upwards in terms of the met coal split and quality of net. So it's not just net split, the quality of net has improved with the semi-hard coke composition there, which is very positive to see. To your question about our second round of old exhibition. Look, my read of this is it's -- if the government in Queensland responding in a way, not dissimilar to what other governments around the countries are doing, and they're more sensitive to the idea that out of the consultation has been more sensitive to the criticism. That the consultation processes could be second-guessed at a later date. And so they're very mindful of that. We understand that. That's not to say we like it, but it is what it is. So we think we think that's probably a 6-month delay that we don't like, but we've got to work with the government and the pressures they are under to make sure that we can find our way through the approvals process. The approvals process there is still, even with this changes, as I say we're not the only one to experience it, is still perhaps more functional than the New South Wales one, I have to say. So as annoying as it is, we just got to work our way through it.

Okay. Well, last question for Ian, if I may. In terms of longwalls and changeovers, 110a to 110b, I'd call small; and 110b to 203, I'd call big. Could you just, for the benefit of the audience, articulate what the timing is for each of those just because the next one [ it seemed like ] will be a big one?

Yes. No problem, Peter. So as you indicated, what we call a step around between 110a and 110b, you're effectively in the same area. So we've got a sort of a 4- to 5-week window in that. And in that change, we're also able to utilize some of our existing longwall equipment that we had on the previous block. So that will facilitate a quicker move. When we go from the end of 110b back to 203 we're really going from the deepest part of the mine or the furthest part of the mine, all the way back to sort of where the mine started at the bottom of the drifts. And we've got about a 7-week allowance for that just because of the additional travel time of taking the equipment back up to there. I don't know if that gives you enough color.

Yes. And do you have to do anything with the support? Given you've obviously beefed up for the deeper [ I assume ] in that, has anything changed? Or you used the same supports integrated in that shallower?

No, we'll use the same support. I mean we've got a program of sort of bringing some out and -- at every move whenever we can as part of the maintenance sort of regime. So that would occur. But we still intend to use those supports for the first few blocks over there before we buy the new longwall, which I think we've talked about as part of Stage 3 due to the same thing a little bit. And I think that's sort of scheduled for [ 206 ] I think, is probably the first one that we'd look to get the second longwall. And then I guess there's sort of some talk about whether or not we run both longwalls for a period of time, where we had some opportunity to sort of reduce that impact of the changeover we just talked about, and we've got 2 sets of it.

Your next question comes from Chen Jiang from Bank of America.

Congrats on the strong March quarter production update. Just a few questions from me. By looking at the discount in percentage, it seems like there's little improvement in thermal and met coal price realization this quarter despite improved coal quality for Narrabri. Just wondering if the discount is mainly due to the lagging and the pricing mechanism? If Whitehaven -- are we expecting Whitehaven June quarter to realize then that thermal and met coal price in March quarter?

Kevin?

Short answer to that is that there's only 2 shipments of [ low CV ] -- coal in the period for about 159,000, 160,000 tonnes. The rest of the coal that we shipped was sold referencing gC NEWC. So higher high-quality coal. And the full impact there is just lag. It's -- you can tell with 45 boats off the coast that we're pricing some coal with reference to prior periods. We're pricing some coal with reference to the month of scheduled shipment. And if we shift from February to March actual delivery, we get the February price even though we delivered in March. But again, when we get to April, we'll ship March coal in April and get the March pricing in April. So it's just a lag, Chen. And all of that or the vast majority of that 13% is just pricing. So we'll catch that up. And it's just a nice problem to have when you've got a rising coal price. And if I look at where April coal price is today, it's over $330, $340. On the spot, it's about [ $312 ] average for the month. So we've got a rising price again. And I'm not really sad about having a lag when it's all due to raising pricing.

Well, you'll see lag again in the next quarter again, of course, given that you're in a rising price environment, unfortunately. But giving you the average Aussie dollar realizations as well. So we can see that in absolute terms, despite the lagging impact and lost opportunity you get it in subsequent periods, the absolute realized prices are far [indiscernible].

