Whitehaven Coal Limited (WHC) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Whitehaven Coal Q2 FY '23 Quarterly Production Call. At this time, all participants are in listen only mode. There will be a presentation followed by a question-and-answer session [Operator Instructions] I'd like to now introduce you to Mr. Paul Flynn, Managing Director and CEO of Whitehaven Coal. Please go ahead, Paul.

Thank you, operator, and thank you, everybody, for joining us. Happy New Year to everyone, I suppose I should say. And we're halfway through the month already or a little bit more, but we probably should say that. So welcome. Thanks for taking the time this morning. As usual, I'll just go quickly through our quarterly report, which you've all seen issued this morning and then move on to the Q&A session. So with that, the highlights, if I could, just quickly, the average coal price for us during the quarter of AUD 527 was a decent result. It's lower than the September quarter, of course, at AUD 581, but still very, very positive territory. And that delivered on an average half -- a record average Half 1 coal price across that 6 months of AUD 552, which is very good. Subject to audit, of course, we estimate that our EBITDA for the first half is going to be in the order of $2.6 billion, which is pretty positive. And managed run-of-mine coal production for the December quarter was at 4.8 million tonnes, 21% up on the September quarter, which is positive. The managed sales of produced coal of 4.3 million tonnes and our total equity sales of produced coal of 3.4 million tonnes, both up on the previous quarter, which I'm sure everyone realizes was heavily weather affected, and I'm sure we'll get to the discussion on that. Cash generation during the course of the quarter was very good at $1 billion as is the balance of cash at the end of the 6 months at $2.5 billion. As far as the buyback goes, we've managed to pick up 40 million shares during the course of the period at a cost of $367 million. And since the inception of the buyback program, we've now picked up just over 140 million shares for a total cost of around $955 million. On the safety front, look, we're doing incrementally better than we've been doing in the past, but that still requires plenty of work. So it's nice to see the improvement trend continuing, although it's off a little bit from where we had been earlier in the year, and we've seen a few more incidents in more recent times, which requires more focus from us to ensure that, that continuous improvement pathway is something that we're delivering on for the safety of our people. If I can go to the overview just over the page quickly. Look, the quarter itself is typified by continued weather interruptions as we spoke about to you in -- with the release of the September quarter. Narrabri, of course, the underground mine that was the least affected by weather and has been doing very well, which has been very, very much appreciated. But that weather certainly affected the open-cut operations, and you saw that come through in the results that we've released this morning. As you may recall, when we spoke to you about the revised guidance, we did take into account prudently an adjustment -- a prospective adjustment for what we thought would be continuing weather that we thought was necessary to take into account for the balance of the year. That has proven to be the right call because not only in October, but certainly into November, we're experiencing still access-related issues for our open cuts in particular. And so that's certainly played out in 2 of the 3 months of this quarter. As a result, you can see and we'll get to the realizations in a minute. But as a result, you can see, we obviously had a shortage of our highest quality coal for blending purposes across our business. And so we have been selling more coal into the mid-CV market than we would have otherwise wanted. And that's really just because the balance of the revision to guidance really was borne by our open cut operations. And without that blend stock, then you -- we weren't able to maximize the benefit of that blending opportunity during the course of this quarter, and I'll speak to that in a minute in further detail. The total for managed coal production, as you can see, 4.8 million tonnes versus 4 million tonnes in the September quarter, saleable coal production at 4 million tonnes versus 4.2 million tonnes, managed sales of ROM coal at 4.2 million tonnes versus 3.7 million tonnes and then the equity tonnes then after. We finished pretty much line ball stocks one period to the next. So no major change there. We had purchased some coal during the course of this period, as you would expect that we would have given that we've revised our guidance for our open cuts based on the weather interruptions that we've been experiencing. So we have purchased some coal. That's obviously up relative to the previous quarter in September when we were carrying stocks into that period. I'll come down to Maules. Despite the weather, Maules did have a better December. And we saw, as I mentioned earlier, October, November certainly experienced access and weather interruptions, but we managed to produce 2.1 million tonnes for the quarter, so another 300,000 tonnes up on the weather-affected September quarter. So that's better. But still, as you can see from the data we've given you there, just on the rainfall during the period, it was pretty significant. And certainly, that hampered our ability to operate in an orderly fashion and the use of helicopters and the restrictions that, that places on you -- or that places on you caused us to produce less than we would have otherwise liked to through this period. But December -- the month of December actually cleaned up quite nicely. So that was a good return to form in the month of December, but obviously, the impacts for October and November are there to see. The sales for December quarter at 1.7 million tonnes, 11% down, and that's really just reflecting that shortage of coal that obviously we're going to try and make up a good portion of that in the second half of the year. Narrabri as I said has done really well. So