Whitehaven Coal Limited

Welcome, ladies and gentlemen, to Whitehaven Coal Limited's first half FY23 financial results investor call. All participants are currently on mute, but following the presentation, we will open up the call for questions. To ask a question, please join via teleconference and press star 1 on your telephone touchpad to raise your hand. Thank you for joining us today. I'll now hand over to our Managing Director and CEO, Paul Flynn.

Good morning, everybody, and thanks very much for dialing in this morning for the half-year results for the FY23 year. I know this is going to cover a lot of old ground for those who've been following and been through our quarterly results, but I'll try and move through this presentation relatively quickly and get to the Q&A session. As usual, I'm joined by Kevin, who will go through the finance section for us. Ian Humphries is here for those who would like to ask an operational question. Of course, Kylie Fitzgerald from Investor Relations is here as well. So Kevin and I will go through the presentation without further ado. Of course, our disclosure is on page two for you to cover off any forward-looking statements. To the half-year, as you know, given that we've been through the quarter announcement, the half-year has been very good for us and I'll just go through the highlights quickly. In Aussie dollar terms, $552 per tonne is a pretty good realised price for the period. Narrabri has consistently performed well during the course of the half year, which is great. The financials in terms of the highlights, the record revenue at $3.8 million and then 2.7 on our EBITDA, $1.8 billion on our MPAT, being a number you've obviously not seen before. From a taxes and royalties perspective, $1.1 billion in aggregate is pretty good for the quarter, again a record for us. Our safety has continued to improve year on year, a 15% improvement, which is very, very positive. The financial results have left the balance sheet in a very good position with net cash of 2.5 billion at the end of December. The Board has declared a 32 cent 40 franc dividend as our interim for this half year, and of course everybody has been aware of the buyback program. We've spent nearly $600 million, $592 million during the course of the six-month period. And our returns as an organisation for the six-month period have been pretty decent at 101% for total shareholder returns for that period. So a very, very good result. I'm over to our markets. Our markets have been very good. We are seeing some softening with obviously the less severe winter for the northern hemisphere, which I suppose is very good for them. But we are seeing coal prices soften in the last month. And so I'm sure we'll talk a lot about that during the Outlook section and then also with the Q&A. Our premium products continue to see very strong demand, so this graph you've seen many times, and it just depicts where the centre of the universe is for us, and that is Japan, Korea, Taiwan. The emerging markets for us being Vietnam, Philippines, Malaysia, and somewhat Indonesia as well for metallurgical purposes. As far as Japan and Korea, Japan goes, that is the cornerstone of our business. Korea and Taiwan, as you know, toggle between two and three depending on the split between the two in any given year. But they are two very meaningful markets for us and pay us good prices for the quality products that we deliver to them. As far as quality goes, I think everybody understands that Whitehaven's suite of coals is generally the high-water market across the thermal market, and you can see there the comparison of us and our portfolio relative to Australia as a whole and then, of course, other coal producing jurisdictions. So from our perspective, we're definitely up there in terms of the pointy end of quality, and that's why we get paid that premium. And as far as the split of those quality outcomes from a sales perspective go, for the first half, 77% of our sales were in the high CV end of the market. We did have a little bit more as we talked about in the quarter of our mid CV products, and that was really just because our open cut mines had been affected by the floods during the course of this half year. and we had less blend capability across our business than we normally have. The mid CV was about 15% of our business and met at 8% of the total. Over to those three important anchor customers that I mentioned before. This graphic is really just to re-emphasize the point that we are in a very important piece of the puzzle for energy security across these three key markets. They're important to us and we're important to them. In aggregate, if you look at these three jurisdictions, these three countries, about 