Okay. So that's due to the lagging and Whitehaven is going to catch up for the next quarter. Just a follow up on the Narrabri Stage 3. So the CapEx released today expected from FY '25 to FY '28 seems like different to the time frame, from my memory, released from the Investor Day, I think, 2 years ago. Does that mean the commissioning of the Stage 3 will be towards the end of this decade? And how should we think of Narrabri long-term production? Are we still targeting 8.5 million tonnes without Stage 3, because Stage 3 CapEx is kind of towards the end of this decade?

No, the $400 million is the $400 million we've talked about, Chen. So there's no real change there. The timing of it is consistent with how we've described it in the past. It may be slightly different from 2 years ago in investor roadshow, but that will only just be what's happened between then and now in terms of timing. Again, the largest part of that is this new longwall that Ian referred to. And so when we commit to that and how we fund that will be a different question. The 8.5 you talk about, if you go back to the investor roadshows, they'll give you the breakout on that. There's clearly development coal, longwall coal and a bit of Cut and Flit in that. So we're expecting volumes to step up when we get into the area south of the mines. And so the material we've shipped out in the past on Stage 3, we halted.

Right. So if I look at the CapEx spend towards the end of this decade, so which means the Phase 3 will be towards, I'd say, FY '29 or FY '30.

No, not at all. The spend -- we said between FY '25 and '28 in the quarterly release, which lines up to the advised figure. Now part of that is commitment to a longwall, part of that is building and conveyor structure ventilation, water and air supply, all of those things will take place over a couple of years.

Yes. I mean that big -- the chunky bit in the longwall, obviously, Ian mentioned the timing of that particularly starting production. So that's the lead time there, you would say, we probably got to place in the order of 2024 for that in order to be able to commence production in 2026. So that's not back-ended in that sense.

Chen, happy to have you drop in and we'll take you through that.

Okay. Sure, sure. Just last question. You mentioned the demurrage cost from the impact at Port Newcastle, is that the cost Whitehaven is bearing or you will get reimbursement from the insurance company?

No, no, the demurrage is really -- how that works is that between us and the customers, we agree on a coal availability date, and we agree to that the vessel is going to turn up. And if we aren't loading that coal at all because we don't have it or because there's completing challenges for that coal, then we end up paying demurrage. And that's part of the reason why there'll be bigger demurrage across the whole business, across the whole coal portfolio, every supplier in the country is having the same issue. So you should expect to see demurrage up for everybody. 45 to 50 boats off the coast of Newcastle is telling me that everybody is going to have a demurrage -- a bigger demurrage cost in '21 and '22.

I mean that's separate from the issue of recoverable demurrage from insurance claims associated with the outage of NCIG. That's a separate matter. There is some take-or-pay costs, which we are to receive under our insurance coverage there. But that's the reason why the coal flow availability and rhythm of our business is so important, given that we buy the take-or-pay spread over the full year. And if you don't use it in a particular period, then you still bear the cost. And if you need more haulage and port capacity at times you didn't otherwise plan for, you were paying again to get it. So that's the importance of delivering the coal on a monthly basis as and when you said you're going to.

Okay. I understand. Sorry, just a follow-up on the cost. Are we still expecting improved or declining C1 costs in the next few years from the in-pit dumping and your cost there, a few cost improvement initiatives in Whitehaven previously talked to the market?

Yes, Chen. Look, I think we will expect to see benefits from in-pit dumping, there's no doubt about that. I mean the hauls at the moment -- so the hauls we've had into the in-pit dumps, and Ian can talk to the length not me, but -- those hauls have been long. In-pit dumping grows has been in place in FY '22, will grow in '23 and finally reach 100% in '24, I think is about the answer there, and we'll see some benefits from that. Chen, the bigger swing in that at the moment or the one that's influencing those costs across the whole of the industry at the moment is diesel. I mean 2 years ago, diesel costs would have been $0.50 a liter. Today, they're $1. So there'll be some other factors coming through. And that's why when we talk about structural change in the coal price in this document, we're trying to work out internally whether this is a structural change, whether input prices are higher for longer and whether prices stay higher for longer.

