Yancoal Australia Ltd (YAL) Earnings Call Transcript & Summary

Hello, and welcome to today's Yancoal Half Yearly Results. [Operator Instructions] I'd now like to hand over to our CEO, David Moult. Please go ahead, David.

Thank you, Luke, and welcome to everybody on the call to this first half 2022 financial results presentation. I'd just like to draw your attention to the first 2 slides, Slide 2 and 3, under disclaimers that are on them. And we'll move very quickly, I think, into just a very quick overview of the half year results. Yancoal delivered a record 6-month financial performance. The revenue is close to the $5.4 billion we delivered for the first full year -- for the full year of 2021, which is a record for that year. The revenue profile has driven a rapid transformation over this financial position. Over the past 12 months, Yancoal's net debt position from $3.4 billion to effectively 0. The cash has facilitated a $930 million dividend payment in April and a further $696 million to be paid to shareholders in September. If we move on to safety performance. Over the last 2 years, we've remained focused on the health and well-being of all our employees, especially with respect to our approach to the COVID pandemic. Unfortunately, we had a small increase in our total recordable injury rate at the end of the period, but management have identified and are working on the factors that influenced this. The majority of the instance being at 2 of our operations. Even with that deterioration, though, our performance for the key safety statistics still remained below the industry benchmark. Yancoal is pragmatic with respect to our approach to climate change in ESG more generally. We recognize that the coal industry is in transition. However, we also recognized the transition needs to be carefully managed. We're exploring renewable energy opportunities, especially with respect to repurposing land as part of returning our mining land when mining is eventually finished back to the community, and we're also looking to diversify into other commodities to sustain the business during our transition to a lower carbon economy. Looking at the next slide, we'll give you an overview of Yancoal's operations. As you can see, our operational mines spanned 3 states in Australia. But the powerhouse of Yancoal is through its 3 Tier 1 assets, Mount Thorley Warkworth, Hunter Valley Operations and the Moolarben mine, all in New South Wales. If you look at the key milestone and key events, Yancoal has been operating in Australia since 2004. It was listed in 2012 and has a history of prudent investment, investing more than AUD 10 billion over that period. This slide gives a more detailed information on each of our operations. I don't intend to go through it in detail, but it's there for your reference when looking at the mine. But you will see the size and the impact that those 3 Tier 1 operations have to the portfolio of our mines. As you're aware, Yancoal is dual listed on the Hong Kong Exchange and the ASX. And we've been -- we're having considerable trading activity recently on both of those exchanges. You will note on the slide there, it references Yankuang Energy. I would note there is no new information on that front, and there is no certainty a transaction will ever occur. If we turn to our key result drivers, you'll see there on that slide that -- we have a significant impact this year from adverse weather across our -- with our volume. And of course, volume is what drives our performance with coal mines, and it's also had an impact, of course, on our costs. In addition to that, of course, we've had the same impact of escalating inflation. Our cost of diesel has gone up and so of many other of our components and parts that we source along with pressure on supply shortages globally from those different sources, being caused by a lot of the external impacts around the world in the last 6 months. If we turn to the coal market. As you'll see from the graphs there, the market has been extremely strong, both in the thermal side of the business and met coal side of the business and more luckily, of course, the thermal coal, which is extremely unusual, has been outperforming met coal by a considerable portion. It's fair to say that supply side constraints due to adverse weather in Australia, resulted in a shortage of good quality coal for the market have had an impact on that price as a global invest and the general energy crisis around the world. And all these factors have been underpinning the price of coal over the last period. Our opinion on that is that, that will continue for the foreseeable future, certainly in this year as those global issues, even if they resolved very quickly will have an overhanging effect on the energy market around the world as will the increasing -- the shortage is here in Australia, which will take the next 6 to 9 months to recover across majority of operators here in Australia. The next slide shows our product mix and sales volume, and I don't intend to go through it, but you'll see that we've got an extremely diverse portfolio of customers. Of course, China still isn't 1 of our key customers at the moment and hasn't been since about September 2020. But you'll see that we have now diversified across other areas. One point to note on there is the growth in our sales into Europe in this last 6 months has gone from 1% last year up to about 9% this year, and that's on the back of the uncertainty in Europe on energy supply, especially with the Russian-Ukraine conflict, and of course, also being affected by the adverse weather -- with the heat effect of the adverse weather in Europe at the moment in the northern hemisphere. I should point out, though, that we have evolved our customer profile over the last year based upon the geopolitical issues around