Yancoal Australia Ltd (YAL) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Yancoal Australia 2022 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chief Executive Officer, David Moult. Please go ahead.

Thank you, Michelle, and thank you to everyone on the call for joining this recap of Yancoal's remarkable financial performance in 2022. Slides 2 and 3 contain notices and disclaimers relevant to today's presentation. [Technical Difficulty] familiar with the content of these 2 slides as they're relevant as we go through the slide pack. While we are pleased that Yancoal achieved record results in 2022, keeping our workforce safe is always our primary objective. The ongoing gradual improvement in our key safety metrics despite challenging operating circumstances is a credit to all the people on Yancoal mine sites. Limiting our production losses to around 20% was as good an outcome as we could have asked for under the adverse circumstances we've had. Constrained production was common across the mining sector, contributing to tight market conditions and remarkable realized coal prices. Yancoal's overall realized coal price more than doubled to $378 per tonne in 2022. Operating cash costs and royalties were also high, but the implied operating cash margin for the year of $251 per tonne drove the company's performance. Revenue doubled to $10.5 billion and EBITDA was $7 billion, both company records. After repaying the majority of debt and returning almost $0.53 per share as the interim dividend, Yancoal still finished the year with $2.7 billion of cash. The Board has elected to return $924 million of this to shareholders as a fully franked dividend of $0.70 per share. This is the first time Yancoal has been able to provide our shareholders with the benefit of franking credits. As I mentioned a moment ago, keeping our workforce safe is our first priority. The positive trend in year-on-year safety statistics was a favorable outcome because the midyear uptick in the [Technical Difficulty] was a reminder that we have to maintain continual focus on this area. In 2022, Yancoal trialed a vehicle collision awareness system at one of our operations. The trial commenced for the light vehicles, and we are pleased to be extending that now to our haul trucks in 2023. Like our safety, our focus on sustainability is continual and ongoing. Yancoal is actively exploring opportunities in the renewable energy sector. The company has commenced development of an enterprise sustainability strategy, which will allow us to better understand the risks and opportunities as we transition to a low-carbon economy, increase operational efficiencies and minimizing environmental impacts and diversifying our business. This slide summarizes the operational drivers behind Yancoal's 2022 performance. Production and sales volume were about 20% lower due to several factors, most notably the heavy rains that repeatedly impacted our mines. The lower production, in turn, directly contributed to the 45% higher per tonne operating cash costs. However, the standout feature was our average realized coal price, which jumped from $141 per tonne to $378 per tonne. The teams at all the mines worked tirelessly through the year to minimize production losses and maximize coal market opportunities. Looking at the coal markets, the heavy rainfall and pandemic disruptions were obvious factors contributing to supply shortfalls and tight market conditions. However, it's worth considering just how difficult it has been to get new mine approvals and funding for those new mines in recent years. Coal prices would not have reached the levels we've seen in 2022 if new supply had been incentivized. Metallurgical coal indices were on the rise again in early 2023 as auto manufacturing lifts the demand for steel, a fact that, that could positively influence metal prices through much of 2023. Thermal coal indices and in particular the high-energy, low-ash GlobalCOAL Newcastle index performed exceptionally well in 2022. The global demand for coal increased by 1.2% and surpassed 8 million tonnes for the first time ever in a calendar year. Since the start of 2023, the GlobalCOAL Newcastle index has retreated as the supply recovery have disrupted [indiscernible] by the market. Conversely, there may be price support for higher thermal coals such as the API5 Index if China resumes imports as it previously did. So far, Yancoal has sold 2 thermal coal shipments into China this year. Thermal coal indices may have fallen from the record level seen in 2022, but the structural issues influencing the price remain. Global energy markets seem far from settled and seasonal cycles have the potential to affect [Technical Difficulty]. Yancoal continued to adapt to the evolving thermal coal market conditions in 2022. We retained core customers in Asia and redirected volumes from India to Europe to meet demand. Market conditions allowed sales of high-ash products to reach new destinations and premiums to index prices were secured. While the occasional low-grade met coal [Technical Difficulty], for the most part, Yancoal worked to maintain relationships and to supply our metallurgical coal customers. This is a sound strategy now that the relationship between thermal coal and metallurgical coal indices are returned to more normal ratios. The production impact in 2022 were the result of 3 consecutive years of exceptional rainfall and pandemic disruptions. The La Nina weather cycle may have ended, but open cut mines in New South Wales remain highly susceptible to rain events because they are still at water storage levels. Production will recover, but it will take time to deliver. The saleable coal production profile follows the Run of Mine profile on the previous slide. Over the past 2 years and particularly in 2022, mining inventory depleted and saleable coal production was prioritized to maximize the benefit from the elevated coal prices. This proved to be an effective strategy, but mining inventory now needs to be replenished so that optimal productivity