Yancoal Australia Ltd (YAL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Yancoal Australia Financial Results First Half 2023 Results Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, David Moult, CEO. Please go ahead, sir.

Thank you, Jonathan, and thank you to everyone on the call for joining this briefing on Yancoal's performance for the first half of 2023. Slides 2 and 3 contain notice and disclaimers relevant to today's presentation. Please make yourself familiar with the content of these 2 slides. The first aspect of the first half performance we need to acknowledge is the remarkable improvement in our safety performance. Strong operational and financial results are built upon workplace culture and a positive safety mindset. Over the past 6 months, our key safety metric improved considerably, reducing by 44%, an outcome that is only possible when people across all our mines embrace the safety initiatives and work cohesively to deliver tangible performance improvements. The production figures, while good when viewed on a half year basis, don't convey the momentum building across the mines. Our people have worked tirelessly through 2 years of adversity. Last year, they capitalized on record coal prices and delivered [ good ] EBITDA. This year, we are continuing to implement our mine recovery funds to return output to levels we achieved in past years. Pleasingly, our second quarter saleable production increased [indiscernible] more over the first quarter, demonstrating the effectiveness of these plans, also aided by the improved weather. We are looking for further production gains in the second half of the year. Our average realized coal price for the half year was AUD 278 per tonne. Excluding last year 2022, this is more than double the average received for the 4 years to 2021. Cash operating costs of $109 per tonne reflects inflationary factors, the mine recovery work and lower output. Despite this, the implied operating cash margin was still $144 per tonne. The realized price and operating margin are reflected in the $4 billion in revenue and $1.8 million EBITDA we reported for the first half. After repaying the last of our loans in March, paying over $900 million in dividends in April, $1.7 billion in taxes, we still held $1.1 billion of cash at the end of June. The Board has elected to return a further [indiscernible] to shareholders as a fully franked interim dividend of $0.37 per share. As I mentioned a moment ago, keeping our workforce safe is our first priority. The total reportable injury frequency rate was trending down during 2022, but is almost halved to 4.4 over the last 6 months. We're now aiming to maintain this level by embedding the gains made through the various programs and technologies implemented across the mines. Like our effort with safety, our focus on sustainability is continually -- is continuing and ongoing. We are chasing immediate gains through upgrades to our mining fleets and actively exploring future opportunities in the renewable energy sector. [indiscernible] company dedicated team to develop the Anchor sustainability strategy and signed 3 aboriginal cultural heritage conservation agreements at MTW. Slide 7 summarizes the operational drivers behind Yancoal's first half 2023 performance. As usual, we have provided a comparison against the same period last year. However, this is not a like-for-like comparison because, in 2022, the priority was minimizing production losses caused by the wet weather to capitalize on the high coal price. The production in 2022 came at the expense of the advanced mining activities that allow mines to [ sustainable outcome ] and cost profiles. This year, and most notably in the first quarter, we shifted our priority to rebuilding the mining inventory because the short-term trade-off required to deliver improved productivity in the coming quarters and years. Cash operating costs were inflated by the low production in the first quarter, but $109 per tonne for the half to us is not acceptable. Cost control has always been a core aspect of Yancoal's operating mindset, and driving the per tonne cost down over the coming quarters is a top priority. Looking at the coal markets. There was record demand in 2022 for thermal coal, over 8.3 billion tonnes globally. The IEA saw further demand growth over the past 6 months and expects total demand this year to match the 2022 level. In Australia, production is recovering from the persistent rain disruptions over recent years, and output is rising from other key supply countries. Balancing this supply growth is the likely reduction in output that was incentivized by record prices in 2022. But that increase in [indiscernible] no longer viable in the current price environment. Price differentials between coal indices returning to more normal levels and the resumption of Australian coal imports by China also provide a competitive advantage to large-scale, low-cost producers like Yancoal. The metallurgical coal indices started the year with momentum that has since stalled as the steel market conditions weakened. Across the thermal coal and [indiscernible] high demand factors appear relatively balanced at this time, leaving seasonal or short-term drivers to influence coal prices in the near to medium term. Yancoal continued to adapt to the evolving thermal coal market conditions in the first half of 2023. We retained core customers in Asia and resumed sales into China as demand from European- and Indian-based customers fall away. The preservation of relationship for the metallurgical coal customers throughout '22 proved an effective strategy. The premiums for these products over our thermal products have returned and our coal sales mix remains consistent with prior periods. Yancoal remains the third largest coal producer in Australia. Our attributable thermal coal production was 12% of the national total last year. Realized sale, large-scale, low-cost mines are the core of our business. These mines produce complementary coal products, which our marketing and operations teams can blend to best meet international market requirements. Returning production to levels achieved previously and bringing our cash cost -- cash operating cost down, we may now maintain our competitive advantage in the industry. Total run coal