the world. And as a result, we've now got an extremely strong customer base across more jurisdictions, still predominantly in the Asia Pacific, but across the world. Our own production was impacted by uncontrollable events, as I pointed out previously. The cumulative impact of the adverse weather conditions, especially rain on our large open-cut mines, along with the overhang of the COVID-19 pandemic. Note the fact that we were badly impacted by infections on our own site, but of course, complying with the requirements of our state governments' isolation rules have also impacted our labor across all the operations. Unfortunately, the low inventory levels that we have from those weather events will take a while for us to recover from. We'll be working through building up our inventory over the next 6 months, but it may run into the start of 2023. On our saleable production, the same comment, supply, lack of ROM coal has resulted ultimately in the lack of a product coal. So we're getting the same issues with a shortage and generally a shortage in supply across the whole of the Australian market. If we turn to costs, those uncontrollable events of weather, but also the high diesel price and the increased rate of inflation have impacted our costs over the last 6 months. I think that graph though, on the Slide 15 shows and put our costs and margins into perspective. And it shows you, yes, we have had an increase in cost, but our margin increase was considerably greater. So even though we are getting affected by higher costs, those higher costs are related to those uncontrollable events, and we'll be looking as we move forward and move out of the events we've had in the last 6 months, we'll be refocusing our position to get ourselves back into a position that we were operating in prior to the 6 months. But it does show that from a margin point of view, we were in a very strong position for the whole of the last period. I won't go through all the details on the financial summary. They are there for record. But it does show those how our revenue, our record revenue performance, EBITDA performance and EBIT across this first half of 6 months, how strong it has been delivering a very strong profit result. And you will note from that, we are now paying tax. And of course, still showing a strong position from profit after tax. So across all our financial metrics, we delivered our first half year -- performance during the first half of the year. I think the record prices in revenue and EBITDA are seen on the next graph. It really just shows that step change in revenue and EBITDA. And I don't intend to say much more about it, but I think it was quite dramatic when you look at it in that form and delivering a 65% EBITDA margin for the first 6 months of 2022. Our record operating cash flow, again, is a remarkable metric for the first 6 months. And if you work that out on a monthly basis, we're looking at $450 million a month of cash flow. So again, very strong cash position. And of course, on the back of that cash position, we have been able to strengthen our position across all the metrics. And if we look at that fiscal position, you'll see there on Slide 19, what that operating cash flow has meant. But what it has meant that at the end of June, our gearing ratio was 3%. And during June, we were at near 0, net debt across the -- across the company. Turning now more to -- a little bit more to the debt gearing and dividend. As I said, our net debt at the end of June was $232 million. We were holding at that time $3.4 billion in cash at 30 June. We've utilized USD 801 million to repay debt. We're just returning $696 million again to shareholders through dividend, which for the year will make $1.25 per share for the whole of '22 being returned to our investors. So I think a very prudent position utilization of our cash repayment of debt and returning value to our shareholders through dividend. If we now turn to the outlook for 2022. We have revised our guidance down and this is on the back of the exceptional rainfall experienced in the first 6 months of the year, along with those COVID-related absenteeism that we've experienced, and also a tight labor market across the whole of the mining industry here in Australia, some supply chain disruptions and higher diesel and other inflationary cost pressures. The revised guidance also factors in the unscheduled downturn on some key equipment and the need to revise the Moolarben longwall mining sequence based upon an aboriginal heritage site above the longwall, which we have taken the decision not to undermine. It still gives us a strong result for the year. Yes, there is an impact on our saleable tons and our costs on the back of all those factors. And we have factored into that guidance an allowance for the Europe meterology forecast for further rainfall in the coming months, and we've tried to take account of that as best we can in that forward guidance that we have given. It should be noted as well that the same factors and the delayed production have delayed some of our capital spend. So we've made that adjustment in our capital expenditure forecast and reduced it by about $50 million for the year. Yancoal has the asset base to benefit from strong market conditions. And however, our Tier 1 operations will give us as they are in the lowest cost quartile of Australian producers, a strong position no matter what the market does. We expect these market conditions to continue for the foreseeable future, but we think that we've got a portfolio of assets that when we do eventually see some weakening those prices, we'll still provide excellent returns for our shareholders and provide good long-term results from our operating mines. That really brings me to the end of what I wanted to say. So Luke, I'll hand back to you now for any Q&A.

