Earnings Transcript for YACAF - Q3 Fiscal Year 2024

Operator: Good day and thank you for standing by. Welcome to Yancoal Third Quarter 2024 Report Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the call over to your first speaker today, Mr. David Moult, Chief Executive Officer. Thank you, please go ahead.

David Moult : Thank you, Desmond. Thank you to everyone on the call for joining this briefing on Yancoal’s third quarter production report for 2024. I'm joined on the call by several members of the Yancoal executive team, including our Chief Financial Officer, Kevin Su; Executive General Manager, Michael Wells; Executive General Manager, Marketing, Mark Salem, and our Executive General Manager, Environment and External Affairs, Mark Jacobs. Before discussing the operational performance, I want to acknowledge that during September, an incident occurred at our Austar coal mine which resulted in a fatality. I, along with the Yancoal team, are greatly saddened by the loss of a former longstanding employee, who was working for a contracting company at the Austar coal mine as part of its closure activities when the incident occurred. Our thoughts remain with his family, friends and colleagues. We have offered Yancoal’s full support to them and to all our people affected by this event. This is the first time we've addressed the market since Yancoal’s inclusion into the S&P ASX 200 and S&P ASX 300 indices on the September 23. Welcome to any new participants on the call and welcome to those of you who have joined us on prior calls. The index inclusion is a welcome event in Yancoal’s 20th anniversary year and 12 years since listing on the ASX. I will give a summary of the third quarter activities and then open the call to a question-and-answer session. My comments are based on the quarterly production report published to the Australian Securities Exchange and the Stock Exchange of Hong Kong yesterday the October 17. There is no presentation packed for this conference call. The Yancoal website holds past presentations for any participants who require additional information on the company. The total recordable injury frequency rate was 7.2 at the end of September and while it remains below the industry weighted average of 8.7 we aim to reverse the current increasing trend through targeted safety intervention activities. As we indicated previously, like last year, we are aiming for significantly higher output during the second half and as anticipated our third quarter production rate showed a step up 17.5 million tonnes of ROM coal production, 26% higher than the second quarter and 13.2 million tonnes of saleable coal production, 28% higher. These volumes are on a 100% basis. Our attributable share of the saleable coal production was 10.2 million tonnes, indicative of what our portfolio of assets can achieve when operating with minimal disruptions, particularly the three large scale open cut mines where saleable coal output increased between 18% and 60%. It is worth noting our mines in New South Wales and Queensland did encounter some weather disruptions during the quarter, but in most cases production impacts were modest due to past investment in water storage and handling capacity. Moolarben had a strong quarter as both underground and open cut operations performed largely to plan. There were minor equipment disruptions at MPW and HPL, but whole cycle management and mine schedule modifications enabled teams to deliver strong operational outcomes. Yarrabee benefited from improved geotechnical conditions and equipment availability and Middlemount had a steady performance despite the impact of some wet weather. At Ashton, a planned longwall move during the quarter resulted in lower output. However, following completion of the move, production rates increased with improved mining conditions being experienced. Our attributable sales volume was 10.4 million tonnes with a typical mix of thermal and metallurgical coal products. The overall realized coal price was AUD170 per tonne, down 6% from the second quarter. However, this included the impact of a provisional price adjustment from earlier in the year. Prices on an adjusted basis in the third quarter were not too different from second quarter prices, confirming our view that coal markets remain stable. Over 10 million tonnes of attributable sales at what are still good coal prices generated robust cash inflow. After all operating capital and corporate costs, including our monthly tax payments, our cash balance increased by AUD430 million for almost AUD2 billion at the end of September. We see thermal coal markets continuing to experience relatively balanced supply and demand conditions, with small variations in market conditions affecting sentiment and coal indices. Thermal coal indices peaked in mid-August on the back of the Middle East tensions and a hotter than average summer in the Northern Hemisphere, contributing to additional electricity demand. Year-to-date thermal coal imports by China are up compared to the first nine months of 2023, and there is the prospect that stimulus measures will be constructive for both thermal and metallurgical coal markets. On the supply side of thermal coal markets, various factors constrained exports from South Africa, Russia and Colombia. By contrast, Indonesian exports were not constrained and achieved good output levels. The main thermal coal indices we referenced traded within limited ranges during the quarter. We retain our view that thermal coal markets and coal indices remain subject to short-term drivers. The prospect of a cold winter in the Northern Hemisphere could result in increased demand during the December quarter. Turning to metallurgical coal markets, we see price indices reflecting weak steel market conditions. The low-volt PCI price benefited from recent demand early in the quarter. However, like the hard-coking and semi-soft-coking indices, demand declined through the quarter, dragging down the price. Yancoal’s large-scale, low-cost production profile is well-suited to all coal market conditions. With no interest-bearing loans, a large net cash position and robust operating margins, we have the capacity to pursue suitable growth opportunities as they arise. If such an event materializes, we will inform the market. In the meantime, we are focused on delivering another robust operational performance in the final quarter of 2024 and delivering on our production guidance of 35 million to 39 million tons of attributable saleable production at cash operating costs of AUD89 to AUD97 per tonne. That concludes the summary of Yancoal’s third quarter performance. We will now move to the question-and-answer session, starting with questions from the phone and then moving on to questions submitted via the webcast. So, Desmond, could you please initiate the process for questions via the phone?