on a 100% basis increased by 5% to 26 million tonnes in the first half. This included a 32% increase in the second quarter over the first quarter as mine recovery plans began to take effect and productivity improved. The open-cut mines in New South Wales are still working through water storage reduction initiatives. Fortunately, the outlook is for relatively dry conditions through the remainder of the year. This should aid our drive to increase production output in the second half of the year. Our attributable saleable coal production also showed a modest uplift increasing to 14.4 million tonnes, up from the low recorded in the second half of 2022. As is typically the case, our 3 largest open-cut mines drove the production performance for the group during the period. As I have mentioned during the call, the rebuild of mining inventory is a priority for Yancoal through 2023 and was a high priority in the first half. If we don't rebuild the mining inventory, our mines will not deliver to the product in prior periods and total output will not recover the levels we delivered in recent years. Cash operating costs of $109 per tonne may have been consistent with the second half of last year. Level that we are comfortable with, and we fully intend to drive costs lower. Although it is not apparent looking at the data for the half year, there was a positive trend from first quarter to second quarter in the cost profile as production volumes recovered. The ongoing production recovery we anticipate through the second half of the year can drive lower per tonne cash operating costs. Unfortunately, there are still cost inflationary factors such as diesel prices, explosives, electricity and parts that remain embedded in our cost base and may prove difficult to fully unwind. Nonetheless, we intend to return to our position at the low end of the operating cost curve where we see a natural competitive advantage. Although cash operating costs remained elevated, the implied operating cash margin of $144 per tonne is still a favorable outcome. State royalties may have declined from the second half of 2022, in line with the lower coal prices, but $25 per tonne remained significantly higher than prior years. We expect the per tonne cash operating costs to reduce as the production profile recovers through the second half of 2023. However, the rate of decline remains subject to many factors, some of which we cannot control. Reestablishing our large-scale, low-cost production profile enables us to operate throughout all points in the coal price side. Our operational expectations for the year have not changed from the guidance we provided in February. We are still aiming for 31 million to 36 million tonnes of attributable saleable production at cash operating cost of between $92 and $102 per tonne. We have revised down our capital expenditure guidance to $600 million to $750 million, primarily reflecting the slippage of spend into 2024. Overall, capital expenditure includes the fleet replacement cycle we commenced in 2021 as well as additional equipment we secured to accelerate the mine recovery plans. Throughout the year, we will continually balance volume, product quality, efficiency metrics, operating costs and capital expenditure as we aim to deliver the best possible outcomes for our shareholders. Slide 17 provides an overview of Yancoal's first half 2023 financial performance. The key line items from the income statement may have reduced from the first half of 2022, however, the financial performance in the first half of 2023 remains elevated when compared to all other prior periods. When looking at the cash flow statement initially, the operating cash flow of $89 million appears low. But please note, this is after the $1.7 billion tax payments we have completed during the period, most of which related to the record earnings recorded in [indiscernible]. As noted at the start of the call, we held over $1 billion in cash at the end of the period. This is after making the 2022 final dividend payment, the final loan repayment and the tax payment just mentioned during the past 6 months. The 2 charts on this slide show the correlation between realized price, operating EBITDA and the operating EBITDA margin. This correlation results from relatively stable production and operating cost profile that Yancoal maintains. With the obvious exception [indiscernible] higher costs in recent periods I have already identified. The operating EBITDA of $1.8 billion and the EBITDA margin of 46% only appear modest in comparison to recent periods. These are still remarkably robust figures. The profit after tax and operating cash flow tend to replicate the revenue and EBITDA profiles. The step change in the operating cash flow incorporates the tax payment I mentioned in the earlier slide. In fact, it was only in mid-2022 when we finally recouped all the prior year tax losses incurred and we commenced paying cash tax. The positive aspect of paying cash tax is the generation of franking credits. The Board elected to repay the last of our interest-bearing loans during the half year and have repaid more than USD 2.7 billion of loans since late 2021. The loan repayments made over the past 2 years will save the group almost $200 million in finance costs this year alone. This is cash that can be applied to better alternate uses. The small difference between the cash position of $1.1 billion and the net cash position of $900 million is primarily lease liabilities on mining equipment. Once again, returning cash to shareholders via dividends is a primary use of Yancoal's excess cash. The Board has allocated $489 million to the 2023 interim dividend. This was 37% -- $0.37 per share, a notional 8% yield when calculated on the 30 June share price of $4.58. The other important point to note is that like the 2022 final dividend, the 2023 interim dividend is fully franked. Yancoal expects to continue amassing franking credits as it pays tax in future periods. Including the interim dividend, Yancoal has declared over $3 billion in dividends in the past 2 years. The remainder of the slides contained Appendices of additional information for reference, but I don't intend to speak to them today. I will now hand back to Jonathan so that we can commence the question-and-answer session.