[Operator Instructions] I'll hand back over for any questions coming through over the web interface.

Thanks, Luke. This is Brendan Fitzpatrick, the IR Manager. I have 2 questions online. I'll read those out. And if any further questions come through, I'll present those also, and we'll hand back to you shortly to see if there's any questions coming through on the phone line. The first question submitted by the webcast comes from Philip Smith. He asks, given that the net debt is effectively 0, does that mean the cash position offsets the debt so that there's no interest paid on the debt, such as an offset on a home loan. And if that's not the case, and the interest is still being paid, are there plans to pay back more debt ahead of schedule? And how is that prioritized in the context of considering dividends in the future?

Okay. Thanks, Brendan, and thank you for that question. Net debt doesn't mean that we're not paying interest on our debt. It doesn't mean that we're in a net debt position. In other words, our cash we're carrying is offsetting that we've got. But at the moment, yes, we are still paying interest on our debt. Is there an intention to pay off more? Well, yes, there will be, and we will be looking at a further debt reduction later this year once we have work through the process of balancing our cash needs in the different areas. And as always with these things, we don't feel it is necessary to have 0 debt. We think it's good to have some debt on our balance sheet. And also we'll be looking for other opportunities, potential M&A in the future that we may need to have some cash reserves to support.

The second question coming through from Michael Russell. Similar in nature, midyear report indicates significant cash generation, as mentioned, $205 per tonne operating margin. Given the strong cash flow, how does the company prefer to utilize the cash reserves, new projects, repayment of debt, dividends, return of capital. And then a second question, what's the view on the recent offer made by the majority shareholder and should minority shareholders be concerned about the offer or the implication for Yancoal?

I might ask Kevin, our CFO, is online. Kevin, would you like to take that question?

Yes, sure. From Yancoal despite the capital management always focus on growth from capital perspective, dividend retain reward shareholders and also deleverage the company. So the cash, as of today, is very healthy, as David just mentioned in the earlier question, it's always a balance between this rate. If there is no foreseeable on cash consuming growth opportunities, that will be the balance we try to further deleverage the dividend. Brendan, can you please repeat the second question again?

Sure, Kevin. He was asking what does the company have to say on the recent offer made by the majority share of the energy and any views for the minority shareholders.

Thanks, Brendan. Also from the major shareholder -- is actually subject to major shareholders in [indiscernible] about the project, how they foresee the project going to go, but this got to the other, it really has -- Yancoal perspective, we have no comments on this one. It's a connected party transaction or perceived to be a connected party operation. As a result, there is a robust complex process and governance process to have the IBC currently oversee the process. I think that's all we can keep.

If I could just add a comment on back of that. I mean -- I think there has been no communication since the last announcement that was put out. It was, at that time, the IBC, as Kevin has said, did reject the officer, and there has been nothing since that time. And to date, I think it's fair to say that there is no -- it may or may not proceed. I mean, we have no communication -- further communication, and I'm sure shareholders will get to know if there is any communication in the future. But certainly, since the last communications in May, there has been no communication with the company.

Thank you, David. The next question coming through from James. I just have the first name, a simple question. Will the full year dividend be fully franked?

The answer to that is no. Oh, the full year dividend?

Yes. So noting we've just had an unfranked interim dividend. The question is forward-looking full year dividend.

It's difficult to say at the moment will depend on tax paid and franking credits that we may have at that time. Of course, the company would like to be able to pay franked dividends. And we'll certainly be looking at that as we go through the year. But we won't know that until we get to our full year results in February next year.

Another question coming through from Mark Kelleher. Can you please advise who purchased [ Yankuang's ] shareholding when they sold out last month. And perhaps as Investor Relations manager, I can just make the observation that -- there's no new majority shareholder submissions put through to the ASX. So we don't have anyone taking up the whole position and moving to a greater than 5% stake beyond that. We don't have any proper disclosure on the share register at this point in time. I've got a question coming through from George. How does Yancoal production issues related to rainfall compared to the broader industry in Australia? Have Yancoal been more impacted given concentration of production in New South Wales? And then a second question, could management elaborate on the spread between the Newcastle and API5 coal price indices. On an absolute basis, this has widened significantly. Are their relative supply/demand difference is currently between the different grades? Will this change?