and efficiency rates can return. During 2023, the teams of each mine will need to find several competing operational factors. Out of necessity, their focus will need to shift from simply maximizing out. Operating cash costs increased from $65 per tonne in 2021 to $94 per tonne in 2022. The lower production volume was a key driver of the change, but volumes only dropped about 20% and the operating cash costs increased by 45%. The cost increase included additional equipment and contractors brought on to aid the production recovery program. These costs will carry through into 2023 and potentially into 2024. Some of the external cost inflation factors may ease with time, but other elements such as wage inflation and advancing mine parameters tend to be present. Although the operating costs increased and so did [ they stayed relative for that effort ], the fourfold surge in operating margin was [Audio Gap], it would have been easy to lose track of cost discipline under such operating conditions, but cost control has always been a focus for Yancoal and keeping the operating cash costs under $94 per tonne was a good outcome, given the challenges we faced. The cash operating cost should reduce in future periods, but the rate of decline remains subject to many factors, some of which we can't control. Another element that needs to be accommodated in 2023 is the recently announced New South Wales Coal Reservation Policy. Yancoal is compelled to make up to [ 310,000 tonnes ] available per quarter from April this year until June 2024. We are addressing the practicalities associated with complying with these directions. We will engage with the government [Technical Difficulty] policy and on the issue of compensation to which Yancoal should be entitled. We remain skeptical that the policy will actually deliver any meaningful cost savings to retail customers because there is nothing in the directions that obligate electricity generators to pass through the benefits they receive from coal prices. Looking at our expectation for 2023. We have a production recovery program that aims to return production to levels experienced in prior years. To deliver this outcome, we must first rebuild the mining inventory and restore productivity levels. This could take several quarters to achieve. But ideally, there will be a positive trend profile through the recovery. The attributable saleable coal production guidance is 31 million to 36 million tonnes for the year. We also aim to bring [Technical Difficulty] costs down over time. That said, we must carry forward the additional costs associated with the recovery plan as well as the recent cost inflation practice. That is why unit cost reduction is likely to take longer than the production uplift. The attributable cash operating cost guidance is $92 to $102 per tonne for the year. Finally, it's worth noting that CapEx figure this year is expected to increase from the prior 2 years to between AUD750 million and AUD900 million. This increase is due to expenditure on fleet and equipment in order to accelerate the mine recovery program. In 2023 and beyond, to deliver optimal performance for our shareholders, we will need to continually balance Yancoal's output volumes, product quality, efficiency metrics, operating costs and capital expenditure. This [Technical Difficulty] flexibility as we respond to international market conditions, the new domestic supply directions and potential rainfall events. This slide provides an overview of Yancoal's 2022 financial performance. The revenue, EBITDA and net profit were all records. On the back of the surge in the realized coal price, the revenue almost doubled to $10 billion. The EBITDA almost tripled to $7 billion, and profit was close to [ 5x ] higher at $5 billion. Yancoal retired almost all of its debt and has held a net cash position from July. The 2 charts on this slide shows the correlation between realized price, revenue, EBITDA and EBITDA margin. This correlation results from the relatively stable growth [Technical Difficulty] with the obvious exception being the reduced output and higher costs in 2022 that I have already identified. The profit after tax and operating cash flows tend to replicate the revenue and EBITDA profile. The jump in operating cash flow to $6.5 billion provided the company with an opportunity to rapidly change its financial position. The Board elected to effectively clear its debt in 2022 by repaying USD2.26 billion of debt ahead of schedule and holding a net cash position from July. The combined early debt repayment [Technical Difficulty] 2021 will save the company almost $300 million in financing costs in 2023 alone. This is cash that can be applied to alternate uses. The Board has determined that Yancoal will use USD333 million to repay the last of its external interest-bearing loans. After this repayment, Yancoal have no external interest-bearing loans for the first time since the company was established. Once again, returning cash to shareholders via dividends is the primary use of Yancoal's excess cash. The Board has allocated $924 million to 2022 final dividend. This is $0.70 per share, which, when combined with the interim dividend of $0.53 per share, is a 20% dividend yield when calculated on the year-end share price of $6.06. The other important thing to note is that the final dividend is fully franked. This is the first dividend from Yancoal that provides shareholders with the benefits of franking credits. Paying the balance of $1.5 billion of tax on the $5 billion profit reported for 2022 will be one of the other primary uses of our cash during 2023. The total dividend for 2022 is close to the sum of the dividends paid between 2018 and 2021, a final reminder of what an exceptional year we've had and the capacity of the company to reward its shareholders. The remainder of the slides contain appendices and additional information for reference, but I don't intend speaking to them. I will now hand back to Michelle so that we can commence the question-and-answer session.