[Operator Instructions] And at the moment, I'm not showing any questions form the phone lines.

Okay. Thanks, Jonathan. I can see several questions coming through on the webcast. I'll start with the webcast questions. And I can see that some of the questions involve some duplication, people submitting things of a similar nature, similar topics. So I'll amalgamate questions for [indiscernible] as I see best appropriate to cover off all the queries. And just before we start, David mentioned that there are Appendices at the end of the presentation pack. This includes slides which show overviews of the mining assets, the reserves and the resources, those types of figures for people who want to gain a background on the breadth and scope of Yancoal who may be less familiar with the company. Looking at one of the first questions coming -- we're talking or were asked about the future of Yancoal Australia and ongoing contracts for the coming years. I'm going to interpret that as the production outlook, the production profile going forward in the coal markets and the contracts exposures we'll be taking into the forward years as much as we can speak to those topics. David, could you provide some comments?

Yes. Thanks. I think looking forward, I mean, we are very happy that our market diversity over the last few years has brought a breadth of customers now over many, many countries, and you can see that in the presentation. It is good to have China back into our mix of supply -- sorry, of countries that we are supplying. And as you'll see with the percentages, again, in the presentation that we have started to move back into China in sort of the ground we lost over the last couple of years. What I might do though we just hand over to Mark Salem to add any other comments on the contract side as we go forward. Mark?

Yes. Thanks, David. This is Mark Salem speaking. Look, in relation to our contract position moving forward, I can say that Yancoal has got a very good reputation in the marketplace, and we are very well contracted with the major buyers in Japan, Korea, Taiwan and China. And we will continue to develop those markets as well as other markets in the developing nations. And our contract portfolio, many of which are under term contracts and many of which is under evergreen annual renewable contracts. Because of our reputation and our coal quality, we don't envisage there to be any risk to that business.

Thanks, Mark. Looking through the question list, there's one here from Sarah Chan at Morgan Stanley. There are several components to the question. It seems to tie in with some of the commentary we've just provided. So to the elements of interest, the washing yield, could we provide any commentary on the yield across the assets? And then a broader question leading into market conditions, is there any commentary related to the recent Australian LNG strikes and a potential impact or flow through effect that may be relevant to the coal markets, which we serve. And you first, David.

Thanks, Brendan. The yields we achieve [indiscernible] quite considerably across the different mines and depending on what products we're producing at the mine. So I don't have all those yields in front of me at the moment. But we get reasonable yields at all operations. Of course, we do wash occasionally harder. And you'll have heard us talking about this over the last couple of years to take advantage of better quality coal, which reduces yields at times. But there is quite a diversity of yields across our minds. I'm sure Brendan, his contact details are available there. And if you needed a bit more guidance on what those numbers look like, I'm sure Brendan can provide that after the call. On the second comment, Mark, I thought I might throw that to you and ask for your opinion on what's happening in the market with this LNG strike.