Yes. I think importantly, just before Ian -- and he's so eager to tip in a further contribution to your answer -- to your question, Chen. But I think you have to acknowledge that not just weather and disruptions to production from existing operations, particularly in Narrabri in more recent times, but then the flood effect across our entire business. There is the C1 cost as you mentioned and the outlook for them coming down will be heavily influenced also by commencing production in the shallow ground at Narrabri. Because that's such a big volume swinger relative to the volume you're seeing us produce at Narrabri at the moment. So we think that there's going to be a significant volume step back up in the shallow ground. And certainly, not straight to the 8.5 that you've mentioned in that first year in that first panel because -- well, it won't actually be a full clean year, it will be partway through a year for a start anyway. But annualizing those sorts of numbers, we'll see a significant reduction in our costs overall because we are carrying take-or-pay considerations associated with the volume higher than the 4.5 million tonnes at Narrabri is going to produce, for instance, just to pick on one particular mine. So that in and of itself will be a material step down in cost, let alone the fact that mining in that shallow ground will see, in and of itself, a significant reduction in cost per tonne at that mine.

The next question comes from Alex Ren from Credit Suisse.

Congrats on the good quarter. Two quick ones from me, please. First one, what's the inventory -- what the level of inventory at [indiscernible]. Just wondering whether that's -- do you have any -- given the weather and disruption to ship movement, is there any risk to write-off stock due to, say, elevated moisture content, if any? And the second one is, what are the met coal pricing assumptions at Winchester South you're using given the current market dynamics? Just wondering whether there's been any update on the pricing or uprate on the pricing assumptions?

Alex, no risk of writing off coal because of a bit of rain, so there's no issue there. We've got about 2 million tonnes in total across stocks, both product and ROM. So we're in reasonable form there. But no risk. You shouldn't be concerned about writing off any stocks in that regard. Our drive is to make sure we just get the tonnes down the port as quickly as we can and get them on a boat. There's [ fewer ] boats out there, as Kevin mentioned earlier, reflects the fact that everybody has got product shortages and that's not what our customers want. But that is a product of the weather situation we've been experiencing the last few months. So hopefully, that will pass now that we seem to be getting a clearer run of things.

And then the Winchester South, I thought there was some material in the original reserve that came out of it. Probably the simple way I think about it, Alex, is that this is looking more like a 10.5 ash semi-hard coking coal standards that you would see from mines that are located in close proximity to it. So if you are using a pricing standard for things like [indiscernible] that's probably what you're talking about in this -- coming out of Winchester South.

Yes. We haven't taken any interest on spot-based pricing positions in order to strike the revision to our reserves. That's been very conservatively positioned using Wood Mac data. If you go into the table 1 in the back of the release today, you'll see that's referring to Wood Mac cost curves. And we obviously take an appropriate discount, which is also mentioned in that document as well.

Your next question comes from Glyn Lawcock from Barrenjoey.

[indiscernible] times.

Sorry, Glyn, you're breaking up there. We didn't catch all that. Can you go again?

He's dropped out.

I think he dropped off. Why don't we deal with the next question whilst Glyn's dialing back in, maybe.

Your next question comes from Greg Hoffman from Hoffman Capital.

Could you provide some details around the company's tax position? When will it begin incurring tax liabilities? What options are there in terms of prepayment or timing of tax payments and the resulting franking credits and that flowing through the [ dividends ]?

Greg, I'm happy to answer that. I think based on where we see the second half of the financial year finishing in the first half, we cleaned up pretty much all the tax losses we've got on the books. I'd expect to see us paying tax first week in December 2022, which will be in effect over fiscal year '22. And that number is going to be -- is probably around the $300 million mark. So -- and that relies on, effectively, the coal prices we get to see through April, May and June as we currently see it. That will give us a credit franking in the second half of the year, which means dividends -- any dividend is paid in the second half of the calendar year will be fully franked.

Your next question comes from Peter O'Connor from Shaw and Partners.

Kevin, just on capital management. Firstly, a housekeeping question. Buyback, when can it resume?

Tomorrow.

Great. And to the last question, with that franking credit available from the second half [ FY '22 ] do you like think there will be a skew towards buyback versus dividend over the next 2 dividend payments?