[Operator Instructions] Our first question comes from the line of Jon Ogden with Eastern Value.

Maybe I'll kick off with 4 questions, I've got more but I want to take them offline. Firstly, can you give any insight into how much tonnage you might have locked in at fixed prices for 2023 on the thermal and met coal side? Or is it still going to be based on benchmarks from 3 months back? I think that's what you normally do, so if that's all going to be 100% in that sort of way? Secondly, what's the attitude to M&A because we've got these BHP assets on the block? I know you guys are interested in more met coal production. I mean are you prepared to get into a bidding war because there's people like Stanmore, Coronado, Peabody, [indiscernible], who'll probably all going to be interested? And then a question whether the government will allow a foreign entity to take control of more assets. Third one, just on the reservation system, so 310,000 tonnes of coal. Now will that definitely be sold at [ $125 ] or is that just a contingency that you might have to sell in the event of a shortfall from other domestic producers? So just clarifying that. And then I just wondered if you can also [indiscernible] a rough portions of the Newcastle 6,000 versus 5,500. I know 5,500 is bigger than [Technical Difficulty] thoughts on that. And even on the Middle, so if you can give us some idea of the mix that we can expect. I'll come back and wait to get another chance.

Thank you, Jon. On the first one, the way we are pricing coal this year is no different to the way that we priced it last year. So we will [Technical Difficulty] relative to index, whether it be a Newcastle index or an API5 index. So it will have the same sort of profile that we've worked on previously. We've not changed that position and that will be going forward in this year as well. On the M&A side, yes, we're interested in met coal mines. And yes, we will be interested in the [indiscernible] mines. And I think there's a comment of yours, we don't want to get into a bidding war. I mean we're not in our nature to overpay for assets. So we'd be very controlled and sensible with our approach to it, but we certainly will be looking at those assets and we think they will be good -- a good addition to our portfolio of mines and balance our thermal-met coal balance. As far as power investment is concerned, our early discussions with the [ Furby ] here in Australia, they're relatively positive. And I think will be improving geopolitical position between China and Australia. We don't see any major issues going forward this year. So hopefully, that side of it should be okay. On the reservation policy, it is definitely going to be sold, you're quite right. It is a continuing holding for each quarter, depending on the shortfalls the generators have. And remember, this is across all the operators in New South Wales, not just Yancoal. If they require coal, they can give a direction to produce. But there's no guarantee that we'll be selling 310,000 tonne every quarter. And at the end of each quarter, there is a reset mechanism as we go to the next quarter. So it is more -- it's not a definite sale. It is more of [indiscernible]. The last one on Newcastle Index, API5 and the Middle, I might defer it to Mark Salem to give you -- our EGM Marketing on that one. And Mark might want to comment back on the first one again on coal pricing as well if there was anything that I've not covered. Mark?

Yes. Thanks, David. Yes, Mark Salem, Executive General Manager, Marketing. Yes, just on -- in terms of the splits, basically from a pure thermal coal point of view, about 25% of our thermal coal production is equivalent to 6,000 material. And then approximately 50% is of the 5,500 or lower grade. And then the balance is in between the 6,000 to the [ 5,500 ] specification. In relation to met coal, we basically -- met coal only represents about 16% of our production. And of that, approximately 1/3 is PCI and 1/3 is semisoft or second grade hard coking coal. In terms of lag pricing, yes, look, we've always reported that we do have a lag pricing structure just in terms of the way sales are performed in terms of the timing of when you actually contract versus the timing of delivery. And there's probably about 30% of our Q1 sales will be reflecting back on the Q4 periods.

