Yancoal Australia Ltd (YAL) Earnings Call Transcript & Summary

Welcome, everybody, to the Yancoal 2021 Financial Results Investor Call. [Operator Instructions] I'll now hand over to our first speaker, Yancoal's, CEO, Mr. David Moult.

Good morning, everyone, and I'd like to just add my welcome to the Yancoal 2021 Financial Results Investor Call. Just before we start, I'd just like to draw everybody's attention to the important notes and disclaimer in the pack, covering off all the usual areas. 2021 was a record revenue year and EBITDA year for Yancoal. Overall, we had an extremely strong year in all aspects of our operations. COVID-19, of course, has affected everyone throughout the year, and we had an effective response and managed extremely well to protect our operations. I think everyone is aware, as the year went on last year, that towards the end of the year, we started to get more impacting the regional areas. And of course, we saw that in the end of year results, and we'll talk about it a little bit more as we go through. So a record revenue of $5.4 billion are attributable saleable reduction at 36.7 million tonnes. Operating EBITDA $2.53 billion, giving us an operating EBITDA margin of 46%. Cash costs at AUD 67 a tonne, and our cash position at the end of the year on the 31st December, was at $1.5 billion. We did make -- I think everybody is possibly aware, a voluntary debt repayment back in October of last year of USD 500 million, and we declared our final dividend for the year at $0.50 a tonne. We also declared a special dividend in addition at $0.204 per tonne for the year. On safety. Our pandemic response plan was managed very well throughout the whole of 2021. However, we were impacted by -- more to do with the isolation requirements of the state government than we were for actual impact in some sites. But it did have an impact upon us, especially in the regions as we got towards that last quarter of the year. Overall, our safety performance was good. We managed to, again, beat the weighted industry benchmark for a mix -- our mix of underground and open cut mines. So it was a challenging year, and I think Yancoal responded extremely well, both in safety, but also in managing their way through the pandemic. If we just look at the operations. And just to remind people of where our operations are, we have a mix of operations. Our key Tier 1 operations are Mount Thorley Warkworth, Hunter Valley Operations and our Moolarben mine, and they're about 80% of everything we do. So there are key operations in every aspect. Our operations produce a mix of coals, both thermal and metallurgical. And in the metallurgical, we produce a mix of PCI semi-soft and a small amount of hard coking coal at our joint venture operation in -- at Middlemount. As you can see there, we have significant resources and reserves, and most of our mine lives are within -- up to a minimum of 20 years, but we've got a couple there, especially Hunter Valley Operations, with an extremely long mine life in front of it. The key result drivers for the year. Our average realized sales price was AUD 141 per tonne. That was a 72% increase on 2020. I said earlier, our attributable production was at 36.7 million, slightly below our 2020 figure of 38.2 million, 4% down. And that was mainly impacted by the effects of La Nina, the rain events during the year and in the latter part of the year, some disruption from the COVID-19 as the infection spread out of the city areas and into the regions. Our attributable sales at 37.5 million was only 1% down on our 2020 performance. And what we did there, we were a little bit down on our product tonnes, but we sold down our stockpiles and took advantage of what was an extremely strong market in that latter stages of 2021. Operating cash costs at $67 were up 14% year-on-year, mainly driven by high diesel price, which has been running extremely high. And of course, diesel price tends to follow our coal price as well as an energy price. So yes, higher diesel price across the operations. Demurrage the port, mainly due to the weather event, and the impact that the weather had on both lower production from the mines, but also interfering with the infrastructure and the difficulties the ports had at of managing some of the storm conditions. If we have a quick look at the coal market. Our average realized thermal price was AUD 134, which was up 76% from 2020. And the international indices, both Newcastle -- the global coal Newcastle benchmark and also the API 5 indices, we're running at record levels back in October. And you can see from the graph there where Yancoal's thermal price sat quarter-on-quarter looking back through last year. So very competitive in the market. That position of record indices is still the same now as we've gone into the first quarter of this year, been underpinned by a very tight supply of coal from all the operations, and we'll