Whitehaven Coal Limited (WHC) Earnings Call Transcript & Summary

Welcome, ladies and gentlemen, to Whitehaven Coal Limited's First Half FY '23 Financial Results Investor Call. [Operator Instructions] Thank you for joining us today. I'll now hand over to our Managing Director and CEO, Paul Flynn.

Good morning, everybody, and thanks very much for dialing in this morning for the half year results for the FY '23 year. I know this is going to cover a lot of old ground for those who've been following and been through our quarterly results, but I'll try and move through this presentation relatively quickly and get to the Q&A session. . As usual, I'm joined by Kevin, who will go through the finance section. Ian Humphris is here for those who would like to ask an operational question. Of course, Kylie FitzGerald from Investor Relations is here as well. So Kevin and I'll go through these -- the presentation without further ado. Of course, our disclosure is on Page 2 for you -- to cover off any forward-looking statements. For the half year, as you know, given that we've been through the quarter announcements, the half year has been very good for us, and I'll just go through the highlights quickly. In Aussie dollar terms, $552 per tonne is a pretty good realized price for the period. Narrabri has consistently performed well during the course of the half year, which is great. The financials in terms of the highlights, the record revenue at $3.8 million and then $2.7 billion on our EBITDA, $1.8 billion on our NPAT, being a number you're obviously seen before. From a taxes and royalties perspective, $1.1 billion in aggregates is pretty good for the quarter, again, a record for us. Our safety has continued to improve year-on-year at 15% improvement and -- which is very, very positive. The financial results have left the balance sheet in a very good position with a net cash of $2.5 billion at the end of December. The Board has declared a $0.32 fully franked dividend as our interim for this half year. And of course, everybody has been aware of the buyback program, and we spent nearly $600 million, $592 million, during the course of the 6-month period. And our returns as an organization for the 6-month period had been pretty decent at 101% for total shareholder returns for that period. So a very, very good result. Over to our markets. Premium market has been very good. We are seeing some softening with obviously the less -- with less severe winter for the Northern Hemisphere, which I suppose is very good for them, but we are seeing coal prices soften in this -- in the last month. And so I'm sure we'll talk about a lot of that during the outlook section and then also with the Q&A. Our premium products continue to see very strong demand. So this graph you've seen many times, and it just depicts where the center of the universe is for us, and that is Japan, Korea, Taiwan. The emerging markets for us being Vietnam, Philippines, Malaysia and somewhat Indonesia as well for metallurgical purposes. As far as Japan and Korea, Japan is the cornerstone of our business. Korea and Taiwan, as you know, toggle between 2 and 3, depending on the split between the 2 in any given year. But those are 2 very meaningful markets for us and pay us good prices for the quality of products that we deliver to them. As far as quality goes, I think everybody understands that Whitehaven's suite of coals is generally the high water mark across the thermal market. You can see that the comparison of us and our portfolio relative to Australia as a whole, and then, of course, other coal-producing jurisdictions. So from our perspective, we're definitely up there in terms of the [ pointy end ] of quality, and that's why we get paid that premium. And as far as the split of those quality outcomes from the sales perspective go, for the first half, were 77% of our sales were within the high CV end of the market. We did have a little bit more, as we talked about in the quarter, of our mid-CV products. That was really just because our open cut mines have been affected by the floods during the course of this half year, and we had less [ blend ] capability across our business than we normally have. Mid-CV was about 15% of our business and 8% of the total. Over to those 3 important anchor customers that I mentioned before, this graph is really just to reemphasize the point that we are in a very important piece of the puzzle for energy security across these 3 key markets. They're important to us, and we're important to them. In aggregate, if you look at these 3 jurisdictions -- these 3 countries, about 200 million people there, that on a weighted average basis, we're responsible for about half an hour of their industry, heating, cooling, cooking every day. So it is a very important piece of the puzzle that we represent. And the continuity of our business and potentially even the growth of it is very important to the security of energy supplies in that region. As far as that reliable energy is concerned, strong demand continues to be a feature of the market we're seeing. Supply gaps are there, and I feel everyone's familiar with these charts because it's not one of our own, it is Wood Mac's. But you'll be very familiar with. There is definitely an emerging issue here in terms of the delta of expected demand versus what the potential supply would be. And so we are going to continue to see a difference there, and that is going to underpin a solid pricing for our outlook as an organization, particularly as it relates to the quality end of the spectrum. Wood Mac is not the only one, obviously, depicting a solid future here. AME has obviously got numbers, which are not dissimilar. CRU does appear to be an anomaly in that regard. In fact, their view seems to think that seaborne thermal market is going to be 660 million tonnes by 2025, which is only 2 years away. So that's obviously going to be quite a capitulation, if you believe in those numbers. But we thought we'd just make sure that we're not just looking at numbers that suit us, but we're looking at all the numbers from the various commentators across this. But our overarching conclusion here is that is there's going to be solid demand for our high-end quality product over any outlook period that you care to imagine on the tonne scale. And met, met is obviously looking pretty good as well, with China taking Australian coal. Again, we're going to see -- well, we have seen uplift in metallurgical coal prices already, and I think that will continue in our outlook period. As far as the supply-demand dynamic goes there as well, we also think that, that is structurally short. And the met market, we think, is going to be a very good place for us to play over time. On pricing, pricing clearly, we have seen some very interesting prices. We're right around $200 before the terrible invasion of Ukraine. And so we have reverted to those levels now that we've seen a less severe winter in the Northern Hemisphere. So prices have come off, as we've mentioned already. But I think structurally, the underpinnings of the strong pricing