200 million people there that on a weighted average basis, we're responsible for about half an hour of their industry, heating, cooling, cooking every day. So it is a very important piece of the puzzle that we represent and the continuity of our business and potentially even the growth of it is very important to the security of energy supplies in that region. As far as that reliable energy is concerned, strong demand continues to be a feature of the market we're seeing. Now, supply gaps are there, and I'm sure everyone's familiar with these charts because this is not one of our own. It is Woodmax. But you'll be very familiar with it. There is definitely an emerging issue here in terms of the delta of expected demand versus what potential supply would be. And so we are going to continue to see a difference there, and that is going to underpin solid pricing markets for our outlook as an organisation, and particularly as it relates to the quality end of the spectrum. And Woodmac is not the only one, obviously, depicting a solid future here. AME's obviously got numbers which are not dissimilar. Crew does appear to be an anomaly in that regard. In fact, their view seems to think that Seabourn Thermal Market's going to be 660 million tonnes by 2025, which is only two years away. So that's obviously going to be quite a capitulation if you believe in those numbers but we thought we'd just make sure that we're not just looking at numbers that suit us but we're looking at all the numbers from the various commentators across this. Our overarching conclusion here is that there's going to be solid demand for our high-end quality product over any outlook period that you care to imagine on these timescales. MET is obviously looking pretty good as well with China. taking Australian coal again, we're going to see, well, we have seen, uplift in metallurgical coal prices already, and I think that will continue in our outlook period. As far as the supply-demand dynamic goes there as well, we also think that that is structurally short, and the met market, we think, is going to be a very good place for us to play over time. On pricing, pricing clearly has been some very interesting prices. We're at around the $200 before... the terrible invasion of Ukraine, and so we have reverted to those levels now that we've seen a less severe winter in the Northern Hemisphere. So prices have come off, as we've mentioned already. But I think structurally, the underpinnings of the strong pricing environment that we see, despite the temporary falls in prices more recently, I think remain the same, and that is demand is good, supplies additions are pretty much non-existent, And with structural restrictions in terms of the consumption of Russian coal in the thermal market, we're going to have a very good outlook, I think, here for some time to come. Metallurgical coal, as I said before, structurally, I think we're very convinced that that's a very strong market over time. And despite the inversion, that inversion has reversed. And so that makes more sense to everybody on this call, I'm sure, in terms of what they historically understood about the relationship of these two markets. which will bring some interesting dynamics to it, I think, just in terms of – well, semi-soft pricing is now starting to look interesting, despite the spread between the various qualities in the thermal market. You will actually see people start to move semi back into that space, and so that will certainly add some momentum also to the thermal market as well. So if I just summarise our market and look at the market drivers at the moment, we've got – Limited supply response. We've got strong demand. We've got sanctions on Russian coal. We've had weather events, which are temporary, we must say, even though that was pretty onerous for us in the first quarter, as we've spoken about over the last couple of quarters' reports. But we do think that the effects of that are starting to unwind in our backyard and down the line from us in the Hunter Valley. So we are seeing volumes improving in there. So we've seen record prices, which is fantastic and speaks to the underlying tightness that we've been seeing. But there are limitations here, and inflationary impacts in our business are something that we'll speak about a little bit more in detail. But, yeah, labour supply constraints are definitely something which the whole economy is talking about, and it's no different in our space, and perhaps maybe even a little bit more challenging given the remoteness of some of our business. COVID looks like it's hopefully behind us. I hope we don't have to keep talking about that for too much longer, but it certainly has... and continues to see a little bit of an impact in our business, but obviously not as bad as what it was in previous periods. But inflationary pressures manifesting themselves across pretty much the entirety of our business is something we're actively managing as we go forward. Now, safety has been a really strong improvement for us year on year. That's nice to be able to say that, but there's obviously plenty of work to be done there. 