talk a little bit about the rate of that slightly, because that's had an impact not just on Yancoal, but on all the operations in Australia. And as a result, there is certainly a supply-side pressure, which is adding strength to the market, but also what -- the world events around us are also contributing to that strength. On the metallurgical side. We averaged AUD 180 a tonne. And I said earlier, that's a combination of semi-soft coal, PCI coal and a little bit of hard coking coal. And again, supply disruption and the weather events have underpinned that throughout the year. Just going back to thermal. Just as a reminder for everyone on the call, if you look at the 2 -- the global coal price and the API 5 price, we're about 2/3 API 5 and about 1/3 of global coal. So if you're looking at an average price of where we are, they are the 2 indices that we would normally look to. As far as our sales are concerned, we sold coal last year into 19 countries. I think everybody is still aware that we aren't exporting to China. But we have done extremely well diversifying that market over the last couple of years and have got very, very strong sales into -- certainly into India, which have grown. Our sales into Taiwan have increased, but also into Vietnam and a few other markets in South America. We have, on the year, rebalanced our met coal a little bit. Back in 2020, our met coal percentage dropped down a little bit. But back in 2021, we've reestablished that relationship with our met coal increasing back up to around 5.8 million tonnes during the year. It's worth noting that we don't sell coal to any country -- or I should say, no more than 25% of our coal is sold to any one area or jurisdictions and country. From a production point of view. Our total run on a 100% basis, that's everything we manage across the group, was 63.2 million tonne, and that has decreased about 7% from 2020, and that was a combination of the impacts of the pandemic, disruption to supply chains, workforce availability, all coming off the back of COVID-19, but also the heavy rain in New South Wales disrupting our operations and also the logistics, both of rail and port. The range didn't directly affect our underground mine -- our key underground mines, but Moolarben mine, which is our largest of our 2 underground mines, impacted -- was impacted by an unanticipated widening of a hard rock inclusion, a dike, which impacted us early in 2021. That's now been successful negotiated and we're clear out and Moolarben is back on track and doing exactly what we expect it to do. But I think it's fair to say that all our teams on all our sites successfully met the various challenges we faced through 2021. Saleable production we talked about, and even after the hard rock intrusion of Moolarben, the wet weather and COVID-19, we managed to get our saleable production to within 4% of FY '20. We did have the advantage at our joint venture mine of Hunter Valley Operations. One of our Tier 1 operations are bringing in a second wash plant as the year progressed, which increased further and optimized our coal stockpiles, which have benefited us as we come into 2022. So our large-scale open cut mine is providing, as I said earlier on, about 85% of the Yancoal's attributable production. Unit costs, unfortunately, did go up during the year, and that was driven by several uncontrollable factors. The key one being the diesel price and the demurrage and of course, the reduction of output impacted our unit costs as well, which were both as a result of the adverse weather we had throughout the year and the amount of growth. Diesel price is continuing at a high level as we go into 2022. And also at this point in time, we're still experiencing the tail end of La Niña. and we're expecting that to run at least through the first quarter, if not into the second quarter of the year before it starts to taper out. We did also -- and we talked about this a little bit last year as well, implement a wash harder strategy to target the higher -- the better quality coal or lower ash coal. That does have effect on your salable tonnes and also your costs. It reduced the tonnes marginally and puts up the cost marginally. But the arbitrage between the global coal price on the API 5 last year opened up to an extent that it was far more profitable for us to be washing our coal a little bit harder to get the advantage of those higher prices. So I think $67 was an excellent outcome considering all the headwinds that we had to experience during 2021. Looking at our financial summary, and then we'll get into detail on a few of these areas. We talked about the revenue being a record at $5.4 billion, our operating EBITDA at $2.5 billion, an operating EBIT of $1.7 million, and our operating profit before tax of $1.4 million, resulting in a net profit after tax of $791 million. So out Tier 1 assets, again, driving Yancoal and generating