Yancoal Australia Ltd (YAL) Earnings Call Transcript & Summary

Welcome to the 2024 Annual General Meeting of Yancoal Australia. My name is Greg Fletcher. I'm Co-Vice Chairman and Independent Non-Executive Director of Yancoal and Chairman 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 begin today by acknowledging the Gadigal people of the Eora Nation, traditional custodians on the land on which we meet today, and pay my respect to elders, past and present. I extend that respect to any Aboriginal and Torres Strait Island people here with us today. This year is the 20th anniversary of Yancoal. The company was established in 2004 ahead of Yanzhou, now Yankuang Energy, acquiring the Austar Mine. Over the next 20 years, through prudent acquisition and asset expansions, Yancoal has grown to be a leading large-scale and low-cost coal producer. The company holds interest in 7 producing mines and operates 2 more on behalf of Yankuang Energy. Total annual production across the 9 mines is around 70 million tonnes of ROM coal and 55 million tonnes of saleable coal, making Yancoal the second-largest coal producer in Australia. I've been informed by the share registry that a quorum is present, and I declare the Annual General Meeting open. Please let me introduce you to my fellow directors attending in person or by telephone conference today: the Chairman, Mr. Ru; Co-Vice Chairman, Ning Yue; Independent Director, Dr. Geoff Raby; Independent Director, Mrs. Debra Bakker; and expressed by apologies for Mr. Xiao, Mr. Huang and Changyi Zhang, who aren't able to join us today. Mr. Ning Yue was appointed to the Board last September. Ning Yue has extensive coal mining and management experience. He joined Yankuang Energy over 20 years ago and has held several senior roles and directorships. Mrs. Debra Bakker was appointed to the Board in March. Mrs. Bakker has experience encompassing precious metals, base metals and critical minerals mining as well as a background in corporate finance. She holds several directorships with companies in the mining sector or related industries. Also in attendance is Yancoal's Chief Executive Officer, to my left, David Moult, who will present the 2023 review. And I'd just like to acknowledge some of our executives in attendance: Laura Zhang, our Company Secretary; Kevin Su, our Chief Financial Officer; and Mark Salem, Head of our Marketing and Logistics. I will now commence today's proceedings. The 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 formal proceedings. Every effort was made to ensure that proceedings proceed smoothly. Being a dual-listed company, the relevant documents have been disseminated on both the Australian Stock Exchange and The Stock Exchange of Hong Kong. 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 written 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 still with the same topic. I would now like to invite David Moult, our Chief Executive, to provide the 2023 review.