it's close to 2 million tonnes there versus 1.6 million tonnes from the previous quarter. So that continues very good form, they're 23% up period-on-period. The next Maules will move start shortly, and we're hoping that we can finish that up actually in the beginning of Q4 of this year. So that's very positive. Saleable coal production of 1.8 million tonnes, up 23%, as you would imagine, consistent with ROM production change as well. The Gunnedah open cut, again, weather-affected, certainly have borne the brunt with Maules of that weather. So if I look at Tarrawonga, it's line ball in terms of ROM production for the period. But Tarrawonga did suffer, I suppose, if you like, if I can say, 2 dimensions to the weather interruptions, not just the impact of whether or not being able to get into the site, but then there's also the limitations placed on our haulage route and being able to get coal down to the Gunnedah prep plant because for those who've been to the site will have traversed Braymont Road and also the private section of the haul road and realize that, that's relatively low lying transportation route. And so we have suffered there as a result. Saleable coal production there, you can see the numbers there 254,000 tonnes versus 400,000 tonnes in September. Sales of coal at 289,000 tonnes versus 353,000 tonnes and stocks at 619,000 tonnes versus 655,000 tonnes. Werris paradoxically, which is normally the one who suffers from weather the most, has actually done reasonably well despite the weather. So that's been a good result. ROM coal production at 416,000 tonnes for the quarter versus 214,000 tonnes. The saleable coal there at 336,000 tonnes to 382,000 tonnes. We've ended similar stocks from what we started within the quarter at Werris. But it has actually done a little better than Tarra. Tarra has been the one which has suffered more. Werris obviously doesn't have the haulage exposure because they've obviously got a rail obstructed there at the pit. And no washing means, of course, that the ROM production does bear up pretty quickly with the saleable dumps as well. If I move over to the realizations, the big change, as I highlighted a little bit earlier, we've got less high CV sales than what we would expect it to have during this quarter. This is a temporary thing. Maules is back up and running in dry conditions, which is nice. It is surprising how quickly that turns and it's a very dusty environment up there at the moment and which is strange given all the weather we've had. So we temporarily as I say, move more sales into the mid-CV part of the market. And our met sales were very low at 7% of the total. So the realizations there, as you can see, AUD 527, I mentioned before. The thermal coal price realized during that period of $351 and our met coal price there, these U.S. dollar numbers at $312 during the quarter as well. Overall, the market remains pretty tight. This is -- it would appear that we're going through a period in the north at least, where there's a relatively subdued winter, but we're seeing a lot of tightness in the 6,000 market, and that's obviously borne out by the types of coal prices we're referring to here. So no one should be surprised about any of that. The met coal market is still subdued. And even though we've seen an improvement there, it is subdued, but the JSM Quarterly there is at $230 versus $237 for the previous quarter was pretty flat. But we do think once that COVID restrictions in China and then China opening up more generally, will put a bit more momentum into the market. So we do expect to see the market firmer. And of course, in our primary markets, such as Japan, at the end of the financial year is looming for the Japanese financial year when the use of Russian coal will cease at 31st of March. So we are seeing quite firm interest in coal in March and also April. And so I think that just reflects that concern that the Japanese players have around continuity of supply after the end of this financial -- Japanese financial year. Logistics and corporate aspects, I won't speak to those, nothing particular there of note. The development projects themselves, Narrabri Stage 3 is continuing with secondary approvals and so on, but there is obviously 2 elements there, which is not news to anybody. Having mentioned these in the previous quarter. There's obviously the EDO with their -- unfortunately that taxpayer funding is causing us a little bit of annoyance just on their challenge of our IPC approval, and of course, the EPBC issues at the federal level, continue to work their way through. I mean that's -- that one has wrapped up, I think, 19 projects in total for reconsideration at the federal level. Narrabri Stage 3 is one of those. And we understand that we'll be in the first tranche of projects to be considered, which is good, but we'd like to see that come to a conclusion as quickly as we can. Vickery, no material change for things there. We did previously mentioned that we would come back to the market with a view on the staged development, the potential for stage development of Vickery going through a smaller version of Vickery then through to the larger at the half year -- release of the half year results. Our view is we'll probably need a few more weeks post that. So I think it will be more like March by the time we actually come to the market with a view on the likelihood of a staged introduction of the Vickery project, which is a south the only notable thing that's changed during the course of the period is that the public exhibition came and went during the quarter, and we're just working through the submissions that we've received as a result of that further exhibition period. We remain unchanged from the guidance perspective. So I think generally, the quarter despite the weather, it was nice to see a good recovery in December and certainly dry weather leading into the second half of the year was very, very welcome. So we're not making any changes to our guidance, and we look forward to some dry weather for good mining. So with that, I might just finish up the formal part of the presentation and hand back to our operator for a Q&A session to open up. Thank you.