15% improvement on a 12-month rolling basis is really nice. But if we look at where we closed the year last year to now, it's actually only a 4% in that same half-year period. So we all know it gets more difficult to eke out the improvements the lower in this curve you get, but we must get lower, and so further effort is required in order to improve past the 5.2 for our TRIFA. The highlights, as I said before, 552 for the average realized price is certainly very good in the record. Revenue record 3.8, EBITDA 2.7 a record and our impact now that you know, 1.8 billion is a very good result. Cash generated from operations at $2.5 billion and our costs at $96 at the lower end of the range that we've given you. And on the return side of this equation I mentioned before, the 32 cents the board has declared fully franked, total returns to shareholders at $9.59 being the dividend and buyback in aggregate. and from a TSR perspective, 101% over that six-month period. Very good. Now, these numbers you've seen, so I won't belabor this other than to point out that we do have a tale of two halves here, and the first half, as everybody knows, heavily weather-affected. We haven't seen anything like that in more recent times once we've rolled past, in fact, the reporting of the December quarter report, and mining conditions have been positive for us. We're looking forward to that continuing in the year, but I think the labour and the weather remain the two riders that we would caution on in terms of achieving our guidance for the full year, which remains at the 19 to 20.4 level. Smalls, as you know, heavily weather-impacted and recovering nicely now, but we're still suffering from labour shortages, which is probably the defining feature at the moment that we're balancing. So we are... We are changing and evolving the employment proposition that we're offering to people from further afield in order to bring more labour into our region. That does come with a cost, and that's not surprising to anybody who's listening to any reports across any industry at the moment. But we have got a steep hill to climb in the second half, which we've done before, but it no doubt is going to be challenging. a period of feverish activity as we seek to deliver within our range of 10.3 to 11.4 for malls. Narrabri, as you know, is going well and progressing closely to its impending change-out. So that's very positive. And so overall, we're in a pretty good space, and it's nice to see, obviously, that wasn't a weather effect, as we talked about over the last couple of quarters. Now we're near to the degree that the open cuts bore during that period. So for the first half, ROM 3.6, very good big increment over year-on-year and certainly on track to achieve our guidance of 5.6 million tonnes. So the change out there, going from 110b to 203, we're expecting that in April, which is positive. And then Cut and Flit has been actually manning up better, so we are seeing some momentum there building. And so we are thinking that in the new year, that's going to be very positive to be into You'll only see a little bit of that, of course, in the balance of this final stages of the financial year, but you will see 203 start to indicate what better volumes and productivities are going to look like in that shallower ground, so keen to see that and report on that in the final quarter of this financial year. Gunnedale Ops, as everybody knows, weather affected, which is obviously difficult, but that leaves us with a reasonable task to get to at the end of this year. I won't dwell on that too much because I think everybody's been through that. I will just call out some numbers here so you can understand the scale of the interruptions that we've had here in Gunnedah in particular. Mauls Creek did suffer, I think it was 24 days of downtime. That's days of downtime as opposed to all the other disruptions that go from wet days and ranting up and cleaning up and so on. The Gunnedah Ops had quite a difficult time as well. Tarawanga had 17 lost days during there. Gunnedale CHPP, because of its connection with the low-lying road to Tarrawonga, actually suffered 36 days during the half, which is quite a significant impulse on trying to deliver during that period. So with that, I'll hand over to Kevin to give us the summary of the financials.