Thank you, Greg, and shareholders, members of the Board, ladies and gentlemen, good morning, and thank you for attending today's Annual General Meeting. At Yancoal, keeping our workforce safe is always our first consideration. Through constructive programs and the concerted effort of all our people, key safety metrics improved sharply midyear and have remained low. A 35% reduction in the total recordable injury frequency rate is the result of our people embracing safety initiatives and working cohesively. Having established a new reference, we worked hard to consolidate and maintain this level by embedding gains made across all the mines. It was gratifying to see our leaders and workforce efforts recognized through Yancoal being named as finalist in the 2023 Australian Workplace Health and Safety Awards. Our focus on sustainability as with safety is continual. This year, we moved beyond the environmental, social and governance report published in past years. In April, we replaced it with our first sustainability report, which integrates previous disclosures and begins our transition to align with international sustainability disclosures. We will continue to keep abreast of the Australian sustainability reporting standards as they develop as well as the requirements of the ASX and Hong Kong Stock Exchange. Existing initiatives include upgrades to our mining or our mining fleets and actively exploring renewable energy opportunities. At the start of 2023, we said we needed to prioritize mine recovery plans and would increase our output in each successive quarter. We delivered on these targets, and in the fourth quarter, we produced at our highest rate in 3 years. For 2023, we were pleased to report AUD 7.8 billion in revenue, AUD 3.5 billion in operating EBITDA, AUD 1.8 billion in after-tax profit. We still held AUD 1.4 billion of cash at the end of December. Since the end of the last year, we have further increased our cash holding and utilized AUD 429 million to pay the $0.325 per share fully franked dividend the Board declared in February. Combined with the $0.37 per share interim dividend, the 2023 total dividend was $0.695 per share fully franked. This was a 50% payout ratio and a 14% yield on the $4.95 year-end share price. Turning to the coal market. A slowing global economy and mild winter in the Northern Hemisphere diminished demand during 2023. A supply side recovery compounded the downward pressure on coal indices noticeably with Australian and Indonesian exports rising by 22% and 12%, respectively. For the past year, we have considered the thermal coal markets to remain relatively balanced. But subject to the influence of short-term factors, such as seasonal demand drivers and supply disruptions, this still remains our view. Coal indices are currently trending sideways under current market conditions and price differentials between coal indices now better reflect the inherent value of different coal types. Total ROM coal on a 100% basis increased by 19% to just over 60 million tonnes of mine recovery plans took effect and productivity levels improved. Our attributable saleable coal production increased 14% to 33.4 million tonnes. Our fourth quarter annualized run rate of almost 39 million tonnes per annum demonstrated that most of our mines have recovered from the disruptions in prior periods. The 33.1 million tonnes of coal sales had a typical split between the thermal coal and metallurgical coal production we produced. Our cash operating costs were AUD 96 per tonne. While we are focused on minimizing our cash operating costs, inflationary factors, including labor, explosives, electricity and spare parts, incurred over recent years may only partially unwind if at all. That said, we have reestablished our position at the low end of the operating cost curve where we see our natural competitive advantage. Our implied operating cash margin for the year was AUD 115 per tonne, a notable achievement given the operating conditions. Keeping costs under control during periods of elevated coal price is more challenging than when coal prices are low. Revenue and EBITDA were the second-highest level in the past 5 years. This is a direct relationship between realized price, revenue, EBITDA and the EBITDA margin. This relationship results from Yancoal's high-volume, low-cost production profile. The profit after-tax and operating cash flow tend to replicate the revenue and EBITDA profiles. The step-down in the operating cash flow incorporates a large one-off tax payment made in early 2023 on the record 2022 earnings. The positive aspect of paying cash tax is franked credit accumulation, which allowed Yancoal to pay fully franked dividends in recent periods. The Board elected to prepay the last of our interest-bearing loans during the first half of 2023. In total, we repaid more than USD 3 billion of loans since the start of 2021. The loan prepayment saved us almost $300 million in financial cost -- in finance costs last year. Yancoal returned cash to shareholders via fully franked dividends. Franking credits eliminate withholding tax from distributions to shareholders outside Australia. As mentioned earlier, the Board allocated AUD 429 million to the 2023 final dividend. Combined with the AUD 489 million allocated to the interim dividend, this was a 50% payout ratio. We have distributed to shareholders AUD 2.5 billion of unfranked and AUD 1.8 billion of fully franked dividends since 2018. This year, we aim to produce at a level similar to the second half of 2023. The 2024 guidance is 35 million to 39 million tonnes of attributable saleable production. Output will vary quarter-to-quarter due to mine plan sequences, long-haul moves and planned maintenance, and there will be a second half weighting to the production profile. We aim to bring the cash operating cost per tonne down from the full year 2023 level and are focused on output given the direct relationship between the volumes we produce and the per tonne cash operating costs we report. We have guided cash operating costs of AUD 89 per tonne to AUD 97 per tonne for the coming year. Overall, it was another very strong performance by Yancoal in 2023. We finished the year with great operational momentum and a very strong financial position. That completes the 2023 review. I would like to hand back to Greg Fletcher for the remainder of the meeting. Thanks, Greg.

Thanks, David. 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.

For the benefit of people online, we're just addressing a matter in the room, please give us 1 minute.

Resolutions will be decided by poll conducted at the end of the meeting. The poll results will be available on the ASX and Hong Kong 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 card. [Voting]