Sure. Sure. Thanks, David. Look, there was some movement, very small movement in the market over the LNG strikes in Australia. Australia only supplies a very small portion of the world international LNG. So the overall impact was very marginal. But please appreciate that gas versus coal is always a consideration in any market evaluation and analysis that we undertake because gas is an alternative to energy production. And so that's something that we do monitor very closely.

Thanks, Mark. I see several questions of a similar nature coming through related to dividend, clarifications or interest in the dividend policy, dividend payout ratios and the philosophy behind the dividend distributions in the first half. Perhaps, Kevin, you might be best placed to provide some comments with regard to what we've delivered for the first half dividend, what we've done in the past and the policy guideline we have in place.

Thanks, Brendan. To start away, that statement about the dividend policy of Yancoal I think probably the easier way. Yancoal has been just a stick to the -- a simple 50% of either free cash flow or NPAT, whichever is higher, as our guidance to the market for our dividends. And then for investors, who has been following Yancoal, clearly, you will see today or last night when you saw the announcement of 37% -- sorry, $0.37 per share is equal to roughly about a 50% plus of Yancoal and PA. So we have been just following our commitment to the investors. And then this is the discipline we will be following in the foreseeable future, but we need to stay way as a company. Our Board has the right to decide our final dividend return. So all the decisions from management perspective, we will try our best to provide to best proposal for everything, and even they will subject to Board's final approval. Thank you.

Thanks, Kevin. I do see more questions on the webcast, but I'll take a moment, Jonathan, to come back to you to check if we have anything coming through on the phone line.

And our first question comes from the line of Angus [indiscernible] from Barrenjoey.

Congratulations on the results. So just 2 questions from me. Just on your production outlook and just the phased recovery there and just considering where you were, I guess, in 2021. Do you see a pathway to recovering, particularly those second half volumes near term? Or how should we think about just the longer-term damage from the water issues? Would be -- just trying to get a sense of the phased recovery profile. And then secondly, just with reference to your balance sheet. Obviously, balance sheet is in a very good position now with no debt, and that's been a great effort to delever your balance sheet. But how do you think about debt on-balance-sheet from a forward-looking basis?

Thanks, Angus. Thanks for those questions and joining us this morning. Look, I think what we had over the last couple of years was unprecedented when it came to rain. And as I said earlier, we've last year focused on making sure we got our production as high as we could to take the opportunities we had with the coal price. As we said, the recovery, we put additional assets in. We put additional people on. We are pushing very hard at the moment, but we're focused basically on recovery that we lost last year. And we said that we would step it up quarter-on-quarter, and that's exactly what we're doing. We're seeing some very good signs across our sites at the moment. The performance is coming back up to levels that we used to get historically. So shorter term, I think we are well on track to achieve what we said, and that is to get us within that guidance range, but also that's recovering significantly a lot of what we lost. Realistically, we've got about another 3 to 6 months work after that to be happy with where all our mines sit when it comes to their overburden in advance and their pre-strip and to continue to deliver output levels that we were delivering on prior to the 2021 and 2022 years. On the debt side, I thought I might just throw that across to Kevin and let him answer that one.

Thanks, David. First of all, I think from Yancoal management and the Board's perspective, we are being very open minded. We have hired all the debt, but we never say we never borrowed, if everything is about how to maximize shareholder credit. So in such a high interest rate environment and then if we feel it's better to actually save the financial cost, actually return the reasonable yield back to the investors, we'll do so. And then similarly, if we have seen great opportunities and Yancoal has the capacity [indiscernible] that in the market, and then we will see such opportunity and we will make sure we make the balance sheet even more efficient. So that's all about that.

I'll just add one comment, Angus, at the end that Kevin touched on it then. I mean we don't want us to do with the lazy balance sheet either. Our Board is very conscious of that. So they will look at capital management to ensure that we manage our balance sheet in an efficient way.

Thanks, Kevin. Thanks, David. That leads into another topic, which is coming up on the web that of potential corporate activity, appetite for acquisitions and funding methodologies that might be implied, might be applied should an acquisition occur. Could you speak to the broad outlook Yancoal applies to potential acquisitions?