Thanks very much, Paul. It's not very often when you get to turn up and talk about a first half that's better than probably four of your last five years. So $3.89 billion or $3.8 billion in revenue. A really strong first half of fiscal year 23. Average realisations $552 whereas in FY22 our average coal price was only $325 a tonne and I say only because that was a cracking year as well. So as a result of that revenue, a little bit of pressure on costs but we're not immune from that and we're not alone on that in the world. I think the The focus in the business was to make sure the tons came out of the ground and went to the customers in the premium markets, premium prices. So as a result, revenue 3.8, as I've said, EBITDA 2.7, just a shade behind, about 10% behind the full year for FY22. NPAC was 1.8, which was a great result, and the cash generated from operations was a touch over $2.5 billion. You can see that we've built cash on the balance sheet. Now, that cash has got some claims to it, and we'll go through those in a slide a little bit further on. And the board has declared a 32-cent franc dividend to shareholders. So EBITDA margin on the next slide. At these coal prices, as I said, the focus really was on production and selling the coal in the premium markets. You can see from the earlier slide Paul put up, more tonnes went into the Japanese market than in previous years. That really was a function of having the tonnes blended up and having the tonnes to sell. In the first half of FY23, our EBITDA margin per tonne of coal was $414. You can see the costs were up about $13, and we'll go through that in a moment, just on the break-up of what's driving that. But if you look at the first half of fiscal year 22, we were pretty pleased with a margin of $102 a tonne, so $414 is a happy day for a CFO. Over the page onto how we got from the first half of fiscal year 22 to the first half of fiscal year 23, there are no surprises in this. FX was a little friendly to us, gave us about $300 million, but the real driver of this was the increase in coal price. You can see that the thermal coal price in the first half of fiscal year 23 averaged 381 versus 146, and you can see the met coal, which was a smaller proportion of the business, was at 285.155. And as I said before, costs were up about 86, and we'll go through that on the next slide. So all in all, it is a record half, and it's an outstanding half. If we go to the unit costs, we've talked about this, and there shouldn't really be any surprises to people. We've seen the impacts of flooding, which was really in that first half around that September, October, November period. It's surprising to most people, a strong Narrabri performance actually lowers our costs because their yield is very high. They're about a 98% or 99% yield, and that actually contributes to the outcome here. As you can see there, we've accelerated the debt amortization. There was an article, I think, in the AFR the other week talked about this. The producers have decided that they want to reduce the risk in that business as banks have decarbonization targets around 2030. And in the back end of this, you can see other costs that we're not immune from, higher diesel prices, labour payments we've made, OEMs that are asking for a little bit more on their equipment, and all in all, that's how we get from $83 to $96. So again, those costs, some of those we would expect to see come out of the business in times to come, which are the impacts of flooding, and we would expect those diesel costs and labour to soften over time as well. come to cash flow generation and it has been a very strong half. So we had about a billion dollars in net cash at 30 June 22. We generated two and a half billion. And in accordance with this capital allocation framework that we put out to the market about this time last year, we've invested capital in sustaining the business. We've paid $945 million to shareholders in the form of buybacks and dividends. And we've got another $280 odd million to come in the dividend coming in about two weeks' time. And that left us with about $2.4 billion. And some people will say, well, what are you going to do with that $2.4? Well, there are claims to it. So let's go to the next slide. So we have We expect to pay this fiscal year 22 income tax of about $552 million in the next 10 days. There's income tax in relation to the first half of fiscal year 23. We'll pay that on the full year 23 result in around December 2023. And we've got an interim dividend there of $274. So after that, if I can call it the unconsumed cash or the untagged cash, there's about $879 or $890 million of cash there. So we'll retain some of this on a balance sheet for future needs and we'll use some of that cash and the cash that's generated in the second half when we return to buying back shares in the second half. The net cash and liquidity, I really don't propose to stay on this for long. You can see in here the cash that we've got on hand. Our ECA facilities or export credit arrangements, they tail off over about a seven-year period. Finance leases are shrinking, and so our net cash is 2.471. Whilst the liquidity there includes an undrawn facility, we don't expect to play in that space. We expect to leave that alone, and we expect to reposition our funding over time. So we are still looking at debt capital markets, although there's no real need in the business for it at the moment, but we stay prepared for that discussion, and we look to align the sources of our capital with the places where our toll goes. Come over the page on the capital allocation, and I expect to have a few questions on this through the question and answer period, but let's try and take you through this. It's really a disciplined approach to capital. We spent some money on maintaining and optimising operations, so we spent $85 million in sustaining capital, including some Narrabri Mains development, and we repaid some finance lease payments for about $36 million. So the cash on the balance sheet went up but that's because we've got tax payments to make on both fronts and we've returned 32 cents to shareholders. In half one fiscal year 23 we bought 67 million shares for a total of 592 and since March when we started this discussion we've bought back 14% of the stock for 955 million. So we haven't dilly-dallied in that and we still see value in that approach today. The payout ratio for the first half is about 36%, which is midway between the bottom end of the guidance of 20% and 50%. And the overarching comment I'd say to people is that we look at an annual result rather than splitting the half straight out of mathematics. So we'll work our way through and see what the end of the year result looks like. And from that, you'll see us continue within this capital allocation framework. Here we go. So just to try and put a bit more clarity into cash that comes to shareholders versus how do we allocate capital from returns. On the left-hand side there, you can see the actual capital that has been returned, which is a record number. You know, it's literally double what we've delivered in previous years, but we've delivered that in the half. And that's been cash in the buyback that we talked about and the final dividend that came out of the fiscal year 22 results. If I come to the results... The capital that's allocated to shareholders, you can see $274 million is going to be in the $0.32 dividend coming to you in about two weeks' time, and the $367 million of capital that we have spent on the buyback in the first half. So all in all, that's a payout ratio of about 36% of NPAT, whereas the payout ratio for FY22 was about 53%. What I'd say to you is that you can see that we're not paying special dividends and that's consistent with the approach we've had and we talked about back in from early February, March in 2022. So let me just hand it back to Paul and I'm looking forward to questions and answers.