Just a quick clarification. So 1/3 PCI, 1/3 semisoft, is the other 1/3 the sort of benchmark hard coking coal? And then just...

No, no, no. Sorry, of the 16%, PCI represents about -- sorry, I'm looking at a table here as well and calculating the percentages as I'm going, but PCI represents about 1/3 of production. And it's not really prime hard coking coal. We don't actually produce prime hard coking coal. It's -- the balance is more semisoft and Tier 2 coking coal.

I see. And then Middlemount, I mean that's the JV. What's the mix on that one?

Well, we're 50% of the Middlemount joint venture. So our numbers would be 50% of that. And Middlemount is a [ ranked ] coal measure. It's not a prime hard coking coal.

Sorry, Middlemount is second rank coking coal.

Yes.

Michelle, are there more questions online? I have some submitted by the webcast that I can go to next if we don't have any questions coming on the conference call.

I'm showing no further questions on the phone lines at this time.

Thank you, Michelle. So on behalf of the people on the webcast, I'll read out some of the questions that we've had submitted. From [ Roji Von ]? Hello. The newest coal reserve report shows the marketable reserve down 22%. Could you please give more details on that bigger change?

Thanks for the question. The majority of that is due to the impairment of the Donaldson mine. So 62 million tonne of the 88 million was the Donaldson reserves that we impaired at the end of 2022. And the remainder really is just depletion on a normal working profile of how the reserves reduce. So the vast majority of it was Donaldson mine.

And for those that may not be familiar with all the assets, the Donaldson mine is not a producing mine. It was a project that was potentially coming into production at some point in the future. So no change to the forecast production profile the company already had in place. The next question from [ Jessica Wang ]. Could the company please elaborate on its acquisition plan for 2023, in which geographies will it seek to make acquisitions, what kind of renewable energy, mineral and coal assets would be most attractive? Is there a targeted time frame for acquisitions? Does Yancoal need to raise capital for acquisitions?

Okay. The first part is the -- we talked already about the BHP metal assets, which are coming to market, and we're aware [Technical Difficulty] key focus of our team as we start this year, looking at those assets. On renewable energy, we're really at the moment only looking at repurposing one of our old mine sites that will become available in a couple of years by developing, as part of the rehabilitation plan for that line, a renewable energy hub. And we're, at the moment, still going through the feasibility. So that's a few years away, that mine finishes operation, which is the Stratford mine in 2024, so still from the assumption the feasibility is attractive, then we'll be looking to rehabilitate that mine site by incorporating the renewable energy side within its rehabilitation plans. On other minerals, we continue to build a knowledge base where I think we've said this a few times previously, we're not rushing into other minerals. Coal is our [Technical Difficulty] probably and coal is what drives Yancoal. But we will continue to look, and we will look at different opportunities. Australia will always be our first choice of locality for any asset, whether it be coal or any other product, but we will monitor other areas of the world for opportunities both in coal and other minerals, especially to see what opportunities lie for us.

Okay. The [ $2.5 ] billion tax liabilities, when will Yancoal pay it? And for the future years, how do you deal with tax liabilities, given the magnitude of the tax payments required?

I'm Kevin Su, CFO of Yancoal, and I will take this question. First of all, as everyone noticed that the $2.7 billion cash we carried from year 2022 has actually a very big portion reserved for the liability -- tax liability in [ 2022 ] accrued and it's going to be paid around May -- the end of May, early June, as per plan. And for the future, yes, all the tax provided in the year commitment, so we make money and then we reserve 30%. And most importantly, to our Australian and Hong Kong manager's benefit, the fully franked dividend provides tax benefit to the tax -- frankly, investors also very importantly they used to suffer [ 50% ] reporting tax, actually now about 30% reporting tax they've got. So we just want to say it actually is quite a positive start to [ reporting metrics ] as well. Thank you.

Thanks, Kevin. Michelle, are there any questions on the conference call for us to take?

And our next question on the phone line comes from the line of [ Weng Fang ] with CMBI.

Congratulations on the record earnings last year. And I have 2 questions. First of all, about the cost. So last year, in particular, in the second half, we had a really big increase in the unit cost. So could you just give some color on the breakdown related to coal washing operating deleverage because of the lower volume and the inflation in general? So what factors contribute most in the cost increase? And regarding the guidance this year, so you mentioned that in the second half of this year, we are expecting a lower cost versus first half. So what's the major driver on the cost reduction? And my second question is about the financials. So because we have around $538 million of the sales of purchased coal, which is a negative figure on the revenue, could you give some color on that figure?