environment we see, despite the temporary falls in prices more recently, I think, remain the same, and that is demand is good. Supplies additions are pretty much nonexistent. And with structural restrictions in terms of consumption of Russian coal in the thermal market, we're going to have a very good outlook, I think, here for some time to come. Metallurgical coal, as I said before, structurally, I think that's -- we're very convinced that, that's a very strong market over time. And despite the inversion, that inversion has reversed. And so that makes more sense to everybody on this call, I'm sure, in terms of what they've historically understood about the relationship of these 2 markets, which will bring some interesting dynamics to it, I think, just in terms of -- well, [indiscernible] pricing is now looking -- starting to look interesting, despite the spread between the various qualities in the thermal market. You will actually see people start to move back into that space, and so that will certainly add some momentum also to the thermal market as well. So if I just summarize our market and look at the market drivers at the moment, we've got limited supply response. We've got strong demand. We've got sanctions on Russian coal. We've had weather events, which are temporary, we would say, even though it was pretty onerous for us in the first quarter, as we've spoken about over the last couple of quarters' reports. But we do think that, that -- the effects of that are starting to unwind in our backyard, though, and down the line from us in the Hunter Valley. So we are seeing volumes improving in there. So we've seen record prices, which is fantastic and speaks to the underlying tightness that we've been saying. But there are limitations here, and inflationary impacts in our business are something that we'll speak about a little bit more in detail. But yes, labor supply constraints are definitely something which the whole economy is talking about, and it's no different in our space, and perhaps maybe even a little bit more challenging given the remoteness of some of our business. COVID looks like it's hopefully behind us. I hope we don't have to keep talking about that for too much longer, but it is -- it certainly has and continues to see a little bit of an impact in our business, but obviously not as bad as what it was in previous periods. Inflationary pressure is manifesting themselves across pretty much the entirety of our business. It is something we're actively managing as we go forward. Now safety has been a really strong improvement for us year-on-year. That's nice to be able to say that. There's obviously plenty of work to be done there. 15% improvement on a 12-month rolling basis is really nice. But if we look at where we've closed the year last year to now, it's actually only 4% in that same half year period. So we all know it gets more difficult to eke out the improvements, the lower in this curve you get, but we must get lower. And so further effort is required in order to improve past the 5.2% for our TRIFR. The highlights is, as I said before, $552 for average realized prices is certainly very good, and a record -- revenue record $3.8 billion; EBITDA, $2.7 billion, a record. And our NPAT now you know, $1.8 billion is a very good result. Cash generated from operations is at $2.5 billion, and our cost at $96, at the lower end of the range that we've given you. And on the return side of this equation, I mentioned before, the $0.32 the Board has declared fully franked. Total returns to shareholders is at $959 being the dividend and buyback in aggregate. And from a TSR perspective, 101% over the 6-month period, very good. These numbers you've seen, so I won't belabor this other than to point out that we do have a tale of two halves here. And the first half, as everybody knows, heavily weather affected. We haven't seen anything like that in more recent times. Once we've rolled past, in fact the reporting of the December quarter report, and good mining conditions have been positive for us. So we're looking forward to that continuing in the year, but I think the labor and the weather remained the 2 drives that we would caution on in terms of achieving our guidance for the full year, which remains at the 19 to 20.4 level. Maules is, as you know, heavily weather impacted and recovering nicely now, but it's still -- we're still suffering from labor shortages, which is probably the defining feature at the moment that we're balancing. So we are changing and evolving the employment proposition that we're offering to people from further afield in order to bring more labor into our region. That does come with a cost, and that's not surprising to anybody who's listening to any reports across any industry at the moment. But we have got a steep hill to climb in the second half, which we've done before, but it is -- no doubt, it's going to be a period of [ leveraged ] activity as we seek to deliver within our range of 10.3 to 11 for Maules. Narrabri, as you know, is going well and progressing closely to its impending change out. So that's very positive. And so overall, we're in a pretty good space. And it's nice to see, obviously, that wasn't a weather effect, as we talked about over the last couple of quarters. Now we're near to the degree that the open cuts bore during that period. So for the first half, around 3.6, very good, big increment over year-on-year and certainly on track to achieve our guidance of 5.6 million to 6 million tonnes. The change out there, going from [ 110 ] to [ 203, ] we're expecting that in April, which is positive. And cut and flit has been actually manning up better, so we are seeing some momentum there building. And so we are thinking that in the new year, that's going to be very positive to be into the shallow ground. You'll only see a little bit of caution in the balance of this final stage of the financial year, but you will see [ 203 ] start to indicate what better volumes and productivity is going to look like in that shallower ground. So keen to see that and report on that in the final quarter of this financial year. Gunnedah ops, as everybody knows, is weather affected, which is obviously difficult, but that leaves us with a reasonable task to get to at the end of this year. And so I won't dwell on that too much because I think everybody has been through that. But we have -- I will just call out some numbers here, so you can understand the scale of the interruptions that we've had here in Gunnedah, in particular. Maules Creek did suffer, I think it was, 24 days of downtime, but that stays a downtime as opposed to all the other disruptions that go from wet days and ramping up and cleaning up [indiscernible]. Gunnedah ops had quite a difficult time as well. Tarrawonga had 17 lost days in there, but Gunnedah, as you may see, because its connection with the low line road to Tarrawonga, actually suffered 36 days during the half, which is quite a significant impact on trying to deliver during that period. So with that, I'll hand over to Kevin to give us the summary of the financials.