Operator: Thank you. [Operator Instructions] Our first question comes from Jonathan Sharp from CLSA. Please go ahead.

Jonathan Sharp: Yes, good morning all. Just my first question on M&A activity. If Yancoal, there is interest in the Anglo asset, we know that. What would be the next step if there wasn't an acquisition there, just with the cash, almost AUD2 billion in cash? Would there be a special dividend? And also, I see Kestrel looks like it's up for sale. Would there be interest in acquiring that since it is a majority hard case and coal product?

David Moult : Jonathan, thanks for your question. Like all M&A, we don't specifically comment on any M&A activity that we're involved in or not involved in at any time. As far as the cash is concerned, I think our position hasn't changed. Our policy remains as it's always been and our board will make a strategic decision based upon what activity may or may not be happening and what the approach to returning capital to or cash to shareholders should be, which is no different to our normal position. Again, on Kestrel, I've got no real comment on Kestrel. It's not something I can comment on this call on. I know there were some comments in the press this morning, but no comment from the company.

Jonathan Sharp: Okay, no worries. Just my second question, can you just give us an update on the Moolarben open cut Extension approvals? Has there been any progress there? I believe the underground will be a bit behind the open cut Extension. Can you just give us an update on that point?

David Moult : Thanks, Jonathan. I'll let Mark Jacobs comment on that, but they are progressing and they are going through the process. But Mark, do you want to?

Mark Jacobs: Yeah. So, we're continuing to work with the New South Wales government on the Moolarben open cut extension. We've got productive dialogue happening with them. I will note though, that this is a mine life extension that doesn't change the forecast cap of production. It's an extension of mine life.

Jonathan Sharp: Okay, great. Any dates when we can expect to see something there?

Mark Jacobs: It's not possible to forecast when we might be able to receive a date. The process has got to go through the regulatory process. And it is being given priority by both the company and by government.

David Moult : I think it's fair to say, Jonathan, we don't see any problems with it. It's just like everything that goes through government these days. It takes time and we just have to follow the process.

Jonathan Sharp: Yeah, no worries. Okay, I'll leave it there. Thanks.

David Moult : Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from Lawrence Lau from BOCI. Please go ahead.

Lawrence Lau : Hi, thank you for taking my question. I've got two questions. First of all, I would like to let the company give us some idea why the realized met coal price in the third quarter is actually dropping faster than the relevant benchmarks. The second question is, if I don't understand wrongly, you are closing down Austar Mines. Will we need to make any provision or impairment against this mine? Thank you.

David Moult : Thanks, Lawrence. On the second one first, Austar Mine has been closed for 2020. We closed in back in 2020. So it was closed four years ago and we're in the process of rehabilitation and actually closing the mine down completely. So, no, there's no other issues as far as impairment or impact on any of our accounts. The met coal realized, but I might get Mark to comment in a minute, but as I said in my summary, there was a provisional pricing update in that number and that impacted that 6% drop. If you look at it on a straight adjusted quarter-to-quarter basis, we've not seen any major change, any significant change in the price. But Mark, I'd like to let you comment on that.

Mark Salem: Thanks, David. It's Mark Salem speaking. Lawrence, thanks for your question. Lawrence, it's a function of the Yancoal portfolio of met coal as well. It's a function of met coal portfolio. When you look at our portfolio, met coal only makes up around 10% of the overall volume, less than 10% of the overall volume. We've got a mix of met coal as well in terms of semi-soft coking, PCI and lower grade hard coking coals. And it really depends on the production mix at the time as well. In addition to what David said, there's also that product mix that comes into play. And in theory, we really weren't necessarily behind the index when you look at it in a different aspect. I can't comment more than that, unfortunately, Lawrence.