Okay. On the cost side, [Audio Gap ] were higher, and that was due to the adverse weather and the additional equipment we've started to bring online to cover the mines after the last 2 years of adverse weather. There are also some other uncontrollable costs like [indiscernible] actually went up as well. So -- but the majority of the cost increase was due to both the volume reduction because we are a volume player and inflationary pressure. The inflationary pressure impacted diesel, impacted our explosives and many of our consumables. Labor also is in short supply in Australia but also the wage inflation of [Technical Difficulty] in the mining industry last year came under pressure.

The second question, probably I can -- this is Kevin. And to reply, the negative coal revenue actually derived from a contract is a [ Thailand ] contract [ TLCP ] contract, which we inherited from the C&A acquisition. I'm not talking about any financial or commercial terms here. It's basically a low fixed price contract. As a result, we have to start our coal from our internal [indiscernible] JV entities, JV [ launch ] and then final a market price, but we have to [ unsell ] those coal at what we previously fixed the low price. That's why you can [Technical Difficulty].

Our next question comes from Yong Por with Graticule.

Just 2 questions. First question is on the dividend payout ratio. So I think the final ratio is 45%, and it seems to fluctuate a bit. It was over 100% last year. Just trying to think in terms of like on what basis was this formulated on? And what can we expect going forward? That's my first question.

This is Kevin. Yes, this is very good question. Obviously, awarding our shareholders is the priority of the management team and the Board. I just want to do a very quick calculation to show how this payout ratio was decided. Basically, Yancoal still committed to maximize our dividend distribution. And if you recall, from our balance sheet, [ $1 ] billion was carried into 2023, and we have to earmark more than $1.5 billion as the tax liability to be paid, as I just mentioned, in May and June. After deducting the potential tax liabilities, there is a -- the very last piece of Yancoal loan was a USD333 million loan that David just mentioned, that facility getting very, very expensive, and so we had to repay it as well to clear all Yancoal's bearing loans. After these 2 big items, pretty much all the cash, if you calculate it, Yancoal -- actually all [indiscernible] to be distributed to our investors. That's why this payout ratio just landing at this percentage. Thanks.

So just a follow on to that. So now that you've extinguished all your debt, going, let's say, in 2023, and hopefully, you have normalized market conditions in terms of production and price, what guidance can you give us for the payout ratio?

We -- from the public guidance it was -- Yancoal never change our position, which we prefer a 50% NPAT and a 50% free cash flow, whichever is higher. So this position, this guidance never been changed, but we need to put a condition here, this I think will vary is subject to the Board discretion, considering [Technical Difficulty] requirements, liquidity requirements and planning. And as a result, the Board will have the final decision-making authority to decide how much dividend could be paid, but the guidance remains the same.

My second question is on CapEx. So in 2023, you have CapEx going up to $750 million to $900 million, I think, from $550 million in 2022. So I'm just wondering, the comments are that this is for the feed replacement cycle. So just trying to understand, is it just '23 where CapEx goes up? Or do you expect continued step-up in CapEx in '24, '25, all things remaining equal?

The CapEx -- and then I'll let Kevin comment as well. The CapEx that you're seeing at the moment is a combination of 2 things. It's a combination of we're equipping the mines and I think we mentioned this in previous presentations that the 2 big mines we acquired back in 2017 from Coal & Allied and had no money spent on them for many years. So 2 of our Tier 1 operations, we are -- and that have been reequipping over the last couple of years, and that will continue this year, and we'll go all the way into 2024, but not more -- not at this higher level, but will continue until we've done it. The second issue is we have brought on additional equipment this year. We cover the mines faster to get ourselves back up to our optimum production level with our inventories recovered. So we would expect, over the next few years, for those capital levels to come back down to the levels that historically we've been averaging. But we are going through this bit of a [indiscernible] this surge at the moment while we reequip these large Tier 1 mines and get the equipment back into optimum position which of course, yes, we paid [Technical Difficulty] we will also get -- we'll start to see some improvements within our operating costs as well because the new equipment will be far cheaper to operate from a maintenance point of view. Kevin, is there anything else you want to add?

No, no, nothing more to add. Thanks, David.