Thanks very much, Paul. It's not very often when you get to turn up and talk about the first half. It's better than probably 4 of your last 5 years. So $3.89 billion or $3.8 billion in revenue, a really strong first half of fiscal year '23. Average realizations, $552, whereas in FY '22, our average coal price was only $325 a tonne, and I say only because that was a cracking year as well. So as a result of that revenue, a little bit of pressure on costs, but we're not immune from that. We're not alone on that in the world. I think the focus in the business was to make sure the tonnes came out of the ground and went to the customers in the premium markets at premium prices. So as a result, revenue, $3.8 million, as I've said; EBITDA, $2.7 billion, just a shade behind, about 10% behind the full year for FY '22. NPAT was at $1.8 billion, which was a great result. And cash generated from operations was a touch over $2.5 billion. You can see that we've built cash on the balance sheet. Now that cash has got some claims to it, and we'll go through those in a slide a little bit further on. And the Board has declared a $0.32 franked dividend to shareholders. So EBITDA margin on the next slide. At these coal prices, as I said, the focus really was on production and selling the coal in the premium markets. You can see the -- on the earlier slide Paul put up, more tonnes went into the Japanese market than in previous years. That really was a function of having the tonnes blended up and having the tonnes to sell. In the first half of FY '23, our EBITDA margin per tonne of coal was $414. You can see the costs were up about 13%, and we'll go through that in a moment just on the breakup and what's driving that. But if you look at the first half of fiscal year '22, we were pretty pleased with the margin of $102 a tonne. So $414 is a happy day for a CFO. Over the page on to how we drop from the first half of fiscal year '22 to the first half of fiscal year '23. There are no surprises in this. FX was a little friendly to us. It gave us about $300 million, but the real driver of this was the increase in coal price. You can see that thermal coal price in the first half of fiscal year '23 averaged $391 (sic) [ $381 ] versus $146. And you can see the met coal, which was a small proportion of the business, was at $285 from $155. And as I said before, the costs were up about $86 million, and we'll go through that on the next slide. So all in all, it is a record half, and it's an outstanding half. If we go to the unit costs, we've talked about this, and there should be -- shouldn't really be any surprises to people. We've seen the impacts of flooding, which was really in that first half, around that September, October, November period. It was surprising for most people, strong Narrabri performance actually lowers our cost because the yield is very high. They're about a 98% or 99% yield, and that actually contributes to the outcome here. As you can see there, we've accelerated the debt amortization. There was an article, I think, in the AFR the other week that talked about this. The producers have decided that they want to reduce the risk in that business as banks have decarbonization targets around 2030. And in the back end of this, you can see other costs that were not immune from higher diesel prices, labor payments we've made, OEMs that are asking for a little bit more on the equipment. And all in all, that's how we get from $83 to $96. So again, those costs, some of those we would expect to see come out of the business in times to come, which were the impacts of flooding, and we would expect those diesel costs and labor to soften over time as well. Coming to cash flow generation, and it has been a very strong half. So we had about $1 billion in net cash at June 30, 2022. We generated $2.5 billion. And in accordance with this capital allocation framework that we put out to the market about this time last year, we've invested capital in sustaining the business. We've paid $945 million to shareholders in the form of buybacks and dividends. And we've got another $280-odd million to come in the dividend coming in about 2 weeks' time, and that left us with about $2.4 billion. And some people will say, "Well, what are you going to do with that $2.4 billion?" Well, there are claims to it. So let's go to the next slide. We have -- so we expect to pay this fiscal year '22 income tax of about $552 million in the next 10 days. There's income tax in relation to the first half of fiscal year '23. We'll pay that on the full year '23 result in around December 2023. And we've got an interim dividend there of $274 million. So after that, if I can call it, the unconsumed cash will be untagged cash. That's about $879 million or $890 million of cash there. So we'll retain some of this on the balance sheet for future needs. And we'll use some of that cash and the cash that's generated in the second half when we return to buying back shares in the second half. The net cash and liquidity, I really don't propose to stay on this for long. You can see in here the cash that we've got on hand. Our ECA facilities, or export credit arrangements now tail off over about a 7-year period. Finance leases are shrinking, and so our net cash at $2.471 billion. Whilst the liquidity here includes undrawn facility, we don't expect to play in that space. We expect to leave that alone. And we expect to reposition our funding over time. So we are still looking at debt capital markets, although there's no real need in the business for it at the moment, but we stay prepared for that discussion. And we look to align the sources of our capital with places where our coal goes. Coming over to the page on capital allocation, and I expect to have a few questions on this through the question-and-answer period. But let's try and take you through this. It's really a disciplined approach to capital. We spent some money on maintaining and optimizing operations. So we spent $85 million in sustaining capital, including some Narrabri mains development, and we repaid some finance lease payments of about $36 million. So the cash on the balance sheet went up, but that's because we've got tax payments to make on both fronts, and we've returned $0.32 to shareholders. In half 1 fiscal year '23, we bought 67 million shares for a total of $592 million. And since March, when we started this discussion, we bought back 14% of the stock for $955 million. So we haven't dilly-dallied in that, and we still see value in that approach today. The payout ratio for the first half is about 36%, which is midway between the bottom end of the guidance of 20% and 50%. And the overarching comment I'd say to people is that we look at an annual result rather than splitting the half straight out [indiscernible]. So we'll work our way through and see what the end of the year result looks like. And from that, you'll see us continue within this capital allocation framework. Here we go. So just to put a bit more clarity into cash that comes to shareholders versus how do we allocate capital from returns. On the left-hand side there, you can see the actual capital that has been returned, which is a record number. Now it's literally double what we've delivered in previous years. We've delivered that in the half, and that's been cash in the buyback that we talked about and the final dividend that came out of the fiscal year '22 results. If I come to the results, the capital that's allocated to shareholders, you can see $274 million is going to be in the $0.32 dividend coming to you in about 2 weeks' time and the $367 million of capital that we've spent on the buyback in the first half. So all in all, that's a payout ratio of about 36% of NPAT, whereas the payout ratio for FY '22 was about 53%. What I'd say to you is that you can see that we're not paying special dividends, and that's consistent with the approach we've had and we talked about back in from early February, March in 2022. So let me just hand it back to Paul, and I'm looking forward to questions and answers.