Yes, thanks. Thanks, Brendan. I think our position has not altered. I think that we look at external opportunities, but we're also looking at internal organic growth opportunities as well. [indiscernible] organic growth in the company, and we're progressing those at the moment. That is -- I think you've heard us talk previously about the upgrade to our copper operation facilities [indiscernible] and increase in the capacity of the open-cut there from 14 million to 16 million tonnes. We do have an underground mine concept, which we are reviewing at MTW. There's an organic project. So internally, we've got -- certainly, yes, we do look at assets that come on market, and we are not trying to expand our coal base. I mean we've talked about it previously, and met coal is still our favorite position if we were looking at acquisitions. So it's not really changed. I think it's still very much aligned with the strategy that we've been talking about now for the last year, a year or 18 months. We are still looking at other commodities. We are building our knowledge base within the company in other commodities. But at the moment, we're not moving in that area. We're just gaining knowledge and understanding of it. On the funding side, I might again pass across to Kevin to talk about that.

Yes. I think, once again, it's about this kind of open mandate and flexibility. We, as a company, yes, we appreciate the fact in the market -- capital market, probably a lot of funding constraints. Yancoal is no different. But in our financial accounts, I think we have stated, we still are open to best facilities if -- we believe that's the best capital management strategy. We're also open to the equity raising opportunities subject to the compliance and regulatory approvals. So all these things are definitely all available to the company and the way endeavor to assess them, as what David just mentioned, when the right opportunity comes.

Thanks, Kevin. Taking a question now from [ Bruce Wong ] at [ White Eye Securities ]. He has 2 questions. The first one coming through relates to the coal markets. Question is, coking coal price in Australia that looks firmer than the thermal coal price through the first half of 2023. And we have [indiscernible] drivers between the coking coal and thermal coal markets and any comments on outlooks for the coming quarters. And then the second question, with the decline of the coal price, do we think there's more chance for securing good -- to secure good quality coking coal assets in the future?

I'll let Mark answer the first part. I'll just comment very briefly on the second part. It's like everything, I suppose, that coal price gets factored into valuations, and valuations drive what company decide when they want to divest or otherwise assets. So in some ways, declining coal price would make some of the assets more attractive. But also I think what it does is take some of the benefit out of it for the seller as well. So there's always a balance between where the coal price is and whether you get the better or the worse mines. And is it the time that -- I mean despite, it's the time for a buyer to be buying, but is it the time for the seller to be selling. So there's always a balance between the two. Mark, do you want to comment on the first part about the met coal versus thermal coal dynamics?

Sure. Yes. Thanks, David. Thanks, Bruce, for your question. I think we have to appreciate that 2022 was a very unusual year for many factors beyond the wet weather that impacted supply, the Russian-Ukraine crisis or an energy crisis created plus the shortage of supply. So we did see the thermal coal market appreciate beyond the met coal market at the time. What we've seen in 2023 to date is basically a return to historic relativities between met and thermal coal. And it was an extraordinary year in 2022 for many reasons. And I think we're seeing that return to historic relativities with the return of normal supply and market demand conditions coming into play. The drivers for the met coal market in the future will be the ongoing demand of steel, which is purely dependent on infrastructure and economy movements -- economic movements in the infrastructure area. And this will -- with the higher inflation rates, there's a lot of aspects that will come into play in terms of impacting that outlook. Thank you.

Thanks, Mark. Jonathan, coming back to you to check if there's questions on the phone before I continue with the webcast questions.

I'm not showing any questions from the phone lines. [Operator Instructions]

Okay. Whilst we wait for anyone to participate on the phone, next question is also coal market related comes from [ Michael Luka ]. We note that the Chinese customer sales volumes were back up to 24% in the first half of 2023 of billing as a shift in the customer base. Although, as we noted earlier in our comments from David, that it's something of a resumption of the customer base we carried in the prior years. Michael observed that most Chinese power plants are using the API 5 or the 5,500 kilocalorie thermal coal. Does that mean the product mix in the foreseeable future is going to rebalance and the realized prices will reflect a rebalance in the markets? Yes. I guess, Mark, perhaps we'll hand straight to you for that one as a another coal market question-related topic.

