Yancoal Australia Ltd (YAL) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Yancoal's Second Quarter 2026 Production Report. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to your first speaker today, Mr. Brendan Fitzpatrick. Thank you. Please go ahead.

Thank you, Desmond, and thank you to everyone on the call for joining this briefing on Yancoal's second quarterly production report for 2026. We have several members of Yancoal's executive leadership team to recap the quarter and participate in the question and answer session. The commentary provided today is based on the quarterly production report published on the Australian Securities Exchange and the Stock Exchange of Hong Kong announcement platforms on the 20th of July. There is no presentation pack for this conference call. The Yancoal website holds past presentations for any participants who require additional information on the company. I'll hand over to our Chief Executive Officer, Sharif Burra, to provide second quarter highlights.

Thank you, Brendan. I also welcome everyone joining us on today's conference call. Before I touch on those, it's important to acknowledge our total recordable injury frequency rate increased over the past quarter. I'm a firm believer that safety, productivity, and cost efficiency are closely linked. We've already taken steps to counter the recent trend through targeted safety intervention activities. Fortunately, the safety performance did not impact production in the second quarter. We delivered a quarterly production record of 10.8 million tonnes of attributable saleable coal. As anticipated, the operational focus shifted from overburden removal to coal recovery during the quarter. Production was up 20%. The quarterly performance carried us to a first half production record. 19.8 million tonnes of attributable saleable coal production, which was 5% ahead of the first half last year, putting us on target to exceed last year's production record and deliver in the upper half of the 2026 guidance range. In April, we announced the Kestrel transaction and have since made good progress on the required approvals. Several conditions precedent have already been satisfied, including the Foreign Investment Review Board approval. The target date for completion is towards the end of September quarter 2026, but could occur earlier if everything falls into place. While it is pleasing to report production records and delivering growth initiatives, at times, we need to make difficult but necessary decisions about our assets. In late June, Yancoal made the decision to cease operations at Ashton from early 2028. The decision was made necessary due to a combination of technical, geotechnical, and economic challenges. Our immediate focus is on supporting our workforce and their families through this period. This includes exploring redeployment opportunities where possible, along with providing career transition support and wellbeing assistance. I'll now hand over to other members of the executive team to share further details from the second quarter, starting with David Bennett, our Executive General Manager of Operations.

Thank you, Sharif. Three months ago, we discussed the outlook and potential implications if diesel supply was constrained. So far, this scenario has not developed, and our operations and procurement teams continue to work closely with our diesel suppliers regarding continuity of delivery. We have a rolling two-month commitment for diesel supply, and as can be seen in the second quarter performance, our mines continue to operate to plan. The outlook for our cash operating costs has improved since we released the first quarter report in April. We are still incurring higher diesel prices, but the overall outlook for impact on our 2026 operating costs has eased slightly. As Sharif mentioned, we delivered a quarterly production record and a first-half production record. These records were made possible by producing 17.5 million tonnes of ROM coal, a 17% uplift compared to the first quarter. From the ROM coal, we produced 13.8 million tonnes of saleable coal, also 17% more than the first quarter. Our attributable share was the 10.8 million tonnes Sharif referenced. Moolarben and MTW were strong contributors to the performance. Moolarben's open cut and underground mines both operated at or above target levels for most of the quarter. This supported elevated feed rates into the coal handling and preparation plant. The 23% increase in saleable coal production was better than we had targeted. MTW had favorable operating conditions throughout most of the quarter and improved equipment reliability. The overall operational performance was just ahead of target, delivering a 34% uplift in saleable coal production from the prior quarter. Ashton, however, encountered challenging mining conditions caused by the presence of hard strata in the coal seam. Its production dropped by 20% and needs to improve in the second half to avoid putting upward pressure on the group operating cash costs. I will now hand over to Brendan Fitzpatrick to provide commentary on the coal markets on behalf of Mark Salem, our Executive General Manager, Marketing and Logistics.