Thank you, Paul. [Operator Instructions] We do have our first question already, and it's from Rahul Anand from Morgan Stanley.

Good morning, all. Thanks, Paul, for the call and team. Look, first question is around your cost performance, seems quite good given the production and the impact you've had from the media and obviously the labor disruptions tracking to the bottom end of that upgraded guidance. I wanted to understand going into the second half, you're obviously going to see run rates pick up in terms of production and hopefully see some improvement on the labor side. I mean, you can comment on that. Is it fair to then assume that your cost performance continues might be used currently or even gets better?

Yes. Thanks, Rahul. And I should have said that I am joined here by Kevin and Ian and Kylie. So there's plenty of capacity here to answer questions. So I should say, so maybe we would spread that around a little bit. But look, I won't be nasty to anybody in the first instance, I can manage that without too many problems. The guidance is -- it remains constant. It's calibrated relatively widely there, as you can see. And it's just really -- obviously, the better cost performance will be reflective if we get to the top end of our guidance and vice versa. Labor is not -- I've seen comments from various participants in the industry saying that labor is perhaps moderating somewhat. We're not seeing the benefit of that, I must say. In fact, everything we're doing in order to secure more labor that will come at a cost. And so we see continuing inflation there in that area, which we're trying to manage as best we can. So the good cost performance that we've had to date, and I say "good" because none of us like being at the type of cost levels that we're operating at the moment, but that is the market we're playing in. There's been despite the wet weather and of course, the lack of productivity that stem from that in our open cuts in particular, Narrabri has been doing very well and being able to keep its coal, that's kept at least a little bit of a cap on the cost moving further north. And so to the extent that we continue to produce very well at Narrabri, then that's going to be a benefit to us. And as you say in the second half, we are expecting good things out of our open cuts in hopefully, a less weather-affected second half, which it certainly looks like the forecast is going to deliver to us. Then there should be potentially further positive momentum on our cost base as well. But that would lead us down to the bottom end of our guidance rather than sort of wouldn't commit to anything better than that at this point in time. But yes, the cost pressures, we're not seeing any moderation on the labor side, despite I've seen a few comments made by other players that in their jurisdictions, at least that may be easing somewhat.

Okay. And then the next one was around the NSW Energy regulation that's been talked about. Obviously, nothing to finalize and I'm not sure how much detail or color you can provide. But how are you seeing the situation develop? I mean we've seen something similar for gas in WA? Have you sort of done some work around what that might be in terms of, I guess, the proportion of volumes, the type of prices you can expect it at around marginal costs? What are some of the conversations that you're having currently would be interesting to hear?