Lawrence Lau : Okay, thank you.

Operator: Thank you for the question. One moment for the next question. We have a follow up question from Jonathan Sharp from CLSA. Please go ahead.

Jonathan Sharp: Hi, just one more question. Just Moolarben underground. When is the longwall move expected there and what is the timing of that longwall move? Thanks.

David Moult : Thanks, Jonathan. It will commence at the end of this year and it will run into the first quarter of next year. It will be a slightly extended longwall move to what our normal move is due to some poorer conditions we've experienced in the development, which have now improved, but it will impact us a little bit on that move. It starts at the end of this financial year -- end of our calendar year financial and will run into the first part of next year.

Jonathan Sharp: Okay, no worries. Is that like eight weeks, four weeks, six weeks for the longwall move? Thanks.

David Moult : Well, a normal longwall move for us is a four-week move. This will be longer than that. I'm expecting it will be somewhere between four and eight weeks.

Jonathan Sharp: Okay, thank you.

Operator: Thank you for the questions. There are currently no questions from the line? Please continue.

Brendan Fitzpatrick: Thank you, Desmond. This is Brendan Fitzpatrick. I'll manage the questions coming through on the webcast. I'll start off with one that's operational in nature, following on from those comments about the longwall move. We saw a strong pickup in the third quarter production compared to the first two quarters. The company has previously said the production will be second half weighted. Notwithstanding that comment about the longwall move in the -- end of the fourth quarter, are we looking at a similar production level for 4Q? Is that possible to clarify without being in the context of the operational guidance that's been maintained for the year?

David Moult : Thanks, Brendan. We did say the second half would be strong. The third quarter was certainly a strong quarter with the three large mines all lifting their production as we expected. That longwall move doesn't impact significantly the fourth quarter. It will come in at the end of the quarter, but it was planned to be in the fourth quarter anyway. We expected it to be carried out at that time. So yes, we're expecting a similar production level in quarter four, which together with our strong third quarter will ensure that we're well in line with those expectations of our guidance.

Brendan Fitzpatrick: Thank you. A question that's seeking clarification on the product mix in the portfolio. Mark Salem, you mentioned about 10% Met coal. Could you clarify if that's on a 100% basis or it includes our official managed assets? Often we have closer to 15% reported in our attributable sales.

Mark Salem: Yeah. And I apologize for that, Brendan. From a marketing point of view, because we manage the assets and from a marketing mindset point of view, it is on a 100% basis and it does include the mines that we also manage.

David Moult : Thank you. Moving on to another topic, we see questions coming through with regard to corporate initiatives. I appreciate that we don't speak to specific transactions that may or may not occur, but is there any comment on timing and decision processes and when the board would be able to determine the use of the existing cash balance? I think there's a lot of media coverage of what's happening in potential M&A opportunities at the moment without me commenting on them at all. From a board point of view, the board, as normal at the end of this year, will look at where we are with any corporate activity, but we'll also look strategically at the dividend payment and we'll make the decision as normal as we assess our full-year results.

Brendan Fitzpatrick: Thank you, David. Following up on that concept of potential distributions in the future period. Could we get a comment on the likely distribution ratio in a future period if cash is to be returned and what would guide that process? Perhaps I'll turn to Kevin, our CFO, for a comment.

Kevin Su: Thanks, Brendan. I think the best indication is still based on Yancoal’s previous communication about the position in our constitution, which is about dividend distribution, 50% free cash flow, 50% NTAT, whichever is higher. And that position remains, never changed. The board is able to exercise its discretion to decide. At the end, just as what David mentioned, if there's a strategic growth opportunity, they will balance different priorities. The cash in companies' accounts is very strong, as what we discussed, and the cash is not going away. Actually, the cash is generating great yield for the company at the same time as well. Thanks.

Brendan Fitzpatrick: Thanks, Kevin. Following up on that topic of cash. We reported in the quarterly over AUD400 million added to the cash balance, close to AUD2 billion held at the end of September. Is there a minimal cash requirement or cash holding that the company needs to maintain once considering various alternatives or applications for the cash?

Kevin Su: This is Kevin again. The same question was also communicated previously in similar meetings. From a company compliance perspective, there is no such thing called a minimum cash balance, but we tend to hold some safe cash, make sure the business is going, given the size of the business, which is roughly, I would say about 300-400 roughly, around that level. Yeah.