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

The proposal is passed and notice is taken to be read. Thank you. Item 1 is the receipt and consideration of the company's financial report for the year ended 31st of December 2023. I will take that report as read. A representative of ShineWing as 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. Two individuals are nominated to be elected, one as an Executive Director and one as an Independent Non-Executive Director. Two existing directors are nominated to be reelected as Independent Non-Executive directors. The biographical details for all 4 directors 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 2023 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 Meeting. Item 4 is the approval of a termination benefit payment. The CEC STIP payment is allocated to Mr. Ning Zhang following his decision to resign as Executive Director, Co-Vice Chair of the Board and Chair of the Executive Committee. Voting exclusions apply to this resolution as outlined in the Notice of Meeting. Item 5 is the approval of the issue of securities under the equity incentive plan. In the absence of such an approval, future issues of securities under the plan may still be made but must be counted towards the company's capacity to issue equities, securities under the 15% limit under the ASX Listing Rule 7.1 at the time of issue. Shareholder approval will be effective for 3 years provided there are no material amendments to the plan. Voting exclusions apply to this resolution as outlined in the Notice of Meeting. Item 6 is the issue of STIP rights to the Co-Vice Chairman under the equity incentive plan. Approval is sought for the issue of up to 16,541 STIP rights to Mr. Ning Yue, the Co-Vice Chairman and Executive Director of the company, under the company's equity incentive plan on the terms set out in the explanatory notes to the Notice of Meeting. Voting exclusions apply to this resolution as outlined in the Notice of Meeting. Item 7 is the reappointment of the auditor and authorization to fix the 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 authority to fix the auditor's remuneration for the year ended 31st of December 2024. Item 8 to 10 are general mandates related to issuing and repurchasing shares. 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 the flexibility to repurchase the shares if and when appropriate. The passing of resolution 10 is subject to the passing of resolutions #8 and 9. The reason for this resolution is to ensure flexibility to allot and issue more shares if the proposed repurchase mandate is exercised. Yancoal is dual-listed on the ASX and Stock Exchange of Hong Kong. Unlike ASX Listing Rules, the Hong Kong Listing Rules require companies to seek approval for general mandates to issue and repurchase shares at each AGM. The company's existing mandates were last approved by shareholders at the company's 2023 AGM. Unless otherwise renewed, the existing mandates will lapse at the conclusion of this year's AGM. Yancoal has sought the maximum mandate permissible under the Hong Kong List Rules. However, it still may not exceed the limit by the ASX Listing Rules in relation to share issuance. Both the ASX and Stock Exchange of Hong Kong set out clear limits and parameters on share issuances. The company seeks the full flexibility afforded under these limits and parameters in order to maximize its capacity to benefit shareholders should suitable opportunities arise. Item 11 is the reinsertion of a proportional takeover provision. The proportional takeover provisions exist in the form of Rule 6 of the constitution of the company and is sought to be reinserted for a further period of 3 years commencing from the date of this AGM. The Board's recommendations for all resolutions 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. The proxy votes received before the meeting have been counted. The totals are shown on the slide. We will now take questions from shareholders as any matters relevant to the business of the meeting. We will begin with questions submitted in writing before moving onto questions from shareholders in the room and then to questions submitted by the webcast. I request any speakers from the floor, please raise their hand. Someone will bring a microphone to you, so you may 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. Questions received by the webcast platform may be consolidated or summarized to facilitate this session.

Beginning with questions received in writing ahead of the meeting. The first question combines several similar questions. It relates to the company's constitution, directs 50% of net profits for net cash flow to be paid as dividends subject to Board discretion. Given the large amount of cash currently accumulating, what is the intended use for that cash surplus given the debt reduction already completed? And specifically, has the company given consideration to conduct either a buyback or implementing a dividend reinvestment plan?

Thanks, shareholders, and thanks, Brendan. The Board routinely considers capital management initiatives. When allocating capital resources, several factors are considered, including the fiscal position, growth opportunities, company constitution and the equity market elements, such as the pre-float and daily trading volumes. Until now, debt reduction and dividends have been the preferred mechanisms. Three most recent dividends have been fully franked. The franking is advantageous for domestic and international shareholders. So currently, there is no plans to implement a buyback or a dividend reinvestment plan. But the company reserves the right to consider doing so at any time.

The next question comes through, could you comment on the new directors, Mr. Ning Yue and Mrs. Debra Bakker and the capabilities they bring to the company?

Thank you. The addition of Ning Yue and Debra Bakker enhances the Board's collective skill set. As an Executive Director and Chair of the Executive Committee, Ning Yue provides a crucial function in the running of the company and its operations. His mining engineering qualification and more than 20 years of experience overseeing coal mining operations makes him extremely well suited to carry out this role. Debra Bakker has a diverse skill set that is complementary to those of the other nonexecutive directors. Debra Bakker has, over the years, held prominent roles in the banking and finance sectors, both in Australia and overseas. In recent years, she has excelled as a director, serving on the Board of several companies in the mining and related industries. Yancoal is fortunate to have both these people in joining the existing Board members.

Next question coming through in writing ahead of the meeting, what is being done to ecologically rehabilitate the mine sites to promote native regeneration?

Thanks, Brendan. At Yancoal, we're committed to the responsible practice of rehabilitation. And recognizing that mining operations temporarily disrupt the natural landscape, we seek to ensure that these disturbances are managed and rehabilitated efficiently and effectively. Recently, the Task Force on Nature-Related Financial Disclosures introduced a framework designed to guide organizations in addressing evolving nature-related risks and opportunities. This framework offers guidance and recommendations on disclosing nature-related impacts, dependencies, risks and opportunities catering to various stakeholders. While the recommendation -- recommendations remain voluntary by Australian entities at this time, we have reviewed the proposed disclosure metrics for the mining sector against our existing measurement practices. In 2023, Yancoal initiated a comprehensive assessment across 4 of its mining sites to explore the potential generation of Australian carbon credit units through the environmental planting methodology under the Australian government commission's reduction fund.