Thank you, David. Our attributable sales were 11.6 million tonnes, an increase from the prior quarter, reflecting both the highest saleable production and the timing of shipments relative to the reporting period. During the quarter, the Argus McCloskey API 5 Index averaged USD 96 per tonne, up 19% from the prior quarter, and the GC Newcastle Index averaged USD 135 per tonne, up 14%. By contrast, the metallurgical coal indices we referenced were both similar to the first quarter. The Platts Low Vol PCI Index averaged USD 161 per tonne, and the Platts Semi Soft Index averaged USD 143 per tonne. Our overall realized coal price for the quarter increased 9% to AUD 160 per tonne. While this included an 11% higher average price for our thermal coal, most of the positive impact from the second quarter uplift in the thermal coal indices should flow through to subsequent quarters. Energy markets were volatile over the past three months. End users, traders, and speculators had to weigh geopolitical risk factors against supply and demand fundamentals, with many governments taking proactive action to secure energy supply. By the end of the quarter, speculative trading activity was abating on expectations that oil and gas supply recovery was underway, despite liquified natural gas Asian spot prices having increased more than 75% since the US-Iran conflict commenced. Thermal coal imports into most of the regions we supply have increased over the first five months of 2026 compared to 2025. There were several common thematics driving the uplift. LNG pricing, availability, or conservation was a primary factor. Also, higher power demand and lower hydropower generation associated with the El Nino weather cycle developing this year was a factor. At the same time, international seaborne supply from most major exporting countries has fallen year-over-year. Australia is an exception, but elsewhere, various regulatory or logistics constraints have hindered supply. Turning to the metallurgical coal markets, we observed a strengthening steel market and stable demand for metallurgical coal. While China required additional metallurgical coal imports to counter reduced domestic output following the Shanxi mine accident, which led to the temporary suspension of production at 135 mines. I will now hand over to Kevin Su, our Chief Financial Officer, to address the financial position.

Thanks, Brendan. Sharif recognition there is a possibility the cash transaction might complete earlier than initially expected. We are ensuring that loan and working capital facilities required will be ready should this scenario occur. We ended the quarter with over AUD 2 billion in the bank. In the cash flow announcements, we said between USD 650 million and USD 850 million of the upfront payments will be funded with cash. The final amounts will be determined by the cash accumulation from now and completion late in the third quarter. Sharif also described the expectation for our production to raise the upper half of the guidance range, and Brendan just indicated the higher realized prices we are likely to achieve in the third quarter. We will determine the optimal cash funding components for the transaction based on these factors as the completion date approaches. The third element of our guidance for 2026 is the capital expenditure. We now project the expenditure will likely be at the low end of the range as some expenditures slips to 2027. We look forward to providing more detailed commentary on this and other aspects of financial performance in our first half results next month on the 19th of August. I will now hand back to Brendan to coordinate the Q&A session.

Thank you, Kevin, David, Sharif, for highlighting the drivers of our second quarter performance. We will now move on to the question and answer session, starting with questions from the phone, then moving to questions submitted via the webcast. Desmond, could I please ask you to initiate the process of questions via the phone, and I'll keep an eye on webcast questions as they accumulate.

[Operator Instructions] There are no questions from the phone line. Please continue.

Thank you, Desmond. I'll come back to you to check if a question's coming through on the phone line. In the meantime, looking at the webcast questions. First question for you, Kevin, on the financial aspects of the quarterly. The cash balance was steady at just over AUD 2 billion, consistent with the March quarter. Can you please share with us the various movements such as net mining cash flow, capital expenditure, and any other major items of cash flow that led to this steady outcome?

Thanks, Brendan. That's a very good observation. Yes, we do have pretty much the same cash balance for Q2. A few things I would like to highlight and share with investors. One is we have paid our final dividends for AUD 1.61 billion in April. We also have paid a deposit for Project Kestrel, which cost us about AUD 56 million to AUD 57 million. That's about USD 40 million. In addition to these two special payments, I would like to also highlight some mismatch or temporary volatility of our cash flow. For example, on 30th of June, there is a payment batch of AUD 133 million, and then the next day, 1st of July, there's a receipt of AUD 100 million. That's roughly about USD 68 million. For that reason, you can see this temporary volatility may cause our cash balance to fluctuate quite a lot. Long story short, I think there's still very strong operating cash flow. Thanks.

Thank you, Kevin. I do see some advice coming through that the volume might not have been picking up particularly well. We'll just get the microphone proximity a little closer for you for this next question. A few people on the webcast have asked what comments we can make about dividend and the dividend outlook as we head into the half-year results coming out in a month's time.