Brendan Fitzpatrick: Thank you. Turning back to operational commentary. The quarterly report doesn't contain operating or cash operating costs. We disclose those in the half-year and full-year periods. Is there some comment that can be made on the cash operating costs in the third quarter, given the increase in production tonnage relative to the prior two quarters?

David Moult : I think the comment I would make is that we reported on our first half cash position and we have maintained our current guidance, which is unchanged, and that is 89 to 97. If you look at what our reported cash costs were in the first half, and look at where we are aiming to be in our guidance. I think it is fair to assume that the third quarter costs were pretty good and pretty low, enabling us as we move into the end of the year to achieve that AUD89 to AUD97 number.

Brendan Fitzpatrick: Thanks, David. There was the observation made at the start of the conference call that Yancoal is now included in the ASX 200 and 300 indices. Is there any anticipation for what that will mean for the company going forward?

David Moult : I think it's a position that we've been looking to achieve for a while. I think everybody knows that the only reason we weren't there was because of our free float and we reached that position in September. I think it's a very positive move for the company. I think it gives us exposure to more of the investment community through the ASX 200 and the funds that follow the indices. So, I think overall it's a very positive move. And I think should encourage a greater diversity of investors in our shares.

Brendan Fitzpatrick: There's a specific question on share trading. It's the query whether Yancoal will be eligible for exchange traded options in the future? From my perspective as investor relations, this is not something that the company would facilitate. I believe some brokers offer that style of trading as a service, but it would be subject to broker service provision, not company initiated activities for any style of exchange traded options. We're getting close to the end of the webcast submitted questions. If anyone has another question, please submit them. In the meantime, I'll turn back to Desmond to see if there are any further questions coming through the phone line.

Operator: [Operator Instructions] We have a question from the line on [Indiscernible 0

Unidentified Analyst: Hi, thank you for taking my question and thank you for having this call today. So, my question is about the cost side. As you guys mentioned in the new sales price call reservation directions last year, we can see that when the directions concluded in June this year, the local government would probably increase the royalty rates starting from July. Is that being implemented for the rest of the year and how that might impact the cost for the rest of the year? Is that already included in other guidance?

David Moult : Thank you for the question. Yes, the royalty rate in New South Wales was 2.6% on July 1 and that was a 2.6% increase on our royalty rate. That is built into all our forecasts and it's built into our guidance. So there is no further impact expected from that. Of course, cash costs are always net of royalty. So the ones you see in our guidance are net of royalty, but in all our assumptions we don't expect any further impact. We've built in that royalty change into the way that we look forward with our costs.

Unidentified Analyst: Okay, thank you.

Operator: Thank you for the question. There are no questions at this time. Please continue.

Brendan Fitzpatrick: Thanks, Desmond. I'll turn back to the webcast questions. There's a question related to our realized prices for Thermal and met coal in the third quarter. The question asks, what is the usual time lag between the realized price and the underlying benchmarks? And how do those trends typically play out through the year?

Mark Salem: Yeah, I'll answer that question, Brendan. Thank you. It's Mark Salem speaking. The pricing structures, because of the product mix that we have together with the various markets that we deal in are very dynamic and very varied. And different contracts have different pricing periods. Typically, a typical lag is two to three months, but that's a generic comment given the structure of our business, the structure of our products and the markets we sell to.

Brendan Fitzpatrick: Thanks very much. A question going back to the topic of growth and diversification, is Yancoal intending to move specifically into met coal or are there other diversification strategies that could be considered non-coal assets that might be pursued?

David Moult : Thanks, Brendan. I think we've stated on several occasions that Yancoal’s stated strategy is to balance our coal portfolio, which means from a coal point of view, we'd be looking predominantly at met coal potential. But as we've said previously, we're a mining company. We are prepared to look at other commodities. At the moment, we're not doing anything in those commodities, but we'll continue to build up our knowledge base. But at the moment, certainly our focus is to balance that coal portfolio to try to get closer to a 50-50 balance between thermal coal and met coal.

Brendan Fitzpatrick: Thank you, David. That's the conclusion of all the questions submitted via the webcast. I'll turn back to Desmond once more for any phone line questions before asking for some closing comments from you, David. Desmond, could you confirm there are no further comments on the phone line?

Operator: Yeah. There are currently no questions from the phone line. Please continue.

David Moult : Thank you, Desmond. Well, thank you, everyone, for attending this morning. It was a very strong quarter. It was in line with what we have been talking about at previous meetings. We expect this second half to continue to be strong. And we look forward to delivering on our guidance at the end of 2023. Thank you for your interest in Yancoal and I look forward to speaking to you again in the future.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.