I think the -- so in the December '22 period, we'll pay that tax. There'll be franking credits available for consideration by the Board in the full year results analysis. And I think people will work their way through what we see as value between buyback and dividend. I mean I think, Peter, when I look at the whole thing, it's -- there is a -- as you know, there's a tremendous surplus of cash coming out of the business in this second half, and it looks like it's holding all the way through '22 and pricing in '23 is still holding up. So I think it's going to be an interesting debate between now and August '22 with the Board.

I think the Board is going to want to keep a close eye on this. I mean the proposition was, Peter, that we've put to everybody -- the balance of dividend to buyback probably still holds today to a good degree, even though that the share price has moved. But the underlying cash generation of the business has moved with that, and one might argue that you're still cheaply valued in this current situation. But without taking the words out the Board's mouth, I mean, we're actively looking at that month-on-month, looking to see how we position this going forward.

Okay. Just a second one on the shipping book. You've talked about the demurrage. You've talked about vessel security. You've demand profile [indiscernible]. Can you give us a sense of how the presentation of ships will look over next couple of months? Is it the triangular queue, [ 2 big issue horn ] to the period, so guidance 2x. I mean how does this play out? Could you maybe walk us through the month-by-month outlook?

No, the short answer for all of that, Peter, is that if you've got coal available at port, you can load on term. So which means in plain English, if your coal is at the port, the boat comes in regardless of where it is on the queue. So the things holding up the 40 or 50 boats off the coast is the cumulative impact probably over the balance of the last 12 or 18 months on -- across the Hunter Valley, across the whole supply chain on production, and that's just tightened up and tightened up.

Yes. I mean from a relative exposure perspective, Peter, we probably borne our pain in terms of contributing to that queue of ships, and that was because of November, December floods when we got shut out there. So proportionately, we're probably the least exposed to that queue than others are because the weather that's occurred in the last few months has been largely kind of value-based, not us. You can see in our report, we're just talking about the logistics. Logistics challenges that have risen from that weather, not production issues on our part. Our production problem happened back in the previous quarter.

First half.

So we're in a better position to be able to deliver our coal because all these ships are waiting for coal to front up at the port. And as I said, we're keeping -- working with the trains well and surely up to our minds at the moment to keep them as short as coal on the ground as we can to make sure we deliver as many sales as we can in those remaining months.

So is this safe to conclude a degree of confidence that you've [ presented there ]?

As I say, the weather and COVID are the 2 things we're mostly concerned about. We've kept our guidance unchanged, and we must be feeling good about it if we've done that.

The next question comes from Glyn Lawcock from Barrenjoey.

Can you hear me?

We can now. Yes, you're back.

Yes. Apologies for that. [indiscernible], apologies. I just wanted to think about -- it's extraordinary times we've got with pricing where it is and it's obviously going to be volatile. How are you -- and then the team thinking about the business going forward then? Is there opportunities to accelerate anything from a volume perspective? Or is the pricing still uncertainty in terms of how high for how long mean you don't accelerate anything? I'm just trying to understand is there opportunities. You've got a cap at Maules, obviously. I mean Narrabri obviously just runs depending on ground conditions. But just is there anything you can do in any of the open cuts or maybe accelerate the permits at Maules? Or is it too early to do anything like that?

Yes. That's a really good question, Glyn. And I'm presuming you've positioned that broad enough to cover not just what can we do with the existing operations, but then presumably development opportunities with all our pipeline projects as well. Vickery is, as we said, I don't think there's any notion of us bringing that forward within the next 12 months, and we've been consistent on that. There's just more work to be done in that space. One of the biggest things at the moment, which I think is probably the handbag on all of this, is people. And I know everybody else has been talking about that, but it's been extraordinary to try and get the people we need. I mean we've done really well, I think, in the quarter to -- despite the COVID absenteeism and anchor our people. Because there's a bloody merry-go-round of people, staff going down from one mining company to the other as people struggle to have the necessary talent to man each of their operations. So we're fighting a battle in that regard, which is not good. Maules, as you say, is at the limit. There's a little bit of upside in Tarrawonga, but not a lot of it. It does have an approval to go a little bit more. We are studying that at the moment just to understand whether or not there's an opportunity to operate more time here. You know it's a [ part of ] operation. Of course, we've got some relatively new gear there and can we run it a little bit harder. So we're looking at that very closely. And of course, Narrabri, our take is to step forward significantly volumetrically by returning to the shallow side of the mine. So we are hanging our hat, if you like, on that. And that's as we should, and we want that to return to the historical run rates or better that you've seen in the past, because when it was doing 7 or close to 8 million tonnes with the 300-meter wall, we should be able to do that for sure with the 400 that we've got. So yes, look, that's Maules Creek, we have spoken at numerous times about doing more there and we are still keen on that. We are closely monitoring the progress of AHS because that is key to us asking for more tonnes than less. We think if AHS goes ahead, then we'll ask for more. If it -- up to the 16 we spoke about in the past. And if it doesn't, we still probably need 14, 14.5 even [ demand ] version of our future for Maules. So that's pretty much around the grounds upside. It is relatively limited, I have to say, without new volume coming on, or the Narrabri returning to the shallow side.