Yes. Yes. Thanks, Rahul. Look, it's a strange world that we're living in. There's no doubt about it. You think you know the jurisdiction you're operating in, and it's very strange waking up one morning thinking that a portion of production is about to be ex-appropriated by the government. And so that's very odd. There's not a lot of detail here, unfortunately, and we've only just had an initial briefing at our announcement outlined with the government on this before you're actually seeing media reporting statements from the government themselves front running the whole initiative. So there's not a lot of detail yet. We've had information requests. We're providing information. There's a lot of concerns here from on various levels, of course. I mean, the most obvious one is whether or not this policy hastily cobbled together as it seems to be, will actually deliver a benefit to -- for the average person on the electricity bill. I mean there's plenty of big moving pieces in the puzzle. And obviously, the sacrifice if tonnes will be devoted at a capital price is large and immediate and the flow-on impact into a customer's electricity bill would be somewhat down the track and how the government intends to actually police that are just dizzy on me. So until we find out more detail, we don't know the number of tonnes that we're exposed to. You've seen a reference to 10% reported as a result of the media that I've seen written up by the Aus in relation to must have been an interview with treasury key, it must have been. So 10% potentially. But we need to get our heads around what the shortfall is here that they're talking about. This market obviously was in balance, if I can say that. That's not to say necessarily the generators like the price that they obtain for the coal. But we all know that from time to time, operations have glitches. And if those operations which were previously supplying them, had some glitches, then hopefully, their temporary nature and balance would resume again. So I'd like to know more information. So as I say, we've received an information request. We're providing information to the government. This is only over uncommitted tonnes. So for anyone who has committed tonnes, those would not be part of any reservation directive as I understand. And so -- and I would imagine most of the players are relatively heavily committed with tonnes, given that the market is very tight anyway and as indicated by the price.

Understood. Okay. Look, I'll take one last one, if that's okay. It's in relation to the met coal ban and obviously, the met coal market coming back as we speak, met coal prices starting to loose. Firstly, have you had any sort of inquiries from the Chinese side in terms of potential offtakes now? I know you don't really sell into the Chinese market that much, but has there been any sort of inquiry on the semi-soft side or any of your premium products at all? And then -- if you did have a opening in the Chinese market and you did see the met coal prices rally in turn impacting positively on semi-soft. How much met coal can you do under the current setup? I mean, is that around that 20% still at a group level? Or can you go beyond that?

Thanks, Rahul. Look, inbound inquiries muted, so nothing there to report given the recent nature of that change. I'm sure that will come in the fall of the time. In terms of what we could do, I mean, the key considerations there, Maules Creek, Tarra, they can obviously both produce a decent proportion obviously, and we could revert to that relatively quickly, subject to existing sales commitments. So where we've locked ourselves into a thermal arrangement with tonnes that could otherwise be moved into semi market, then you'll have to wait until that unwinds. And at current prices today, you have to move a hell of a lot before that starts to look appealing. So at the moment, you can see the split at 7% for the quarter. It's going to be there and around there for the full year, basically on the way we're going, unless some material change occurs and semi-soft pricing starts to outstrip the thermal.

How much have you locked in just before I go in terms of thermal? I mean, how long for?

No change from what we normally do.

All right. Look, that's all for me. Thank you very much, team. Have a nice day.

Thank you.

Thank you, Paul. Our next question is from Paul Young at Goldman Sachs.

Thanks a lot, Paul. Hi Kevin and team, I hope you're well, happy new year. Paul, I guess the first comment just on your production. I mean, you did really well. So congratulations. You outperformed the Hunter Valley operators despite of the weather. My question is actually on the market to begin with. And just on those inquiries from Japan for when those utilities are looking to move away from the Russian 6,000 kilocal products, just at a very high level from the industry perspective. Have you heard of any total sort of volume that the Japanese need to move away from that Russia 6,000 kilocal? Just to understand if you've heard a big number, like an overall number. And then secondly, on that. How do you think this plays out? Anything just simply those Russian tonnes go elsewhere and the Koreans take that, and we just see simply just a reshuffling of cargoes?