Thanks, Kevin. Just over to our guidance now quickly for you. So no change in there, as we've mentioned before. ROM remains at 19% to 20.4%, as I mentioned earlier. Sales on a managed level at 16.5% to 18%. The costs, as we've mentioned now, at $96, we're reporting, obviously, we're just above the bottom of the range there, which I think has actually been a decent effort given the bumpy ride we've had with weather and, hopefully, the temporary impact on costs that Kevin has gone through that have related from the flooding related matters. So we think with the second half that's more heavily volume weighted, there's a good chance we can improve on that current position, which is very positive. We're now speaking on the CapEx, which is not surprising given supply chain and other related issues there, I mean, generally, we understand that the first half, for those who've watched us in the past. And so we're unlikely, I think, to get the total of that capital for the balance of the year remaining. But there are some inflationary pressures in the business, as you know, so we're doing our best just to try and keep that all under control. In terms of the market outlook, we'll just finish on this here The Russian sanctions, I think, are the key impact for us in the near term. Let's see how that unfolds. Weather does feel like we've got a bit of weather pattern in front of us, so we're not taking that off the table. Clearly, labor issues are causing us and everybody a lot of concern and the inflationary impacts that go with that as well. We have -- as I'm sure there'll be questions in a minute about this. The coal reservation policy for the New South Wales government has announced the details, of that we don't have for you, unfortunately, at this point in time. We do expect there's imminent directions from the government in that regard. We can perhaps talk about what we know, but we don't have the details. So what we need is stay tuned for that. As I said earlier, I think the Northern Hemisphere winter, mild as it was, that's good. That doesn't mean that in the short term there's a little bit more oil, gas coal laying around than what you had planned for. That's probably good for them, less good for the rest of the market in the short term. But I really think that the structural issues associated with sanctions remain, and so I think this is just a temporary softness that we're seeing in the market. Met coal prices are improving. China taking Australian coal again, as we've always said, is a good thing for improving relations there. I think that's very positive. Longer term, obviously, energy security is going to continue to be a real issue. High-quality coal is going to be needed for longer. Our transition is aided by the continuing supply of the coal that we produce to our important markets, and we'll continue to play that important role, particularly for those 200 million people, as I mentioned earlier. And without any supply side response coming on here, I think that bodes very well for the longer-term outlook. As far as our individual focus as a company level for the balance of this year, we want to continue to focus on our safety. We're doing well. We need to do better. The environmental compliance and sustainability outcomes for us have been very positive also, but needs more effort. We're obviously focused on delivering our guidance. And given the rough start we had with weather and [indiscernible] in the first half, we're very much focused on bringing home the bacon in the second half. Managing our costs and keeping the margins in the right place is very much part of our focus. The capital, as I said, we'll likely probably going to spend there, but we are looking very closely at Vickery. And I did say to people at the quarter report that we'll say something during the quarter of March on the prospects for a staged introduction for Vickery. So that's very much front of mind for us. We're working on -- hard on that. And we'll work with the time that we can actually [indiscernible] our opportunity for everyone to have a discussion on that during the month of March. And then once we know more about this coal reservation policy, we'll have to say something on that as well, no doubt. But with that, a very, very good half year. We're really positive about the results. We've been able to reposition the company financially, set it up well for the future. We acknowledge the softness that we see in the current pricing just for the second half. But again, I think the structural underpinnings of the market going forward are very, very constructive for our business. And with that, I'll just thank everybody, all our employees and all the shareholders for their support during the first half of the year and look forward to the second half. I'll hand it back to you, operator, now for Q&A session to open up.