Thank you. Another question on a similar topic, standing water and contaminated water is an issue with our climate. What processes are being looked at to reintroduce water after purification?

Again, we recognize the significance of water as a valuable and shared resource. Our water management practices adhere to stringent regulations and compliance with our licensing conditions. We have comprehensive surface and underground water management plans, and these plans govern the daily interactions between our operations and water resources. Water management at Yancoal is subject to both Commonwealth and state legislation. The Yancoal water accounting and reporting standard was developed in accordance with the Minerals Council of Australia Water Accounting Framework. The MCA framework provides a consistent approach for water accounting and reports -- reporting across our owned and managed operations, supporting compliance with our regulatory obligations. At Yancoal, we recycle water on site through the reticulation of stored mine water to reduce the demand for use on other input sources. During 2023, we recycled 9,298 megaliters of water on site, a 4% increase compared to 2022. All water interaction is licensed and managed in accordance with the water management regime within the jurisdictions within the Yancoal operations. Mount Thorley Warkworth, Moolarben, Donaldson and Premier have discharged licenses with quality and volumetric limits.

Thank you. Could you please comment as to whether Yancoal will largely stick to its knitting rather than embark on even larger renewable energy projects then considered for Stratford mine?

Regarding the concept of the renewable energy to hub at Stratford mine site, this is -- it's still the study of -- it's still the subject of a study and internal and external approve processes -- approval processes. Yancoal is evaluating the merits of the project in the context of its obligations for the site. The concept revolves around assessing how the company best manage and utilize the site post mining. Given the specific aspects in topography of that site. The company's primary business remains mining.

Thank you. And one more question submitted in writing, can the Chairman indicate the extent that Yancoal is seeking to diversify into minerals in Australia?

Yancoal's coal mines have finite reserves and resources. Most of the mines exhaust the reserves over the next 15 or maybe 20 years at current production rates and economic projections. Accordingly, the Board needs to consider pathways that could carry the company beyond this horizon. The Board also needs to consider the outlook for various commodities and the Australian government policies regarding foreign investments into critical minerals, mining and processing as it contemplates the pathways ahead. Having built itself up over the past 20 years through the acquisition, optimization and expansion of coal mines in Australia, the company clearly has core competencies. It can leverage assets of this type. That said, the company's 3 large low-cost mines are some of the best thermal coal mines in Australia, and we are mindful that any new assets introduced to the portfolio need to complement the existing assets. We have said we are open to diversification beyond coal but will be astute regarding growth opportunities we might pursue, as we have demonstrated in the past.

Thank you. That concludes the questions received in writing ahead of the meeting. We'll now proceed to questions from people in the room. If you raise your hand, someone 1will bring you a microphone and we will ask that you introduce yourself and then proceed with the question.

My name is [ Anderson ] and my questions [indiscernible] United Nations has said very clearly that there must be no more [indiscernible] coal mines [indiscernible]. That's very obvious, the increased frequency [indiscernible] in Australia [indiscernible]. Now the governmental annual [ change is now at nearly 1.5 degrees ] [indiscernible] on track to 3 degrees by century's end. Terrible consequences predicted for humanity. [ Yancoal ] reports, which proposed new coal mine expansions in New South Wales, Yancoal's HVO mine expansion will account for [ 1,165 million tonnes ] of greenhouse emissions for the lot of the expansion. That's [ 86% ] of New South Wales known emissions from currently known emissions from proposed coal mine expansions. HVO's and Moolarben's proposed expansions added together account for 90% of known emissions of the proposed New South Wales coal mine expansions. So my question to you and the directors is what am I going to tell my children and grandchildren? What would you tell yours about this company's massive contribution to catastrophic global warming, [indiscernible] reputable international scientific advice?

Thank you, Mr. [ Anderson ]. As a shareholder, all shareholders have the option to invest in a coal mine or coal company and always play an important role for the Asian region to provide energy source for people throughout the region. There is a supply-and-demand equation, and we are meeting the requirements of a lot of people in this region, and their livelihood. So coal has a long future. And as shareholders, you have the option to invest in a coal operation or a coal entity such as Yancoal or not invest. So coal will be around for a long time. And I think we have an obligation to our shareholders to maximize the returns to those shareholders. And I don't have a problem with providing energy to people in the Asian region, so that they have better quality lives. And having been in China and worked with people that many, when they were growing up were working up oil lamps to study. That's no longer the case, and I think it's part of -- it's coal. So I think coal has had and will have an important role in the future. And I think all directors, both new and past, are very mindful of that and the important role that coal plays in not only Australia but in this region and internationally. So we might have a different view.