significant cash flow during the period of these -- of strong prices. And as I said earlier on, those strong prices are continuing into '22, and we're looking for optimization of our mines to continue to take advantage of them. If we look at the drivers of our operating EBITDA and the influence of the rising benchmark coal prices and the Yancoal realized coal prices is obviously the main driver to that increase in operating EBITDA. The interesting point is that the Australian dollar -- Australian-U.S. dollar exchange rate did not soften that at all. Many times, as the coal prices increase, the dollar follows. And in Australian dollar terms, we lose out some of the benefit. But this time, we didn't lose out the benefit. In fact, as the year went, we had a weakening dollar, which increased it. So our combination of very, very strong coal prices and a weakening Australian dollar later in the year had a very positive impact on our toll prices. If we look at our operating cash flow at $1.9 million, that was a record operating cash flow, again, as a direct result of high coal prices and a substantial increase year-on-year from 2020 to 2021. And of course, we recorded a significant loss in 2020 on the back of the reconsolidation of the old [ Watagan Loop ]. And we've again reestablished our position now well into profit for 2021. With respect to our fiscal position. As we've said, we had a very strong cash flow position. We had $1.5 million at the end of December 20, 2021. And we have, as we talked about, declared a significant dividend for our shareholders at that time. From a debt point of view, our gearing is now well below 30%. We did make the early repayment back in October of last year, and we're comfortable now with our gearing position. We will consider the potential for further debt repayments in future periods. But we're also looking at opportunities, and retaining some cash there gives us a lot of strength in that area as well. Turning to the dividend. We allocated $930 million to pay dividend for 2021, which is a $0.50 per share unfranked final dividend and a $0.0204 per share special dividend. The special dividend we believe enables shareholders to directly benefit from those record coal prices in 2021. Our shareholders got no dividend in 2020 or interim dividend in '21, and we feel that we've got shareholders who have been very supportive over the years, and we took advantage of passing on a lot of the benefits of that very, very strong coal market through the final dividend. If I turn to the outlook for in 2022. We have put guidance in the presentation. The guidance is a little bit broader than we would normally give, and the reason we've given that is because we're still getting impact from some of the uncontrollables that impacted us at the end of 2021. So heading into 2022, there are still risk presented by the current La Niña weather cycle. And unfortunately, a lot of mine -- our big open cut mines are still carrying all our water onsite. So we've got elevated water levels, and we still -- as everybody can see, I think, from outside at the moment, are getting significant rain events. The potential diesel price -- the potential for increase in the diesel price is still there. And I think world events, especially Ukraine and Russia events, are if anything, just making that position even worse as far as the potential increase in diesel. So we've put a range of 35 million to 38 million tonnes through our attributable to salable coal production. Attributable cash costs taken onboard, those comments I just made about diesel and other controllables between $71 and $76 in and our attributable capital expenditure between $600 million and $650 million. That is quite a step up next year. We have constrained our capital over the last couple of years through the COVID period. We are in a position with our major Tier 1 operations where we are starting to replace a significant amount of our heavy equipment coming towards the end of its life. So we are in an updating phase. So our sustaining capital for 2022 is fairly high. It is fair to say that international coal indices are again at record levels in early 2022, as supply-side constraints persist and commodity shortages occur in other international energy markets. That really brings me to the end of the presentation other than to say, I think that the whole of the Yancoal team on all our operations have I've worked on extremely difficult headwinds, that we delivered a first class result. And we are in a good place this year to take advantage again of the very, very strong coal market which continues into 2022. Albeit, we still have the headwinds of weather and COVID to manage during the early part of this year, but we would expect to see that improvement as the year goes on and get ourselves back to what I would say is a normal operating position. So thank you for listening. I'd like to hand back to...