[Operator Instructions] Our first question comes through from Chen Jiang from Bank of America.

I just have a few questions -- well, 2 or 3, please. On Slide 5, there's a big jump for your sales volume to Japan in the last 6 months. I guess, this will continue with the sanction on Russia coal. I'm wondering, have you seen any increased competition, where it's diverted by heavily discounted Russia coal into your sales destinations such as Korea, Malaysia, India and the other Asian countries who don't have Russia sanctions? I have 2 more after this.

Yes. Thanks, Chen. Look, Japan definitely is a big piece of the puzzle. And I think in the short term, there is -- some might say risk. Others might say opportunity for more volume to go in there, particularly as Russian sanctions come into force there from the first of April. So we may actually see directionally more of our volume going into Japan. As I mentioned earlier, Korea and Taiwan toggle between second and third in terms of our sales mix. I probably suspect that in the second half, and even further into the new year -- financial year, you might see Taiwan even grow a little bit more. Korea, it would appear -- it does appear to be taking Russian coal, and so that's not a consistent position across the Korean market in its entirety. We have got different organizations that we're dealing with taking different positions there. But by and large, that industry is taking some, where Taiwan has excluded it altogether, Russian coal that is. So I do -- if I'm forecasting, going forward, Japan a little bit more; Taiwan, a little bit more. Korea may be moderating slightly in terms of percentages, but that's where we're seeing it. India, we think, is taking quite a bit of Russian coal, and it's being offered at heavily discounted prices. And so it's understandable at a level that they're taking that. Obviously, that's not a market we're playing in, so we don't see -- but we're not seeing any real displacement of coal that's causing us greater concerns. We know that Japan has been searching around the globe looking for available [indiscernible] material. And so they've been tapping on the door of pretty much most coal producers in jurisdictions, but we think the volume response there has been much at all. And so, hence, it is our prediction that we'll probably be putting a little bit more into Japan in the foreseeable future.

May I ask another question on Slide 30 of your presentation on shareholder return? So interim dividend, $0.32, so that's 16% dividend payout ratio. I guess, that's lower than the market expected. You still have 80% of buyback to complete in the next 8 months. So by using that 8% of buyback, your second half FY '23 payout would be potentially more than 50% just on the buybacks. I'm just wondering how should we think of your dividend payout ratio in the second half of FY '23? We had a look at your split of the dividend and the buyback in the last 12 months. It seems like 40-60. But just considering your magnitude of buyback, how should we think of your dividend payoff?

Thanks. I'm going to start this off. I'm sure Kevin will add something to this one. Look, I think there's -- the numbers that you've recounted there, of course, are correct. There is an element in our thinking of a little bit of caution here. Typically, we pay a little bit less in the first half and we'll be heavily weighted in the second. I think our view on that is probably a little bit more focused given the softness in the market. So we know that the second half on average, revenue-wise, is going to be less than the average of the first half. And so Kevin has highlighted the claims already over the cash balance that are there that will need to be fulfilled. And there will be other capital needs, if I can call it that, which we should also bear in mind. So as I've just mentioned to you, we will talk to you in about a months' time about our thoughts on the state of Vickery and our thoughts on a staged introduction of that. So we are bearing these sorts of factors in mind as well. The buyback, Kevin, you can speak to the balance of the buyback. I think, of course, Chen, you'll acknowledge the minute before our AGM was held, clearly, the government took off the table the off-market buyback route. And so the prospects of us being able to do a full 25% within a 12-month period, I think everybody understood that, that was not possible. And so we've been consistent performers in the buyback period since then. With our buyback in the periods, we were able to trade, and we'll continue to do that. We see that as a very important and, broadly, very well supported by shareholders in doing so. Kevin?

Happy to step in, Paul. I'd probably say -- I'd say, this first half, we're generally a little more cautious on dividends. I don't do straight arithmetic. The full year, we've given you guidance between 20% and 50%. Clearly, with the approval from the shareholders in October of the second stage of the buyback, we really only had a couple of months to have a swing at that. We would expect to be back in the market, and we expect to be back in the market in the second half, and we see the shares as being compelling. So I would say, wait for the full year. I'd also probably say this that we want to keep the balance between buyback and dividend, and that ratio that you talk about there is about where we like to see that. And we don't want to step too far ahead of that on the dividend because, in the past, that's just encouraged transient shareholders, will be the way I will describe it. So stay tuned for the second half, Chen, and we should be compliant with the policies that we will put out for the people and the guidance we've given you.