And a couple of follow-ups then. How bad is labor turnover at the moment? Could you maybe quantify that, what it is versus sort of your historical average? And then I believe you're actually commenced the cut and flit in the shallow areas of Narrabri, just wondering any observations you've made now that you're in the southern zone. I know it's the shallow areas, but just any observations from the Cut and Flit showing up anything you weren't expecting?

So Glyn, it's Ian here. So I mean if you look at our labor, we're probably running at about sort of 5% to 10% of workforce down, trying to fill those vacancies. We've got -- and then as Paul touched on, there's some key roles that are very difficult in new industry to fill, particularly in the underground space, trades people, statutory roles. Mining professionals more generally are hard. Mining engineers, et cetera, particularly ones with a bit of experience. So we've got a number of initiatives out there as all of our, I guess, competitors have in trying to sort of attract the additional operators. We're obviously looking at the remuneration, making sure it's market competitive, but obviously mindful of that cost pressure as well. Sourcing from different areas, we're looking at that. Looking at how we might manage around the travel arrangements associated with that. We've got some longer-term initiatives in place where we're taking trainees on. And we're also then looking at upskilling of other people that are outside of the industry as well. So there's no one silver bullet, unfortunately, and I guess we don't see this problem going away. And we're also having a sort of an overarching look at all of our training programs. And like most entities, that's an area that the industry is going to have to continue to tackle to bring more people in it because the pool that's there now is just insufficient. To your second point about the Cut and Flit, we had hoped to have started that. We do have work going on in that area, establishing belts, et cetera. But the particular continuous miner that we've been waiting on from that has been delayed, and we're expecting to see that late this month, and then we'll get in there and start actually doing the production from that method.

Okay. And then just a final one, Paul, if I could. Just -- I think it was Kevin that mentioned diesel has gone from $0.50 a liter to $1 a liter. Could you help me understand what that means in dollar million spend perhaps? And could you give me a sensitivity for every $10 move in the oil price? Is there any way you can help me understand the cost pressure?

Yes. So we burn about 140 million liters of diesel at a managed level. And when it goes from $0.50 to $0.70, it puts on 70 million on about 22 million tonnes of ROM or the 20 million tonnes of ROM. So it's about -- it adds effectively somewhere between $3 or $4 a tonne from that price back at that previous price. There's also a little impact of that on rail, Glyn, because the diesel locos will go up and down. But by far and away, the biggest impact is in the pit with excavators and trucks. So [indiscernible].

Yes. No, obviously, heard. Is there a way for me to look that back to the oil price that I followed in any way or how, you think, like a sensitivity to dollars per barrel or not too hard?

I can probably -- where it ties back to the Singapore Gasoil contract. That's where it ties back to. So if you're [ falling ] back to crude and you can get a correlation back to Singapore Gasoil, then you'll get -- and that ties back into here. But I'm happy to provide you a little bit more color on that offline rather than on the call.

No worries. I appreciate it.

There are no further questions at this time. I'll now hand back to Mr. Flynn for closing remarks.

Thanks, everybody. I think we've moved -- I think we've gone over time by 3 minutes. So thanks very much, everyone, for all your participation and attention today. If there's any further questions, you know where to find us. We look forward to catching up with you in due course. Thanks very much, operator. We'll hand back to you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.