Thanks, Kevin. Just over to our guidance now quickly for you. So no change in there as we've mentioned before. ROM remains at 19 to 20.4 as I mentioned earlier. Sales on a managed... level at 16.5 to 18. The costs as we've mentioned now at 96 we're reporting obviously we're just above the bottom of the range there which I think has actually been a decent effort given the bumpy ride we've had with weather and hopefully the temporary impulse on costs that Kevin's gone through that have related from the flooding related matters. So we think with the second With the second half that's more heavily volume weighted, there's a good chance we can improve on that current position, which is very positive. We're underspending on the CapEx, which is not surprising given supply chain and other related issues there. I mean, generally we underspend the first half for those who've watched us in the past. And so we're unlikely, I think, to get to the total of that capital with the balance of the year remaining. But there are lots of inflationary pressures in the business, as you know, so we're doing our damnedest to try and keep that all under control. In terms of the market outlook, we'll just finish on this here. I mean, the Russian sanctions, I think, are the key impacts for us in the near term. Let's see how that unfolds. Weather does feel like we've got a better weather pattern in front of us, so we're not taking that off the table. Clearly labour issues are causing us and everybody a lot of concern and the inflationary impacts that go with that as well. We have, as I'm sure there'll be questions in a minute about this, the coal reservation policy for the New South Wales Government has announced. The details of that we don't have for you unfortunately at this point in time, but we do expect that there's imminent directions from the Government in that regard. We can perhaps talk about what we know, but we don't have the details, so we need to stay tuned for that. As I said earlier, I think that the northern hemisphere winter, mild as it was, that's good. That does mean that in the short term, you've got a little bit more oil, gas, coal laying around than what you had planned for. That's probably good for them, less good for the rest of the market in the short term, but I really think that the structural issues associated with sanctions remain, and And so I think this is just a temporary softness that we're seeing in the market. Met coal prices are improving. China taking Australian coal again is, we've always said, is a good thing. We're improving relations there. I think that's very positive. The longer term, obviously energy security is going to continue to be a real issue. Higher quality coal is going to be needed for longer. Our transition is aided by the continued supply of the coal that we produce to our important markets. and we'll continue to play that important role, particularly for those $200 million that I mentioned earlier. And without any supply-side response coming on here, I think that bodes very well for the longer-term outlook. As far as our individual focus as a company level for the balance of this year, we want to continue to focus on our safety. We're doing well. We need to do better. The environmental compliance and sustainability outcomes for us have been very positive also, but that needs more effort. We're obviously focused on delivering our guidance and given the rough start we've had with weather and so on in the first half, we're very much focused on bringing home the bacon in the second half. Managing our costs and keeping the margins in the right place is very much part of our focus. The capital, as I said, we're likely probably going to spend there, but we are looking very closely at Vickery. I did say to people at the quarter report that we'll say something during the course of March on the prospects for a staged introduction for Vickery. So that's very much front of mind for us. We're working hard on that and we'll work with the time so we can actually afford an opportunity for everyone to have a discussion on that during the month of March. And then once we know more about this coal reservation policy, we'll have to say something on that as well, no doubt. But with that, a very, very good half year. We're really positive about the results. We've been able to reposition the company financially, set it up well for the future. We acknowledge the softness that we see in the current pricing just for the second half, but again, I think the structural underpinnings of the market going forward are very, very constructive for our business. And with that, I'll just thank everybody, all our employees and all the shareholders for their support during the first half of the year and look forward to the second half. I'll hand it back to you, operator, now for Q&A session to open up.