May I have another last question regarding your cost? First half FY '23 cost, $96 per tonne, at the lower end of your guidance of $95 to $102. And your production in the second half is going to be more than first half, second half weighted after guidance. And you were expecting less with the disruptions. So is that fair to assume the second half FY '23 unit cost is likely to be at the lower end as well or lower than the first half FY '23?

I think the -- thanks for that. I think that's a really good question. I'd probably look at the mix of operations that are going to contribute in the second half. In the first half, Narrabri has performed very strongly, and that's helped to lower the average cost. In the second half, we're going to see better performance from an overcut and less representation -- proportional representation from Narrabri. So that $4 of benefit that you saw in the first half is unlikely to be repeated in the second half. We should get better volumetric outcomes, and we're seeing slightly lower diesel costs in the business. So our expectations are second half, we should still be around that bottom end of the guidance would be my view, and I think this is as much as I want to say.

We're hoping for less weather impacts in the second half.

And it's looking that way.

Our next question comes through from Paul McTaggart from Citi.

So I did want to follow up a couple of things. You made some comments, Paul, about some labor in Maules Creek and going further afield. So I just wanted to get a sense of what you were doing around trying to kind of get labor. And second was when -- I mean, you produce coal that traditionally is not used [indiscernible]. So how does that discussion go with the government? And did you get any sort of recognition from the government, if that's the case?

Yes. Okay. Our temperature is going up already on -- with that second question, but give me some time to breathe there a little bit. And Ian can give you some answer, paul, on the additional initiatives that we're engaged in now at Maules Creek and across the business.

Paul, look, we are looking at the various areas that we can source labor from rather than the traditional sort of target areas we've had, and that's proving beneficial. We have looked at various roster options to, I guess, facilitate those different areas we've looked at, and they've been implemented recently. And we're seeing some favorable results there, and we're hoping that that's going to grow. And we continue to ensure that sort of the remuneration and incentives and things that we have to our employees is market competitive, and that continues to move, and we keep following that. And we continue to look at what we can do to grow -- train trainees, indigenous engagement programs and things for our local community. So there's a suite of activities there, and we need to keep moving with the market and staying dynamic in that space.

And so Ian, to remain market competitive, I mean, how much kind of pressure is putting on the labor costs?

Well, I mean, we've introduced what we call a market allowance to our -- well, both our employees and contractors, and we've linked that to coal price. And I guess, what we -- the initiative there is to ensure that should the situation change that we're not embedding that cost profile. But effectively, that stuff with over 10% increase to them on an annual basis, well, that's in play.

First of all, the retention payments that we've mentioned to you in the past, Paul. But as you say, there's other momentum there. Unfortunately, inflationary-wise as enterprise agreements are up for grabs. So that will be no news to anybody that the requests that are being made there are escalating. And so we're working hard to make sure we can manage the cost of that. But we still have to achieve the outcomes we need from a total FTE perspective. I mean, that is a real battle. So -- and the market isn't obviously one market, of course. And so when one company goes out and does a certain thing that ripples around the market pretty quickly, other people are looking for a single sort of initiatives. So yes, look, it is a challenging environment, but seeking people from further afield when we've tapped out the local market is a thing that we're having to engage more and more over time. And if we wanted to bring on more volume through a staged introduction of Vickery, that's only going to compound that issue.

And I think the other one, Paul, you mentioned in a previous call is the housing policy and developing additional housing in the regional areas for those who want to move out there. Now that's a slightly longer-term strategy, but we've kicked it off. And that, I guess, comes back to that sort of plethora of options that we have for different people to meet the various requirements.

So Paul, then just on the other part of your question, look, that has been a very difficult range of discussions, not just with us, of course, right across the industry. There are people obviously already embedded in the supply relationship for the domestic power generators. And as you rightly pointed out, the type of coal that they've historically sought and supplied and consumed, is nothing -- there's no resemblance to the coal that we produce. And so the notion that we would sacrifice high-value export revenues for the company, for the state, for the country to be diverted internally and, of course, [indiscernible] to be consumed isn't is a particularly sensible option. We have raised this, as had the other producers. And of course, it makes no sense for us to be giving anybody 6,300 material to burn in a power station. That's not designed for that. And a 9% to 10% ash product is not useful when they've been historically consuming anywhere between 24% and 28% ash. So yes, that's difficult. So we're helping the government understand not just the quality dimensions of this and the ramifications of that in the marketplace, but then also the logistical considerations associated with supplying certain power stations. I mean, it's very difficult for everybody to get trains into the Central Coast, so we all use much longer trains than the loops there that can accommodate. So there's going to be some inefficiencies imposed on that if you're having to use smaller trains. So yes, there's a lot of dimensions, which I think the bureaucracy -- the government bureaucracy who's been charged with evaluating this is, is coming to terms with. And we'll just have to keep helping them understand the limitations of both the product and the physical nature of this. I mean, look, Paul, in my view, at the end of the day here, this is largely a political issue. That is my concern. There's no a shortage of coal going around. It's a price issue. People's electricity bills are looking pretty unfavorable from a government's perspective, especially the government that wants to get reelected. And so I think they've been caught up in all of this, quite frankly. So there is coal available. And if you want to pay an export-quality price, then it is available. But that is the market construct that the government -- successive governments over the many terms have orchestrated here. Long-term assets with shorter-term supply agreements attached to them, when they're privatized, was always going to deliver this exposure to the export parity pricing, and it's now upon them.

