Yancoal Australia Ltd (YAL) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Second Quarter 2024 Production Report 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 first speaker today, Investor Relations Manager, Brendan Fitzpatrick. Please go ahead.

Thank you, Maggie, and thank you to everyone on the call for joining us this briefing of Yancoal's second quarter production report for 2024. Typically, our CEO, David Moult, provides a summary of the quarterly production report, however, David is not available to join us today. Instead, Kevin Su, our Chief Financial Officer; Michael Wells, our Executive General Manager of Finance; and Mark Salem, our Executive General Manager, Marketing will summarize the second quarter activities. We will then open the call to question and answers. The commentary provided is based on the production report published to the Australian Securities Exchange and the Stock Exchange of Hong Kong yesterday evening, the 18th of July. There is no presentation pack for this call. The Yancoal website holds past presentations for any participants that require additional information on the company. Kevin, could I invite you to provide initial comments.

Thank you, Brendan. Yancoal has consolidated operational recovery that started at the beginning of 2023. The 18% increase in attributable saleable production compared to the first half of 2023 reaffirms the strong recovery achieved over the past 12 months. Yancoal's operational and financial performance is made possible by our people. The total recordable injury frequency rate increased to 7.0, and although it remains below the comparable industry weighted average of 8.7. We are committed to reversing the rate and trend through re-invigoration of programs that delivered to the favorable change in 2023. Turning to the financial performance. We finished the half year with another robust quarter. We added $380 million to our cash position through the June quarter. This increase to the cash balance is after all operating costs, corporate overheads, capital expenditure and monthly progressive tax payments. By the end of June, we were debt free and held $1.55 billion in the back. This cash position is after we returned over $429 million to shareholders as a fully funded dividend in April. Our financial performance is closely linked to our average realized coal price of AUD 181 per tonne in the June quarter consistent with the March quarter price. This price when combined with our scale of production and the competitive cash cost drives our business. Our 2024 production guidance is unchanged and like last year, we expect production volumes to increase in the second half. I'll now ask Mike to provide further comments on the operational performance rate.

Thank you, Kevin. The Australian Bureau of Meteorology moved to a La Nina weather pattern watch during May, and we saw above average rainfall in parts of Eastern Australia during the quarter impacting our operations. Our sites are now much better positioned to deal with adverse weather impacts. However, we still need to suspend operations at times to ensure site safety and avoid damage to assets. In New South Wales, Moolarben and MTW managed to offset some of the production losses through changes to the mine schedule, including prioritization of coal extraction and shorter haul cycles. Our total ROM coal for the 6 months was up 7% to 27.9 million tonnes and a saleable coal production increased 16% to 21.6 million tonnes. Our attributable share of saleable coal production of 17 million tonnes was an increase of 18% and annualizes around the low end of our guidance. But as Kevin mentioned, we expect to increase production in the second half. Our operational performance in the third and fourth quarter of last year demonstrated what our high-quality suite of assets can deliver. There will always be some variance in production through the year due to longwall moves, maintenance schedules and other variables. We haven't reported our operating cash costs for the half year. As is usually the case, we'll report these in the first half 2024 financial results to be released next month. Given the production profile is weighted to the second half, it is logical to anticipate a higher per tonne operating cash cost in the first half, followed by a lower per tonne cost in the second half. I'll now hand over to Mark to comment on the coal markets.

