Yancoal Australia Ltd (YAL) Earnings Call Transcript & Summary

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

Thank you, Desmond, and thank you to everyone joining us for Yancoal's briefing on the third quarter production report. We have several members of Yancoal's executive leadership team on the call to review the quarter and participate in the question-and-answer session. The commentary provided today is based on the quarterly production report released on the Australian Securities Exchange and the Stock Exchange of Hong Kong yesterday, the 20th of October. All financial references in this webcast are in Australian dollars unless otherwise designated. I'll now hand over to our Chief Executive Officer, Sharif Burra, to provide the quarterly highlights.

Thank you, Brendan, and welcome, everyone. The third quarter was an important period for Yancoal, marked by the completion of the Kestrel acquisition, continued operational discipline across our portfolio and stronger realized pricing, supporting a significant uplift in our cash position. On the 1st of October, we completed the acquisition of an 80% interest in the Kestrel coal mine. Kestrel is a high-quality, long-life metallurgical coal asset that strengthens our portfolio and increases our exposure to premium steelmaking coal markets. It's a meaningful step forward in our growth strategy, and we look forward to working with our joint venture partner, Mitsui, and the Kestrel workforce as integration activities progress. Earnings from Kestrel will commence this quarter. Despite lower production due to planned longwall activities, our cash balance increased by $340 million during the quarter. This reflects stronger realized pricing, disciplined cost management and continued operational momentum across the business. Kevin will expand on the financial position and guidance later in the call. Turning to production. Managed operations delivered 16.6 million tonnes of run-of-mine coal and 12.4 million tonnes of saleable coal during the quarter. Production was lower than the second quarter due to the planned longwall relocation at Moolarben and challenging geological conditions at Ashton. Importantly, Moolarben's longwall returned to regular production in September, providing a foundation for improved output in the December quarter. Across the open cut portfolio, Mount Thorley Warkworth, Middlemount and Hunter Valley operations all delivered strong performances. And year-to-date, we're tracking ahead of last year's record performance. Looking ahead, stronger production in the December quarter, continued support from favorable coal market conditions and the commencement of earnings from Kestrel are all constructive for our full year performance. Normally, at this stage, I'd hand over to David Bennett, our Executive General Manager, Operations, to provide further detail on operational performance and safety. However, David is attending to other matters today, so I'll cover these topics. Safety remains a core focus across all sites. Our total recordable injury frequency rate ended the quarter at 7.14% compared with 7% at the end of June. While still below the industry weighted average, the recent trend reinforces the need for continued targeted intervention activities to strengthen safety performance. Operational performance during the third quarter was broadly in line with our expectations. The planned longwall relocation at Moolarben was the primary driver of lower production relative to the second quarter. Across managed operations, we produced 16.6 million tonnes of run-of-mine coal and 12.4 million tonnes of saleable coal. Moolarben completed the longwall relocation with open cut operations and the coal handling and preparation plant performing strongly throughout the quarter. The longwall recommenced production in September, positioning the site for increased output in the December quarter. Mount Thorley Warkworth delivered higher run-of-mine production, supported by strong mining fleet performance and dragline productivity. Saleable coal production remained consistent with the prior quarter. Hunter Valley operations maintained strong momentum with run-of-mine production exceeding our forecast and coal handling and preparation plant performance supporting consistent saleable coal output. Middlemount delivered improved production, supported by strong mining performance and favorable yields. Yarrabee delivered steady production with continued focus on coal exposure and mining optimization. Ashton's production was significantly lower due to challenging geological conditions in the longwall roof. Operational focus remains on safely managing strata conditions and supporting future production continuity. With Moolarben's longwall now operating and strong open cut performance across the portfolio, production in the December quarter is likely to be stronger than the September quarter. Kestrel produced 6.3 million tonnes of ROM coal and 4.8 million tonnes of saleable coal on a 100% basis in the 9 months to the end of September. We received our 80% interest from the 1st of October onwards. The operation continues to perform well, resulting in a longwall relocation being brought forward, which will affect coal production in the back end of the fourth quarter. I'll now hand over to Mark Salem, our Executive General Manager, Marketing and Logistics, to provide commentary on the coal markets.