Michelle, I'll take a few more questions from the webcast at this point. Next one from [ Michael Luka ]. Cash operating cost, raw material component increased by $10 per tonne. Was that mainly due to externally purchased coal for blending in order to optimize the sales profile? And then the second question. There's discussion around the API5 markets and the potential for China imports to resume. Given the current API5 prices sitting around USD110 a tonne or AUD160 and the overall cash cost guided for the coming year is around about AUD100 per tonne, there seems to be less margin in that particular product, let alone the volumes that would potentially go to the New South Wales Coal Reservation Policy. Could you provide comments on the product mix and the margins that Yancoal is looking for?

Okay. On the first one, raw materials are our raw materials, other things that we buy, the diesel or explosives, the things that we have to spend money on to operate a mine. So what you see when you see the raw materials we've given in that presentation is the inflationary factors coming through [Technical Difficulty]. The second one -- electricity, so that's the other raw material that comes within that category as well. Second one, what you saw in the cost pressure is an industry reflection. We're not on our own. Our cost base, yes, has gone up, and it's gone up because of the factors that we talked about early on, but so has everybody else's. Relatively speaking, we're still in the same position we were in previously, which was the bottom end of the cost curve compared to the other producers in Australia. Our coal comes from different mines and each of our mines, overall, we have that -- you're quite right, we have that overall cost. But each of our mines have a different cost profile. Our lower-quality coal mines tend to be also our lower cost operating mines as well. So the margins that we get from some of the lower-priced coals are actually very strong because that coal will be delivered out of our lowest cost operations and vice versa, when you get to some of the better quality coals that tends to be deeper, therefore, it tends to -- the mine that produce them have a higher profile, cost profile as well. So again, relatively speaking, you're maintaining your margins from that point of view. So yes, the margins will get squeezed as coal price comes down, but our intention is over the next year and then as we go into 2024, to focus on getting our -- all our controllable costs back down, getting back down to our normal operating levels, getting our volumes back up to its operating level and recovering some of that cost differential to our optimum market.

Next question from [ Zhong Wei Wu ]. I note that the saleable coal volume from Mount Thorley Warkworth was lower than the volume from Hunter Valley Operations in 2022. Is there any reason or comment on the production differential from those 2 mines?

I'll just put it on the slide to look. The mines actually were very similar in terms. There was a differential, but it's only a small differential. They both got impacted by adverse weather in the Hunter Valley. But the main difference between the 2 operations is that Hunter Valley Operations is a very much larger mining area. It has 3 operating areas whereas [Technical Difficulty] only now has 1 big mining area and also has the capacity to move water out of the operating areas faster. So anything that you see in differential -- and it's not a huge differential, but anything you see in differential is mainly due to the operating footprint of HVO being larger than it is at MTW.

Okay. Next question from James Carmichael. Makes the observation, it's a great financial result with a record profit, fully franked final dividend of $0.70 per share and a P/E ratio of just 2. James makes the observation, there's the potential for a 30% increase in coal volumes this year should weather or labor [Technical Difficulty], which should underpin a strong result for 2023. In that context, is there a consideration for potential share buyback?

Share buyback, it's something we -- always we discuss with our Board on several occasions. But at the moment, the main focus for the Board is liquidity of our shares and maintaining that liquidity. And we think that at the moment, a share buyback more than likely would actually adversely impact liquidity. So at the moment, we think doing what we're doing, which is looking to increase liquidity, increase our free float and reward shareholders is the right way to move forward.

[ Peter Chen ] asked a question which touches on 2 of the topics we've already discussed. Let's bring them together. Can the company go through the dividend suggested seems lower than 50% payout and free cash flow in 2022 and is that connected to potential M&A activities in the future?

Well, I think, Kevin gave a good breakdown on how the dividend calculation was. The Board took a decision on all the factors when it came to that dividend position and taking account of the additional small amount of debt repayment to clear all our debt. As far as M&A is concerned, we're very conscious of it and we are looking at how we're going to fund any potential M&A as we move forward this year. And that will be another discussion to the Board. So we are still in a strong position from a cash generation side, and we would look at other opportunities, of course, as we move forward if we were successful in our bid with any of these opportunities that may be out there.

A question that ties in, once again from [ Shawn Zung ], assuming the healthy profits going forward, does Yancoal still plan to pay both interim and final dividends in future periods?

Again, that really goes back to what I just said, the Board will consider each dividend payment on its merits at the time. [Technical Difficulty] consider what other demands there are on our cash at that time.