Thanks, Mike. Good morning, everybody. Kevin touched on our overall average realized price of AUD 181 per tonne, which was 1% up from the March quarter. Our realized prices by product stream for the June quarter were $163 per tonne for thermal coal and $318 per tonne for metallurgical coal. Our attributable sales for the period of 8.6 million tonnes and the sales volume split was consistent with our usual profile being 88% thermal coal and 12% metallurgical. Once again the thermal coal markets appear well balanced for much of the June quarter. We observed good levels of demand, but our major end users in Japan and Korea, for example, are holding relatively higher stock levels. Some buyers shifted away from Russia supply after the U.S. applied further sanctions, which resulted in a redistribution of cargoes across international markets. China sourced additional imports to counter a temporary supply interruptions caused from safety inspections. By the end of the quarter, rainfall increased bolstering hydropower generation and alleviating the need for additional imports. Indian demand continues to rise on residential and industrial power requirements as it has yet to see the seasonal uplift in hydro generation. Turning to supply factors. Indonesia had weather interruptions impacting smaller mines, but its primary operations performed well. Indonesia's exports were up 30% in the first 5 months of the year compared to 2023. It is a similar story in Australia where exports were up 12% in the first 5 months of the year despite some main disruptions. Also exports from the U.S.A. remained consistent despite the Baltimore bridge collapse. Colombia also had steady export levels with 1 exception being South Africa, where infrastructure constraints impacted the export volumes. In the metallurgical coal market, reduced supply was countered by reduced demand due to an overall softening of the steel market. Similar to the thermal coal market, sanctions on Russia have led to a redistribution of metallurgical coal cargoes across regional markets. India had been a positive driver in prior periods, but demand was lower during the quarter. It may pick up after the reelection and monsoon seasons have concluded. Japan -- Japanese imports of metallurgical coal remained weak on the back of soft steel demand from the automotive industry. Demand from China was also lower despite good sentiment and stimulus factors. Like thermal coal markets, indices fluctuated during the quarter, but the averages have remained very similar to the prior quarter. Consistent with our view over the past year, international coal markets appear relatively balanced and susceptible to short-term factors influencing supply and demand or trader sentiment. Thank you for your listening, and I pass back to Brendan.

Kevin, Mike and Mark, thank you for those insights. I think we should now move on to the question-and-answer session, starting with questions from the phone line, then moving on to questions submitted via the webcast. Maggie, could I please ask you to initiate the process for questions via the phone.

[Operator Instructions] Our first question comes from Wayne Fung from CMB International Securities.

So my question is about the production volume. So we had some decline in the volume in the second quarter. And so what's the decline affected more by the weather or other operational factors, such as the longwall move, wash plant and truck availability, et cetera. So which effect take a more important role and what should we expect for them in the third quarter?

Thanks, Wayne. This is Kevin from Yancoal. Actually, if you look at our announcement, we have a split of the [ span nation ] by different mines. For Moolarben, we mentioned the underground move and also we talk about the weather issue, blasting issue and then the equipment utilization issues in HVO. I think all different -- mine have different reasons very much listed in the announcement already, if you can refer to that session, please.

Our next question comes from Sara Chan of Morgan Stanley.

Thanks for the run through on the results and again, another very impressive quarter. A quick question for me is, so can I have some color about your export market split roughly for the quarter. So you've mentioned China demand has slowed down because of the increased hydro domestically and then India has been taking up. So like for the overall mix for the market, any notable changes like on a quarter-on-quarter basis or on a year-on-year basis across various markets in terms of the split like -- to traditional markets in Japan, Korea, China, obviously.

Thank you, Sara. It's Mark Salem, EGM Marketing, speaking. Look, we don't normally report on sales distribution on a quarterly basis. But I can assure you from our position year-on-year, our sales distribution will be very similar to 2023.

Understood. Can I have -- 1 more question. So on the M&A front, which I think we -- investors are focusing on a lot. So yes, just to hear any updates, any later thoughts on the management strategy or the sense on acquisition?

Thanks, Sara. This is Kevin. From the company perspective, we made a very consistent disclosure and communication to the market by Board and our CEO, Yancoal is very much interested in the diversification. However, we are not in a position to give comments on any particular transactions, you would appreciate. But that kind of initiative is always with the management and our Board.

Our next question comes from Lawrence Lau of BOCI.

I just have a simple question. Regarding your small -- 1 small mine, Stratford/Duralie, if I pronounce correctly, I think in your announcement, you're going to shut down this mine. I just wonder, do you have to make any impairment against this mine?

Lawrence, it's a good question. For Stratford/Duralie, Yancoal has been gradually depreciating the assets, so we do not have any impairment risk regarding the closure of the mine, Lawrence.

Our next question comes from Sara Chan from Morgan Stanley.

No, I think that's been covered already.

I see no further questions from the audio. Now I will go back to Brendan for the webcast questions.

