Yancoal Australia Ltd (YAL) Earnings Call Transcript & Summary

Welcome to the 2023 Annual General Meeting of Yancoal Australia. My name is Greg Fletcher. I'm the Co-Vice Chairman and Independent Non-Executive Director of Yancoal and Chair of the Audit and Risk Committee. I'm pleased to chair today's meeting and welcome those shareholders, interested parties and staff in attendance. I'd like to acknowledge the traditional owners, the people on whose land we are at today, and pay my respects to elders past, present and future and welcome any indigenous person may be on at today's AGM. I've been informed by the share registry that a quorum is present, and I declare the Annual General Meeting open. I'd first like to introduce some of my directors. Firstly, Helen Gillies to my left. Helen is an Independent Director and Chair of the Rem and Nom Committee. I'd also like to welcome David Moult to my left. David is the Yancoal CEO. And online, I have my Co-Vice Chair and Chairman of the Executive Committee, Ning Zhang; Dr. Geoff Raby, Independent Director and also Chair of the Health, Safety and Environment Committee; and of course, we have our Chairman, Zhang from China. So welcome to those directors. Unfortunately, a number of directors couldn't attend today. They being Mr. Wu, Mr. Xiao, Mr. Zhao, Mr. Changyi Zhang. And I'd just like to confirm that we have a number of Zhangs on the Board, and we have a number of Zhangs as executives. I can confirm that none of those are related. But I'd also like to introduce some of the executives here with us today. We have Kevin Su, our CFO; Mark Salem, Head of Marketing; and we've got Laura Zhang, our Company Secretary and Chief Legal Officer. Mr. Wu and Mr. Xiao are stepping down as directors of Yancoal Australia at the end of this meeting. Both Mr. Wu and Mr. Xiao has served as Board members for the past 6 years. During their tenure as directors, Yancoal integrated with Mount Thorley, the Hunter Valley Operations, and incorporate those into our assets, and we were also listed on the stock exchange in Hong Kong during this period. Their involvement has contributed to the success of Yancoal, and we will thank Mr. Wu and Mr. Xiao for their dedication to the company. I'd also like to pay my -- acknowledge Mr. Feng from Cinda, who recently resigned as a Director of Yancoal after 6 years and again is a fine contributor at the Board meetings. Mr. Ru is nominated as a replacement on the Yancoal Board. Mr. Ru has extensive leadership experience, having previously served as Chief Financial Officer and External Director of Zibo Mining Group and Shandong Energy. Mr. Ru was appointed as the Deputy General Manager of Shandong Energy in March 2022. Mr. Huang is also nominated as a replacement on the Yancoal Board and has extensive leadership experience. Mr. Huang joined Yankuang Energy in 1999, has held several senior leader roles. In 2021, he was -- he became Secretary of Yankuang Energy Board and subsequently a Director of Yankuang Energy. I will now commence today's proceedings. Commentary provided today includes forward-looking statements. The notices and disclaimers on Slides 3 and 4 pertain to these topics. This year, we have again encouraged shareholders to participate in the AGM via webcast. In addition, we have done our best to ensure that all shareholders and proxy holders will have the opportunity to participate in the meeting, including, for those entitled, the ability to ask questions at the end of the formal proceedings. Every effort was made to ensure that proceedings proceed smoothly. The relevant documents have been disseminated on both the Australian Stock Exchange and the Hong Kong Stock Exchange. Today's meeting can be observed online via the Computershare virtual meeting services platform. This allows shareholders, proxy holders and guests to observe the meeting virtually. In addition, shareholders and proxy holders can submit questions in real time. If you have joined us through the Computershare Virtual Meeting Services platform, you can start submitting your questions now, and we will address them later in the meeting. Please also note that your questions may be moderated or amalgamated if we receive multiple questions which deal with the same topic. I would now like to invite David Moult, our Chief Executive Officer, to provide the 2022 review.