Thank you. The next question from the floor. [ Nancy ]?

[indiscernible] so I just want to make a minor comment on what the gentlemen spoke about. So [indiscernible] if Australia stops exporting coal, coal is a very common resource and will -- and [indiscernible] market given the disruption. So I think they can reanalyze that. If I can do it -- sorry, if they're going to complain, they need to complain and be effective in their complaints and not penalize us Australia -- Australian shareholders and Australian workers. My question relates to the takeover that was [ bought in by the Board ] last year to around $5.05 a share, which way undervalued the company. So I just want to make sure I've got Yancoal shares [indiscernible] it's a rip-off. [ Quite honest, I know when ] I'm ripped off. And if I am going to be ripped off, I want to be given plenty of notice, so I can sell my shares [indiscernible].

Well, I can say that there was an independent Board committee formed to opine on that. And we probably had very similar views to it. But we are very mindful with shareholders. And if we had similar offers, we're very mindful that shareholders deserve the best return.

But the company, the holding company, the major shareholders are in a position of strength, so they can kind of force, they got leads where they can force [indiscernible]particularly I think going for [indiscernible]. So that is a concern to the future of the company in my opinion, and it's about trust [indiscernible] the head of the company. For the Chairman, that's the question I would have liked [indiscernible].

What I can say is the Chinese majority shareholder has been very, very supportive of this company through bad times. And if it wasn't for our majority shareholder, we wouldn't be here today. I reflect back to 2015, they invested in the expansion of Moolarben. In 2017, we invested in the C&A transaction. And today, all shareholders are reaping the benefit there. So they have the best interest of Yancoal, similar to us as directors, but also you guys as shareholders, that they want the same things that you want. They want a very successful company, a profitable company, one where the share price is increasing. So they have the same requirements. And if they did provide an offer, we consider that but I have not heard of things and don't anticipate.

First of all, outstanding performance. As a shareholder, I'm very happy on the share of dividend and [indiscernible] for more. And my concern is that [indiscernible] provision in the dividend, would that be still maintained if Yancoal were to enter into a position in Australia? as I understand, there are a lot of assets [indiscernible] that end up for sale. And if you were to acquire any of them, you will still be able to maintain your generous dividend. It should be noted that Yancoal reduces [ collusion ] in AGM because you provide high-quality, energy-rich coal. So in places like China and Japan, without Yancoal and [indiscernible] coal, they will end up using a lot of coal, something that [indiscernible].

Thank you very much for your question. Each 6 months, we sit down as a Board and review the dividend, and we've been consistent in terms of our 50% payout. And as David pointed out, I think last year, the yield was 14%. Come August, we'll again look at the dividend. But we weigh up other opportunities, and it's really around the whole capital management. So it will be something we will be addressing again in August, as we will next February. And if there's other areas that we should be providing that cash, we'll look at that as a Board. But I can also say that our majority shareholder, Yankuang Energy loves the dividend, and loves the dividend to be maximized. So you got a big driver in probably the 2 major shareholders being Cinda and Yankuang Energy like their dividends to be pretty consistent around that 50%.

And first of all, I want to say management and the company did a great job. And probably compared to your peers, you are the only one that's actually debt-free and have so much cash flow. So I want to ask two questions. And the first one is on Page 56 regarding the CapEx. Most other coal companies actually have to increase their expenditure. But I look at it this year, the first [indiscernible], the CapEx commitment is actually lower than last year. So I just want to ask how do you actually decide what kind of the timeframe, the trend of CapEx? Are you going to decide every year or you have some sort of 3 or 5 years' plan? And if you want to spend that money, can you give us a bit of detail where you're going to spend that money? And my second question is, again, about the dividend. I look at it, previously, you paid even higher like 68%, even 80%. So now you have a lot of cash and the CapEx is not very high, so can you give us a bit of color? Like I know this is a good idea to conserve money for bad time. And what kind of future -- but anyway, I just want to say, even you pay 50%, you are still the highest dividend paying company among your peers. But I just want to know how you consider, that kind of consideration to determining what kind of payout ratio on a yearly basis?

I'll turn it to you for the CapEx.