Thank you, Sharif. Attributable sales were 9.0 million tonnes, lower than the second quarter due to reduced saleable production and the timing of shipments. Thermal coal markets strengthened during the quarter as geopolitical tensions, supply disruptions and weather-related constraints tightened seaborne markets. Higher liquefied natural gas prices reinforce coal's competitiveness in the global power generation mix. Demand across Asia and Europe remained resilient with coal-fired generation supporting energy security and cost management. Australian producers benefit from favorable operating conditions and strong export performance. Against this backdrop, pricing for lower energy thermal coal strengthened relative to higher calorific value products, reflecting increased buyer preference for Australian supply amid uncertainty surrounding Indonesian exports. Thermal coal indices increased during the quarter. The API5 Index averaged USD 99 per tonne, up 3% from the second quarter. The Newcastle 6,000 Index averaged USD 136 per tonne, broadly unchanged from the second quarter. Metallurgical coal markets also strengthened. Chinese steel producers increased imports ahead of the seasonally stronger consumption period, while domestic supply constraints and export disruptions in Russia and Canada further tightened seaborne availability. Metallurgical coal indices moved higher. The Platts Low Vol PCI Index averaged USD 180 per tonne, up 12% from the second quarter, and the Platts Semi-Soft Index averaged USD 149 per tonne, up 4%. Demand across major steel-producing regions remained broadly stable with resilient production in China, Japan and Taiwan, partially offsetting softer conditions in India and South Korea. Our realized prices increased during the quarter. Thermal coal averaged $160 per tonne, metallurgical coal averaged $229 per tonne, and our overall realized price averaged $170 per tonne. Recent benchmark price increases have not yet been fully reflected in realized pricing and further uplift may flow through in subsequent quarters. I will now hand over to Kevin Su, our Chief Financial Officer, to address the financial position and guidance.

Thank you, Mark. As Sharif noted, our cash balance increased by $340 million during the quarter. This reflects stronger realized pricing, disciplined cost management and continued operational momentum across the business. The cash balance benefited from favorable timing of payments and receipts, unlike last quarter when the timing was unfavorable. There was also a positive impact from unrealized foreign exchange gains on our U.S. dollar cash holdings. We completed the Kestrel acquisition on the 1st of October. The upfront cash consideration of USD 1.85 billion was funded through a combination of available cash and initial utilization of the USD 1.2 billion 5 year syndicated acquisition loan facility. Payment of the upfront consideration factored in the USD 40 million deposits and other provisional adjustments for the net debt and working capital. Our USD 200 million committed working capital facility remains undrawn. Our operational guidance for 2026 remains unchanged. Attributable saleable production is likely to be delivered in the upper half of the 26.5 million to 40.5 million tonnes range. Higher diesel prices have returned as a cost headwinds, placing operating costs towards the upper end of the guidance range. Cash operating costs should fall towards the upper end of the range of $90 to $98 per tonne. Capital expenditure will be skewed to the fourth quarter with less than $400 million spent year-to-date. Full year capital expenditure should fall within the guidance range of $600 million to $750 million. Stronger realized pricing, favorable market conditions and the commencement of the earning from Kestrel are constructive for our financial performance in the final quarter of 2026. I'll now hand it back to Brendan to coordinate the question-and-answer session.

Thank you, Kevin, Mark and Sharif for the -- for outlining the drivers of our third quarter performance. We'll now move to the question-and-answer session, starting with questions from the phone, then moving to questions submitted via the webcast. Desmond, could you please initiate the phone question process?

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

Thank you, Desmond. I'll come back to you shortly to check again. In the meantime, we'll start with some of the webcast questions. Unsurprisingly, Kestrel is featuring in a number of the questions submitted so far. Whilst we didn't have operational control through the third quarter, Kestrel will form part of the portfolio going forward. So let's look at some of the questions coming through on that topic. Something high level to start with. Will the Kestrel staff be managed by Yancoal or by a third-party? Sharif, can you please elaborate on the operating structure going forward?

Yes. Thanks, Brendan. We're currently in the process of integrating Kestrel into Yancoal. The intention is over time that it's operated similar to all of our other operations. We had the great benefit of being able to go up to site in the first couple of weeks of ownership and get to meet the team and the people on site there and very impressed with the culture, great management team and certainly, the mine was producing well. So the intent is through the integration process to bring it into the Yancoal family and to run it as we do our other mines.

Thank you, Sharif. Kestrel is an operating mine. It's in production. What can we say at this point in time, given the early stage of the implementation integration process with regards to the production profile this fourth quarter and then going into the forward horizon?

Yes. Thanks, Brendan. The mine has been producing well. It certainly continued to produce well through the short period of time we've had it. There will be a longwall move brought forward as a result of the production profile and that longwall move will be at the back end of this quarter. With regards to production profiles going forward, we're currently working through the budget and 5-year plan process, including the Kestrel asset, and we'll be able to provide that information -- some of that information in terms of guidance at the end of this year.

Thanks, Sharif. That leads into the next topic with regards to an update on the cost and CapEx profile for Kestrel post acquisition and any plans for expansion of production from the current level. Is there anything we can say at this point in time? Or will we have to wait for the full year results in February before we have any forward-looking commentary?

Yes. Look, we'll wait until February. We're obviously working pretty diligently through some of the opportunities at Kestrel, will take our time. It is a very high-performing underground mine. It's running very well. And the intention through the integration process is to work closely with the team at Kestrel and build off the strong base that they've developed there together.