Thank you to Paul and the team. Now is your chance to queue for a question. If you have joined in over the teleconference, you can press star 1 on your telephone touchpad to raise your hand. And we'll pause a moment to assemble a question queue. Just a reminder there, that's star 1 to queue for a question. Our first question comes through from Chen Jing from Bank of America. Please go ahead, Chen.

Good morning, Paul and Kevin. Thanks for the presentation. I just have a few questions, well, two or three, please. On slide five, there's a big jump for your sales volume to Japan in the last six months. I guess this will continue with Japan's sanction on Russia coal. I'm wondering, have you seen any increased competition with diverted but heavily discounted Russia coal into your sales destinations such as Korea, Malaysia, India and other Asian countries who don't have Russia sanctions. I have two more after this. Thank you.

Yeah, thanks, Chen. You know, Japan definitely is a big piece of the puzzle and I think in the short term there is, some might say risk, others might say opportunity for more volume to go in there, particularly as Russian sanctions come into force there from 1st of April. we may actually see directionally more of our volume going into Japan. As I mentioned earlier, Korea and Taiwan toggle between second and third in terms of our sales mix. I probably suspect that in the second half and even further into the new financial year, you might see Taiwan even grow a little bit more. Korea would appear to be taking Russian coal. And so that's not... That's not a consistent position across the Korean market in its entirety. We have got different organisations that we're dealing with taking different positions there, but by and large that industry is taking some of it, whereas Taiwan has excluded it altogether, Russian coal that is. So I do, if I'm forecasting going forward, Japan a little bit more, Taiwan a little bit more, Korea maybe moderating slightly in terms of percentages. But that's where we're seeing it. India, we think, is taking quite a bit of Russian coal and it's being offered at steeply discounted prices. And so it's understandable at a level that they're taking that. Obviously, that's not a market we're playing in. So we don't see, but we're not seeing any real displacement of coal that's causing us greater concerns. We know that Japan has been searching around the globe looking for available 6,000 materials. And so they've been tapping on the door of pretty much most coal-producing jurisdictions, but we don't think the volume response there has been much at all. And so hence our prediction that we'll probably be putting a little bit more into Japan in the foreseeable future.

Thank you very much, Paul. May I ask another question on slide 30 of your presentation on shareholder return? So interim dividend, 32 cents. So that's 16% dividend payout ratio. I guess that's lower than the market expected. You still have 80% of buyback to complete in the next eight months. So by using that 80% of buyback, your second half FY23 payout would be potentially more than 50% just on the buyback. I'm just wondering, how should we think of your dividend payout ratio in the second half of FY23? We had a look at your split of the dividends and the buyback in the last 12 months. It seems like 40, 60. But just by considering your magnitude of buyback, how should we think of your dividend payout? Thank you.