Yes. Thanks, Paul. Yes. Look, the production was pretty good. Thank you very much, that Ian can take credit for that doing a good job. But I think December -- December was great for us to have some dry weather to be able to move forward. And we did have some limited production, as you know, whilst we're helicoptering people in and out, but that was very, very limited, but at least kept things ticking along. The overall tonnes that we believe that Japan needs to find a substitute for us in the early 20 million tonnes is my understanding of that. And we know that they've been [scaring] around looking at other jurisdictions to try and find some other coal, but those are the coals, do have different quality dimensions associated with them. So I don't think -- say for instance, if you found some spare tonnes, and that is if you found some spare tonnes out of South Africa say for instance you can't just replace the 6,000 that they're used to hear with all the qualitative attributes that they value and then just switch that over to South African supply. So we think there's a limited upside for them in doing that. But as a result, you can see the market starting to tighten, the forward curve start to tighten in that March and sorry, April and May period. So our customers are looking for more volume. They're looking for longer tenure and both of those things, which we welcome. So we think that number is about the 20 million tonnes. The Korean market is harder to read because there seems to be a mixed response in terms of the consumption of -- or ongoing consumption of Russian coal. Their market was about the same size, we believe, in terms of the tonnes -- the Russian tonnes that they would be seeking to consume. But as I say, it's not like Taiwan or Japan, where there seems to be more of a blanket approach to the exclusion of Russian coal. Korea seems to be a more nuanced market in that regard. So that's -- we're watching this clearly just to see how it plays out.

Yes. And then just on that, just provide you an opportunity to maybe lock in higher price contracts under JFY or more tonnes into that higher price annual contracts, are you looking into that?

Yes. We certainly are looking at that. I mean, the Japanese market say, for instance, still wants to maintain both pricing arrangements being the fixed annual thermal contract and also the global coal basis of pricing. So our focus has generally been locking in the premiums. And because most of our contracts, we have very little exposure to the annual JFY thermal contract and it's only about 5% of our business. So our focus has definitely been to lock in premiums and where people want longer tenure than higher premiums for that certainty.

Yes. Okay. That's great, Paul. Lastly, just on pricing and mix. Just on met coal, you got a huge premium. Was that just a timing on cargoes? Are you just selling -- having selling some PCI, et cetera, interest into those months where prices are really high?

Yes, that's all. That's all that was, Paul. There's optimal volume, as you can see, but it was just here just timing.

Yes. Got it. Last one for me, just on the high CV thermal coal. I know you said it's drier there, you can now get access to wash plants and wash more coal, where will that trend do you think? It is hard well, look, not a specific number, but I mean, are you going to be back trending towards the September quarter number of 90%?

Of washing?

Yes. So just high CV thermal coal's percentage of production?

Sorry, yes, okay. The overall split. Look, I do think there's a little bit more of a tail of Obviously, it's nice to have more coal on the ground, but we did have a backlog of commitments that we need to make. So that coal that's coming out of the ground now is largely spoken for to make sure that we honor all our contractual arrangements. So this quarter, I think there'll still be a tail of the mid-CV sales, but the fourth quarter should revert back to where we were.

Our next question is from Paul McTaggart from Citigroup.

Hi Paul. So look, I was just trying to understand. So when I look at the Maules Creek data, ROM coal production was pretty good in December, but then saleable coal production was down quite a bit because of access to washery. But how do you manage at a site to do your ROM mine but not have access to the washery? What sort of doesn't quite fit -- what was the problem with access to the washing at Maules, given that you could mine at that time?

Let me just work way through that, Paul. I think the issue there is really just it's timing. I mean, of course, you can see stocks period-on-period, if you go look at the bottom there, stocks period-on-period largely, are largely flat. And then you had 2 months there, you've had 2 months there where we've had pretty muted production. And so our total stocks -- ROM is obviously before you've washed anything, and we sell bypass and we also sell washed coal. And so the movements through into sale was really just about whether or not you've got you've washed or processed that coal, if I can call it that, processed by one form or another, be it bypass. It's gone through the system bypass or it's gone through the washery. And our sales, as you can see, 1.7 million tonnes versus 1.9 million tonnes period-on-period. The movements are really just the differences between whether it sits there unprocessed, if I can call it that, on a ROM basis versus whether or not it's actually gone through our infrastructure and therefore, being processed. And that's where the nuances come from the saleable versus the ROM ratios, if you like. The same thing extends across -- if you go and have a look at the other open cuts, the same thing stands there, you can see, Werris, I should say -- Werris Creek you say, well, why we've got a differential there. Well, when it's a bypass mine, but we treat ROM coal has been washed out of the ground, but we can also -- before it's being crushed, it's not saleable. And once it's crushed even though it's largely 100% recovery, that's when we treat it as saleable. But our total ROM production is obviously inclusive of everything.

Okay. Maybe I'll take it off-line because I still doesn't quite -- the number still not quite add up to me. But I'll touch base offline.

Give us a call after the call.