On the adverse weather, the majority of operators have been impacted by adverse weather, certainly New South Wales operators have been impacted to a greater extent than Queensland. However, Queensland were impacted to a certain extent. We are pretty much in line with the rest of the industry here in New South Wales. I would suggest in this last quarter, maybe there was more regional rain in the lower Hunter Valley than the upper Hunter Valley. So you might see from other companies that they weren't impacted quite. So badly in the last quarter. But certainly, the big operators in the Singleton area were all up -- were all impacted in exactly the same way. That was the first question. The second 1 was the marketing question?

That's right.

So maybe I'll throw that over to Mark Salem, our EGM of Marketing to answer.

Yes, sure. Thanks, George. I think very simply, the current supply constraints that are happening out of Australia at the moment, in particular, in New South Wales is severely impacting the low-ash or GCNewc market. Australia is a major supplier of that coal, in particular, out of the [ Newcastle ] a major supplier into our Asian markets. And so the current supply constraint is definitely driving that market. But due to the Russian-Ukraine crisis, what we're seeing is the Russian coal being displaced in some of those prime markets and being sold into more Southeast Asian markets where there's no sanctions, and that's impacting the higher ash market where they're selling products in those markets -- better products in those markets impacting the high ash market. Plus there's generally that market has been less impacted by overall supply constraints. So that's really created that arbitrage that significant difference between GCNewc and API5.

Thanks, Mark. Next question comes from John. That's similar in nature. Do we have any comment on our production split between the Newcastle GCNewc products we produce and the API5 products we produce. We've said in the past that there's -- it's mostly API5. The follow-up question is similar to what we just answered. The API5 is at a large discount to the Newcastle, which markets have moved towards using -- our other markets move towards using API5 due to the discount. And will that have some endpoints on closing out the price differential? And any thoughts on the outlook for exports to China, given the import restrictions that have occurred previously, and would this affect the prices of Australian coal going into the international marketplace? And what would we think that the prices for the replacing new top indices -- API5 indices could look like if normal trade flows resumed in the Asia Pac region.

Would you like to take that, Mark?

Sure. Okay, John, thank you very much. Okay. The first question, in terms of the product split. Look, I can say confidently that we are continually optimizing the way we produce our coal. And certain coal has certain characteristics. And you can't -- some coals, you can make better, some coals you can't. So from Yancoal production point of view and sales point of view in terms of developing a product strategy, we always try to optimize washing of our coals, which sometimes do improve the quality and -- but sometimes we can't. You can't make a silk purse out of the sales here is that the typical reference that we have. The coal has its own chemical nature. So we're always looking at those strategies. I suppose in terms of which market the API5 has moved, taking more of the API5 type coals. We are seeing -- because of the price differential we are seeing interest in higher ash coals that linked are more associated with the API5 in some of our more traditional markets, for example, in Japan, Taiwan, and in Korea, where we have typically sold the more premium coals. They are looking at it. But they are also constrained in terms of how much they can actually physically take. And because of the small quantities, it's not going to have such a big impact on closing that price differential. With respect to exports to China. I think the recent government discussions that have happened have improved or starting to improve the relationship in terms of Australia to China. And it's too early to tell when things will resume back to normal. But will it have an impact on the Australian profile? I believe it will because China can take that higher ash coal -- and the higher ash coal will still be cheaper than their own domestic prices. So you'll see that having some impact. But when we -- it's too early to tell at the moment. And in relation to the last point in terms of price outlook and will those 2 markets remerge together? Look, the market is volatile, and we often see divergence and then coming back. And I think, ultimately, yes. But to put a time frame on that, it's very difficult at the moment whilst we've got such dynamic issues happening such as the Russia-Ukraine crisis, such as the ongoing effects of [indiscernible] on supply being present to us to contend with and count back those market dynamics.

The next question, once again from Mark Kelleher. He knows that we're asking shareholders to express caution when purchasing shares due to the offer made by the majority shareholder, and that is a reference to the text we have at the end of our monthly updates on the transaction. Can you explain why this would require shareholders to be cautious assuming the Board is looking out for the best interest of all shareholders? Perhaps as Investor Relations Manager, I'll just make the comment on that one Mark. It's -- tech that we include to make sure the market is fully informed and everyone is considering the circumstances when making any potential investment in the company. It's there as a -- I wouldn't say a disclaimer, but to make sure the market has got all the information in mind in making an investment decision. I do have more questions on the webcast or multiple time ticking along. So Luke, thinking I could hand back to you for the time being. Make sure we have the opportunity to take questions over the phone line. And then if you want to come back to me and I can do more questions from the webcast. Thank you.