Thank you, Greg. Shareholders, members of the Board, ladies and gentlemen, good morning, and thank you for attending today's Annual General Meeting. While we're pleased that Yancoal achieved a record results in 2022, keeping our workforce safe is always our primary objective. The ongoing and gradual improvement in our key safety metrics, despite challenging operating circumstances, is a credit to all our people on the Yancoal sites across our company. Positive trend in year-on-year safety stats was a favorable outcome, but the midyear uptick in the total recordable injury frequency rate was a reminder of that continual focus that is required. New initiatives trialed in 2022 included a vehicle collision awareness system at one of our operations. The trial commenced with light vehicles, and we are now extending that to our haul trucks in 2023. Like all our efforts with safety, our focus on sustainability is continual and ongoing. Yancoal is actively exploring opportunities in the renewable energy sector. The company has also commenced development of an enterprise sustainability strategy. This will allow us to better understand the risks and opportunities as we transition to a low-carbon economy, increase operational efficiencies and minimize environmental impacts and diversify the business. Yancoal achieved a record revenue and record EBITDA in 2022. Constrained production was common across the sector, contributing to tight market conditions and remarkably realized coal prices. Yancoal's overall realized coal price more than doubled to AUD 378 per tonne in 2022, driving the revenue up 95% to AUD 10.5 billion and lift in the EBITDA to AUD 7 billion. 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 million -- AUD 2.7 billion of cash. This enabled the Board to return AUD 924 million to shareholders as a fully franked final dividend of $0.70 per share. The total dividend for 2022 represented a 20% yield based on the year-end share price of just over $6 per share. Looking at the coal markets. The heavy rainfall and pandemic disruptions were obvious factors contributing to supply shortfalls and tight market condition. In 2022, our average realized thermal coal price was AUD 372 per tonne compared to AUD 134 per tonne in 2021. Similarly, our average realized metallurgical coal price was USD 405 per tonne compared to AUD 180 per tonne in 2021. Thermal coal indices may have fallen from the record levels seen in 2022, but the structural issues influencing the price remain. It is worth observing the coal indices referred to in this slide are still trading at twice the levels that they were just 2 years ago, and Yancoal's contract structures delivered a lagged price realization relative to these indices. Global energy markets seem far from settled, and the seasonal cycles have the potential to lift prices during 2023. Yancoal delivered 29.4 million tonnes of attributable coal production at cash operating costs of AUD 94 per tonne in 2022. 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. The lower production volume was one key driver of the increased cash operating costs. The cost increase also included additional equipment and contractors brought on to aid the production recovery program. These costs will carry through into 2023 and potentially into 2024. Although the operating costs increased and so did the state royalties for that matter, the fourfold surge in operating margin was unprecedented. It would have been easy to lose track of cost discipline under such operating condition, but cost control has always been a focus for Yancoal and keeping the operating cash cost under AUD 94 per tonne was a good outcome given the challenges that were faced over the last year. Heading into 2023, the open-cut mines in New South Wales still have excess water on site, the result of 3 years of exceptionally high rainfall. When the La Niña weather cycle began in 2020, the production impact was relatively modest, because as mentioned, we had the ability to deplete our mining inventory. Unlike past La Niña weather cycles that typically last for 1 year, there was limited respite from the rain over the past 3 years. The cumulative impact on production became more pronounced each year. Our people at all the mines did an acceptable job to meet the operational challenges of the past 3 years. I have confidence in the recovery plans and the ability of our teams to deliver the plans. Our aim is to return coal production and coal sales to the levels achieved in prior years. As mentioned earlier, both revenue and EBITDA reached record levels last year, exceeding the previous high of 2021. There is a direct relationship between realized price, revenue, EBITDA and the EBITDA margin. This relationship results from the relatively stable production and operating cost profile Yancoal maintains, 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 flow tend to replicate the revenue and EBITDA profiles. The jump in operating cash flow to AUD 6.5 billion provided the company with an opportunity to rapidly change its financial position during the past 15 months. The Board has effectively cleared its external interest-bearing loans by repaying USD 2.26 billion of debt ahead of schedule in 2022 and a further USD 333 million in March this year. The combined early debt repayments made since October '21 will save the company over AUD 300 million in finance costs in 2023, cash that can be applied to alternative uses. As mentioned earlier, AUD 924 million was allocated to the 2022 final dividend. Combining the $0.70 per share, with the interim dividend of $0.53 a share, which resulted in a 20% dividend yield when calculated year-on-year year -- sorry, year-end share price. 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. Yancoal has said in the past it aims to balance sustaining capital expenditure, debt reduction, distributions to shareholders and growth initiatives. Over the past 18 months, the Board has utilized the remarkable cash flow [ to meet this aim ]. Yancoal is in an extremely robust financial position and has clear plans in place to lift its production rate and lower its cost -- its per tonne cash cost over the coming quarters. Looking at our expectations for 2023, we have a production recovery program underway that aims to return coal sales 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 ]. We also aim to bring the per tonne cash cost -- operating cost down over time. That said, we must carry forward the additional costs associated with the recovery plan as well as recent cost inflationary [ pressures ]. That is why unit cost reduction is likely to take longer than the production uplift. The capital expenditure figure this year is expected to be between AUD 750 million and AUD 900 million for the year due to the additional expenditure on fleet and equipment to accelerate the mine recovery program. International coal markets have the potential to rally on seasonal drivers and supply disruptions. Having eliminated its interest-bearing loans, Yancoal is well positioned to capitalize on opportunities which may arise. In 2023 and beyond, to deliver optimal performance for our shareholders, we will need to continually balance Yancoal's output volumes, product quality, operating costs and capital expenditure while pursuing operational improvements. That completes my review of the operations for 2022. I'd like to hand back to Greg Fletcher. Thank you.