Sure. Sure. Look, Yancoal Australia's product mix is what it is. Geologically, the coal is what it is, and that won't change. The fact that we have sold 24% of our sales into China does mean that we do produce a lot of that 5,500 category coal. And China did present to us the best market in terms of alternatives of India, Europe, Southeast Asia. So in that regard, we're always targeting the optimal market return for us. Thank you.

Thank you, Mark. And I will make an extra observation. When we're looking at Slide 10 in the presentation pack, we can see the volumes by customer market. Just clarifying that these are volume differentiation of the exports in the management discussion and analysis in the half year result. We also provide segment analysis, and you can see the revenue differentiation by customer market and it gives some appreciation for volume versus revenue. And as Mark has been touching on, product type and price realization are the factors that can create the relative difference between the volume split and the revenue split. We've got a question coming through. It's weather-related, the observation that the Bureau of Meteorology recently upgraded El Nino alert and asking what can we do operationally to mitigate these impacts. And as I hand the question over to David, we're noting that the several years of outlining here, whether a cycle just been affected where we're dealing with excess rain. So some dry conditions, not necessarily the worst thing for us at this point. David?

Thanks, Brendan. Yes, the -- there is always a balance between too much water and not enough water. And the last few years, we've had far too much. We have increased our storage capacity on all our large mines, which means we can hold more water on site. It gives us the scope and capacity to handle the excess rain that we've had. But also by holding that water in out-of-pit storage facilities, which don't interfere with our mining, it also gives us a more secure water supply for the El Nino dry periods as well. So I think we are pretty well set up now. We did invest significantly last year in those storage facilities and also pumping facilities to move water faster out of the mine working areas into those out-of-pit storage facilities. But also that gives us some security as well in dry periods.

Thank you. We've got what looks [indiscernible] on the dividend discussion from earlier, Kevin, one of the participants on the webcast has noted that the dividend is equivalent to the first half 2022 dividend franking credits. Curious if this was a deliberate outcome and how the short term and the long term split of dividends might be determined in any given period.

Thanks. First of all, I don't think this is deliberate. As I mentioned, there is a clear tough line from the company, and we want to ensure we provide such consistency to the market. So they happen to be similar. That's not a bad thing to us. But the franking credit was mentioned here, and I just want to take this opportunity once again to emphasize the importance when Yancoal started paying cash tax, accumulating sufficient franking credit, made them available to ASX Investors, Hong Kong Exchange Investors. And we all believe those dividends, with or without franking dividend, eventually, hopefully, they all provide best return to our investors.

Thanks, Kevin. Jonathan, I'll come back to you to check if we've had any further questions come through on the phone line.

I'm not showing any questions from the phone lines at this time.

Okay. I've addressed or amalgamated all the various webcast questions coming through from investors and analysts. I'll wait one more moment to see if any further questions come through from investors or analysts. And if nothing pops up in the next 10 or 20 seconds, maybe 30 seconds after typing, I'll be then handing back to David to provide some closing comments before we hand them back to Jonathan to close out the call. So last call for any questions. As David mentioned earlier, I am available, Brendan Fitzpatrick. My details are on the market releases, mobile phone, e-mail, you can reach out to me for anything that needs to be followed up after the webcast. Jonathan, quick check, any questions with you?

Not showing any at this time.

Okay. I'm showing no further questions from investors or analysts on the conference call. David, I'll hand back to you to make some closing remarks.

Thanks, Brendan. I just like to thank everybody again for joining us this morning for this 6-month investor presentation. I think the pleasing thing is we are achieving what we said we would achieve when we kicked away this year. We didn't -- we knew that we had some deficiencies in our inventory levels because of the rain last year. We did speed up that recovery by some levels of investment, both in the plant and employee numbers. But the pleasing thing is now the mines are getting back to where we want them to be. And at this moment in time, we are starting to see some very good productivity outcomes at all our big operations. So thank you, everybody, for supporting us and being here this morning. We look forward to an even better second 6 months and delivering on those guidance figures that we said we would do. Thank you, everybody, for attending, and look forward to speaking to you again in the future.

Thanks, David. Jonathan, could you please conclude the call for us.

Thank you, ladies and gentlemen, for your participation in today's call. This does conclude the program. You may now disconnect. Good day.