Delving further into the Kestrel acquisition and the various financial metrics. One of the questions coming through is asking for some insight into the various financial metrics regarding the acquisition. What was the return on investment for this acquisition? Or how was it -- or how does it compare with Yancoal's weighted average cost of capital or the assumed realized price for the Kestrel products? What can we say in regards to this? Perhaps Kevin, I'll turn to you to see what's available as an initial comment.

Yes. I'm probably going to just maintain the position as we announced the Kestrel transaction on 14th of April, the presentation we published in ASX and Hong Kong Stock Exchange. We do have a few simulated number there. However, the question asked about ROI, about WACC, the expected return and the price assumption, they were not disclosed publicly. It's a very Yancoal internal assumptions. So for that reason, I'm probably going to just refer back to the presentation we posted previously.

Thanks, Kevin. Quite understandable. I believe we've got one question coming through on the phone line. Desmond, I'll turn to you before returning to the webcast questions.

We have a question from the line of Mark Charles Paterson from Bell Potter Securities.

Just obviously, Brendan, regarding the cash flow, which is what the market obviously looks at, and we've charted pretty much since back to 2023. Obviously, in the third quarter, you had a strong met coal position and obviously price coming through there better than thermal. Obviously, that's been reversed in the current spot prices, obviously, up API $115 compared to $99, $150 for Newc. And obviously, we've now got Kestrel with the low ash high coking coal price coming through. How should we look as a sensitivity on a percentage contribution going forward for each API, Newc and the met coal, so we can sort of get an understanding of, obviously, sensitivities of where those prices are moving and obviously impact on the company.

Okay. Mark, I appreciate the appetite to understand the product mix going forward. If we look at the product mix currently or pre Kestrel, we've been fairly steady state. Circa 85% thermal products and 15% metallurgical coal products being the Low Vol PCI and the Semi-Soft. In the half -- sorry, in the April presentation pack, we put some pro forma charts in showing the product mix going forward. Kevin, if you just want to highlight some of those numbers that we provided previously, it will be indicative. There will always be period-by-period variations in any specific time frame, but it is a good reference to use at this point in time.

Sure. As Brendan just mentioned, we have put in some high-level indicative number for the pro forma coking coal portfolio, which is going to be increased from a 16% to 22% based on the 2025 number. And then in the previous communication, we also mentioned for anything other than coking coal, that thermal coal, we have API5, GCNewc. We generally follow the public statements as all the coal produced largely in Hunter Valley will be using GCNewc. And then all the thermal coal 100% produced by Moolarben, they are thermal, they tend to be take API5. Hopefully, those numbers will give you a high-level indication about how much percentage attributable to the coking coal API5 and the GCNewc.

Thanks, Kevin. Mark, was that sufficient? Is there anything further you need?

Yes. So just on the thermal. So just on the thermal, on that 85%, is that split more towards the API5 rather than over Newc because obviously, API5 has been relatively strong in the last 4 to 5 weeks or so?

I think, Mark, if you look at the flow of coal from our assets, if you look at Moolarben, that's majority API5. So that will give you a flavor of the materiality of the size of where that comes. And predominantly, the Newcastle coal field sites are new convex. It will be reasonably close.

And one final observation is Mark Salem and his team do a great job optimizing the product mix. They use the blending capabilities across the different assets to best meet the market needs and the customer appetite. So there is always some variation to the product profile as we look at the market conditions. Having mentioned that, Mark Salem, perhaps I could hand across to you to see if there's any additional comment you'd like to make on how we're seeing the current market conditions and how we're adapting our product profile to suit those market conditions.

Yes, sure. Thanks, Brendan. Yes, look, it's an ongoing exercise in terms of optimization of our revenue and our product mix. And we're continually working with the mine sites in a very close way in terms of where significant price movements exist, how we modify the way we prepare the coal and the way we blend the coal, always in an attempt to optimize. And that reflects back on the comment you made, Brendan, in relation to how the blending and how coals can change from different categories in relation to Mark's comments about API5 or GCNewc. It depends also on the arbitrage that does exist and the markets available and how we prepare those cargoes. But in essence, I think the comments that were made by both Kevin and Sharif should give Mark a good guideline of how we -- where those coals basically sit against approximate indices. The intricacies are always very delicate and very involved, and that's probably a good guideline.

Sorry, just one final question, one quick one. Just on the Kestrel price. Obviously, that's a low ash hard coking coal price, which I think when you announced the acquisition was $146.5. Now my understanding that is obviously a discount to the hard coking coal, which is sort of $280. So it's above that $225 level where you start paying contingency payments over the top of what you paid already. Do you expect to occur in the fourth quarter, any contingency price because of that price increase?

Mark, based on what we have publicly announced, the contingent payments will be triggered on a full year basis if the hard coking coal index is above USD 225. And this is on an annual basis. So we are not able to simulate only based on Q4. We will need to look at the whole year basically for the next 12 months to see the potential impact, Mark.