We will now move to the formal consideration of the business before the Annual General Meeting. Anyone attending in person today will have been issued an attendance card: yellow indicates a nonvoting shareholder; blue indicates a voting shareholder or proxy holder for the Yancoal Australia Annual General Meeting; and white indicates a nonvoting visitor. Persons holding either a blue or yellow card are entitled to speak at this meeting. However, only those persons holding a blue card are entitled to vote at this meeting. If any shareholder here is eligible to vote and does not have a blue-colored card, would you please raise your hand now? Resolutions will be decided by poll conducted at the end of the meeting. All results will be available on the ASX and Hong Kong Stock Exchange websites later today. The following summary outlines the items of business for today's meeting, in accordance with the Notice of Annual General Meeting for Yancoal Australia, which was published on our website and dispatched to shareholders. The Notice of Meeting contains the text of each resolution to be put to this meeting. With your approval, I now move that the Notice of Annual General Meeting be taken as read and that the text of each resolution be taken as read. All those in favor, please raise your blue attendance. [Voting]

All those against, please raise your blue attendance card. [Voting]

The proposal is passed, and the notice is taken as read. Thank you. Item 1 is the receipt and consideration of the company's financial report for the year ended 31st of December 22. I will take those reports as read. A representative of ShineWing Audit, Yancoal's auditor, is present and available to answer any specific questions about the preparation and content of the Auditor's Report. Item 2 is the election of and reelection of directors. There are 2 individuals nominated to be reelected, one is as an Executive Director and one is as a Non-Executive Director, and 3 individuals nominated to be elected as Non-Executive Directors. The biographical details are contained in the explanatory notes to the Notice of Meeting. Item 3 is the adoption of the Remuneration Report. The Remuneration Report is contained within the 2022 Annual Report. I will take the report as read. This vote is advisory only and not binding on the company or its directors. Voting exclusions apply to this resolution as outlined in the Notice of Annual General Meeting. Item 4 is the issue of STIP rights for the Co-Vice Chair under the equity incentive plan. Approval is being sought for the issue of up to 65,833 STIP rights as defined in the explanatory notes to the Notice of Meeting to Mr. Ning Zhang, the Co-Vice Chairman of the company, under the company's equity incentive plan on the terms set out in the exploratory notes of the Notice of Meeting. Voting exclusions apply to this resolution as outlined in the Notice of Annual General Meeting. Item 5 is the reappointment of the auditor and authorization to fix auditor's remuneration. At each annual general meeting, the company must appoint an auditor to hold office from the conclusion of that meeting until the next annual general meeting and provides the Board the authorization to fix the auditor's remuneration for the year ended 31st of December 2023. Item 6 to 8 are general mandates relating to issuing and repurchasing shares. Under the company obtains these general -- unless the company obtains these general mandates, its ability to exercise its right to issue shares without obtaining shareholder approval is limited, and the proposed repurchase mandate gives the company flexibility to repurchase the shares if and when appropriate. The passing of Resolution 8 is subject to the passing of Resolution 6 and 7. The reason for this resolution is to ensure flexibility to allot and issue more shares if the proposed repurchase mandate is exercised. Recommendations for all items are set out in the explanatory notes to the Notice of Meeting. I'm now going to cast the votes for the proxies I hold on all resolutions in accordance with the directions provided by shareholders or, otherwise, as set out in the Notice of Meeting. As mentioned earlier, a poll will be conducted for these resolutions at the end of the meeting. We will now take questions from shareholders on any matters relevant to the business of the meeting. Both the questions and the responses will be repeated in Mandarin for the benefit of the Hong Kong Stock Exchange shareholders. We will begin with the questions submitted in writing before this meeting. So first of all, we'll go through those meetings -- those questions. And then after that, we'll go through questions from those here today. After that, we'll go through questions from shareholders online. Brendan, would you like to open?

Thank you, Mr. Fletcher. The first question, received from a shareholder ahead of the meeting; shareholders' name, [ Anne Yan ]. And the question, Yancoal share price and Hong Kong Exchange share price appeared to underperform compared with its 2022 financial performance. The loans were paid off, but the share price response was moderate. The share price performance also lagged some other ASX and Hong Kong Exchange coal stocks. Is there a view on the Yancoal share price performance?

David?