A question from [ Roger Juan ]. In addition to the tax liabilities, it looks like the tax rate is around 29% to 30%. Is the expectation this would be consistent or change in the future?

This is Kevin. The short answer is 30% is correct. The small difference always caused by the difference between accounting profit and addressable profit. But overall, 30% is correct. Thank you.

Question now from [ Joachim ]. Looking at the coal markets and interested in a comment on the relativity in the average realized sales price for the thermal coal indexes. Note that there's the big gap between the GC Newcastle 6,000 kilocalorie index and the API5 [ 5,500 ] kilocalorie Index. And the former is falling sharply. Is there some comment on how we see these coal markets performing?

I might hand over to Mark Salem to address that question. Mark?

Yes. Thanks, David. Mark Salem. Yes, I think -- thanks. Look, the 2 indices are very independent in relation to the markets that they -- and the quality of coal that they reflect and we are seeing the global coal in [ Newc ] fall in so far this year as a result -- as David mentioned, as a result of excess supply and plus a lot warmer winter and lower gas prices in the European Atlantic Basin. So we are getting some alignment. In terms of realized pricing, we keep a very balanced book in relation to both fixed and floating indexes, and we try to manage that in terms of -- as a risk management structure. And again, it really depends on the product mix, as I explained before, in terms of the proportion of high-grade 6,000 material versus the low-grade API5 5,500 product.

Thank you, Mark. Changing topics now. We have a question from [ Henry Drakos ]. Can you provide background information or thoughts on the benefits of being included in the Hang Seng Composite Index.

This is Kevin. It's a very good question. First of all, due to low liquidity issues, over years, Yancoal hasn't been included in any sort of index. But I think a few days ago, the news for Yancoal to be [Technical Difficulty] absolutely changed the [ organic tier ]. As you know, Hong Kong not only has its own very massive capital markets, it also have a potential connection with very big Chinese capital market as well and to be participating such Chinese investors, they got to be a -- we call a Shanghai Connect, Shenzhen Connect with Hong Kong and then with one of the precondition to be part of index. So not only being in the index itself to be covered by the [Technical Difficulty] of potential Chinese -- Mainland Chinese investors to participate a Hong Kong connection -- Hong Kong Connect program, which is currently being reviewed by different regulators or stock exchanges, which we are yet to know, but we are being very hopeful as without being part of index, we'll never be able to achieve that. Thank you.

And we have a question, which ties into that commentary that you just provided, Kevin, from [ Peter Chen ]. Is there any schedule or time frame that we are familiar with for potential inclusion or participation in the Shanghai, Hong Kong Connect scheme?

From the company perspective, we are doing everything we can to explore the possibility. But we have to say we don't have a clear schedule and if whoever person being familiar with that contract, the 2 conditions need to be ticked, one is part of index [Technical Difficulty] already. But the second one to -- a foreign company like Yancoal need to be [ expected ] by 2 exchanges at the Shanghai exchange. We currently know there's a change the regulation covering the potential foreign companies. But the details of the policy is yet to be published. We think it may need another 2 or 3 months to get all the details clarified. Thank you.

Thank you, Kevin. So we have a question from [ Will King ]. He's asking for some further comments on the renewable energy projects, and extended that question to ask, would there be a scenario where there could be some sort of division created within the company, I believe, for the renewable energy project endeavors.

The renewable energy project, as I said previously, is part of the rehabilitation of one of our mines, which comes to the end of its life next year, in 2024. As I think everybody knows, we are legally obligated to rehabilitate our mines. It's not a cheap option. It's an expensive option [Technical Difficulty] there's no better way of repurposing the mine site. We have big holes in the ground, we have water, and we have built sites. And when we looked at it, we came to an obvious conclusion that, that maybe would be suitable to install renewable energy hub with some solar support. So we're in the feasibility at the moment. Once we get that completed, we'll have a better understanding. It does have other benefits to us. It will generate carbon credits, which for us in the future, we think may be important because of the changing federal government and the introduction of the changes to the safeguard mechanism which looks at your emissions cap across the company. As far as the structure, we haven't -- we'll be looking at how we structure this in the future. We haven't come to a landing on structure as far as whether we hold it with Yancoal or we look at putting together a separate entity to hold. We also haven't come to a landing on whether we will do it on our own or whether we will talk to other people in this area and look for other expertise. So I think it's too early to answer the question fully, but there will be areas that we will review as we get to the end of the feasibility.