Sure. We did have a question in queue from Tim Elliott from Regal.

You've obviously got enormous resources and value operations in [indiscernible]. Do you have any opportunities to add production, particularly low CapEx production, there's obviously exposed high vol there. Where the coal produces pretty high-quality thermal coal and/or semisoft for the met coal market. Could you just talk about whether or not you have any potential future opportunities?

Thanks, Tim. You're quite right, both very, very large mines. HVO, a little bit different to MTW have more operating pits, but they're all operating when they're operating normally, which unfortunately, they're not at this moment in time because of the adverse weather, but when they're operating normally, they're operating close to their optimum positions at the moment. Now, MTW, I would suggest, at least 18 million tonnes, that's its approval levels. And we will be working very hard to get back to that as quickly as we can. HVO does have some opportunities in the future, and we're examining those at the moment and putting them through our feasibility process to look at how we can look at increasing the HVO tonnage over the next few years. So we'll be working with our joint venture partner, Glencore, and looking for how we can optimize HVO to deliver more tonnes.

[Operator Instructions] I will hand back over to the team for the webcast questions.

Thanks, Luke. I'm looking through the online questions because that was submitted concurrently, we're getting some overlap in the types of questions and content. So I'll start paraphrasing or combining them. See questions from Paul Anthony. Again, the focus is on the use of capital, noting the 40% payout ratio in the first half. Is there appetite for more dividends coming into the year or potentially corporate acquisitions? Yes, it's similar questions between those 2. I'll just want to reiterate the comments we provided.

Yes. Thanks, Brendan. I think it's reasonable that the interim dividend is possibly a little bit more conservative than our final dividend may be. Yes, there are potential opportunities in the future for -- of the use of cash in the way of opportunities as they may arrive. So I think what we've done is taking a little bit more conservative position with our own. With our interim dividend, we'll certainly be looking at paying off more debt in the future. And of course, at the end of the year, we'll review that position for the full year dividends in February 2022 -- '23.

A question from Peter Jan, expanding on some of the topics that have come up. Commentary and outlook for coal prices seem to be more positive in this first half report. We've touched on the views for the current outlook. But how are we viewing coal prices going into 2023? There's a second question. Is there a deadline for the Yankuang Energy potential transaction? And third question, can we just get a comment on the company constitution, which refers to 50% payout for the dividend on an annual basis.

Coal markets into next year, and Mark might want to add to what I say. I mean all I will say is at the moment we're looking as though the remainder of this year, those impacts at -- impacted the coal price in the first 6 months look to be continuing to the second 6 months, therefore we are still getting some effect from the rain even if we don't get any more rain this year, we're still having that recovery period, and that's affecting all the producers in New South Wales. So there is a shortage of supply, especially in the low ash thermal coal area. As we move into 2023, I think it will depend on many factors. I do think there is -- and if you go back pre the Ukraine crisis, the coal price was already at a higher and stronger level than maybe we would have expected it to be at that time. So I think there will still be a level of uncertainty globally, which will underpin -- from an energy point of view, which will underpin the coal price going into next year. What will it be? I haven't got a crystal ball, and I really couldn't tell you. But I do think we'll be -- we're still looking at potentially coal price, even if it comes off from its current size higher than we would normally have expected to be.

Correct, yes. The Yankuang Energy, well, there is no actual firm offer from Yankuang Energy. So there is no date as such are the -- for or against. As far as we are concerned at this moment in time, that is up to Yankuang Energy. What they do, but there is no firm offer being presented to Yancoal from them. Yes, the 50% payout ratio is in the constitution and it can be 50% of net profit after tax or 50% of free cash flow. And that, of course, is for the Board to discuss and deliberate when they formulate the dividends.

Thank you. There was a mention of demurrage costs. And Yancoal still experiencing delays at the ports and is this expected to continue included impact on sales forecast.

Yes. Mark, I want you answer that question. Just in relation to demurrage costs. Demurrage cost has been a function of supply issues and delays caused by the wet weather. The company has, in all attempts try to mitigate those costs. But again, because of the extent of the supply issues and the length, it's been a challenging exercise. In terms of going next year, we will be managing that position in a -- we will be managing that position. What was the second part, Brendan?