Thanks, Brendan. I think from Yancoal's perspective, the dividend position has been pretty consistent. We have been making the same position. We will be paying from a general guidance perspective, I would say the 50% NPAT or 50% free cash flow, whichever is higher, and subject to the Board's final decision. We are pretty much still following the same indication to the market for now. Thanks.

Thanks, Kevin. Desmond, I believe we have a question coming through on the phone line. Could I go to you for that question, please?

[Operator Instructions] We have a question from the line of Glyn Lawcock from Barrenjoey. Please ask your question.

Thanks for your time. Yes, just had a question on closing of the Kestrel acquisition, which you said hopefully will complete before the end of September quarter. I know you've got the Australian Foreign Investment Review Board approval. What are the key regulatory outstandings now then to get it to complete by the end of the September quarter? Are they fixed in time, or could they slip?

Yes. Thanks for the question. At this point in time, we're reasonably confident that the further clearances and waivers that we need are in hand. There is obviously always the chance they could come forward or slip. At this point in time, we're reasonably confident that they will complete as we plan.

Sorry, is there a particular one? Is it one of the Chinese authorities that needs to sign off? I mean, obviously Foreign Investment Review Board was a big one to get from the Australian side. Is there one particular one that is most important to get signed off?

Hi, Glyn. Brendan here. Appreciate the question. You are quite right. The Foreign Investment Review Board was one of the most critical steps for us. The majority of the ones remaining relate to international regulatory competition from various nations. We are working through those processes, supplying the information that is required that allows the various bodies to reach a level of understanding and comfort with the proposed transaction. As Sharif suggested, they are proceeding. We think they will complete on time or ahead of time, until they complete, we cannot be definitive on the schedule, but we are optimistic.

There is no red flags, though, Brendan, I guess is the key message.

Quite the point. We are quite confident that we are progressing towards completion, it is just a matter of timing and sequencing, we still need to go through the processes, far be it from us to be explicit until such a time that all things are put in place. Desmond, any further questions from you before I go back to the webcast?

[Operator Instructions] There are currently no questions from the phone. Please continue.

Okay. Looking at some of the webcast questions. A question coming through on coking coal price indices. I suspect this is related to some of the recent media commentary coming through. Do we think coking coal indices, the pricing structures are working well? Do we think any reform is needed?

Yes, thanks, Brendan. Look, we're certainly aware of the recent editorial from a POSCO executive on coking coal price mechanisms. Yancoal's got a very respectful and productive relationship with POSCO, which is a valued customer and partner of ours. At this point in time, we won't be speaking publicly on this issue.

Thanks, Sharif. Earlier, David mentioned the diesel cost impact on the company. One of the questions coming through is what is the current proportion of diesel cost impact on the company, and how does the company manage the diesel costs? What I can say on that one is we've previously disclosed that last year, direct diesel costs comprised AUD 7 a ton of the AUD 92 per ton cash operating costs we reported for 2025. We started the year with a forecast for a similar level of diesel price within the AUD 90 to AUD 98 cash operating cost per ton we'd guided for this calendar year. At the first quarter production report, we talked about the higher diesel prices and the forward curves we were contemplating. We allowed for primarily the higher diesel price lifting the cash operating costs towards the upper end of the guidance range. There is some easing of that diesel cost pressure and outlook. We've said we'll still be in the top half of the cash operating cost guidance range, perhaps no longer at the top end of the guidance range. There are other elements we need to be mindful of as we work through this second half for 2026. Hopefully, that's provided some context for the diesel price impact. A question from Hanyin Yang at Morgan Stanley. Hanyin asks about the Ashton mine, which is, in her words, been suspended this year. I note that the closure actually takes place in 2028, Hanyin. We are operating through until that period of time. Hanyin is asking the question, do we expect any impairments this year in relation to the actions taken at Ashton?

Thanks, Brendan. I might provide some clarity here. There will be several phases to ending Ashton's mining operations. The initial reduction of planning and development activities, which we've undertaken. The completion of development mining in the Pikes Gully seam in early 2027, and completion of longwall mining in the Pikes Gully seam in early 2028. It is a staged approach. The longwall will keep operating through until 2028. It's more the immediate impact of development activity. I'll hand the impairment question over to you, Kevin.