Scott. Yes, if you would like to start the Q&A call, and we'll take it from there. Thank you.

[Operator Instructions] First question comes through from [ John Anderson ], he's a private investor.

My question is really about the ability to pay franked dividends. You provided a bit of a hint today that you'll be paying out franked dividends in the future. Is there any sort of more detail you can provide around that?

I think you're aware until now, we were covering our profit with our tax losses. But as of 2022, yes, we will be in a tax-paying position. And by the end of 2022, we'll be in a position to pay franked dividends.

But not in the first half?

Sorry, John?

But not in the first half of 2022?

I wouldn't expect in the first part. But we will be in a tax-paying position this year. So we will be paying franked dividends as we work through the last of our accumulated tax losses, more than likely to get used up in the first half of this year.

[Operator Instructions] Our next question comes through from [ Robert Jones ] from [ R&S Jones Property Limited ].

Yes, just my question. I was just wondering what -- I mean, at the moment, obviously, coal prices are quite mad. What are you seeing going forward? What's likely to happen with the prices?

Thanks, Robert. Good question. And I think we are seeing -- there's a lot of supply side pressure that [indiscernible]. And I think world events are impacting all energy prices. So there's a significant amount of headwind at the moment maintaining that price where it is. But if we look over time, we would expect, as the year goes on, that as the La Niña starts to taper, again, dependent upon COVID impacts. But we would expect the supply side response to be -- to get itself back into a more normalized position. We don't see any major operations coming online, but we do think that the operations will get back to a normal operation. And under that scenario, we would expect to start to see that as the year goes on, but it will come back to a more normal position when it comes to coal price away from its record highs at the moment. What would that be? It's like anything else. I can't give you -- I haven't got a crystal ball to give you an idea. But we do expect the coal price to weaken as the year develops.

[Operator Instructions] We have another question coming through from [ John Anderson ], private investor.

I'd just like to ask a question about your debt profile. The [indiscernible], instead of paying a nonfranked dividend is to repay debt. So I'm just wondering whether you have capacity to bring forward something of debt payments.

Like I said a minute ago, John. I think our intention is to visit that again in the future. We did make a significant debt repayment towards the end of last year, the USD 500 million. That was repaid in October. Our gearing, we think, is in a good place. It was 24% at the end of the year. And what we'll do is what I said, we will consider further -- intent for further debt refinements as the year progresses. It depends on lots of things. I mean it's good to have some cash available. It's good to have the have the firepower if we wanted to look for opportunities that may be out there as well. So it's a combination of all 3. We want to see shareholders rewarded well through dividends. Yes, we'd like to see our debt well controlled. And also, we'd like to be able to implement a growth strategy going forward as we come out of these difficult times we've had for the last couple of years in COVID.

The next question comes through from Ken Kamon from Pacific Rim Investments.

First, congratulations on a great 6 months. And my question is about Slide 10, the -- which shows the realized price with respect to the Platts PCI and semisoft indices. The discount looks extreme here during the last 6 monthly period, and I was wondering if you could provide a bit of color on that.

Yes. I think it's the way that the graph is looked. So there isn't a huge discount to it. I mean what you're looking at there is our average pricing. And if you look at the thermal coal pricing in that period, as I said before, we're about 2/3 of our thermal coal is the API 5 line, which is the lower line of the 2, and about 1/3 is the global coal. And the other thing to remember, of course, is that we're always looking backwards when we're pricing -- or most of the time when we're pricing coal. So in that quarter, a lot of that coal in that final quarter would have been priced in the previous months. So now we don't discount the coal to the indices other than for the quality of it. And as I say, we tend to pin significant amount closer to the API 5 price than the global coal price. And on the met coal side of it, as I said, we only have a very, very a small amount of hard coking coal. And again, the pricing for PCI and semi-soft coal is done in 2 ways. Well, it's on a -- there's a spot market, but we don't tend to spill into the spot market for the met coal side. So we are working on a benchmark, and it's a quarterly benchmark that gets updated for met coal. So again, you're looking at a delayed effect of pricing in the market.

[Operator Instructions] We don't appear to have any further questions at this time. So I'll hand back to Mr. Moult for any closing remarks.

Thank you. And look, thank you, everybody, for your time and certainly the questions. And we did have a very, very good year. I think it's important to know that we're in a very good place for this year. There are things we can't control, but we are working extremely hard to make sure that they are, to the best of our ability, controlled. However, we'd expect to continue going forward and being the leading coal producer in Australia and certainly the lowest-cost coal producer. Thank you for your time this morning, and I look forward for your continued support.

This concludes the Yancoal 2021 Financial Results Investor Call. Thank you once again for joining us today. You may all disconnect.