Thanks, David. A question, linking back to early discussions on the tax payments. Could we get some confirmation on the time frame for the tax payments that will be made on the 2022 earnings? And is there any potential for taxes to be deferred in the future for Yancoal?

Yes, we confirm we have to pay 2022 tax as per the way stated in our financial accounts. We follow [ ATO tax rule and PAYD ] on marketing installments. As for the installment itself, it could be individually negotiated with ATO, if necessary. But so far, we haven't seen much opportunity either for Yancoal to delay this kind of payment. This may also impose Yancoal tax avoidance risks. So we will just follow the [Technical Difficulty]. Thank you.

Okay. Michelle, I'm mindful that we're coming up to the end of our allotted time. I'll come back to you to see if there are any final questions just [Technical Difficulty] line, and then we'll move to the conclusion of the call.

And our follow-up question comes from the line of Jon Ogden with Eastern Value.

I'll just try and make them very quick. Just a bit more on the China reopening. Has China particularly been on API5, 5,500 kcal? I think that's probably -- the company was orientated that way. I just wonder if the Chinese power stations are particularly looking for that kind of product and noting that you were -- 20% of your volume was going to China before the ban, so are you expecting to rapidly get back to 20% levels? Or is that going to be very slow-growing, just noting that China was looking to do more internal coal? But now maybe they've had a few actions maybe looking back to imports again. And so any thoughts on that would be good. Secondly, just quickly on the write-downs that you have [ $350 ] million, any more of that to come? Or have we kind of got rid of all of those out of there? And then a third one is just on the royalties. Obviously, Queensland imposes very high royalties. We've got the election, I think, in New South Wales in May, maybe switching over to Labor also. So any thoughts on how royalties might change if there's a change in government or maybe if you have anything to say on that. So those are the additional ones I got there.

Thanks, Jon. China reopening, yes, they do like the API5 quality. And we think that with the growth in that market again from Australia, that will actually underpin the API5 price. I think it's fair to say that China is coming out of what was its -- well, it came -- it started to open up after COVID, then COVID, of course, took off during that period, but I think China is now coming out. So the industry is starting to ramp back up. Therefore, coal use will start to go back up as well, and we're very comfortable with that. And yes, it's slow at the moment, but I think we've managed to sell 2 cargoes in there, satisfactory, and we would expect we have some extremely good customers in China, and we expect them to be looking to resume their offtake. On the impairments, we do our impairment assessments every year. And we've impaired these 2 assets at the end of December. At this moment in time, there's nothing else that would -- otherwise we would have acted upon it. So [Technical Difficulty] but like every company, every 12 months, we do a complete check across all our operations. Royalties, very disappointing up in Queensland. [Technical Difficulty] has been pushing very hard against that. I think it's just too early to say in New South Wales. Our Energy Association in New South Wales has been [indiscernible] very strongly -- our company and the other major company support. And Labor are saying if they get in there, that they have no intention of increasing royalties. We'll see what happens. I think it's too early to say and hopefully, they stand by what they said just pre-election if they do win the election. I don't think the coalition government [indiscernible].

So one other quick additional one. Just on the Coal & Allied acquisition, which came with this contract, which you have to [indiscernible] every year. Any idea you can give us on the volumes that's involved or on pricing just so we can sort of incorporate that in the model?

I'll jump in there, Jon. It's -- again, with all of our contracts, there's commercial confidentiality around them. It is a small volume. In years gone by, it hasn't been a material impact in terms of what it appears in the accounts. It was just more noticeable this year due to the relative difference in the coal price indices. So I can take you through that a little bit more in detail offline as a follow-up. But really, it's -- what we've got in the accounts is the extent of the information that we have in terms of contract structures. Michelle, I think, if that's okay, we'll make our closing remarks. David, over to you.

Thanks, Brendan, and thank you, everybody on the call, and thank you, everyone, for those questions. They were well thought out questions and explored most of the areas that we expected our investors to be looking at. So thank you all for your support. We had a fabulous year last year. We're looking forward to another good year this year. Yes, there are still some challenges, but we're hoping that some of the external challenges that we had last year will leave us, especially when it comes to weather and hopefully, the COVID issues, and we look forward to delivering further value for shareholders during 2023. Thank you all for your involvement this morning.

This concludes today's conference call. Thank you for participating. You may now disconnect.