Thank you, Maggie. I note that we have several questions coming through on the webcast. Some of them are similar in nature and some of them have been already or partially addressed by the questions already conducted on the call. So I will amalgamate or combine questions or rephrase them accordingly. The question list -- there are several questions related to that large cash balance we're carrying at this point in time. Could we have a comment from you, Kevin, please, on the intentions for the cash reserves? Any commentary perhaps around buybacks, acquisitions, dividend allocations and how the company will approach that topic?

Thanks, Brendan. Yes, it's quite a significant cash balance for $1.55 billion currently in the -- on Yancoal's book. I think Yancoal has been very consistent in communicating with investors and the market about our intention to further grow the business. We can be very clear in the current situation Yancoal will not conduct any share buyback. This has been communicated previously as well. For the MA opportunities, yes, we are interested in any growth and diversification opportunities as just explained to Sara Chan earlier. And for the dividend, about site framework, about the preference of 50% of free cash flow or 50% of NPAT, whichever is higher, and this has been consistently conducted by the management team as well. But I just want to make this very clear, this is subject to both discretion, IDNs and balancing the growth opportunities and the capital requirements.

Thank you, Kevin. On the topic of dividend, we have some questions related to the timing of dividend payments related -- in relation to when they get disclosed and whether there is a potential for the payout ratio to change in the future. Perhaps you could comment on those specific elements related to dividends.

Sure. If I understand this correctly, there are 2 different questions. The first 1 about the date, Yancoal is dually listed in both ASX and Hong Kong Stock Exchange, which means actually in the distribution of our dividends is more complicated than normal BSS companies, especially in the past few years, there are some QDII investors from Mainland China with a little bit more complicated tax implications. So over all those years, I think Yancoal has been very skillful in managing such tax issues. So in the future, we do appreciate we might be able to improve our distribution window, which means we might be able to reduce the -- from the exit date to the distribution date and the company will be working on that one. From the payout ratio perspective, we believe the current payout ratio is adequate. But once again, it is really subject to the Board, and this will be from time to time to be discussed at a board level.

Thank you, Kevin. Previously on the phone lines we had a question related to the first half and particularly the second quarter production profile. I see a question coming through. It's asking in relation to the production for this calendar year given the second quarter's output was lower quarter-on-quarter and year-on-year. What comment do we have on the production costs, and what outlook do we have for the production going into the second half in relation to the guidance we've provided to the market at this point in time? Mike, perhaps I could ask you to expand on the commentary you offered earlier in the call.

Yes. Thanks, Brendan. So for 2024, the timing of the coal release throughout the year is very similar to that -- that was achieved in 2023. And by that, I mean that there was an expectation at the start of the year that there'd be a greater coal production volumes in the second half of the year just with the nature of where the pits are out and the sequencing of the mines. That is still very much the case in the current year. And so our production in the first half of this year was 18% up on the first half last year in total, and we are expecting a strong second half performance similar to what was achieved last year. So we're still comfortable that we will be -- we will achieve our market guidance. With regards to costs, again, very similar to last year. Our costs are very much linked to production volumes. So with the volume increase relative to last year, we'd expect to see a cost reduction. And then as commented on during the prepared comments, we would expect a strong cost performance in the second half when those volumes recover.

Thank you, Mike. I see an additional question related to the production profile. It looks to be about production beyond the current year, asking the growth potential with the assets currently on hand. Whilst we don't typically comment on the production forecast beyond the current calendar year, what we have acknowledged in the past is that when the operations are running at close to the operational capacity and the mining license limits, we see output around the level that the company achieved in the third and particularly, fourth quarter last year. So that gives a sense of what the assets are capable of, links into the comments Mike was just providing. Looking longer term, we have no specific expansion or growth projects underway right now. If there is an expansion or a change in the production profile from any particular asset, we would, of course, inform the market at the point in time when such a plan is put into place. We've got a question or a series of questions coming through related to our free float. And people noting that it's around the 30% level now and asking how that fit in with potential index inclusion. And what scenarios could potentially play out with regard to the free float going forward. Kevin, perhaps you could comment on this topic.