Our next question comes through from Tony Mitchell from Shaw and Partners.

Paul, what's the latest [ government ] policy on the domestic coal situation here?

Tony, look, I don't think they have a stated position here in this regard. I think they're -- the only thing that I've heard from them thus far is to echo the government's position is that, whilst this thing is a foot, there's no change in royalties. And obviously, everyone is concerned about that having seen what's going on in Queensland. And so we can't be having 2 of these initiatives compounding the effect negatively for our sector. So I don't believe there would be any change from an opposition perspective. I think they're letting the government obviously take the pain on announcing it. And -- but we have been able to extract from -- the industry has been able to extract from the government a commitment that there will be no royalty changes, and the opposition has echoed that.

Okay. Would you have any interest in buying BHP mines at either Black Water or Daunia in Queensland?

Well, we've got fully on our plate. I think it's probably the easiest way to answer that. And we're -- we didn't talk about Winchester South. In fact, we haven't mentioned it at all during the course of this call. But I have mentioned Vickery a couple of times, and we are looking at that very closely. And so we have a lot on our plate. And whilst we've heard the rumors, of course, everyone heard the rumors about some assets coming to market, and we look at everything as it comes along the way. So I don't want to be caught up in too much discussion on that other than to say, we've got plenty on our plate. So I'd rather deal with the prospects of a staged introduction of Vickery. And in 6 months' time, we're hopeful that we'll actually have an approval for Winchester South. That sort of maybe on the more [ ballsy ] side of things. Maybe, it might be 9 months, but there's no reason why it can't come out in that period. And then, of course, we've got to engage at the federal level. But the met coal mine is being developed up in Queensland, that's still a viable prospect. And I think there's no -- no one is debating the structural nature of the shortage in met coal going forward. And Queensland is obviously well positioned to be able to service those needs.

Yes. Do you think -- does the company have a planned percentage of your coal that would come from metallurgical coal over the next few years?

Yes. We wanted to be 50-50 was our aspiration.

50-50, right, okay.

50-50, yes, I mean, we're obviously not shy about that. We know we've got the best thermal in the market, and customers love it. But we do think, over time, our proposition as a company is better balanced by having more met in the business. And as I mentioned earlier, semisoft with prices now reverting -- met coal prices now reverting, semisoft inbound interest has been also better than what we've heard in the past couple of years in particular. And then, of course -- so we think we can swing more [ walls ] and potentially Vickery into that semisoft market. And then, of course, Winchester South would be the game changer from our perspective from a met composition perspective.

So can you get to that 50-50 by just doing Winchester South and your other -- and Vickery? Can you achieve that objective over the new few years just doing those things without acquiring any coal assets?

You'll have to hand the baton on to someone, Tony, after your 3 questions. But you can't get to that with just further met coal sales out of Maules Creek and Vickery and Winchester South. You go -- you'll make a huge difference in bringing Winchester South on, of course. But yes, we're not obviously up there for one asset alone. We think there's -- there are other opportunities over time, but we're not raising out to try and create some transformation here.

Our next question comes through from Paul Young, Goldman Sachs.

A lot of the high-level questions have been asked, so I just want dig into some of the projects. In particular, starting with Narrabri, I mean, we're pretty seeing something out of the Southern part of the mine, which will be great for that operation from a production and cost perspective. I just want to focus on the CapEx spend in Narrabri in the half. It's the one area where you fell short versus the run rate for the full year. Open cuts and growth project spend was in line with the full year. But I noticed on Narrabri, obviously, a lot of the money is going into the 200 series and the mains development for the future. So just wondering, has there been any impact on potential future production or development because of access to labor, et cetera?

Well, no, I don't think there's been no impacts of delaying us. Now we have experienced some delays though. There's no doubt about that in mobilizing some of the equipment and -- that will bring the equipment for that work. But as far as development flows and so on goes for us, we've got no issues there. We're well covered. We will -- you will see more going out in the second half, as I said earlier, we won't get to the full numbers based on where we are today. There's just -- it's slid to the right, but we're well within the balance of our requirements.