Thanks, Greg. First, I'd just like to thank you for acknowledging the strong financial Yancoal delivered in 2022 and its capacity to effectively eliminate its external loans. The prepayment of over $3 billion of debt between October 2021 and March 2023 has transformed the company's financial position and leaves it extremely well placed to navigate whatever coal market conditions might occur in the coming months and years. Regarding the perception of relative performance, there are several factors that influence share price activity comparing between coal companies, for example, the product mix sales volume, cash operating cost, mine life, capital expenditure plans, debt profile, growth prospects can all influence equity market expectations. It's worth noting that since the start of 2023, Yancoal share price has held up better than its coal sector peers on the ASX. The company has informed the market that its recovery plans are in place to address the impacts of 3 consecutive years of wet weather and COVID-19 disruption. Yancoal's focus this year, as it has been for several years, is on maximizing production, minimizing the controllable costs and optimizing the product profile to meet the market conditions. By pursuing the operational targets, the company can best deliver on the potential of its portfolio of large-scale [indiscernible].

[Foreign Language]

Thank you. Moving on to the second question, coming from shareholder [ Melody Carue ]. Can you please expand further on achieved or possible sales into areas such as Europe and possibly the U.K. that traditionally have not been major markets for Yancoal?

David?

Yancoal's marketing team continually seeks to optimize the company's diversification of its mix and sales profile. During 2022, the proportion of coal sales managed by Yancoal that went to Europe was up -- was 9%, up 2% in 2020 -- from 2021. The sales to Europe include a small component going into the U.K. Geographically, Europe and the U.K. are not Australia's natural market. However, the 2022 sales profile was the result of dislocation of the global energy markets created by the invasion of Ukraine. Should customers in Europe or the U.K. require further supply, then Yancoal will evaluate the opportunity while maximizing the diversification and sales strategy. We remain focused on optimizing the value of our coal.

[Foreign Language]

Thank you. The third question from the [ Anson Family Super Fund ]. The share price has not increased in line with profit since the termination of the potential takeover by Yankuang Energy. Is the Yancoal share price being held back? Is the company preparing itself for another takeover in the next 1 to 3 years?

Thank you. Firstly, I can tell you that there is no indication of any takeover. So that's probably the first point. The second point is our share price is very much tied into the coal price indices, and that's probably the biggest contributor. And our management team is very much out there promoting Yancoal. And I can tell you, most of our senior management are shareholders, so it's in their best interest to promote Yancoal in the share price. So I hope that answers the [ Anson Family Super Fund ].

[Foreign Language]

Thank you. And the last question received ahead of the meeting from [ Lyle Hooper ]. Some scientists have developed a process to extract carbon dioxide from the power station emissions and produce additional electricity. I would like to see coal miners lobby the government to have the CSIRO develop a similar process and established facilities with the technology next to coal-fired power stations.

David?

Yancoal has been a member of LETA, which is Low Emission Technology Australia, which is a company that was set up many years ago. It was originally called COAL21. And has contributed to that since 2006, as does the whole of the Australian coal sector. This industry association has undertaken significant research work, most of which has been co-funded by the federal government, and some of it is state government as well, into low emissions technologies, into carbon capture and storage. So indeed, the Australian government could always do much more for us, but we do lobby the government. We do lobby them through our associations, and we do lobby them through this separate company, which we are part of and a member of the Board of, which is effectively involved in low emissions technology.

[Foreign Language]

We'll now take questions from the floor. I'd request any speakers from the floor to please raise their hand, someone will bring you a microphone, if you could please state your name before speaking. If you are a proxy holder or representative of a corporate proxy, please also state the name of the shareholder you are representing.

Yes. My name is [ Peter Seyed ], private investor. And my question is in relation to the media report of our [ B2B ] investors of some of our coal mines. I understand you cannot disclose the private negotiation, but there was a report Yancoal was the lead bidder. So my question is about if that happens, how are you going to fund that acquisition? Are you going to give our money again? Or are you going to issue your shares?

[Foreign Language]

[ Peter ], thanks very much for the questions. And you're right, we don't speculate on acquisitions or transactions. What I can say is that if we were to do a transaction, we've got a very strong balance sheet. As well, I think we've got a history of, through the Coal & Allied transaction, to be able to do those transactions. And we have a very supportive major shareholders, and we've got supportive financial institutions as well. So there was a transaction to take place, I think we'd be in a good position.

[Foreign Language]

The gentleman at the front.

This is a follow-up question to the first question. Some evaluations that have been mentioned in the media [indiscernible] [ $9 billion ]. So as I said, we're not going to speculate on the commercial [indiscernible] a large step up in price [indiscernible] I believe will be.

We won't be commenting on the value. Sorry.

[Foreign Language]

Thanks for the question, but we don't provide opinions on the value of other company assets.

Are we taking over debt of other coal mines if you were to pay price, as we speculate in the media, taking on a lot of debt by those clients? What impact on shareholders would that have or by the mines at that price?

[Foreign Language]

As a Board, we are regularly reviewing opportunities, reviewing our capital management plans as well. So the only reason why we do a transaction is if there's value for shareholders, which is what we did with the Coal & Allied transaction back in 2017. We won't be doing a transaction if it's not valuable to the shareholders.

Very nice comment. Is this talking to the second question?

[Foreign Language]