Okay. That's great. And then second question on Vickery. Paul, I mean, it's -- we don't have to really go through the history of 7 years of sort of waiting on permits and talking around sell-downs and all sorts of things over time. And now we're in a situation where you're looking at a capital-light model on a starter project and not much mention on the larger project and obviously go through the feasibility study or recap of the CapEx. But I guess, the question is what's the end gain here in Vickery? Is it still to finish the studies and the capital update on the larger project, the $700 million, $800 million larger project? Are you still goal-seeking or targeting a potential sell-down of this asset? And I'm just curious about the overarching strategy of Vickery now.

Yes. That's a good question, that's a good question. Stage introduction is what I mentioned a couple of times there with the early mining case of Vickery. And when I say stage, I mean, I'm thinking it's a 2-step introduction, smaller version. If we could get that on quickly, I'm thinking about accelerating revenue in this period to be able to take advantage of the existing surplus capacity at the Gunnedah prep plant and also those surface take-or-pay, I think that would be useful. The broader proposition for the full-size Vickery, we will put to the Board within this year -- this calendar year. And so we are interested still in bringing the whole thing on. There's no lack of interest in that regard. So -- but you can imagine, there's lots of work going on at the moment because capital estimates are hard to nail down. And so you can imagine the team -- our project delivery team is working pretty hard to try and get the best estimates they can on that because when we do what eventually come to the Board, it was not just a small version than any bigger version. There's going to be an allowance that has to be made for capital inflation.

Yes. Okay. Makes sense. And then when it goes to Board approval, if or when, I should say, then you can go out and obviously present that -- those results, et cetera, open up a data room and then get potentially look at bringing in a partner.

Yes, yes. That's right, Paul. Look, energy security concerns, being what they are, people are very interested to see the volume come on. There's no doubt about that. But obviously, that means us -- unless we bring in other people, that means us taking all the risk on that. So we would like to see if there's other opportunities for us to share that risk. Having said that, as I have mentioned on these calls in previous periods, there is -- we are attracted to the idea of having full unencumbered use of our own coal to spread across our business and blend it as we see fit. And that is a very big part of the value proposition that Vickery represents given you've got big differences in the market between the various segments, between the lower-rent coals, [ future ] 500, the gC NewC. You can see that this opportunity is very meaningful. So we don't really -- it may not be in our interest to have anything structurally in place that impedes our ability to get our hands on our coal, such as we have greater restrictions at Maules Creek, like for instance, but we've inherited that. So we're looking at other means by which people can give us financial support, but perhaps not direct equity into the project.

Our next question comes through from Glyn Lawcock from Barrenjoey.

Look, just a very quick one. The buyback, can that start from tomorrow or from today, just from a technical perspective? Any issues?

There's just one buyback issue at the moment, Glyn. That's a good question. Thank you for raising it. Ordinarily, we will start the payout after the results go out. Ordinarily, we would -- we are holding off that until such time that we think there's an imminent pronouncement from the government on whatever this reservation policy is going to mean. So we are -- you won't see this in the market for a day or 2 until such time that that's -- I understand it's imminent, so it's going to be flushed out. I wish it was today, so we can talk about it. But it's -- there will be a couple of days before we can move forward, I think. But that's the only thing that's impeding us from moving back into the buyback program.

Okay. And then the federal government, any issues there on the windfall tax? Or has that gone quiet?

Haven't heard any more discussion. That seems to be more in the media than it is in dialogue with the government. So part of it seems to have gone away and has had any suggestion of problems with diesel fuel rebates and other considerations.

All right. And then just finally, you've probably [indiscernible] at the wrong time now that coal prices have fallen, and you went [indiscernible] thermal. How quickly can you go back to your 80-20 if prices stay at this sort of disparity now the other way around?

Yes, yes. Look, I think we've done pretty well out [indiscernible] actually. But yes, the market is reinflating on the met side. That's great. That's really good. We can move back into that market pretty seamlessly. And so we haven't tied ourselves up commitment-wise for long-dated thermal contracts that will prevent us from moving back into the semisoft. So we're in -- we'll be pretty responsive to that on the basis, Glyn, that still makes sense. And I just want to qualify that because even though the semisoft numbers will start to look very good, they do look good. In terms of the blending opportunity, given the difference between 5,500 material and 6,000, there's still a very strong argument for blending on the thermal side versus a discrete sale on the semi side. So I just want to raise that just in case people start having more expectations on the semi side. We will definitely sell more semi. I can see that coming. But the blending opportunity on the semi is still very strong.

So just to clarify then, we should be expecting at least in the back half of fiscal '23, it would be like [ 92 ] [ 8 ] like it was at the moment. You can't switch quickly this back half, and it will be back into '24 when you maybe can readjust again.

It will be early in the new financial year that you see a big change there. We certainly have unsold tonnes in the balance of this financial year, so that's possible to move more in there. But yes, in the early '24 is when you'll see it.

There are no further questions at this stage. I'll hand back over to Paul and the team.

Thanks very much, everybody, for all your time this morning and the questions. I appreciate that. If there's any further questions, I'm sure we'll see many of you during the course of the next couple of weeks. But thanks for the time, and we'll call that to a close now. Thanks, operator.

That concludes the call today. Thank you all for joining. All participants may disconnect.