Yeah, thanks, Chen. I might start this off. I'm sure Kevin will add something to this one. Look, I think there's... The numbers that you've recounted there, of course, are correct. There is an element in our thinking of a little bit of caution here. Typically, we pay a little bit less in the first half and will be more heavily weighted in the second. I think our view on that is probably a little bit more focused, given the softness in the market. So we know that the second half, on average, revenue-wise, is going to be less than the average of the first half. And so Kevin's highlighted the claims already over the cash balance that are there that would need to be fulfilled. And there will be other capital needs, if I can call it that, which we should also bear in mind. So as I've just mentioned to you, we will talk to you in about a month's time about our thoughts on the state of Vickery and our thoughts on a stage introduction of that. So we are bearing these sorts of factors in mind as well. The buyback, Kevin, you can speak to the balance of the buyback. I think, of course, Chen, you'll acknowledge the minute before our AGM was held, clearly the government took off the table the off-market buyback route. And so the prospects of us being able to do a full 25% within a 12-month period, I think everybody understood that that was not possible. And so we've been consistent performers in the buyback period. Since then, with our buyback, in the periods we were able to trade, and we'll continue to do that. We see that's very important and broadly very well supported by shareholders in doing so. Kevin, you go.

Yeah, no, happy to step in, Paul. I'd probably say, I'd say this. First half, we're generally a little more cautious on dividends, so don't do straight arithmetic. The full year, we've given you guidance between 20% and 50%. Clearly with the approval from the shareholders in October of the second stage of the buyback, we've really only had a couple of months to have a swing at that. We would expect to be back in the market and we expect to be back in the market in the second half and we see the shares as being compelling. So I would say wait for the full year. I'd also probably say this, that we want to keep the balance between buyback and dividend. and that ratio that you talk about there is about where we like to see that. And we don't want to step too far ahead of that on the dividend because in the past that's just encouraged transient shareholders would be the way I'd describe it. So stay tuned for the second half, Jen, and we should be compliant with the policies we've put out to people and the guidance we've given you.

Brett, thank you very much. Paul, Kevin, may I have another, the last question regarding your cost. First half, FY23 cost $96 per ton at your lower end of guidance of 95 to 102. And your production in the second half is going to be, you know, more than first half, second half weighted as per your guidance. And we're expecting less with the disruptions. So is that fair to assume your second half FY23 unit cost is likely to be at the lower end as well or lower than the first half FY23? Thanks.

I think the, and thanks for that, I think that's a really good question. I'd probably look at the mix of operations that are going to contribute in the second half. In the first half, Narrabri has performed very strongly and that's helped to lower the average cost. In the second half, we're going to see better performance from an overcut and less representation, proportional representation from Narrabri. So that $4 of benefit that you saw in the first half, is unlikely to be repeated in the second half. We should get better volumetric outcomes, and we're seeing slightly lower diesel costs in the business. So our expectations are second half, we should still be around that bottom end of the guidance, would be my view, and I think that's as much as I want to say.

We're hoping for less weather impacts in the second half.

And it's looking that way.

All right. Thank you very much, Paul and Kevin. I'll pass it on. Thank you.

Thank you. Thank you, Chen. Our next question comes through from Paul McTaggart from Citi. Please go ahead, Paul.

Hi, guys. I might ask five questions. No, I'm only kidding. So I did want to follow up on a couple of things. You made some comments, Paul, about labour in Moores Creek and going further afield. So I just wanted to get a sense of what you were doing around, you know, trying to kind of get labour. Yep. And second was, you know, when... I mean, you produce a coal that traditionally is not used or insured in New South Wales coal-fired power stations. So how did that discussion go with the government? And did you get any sort of recognition from the government that that's the case?

Yep. Okay, my temperature's going up already with that second question, but give me some time to breathe there a little bit and Ian can give you some answers, Paul, on the additional initiatives that we're engaged in now at Moores Creek and across the business.

Morning, Paul. Look, we are looking at the various areas that we can source labour from rather than the traditional sort of target areas we've had. and that's proving beneficial. We have looked at various roster options to, I guess, facilitate those different areas we've looked at, and they've been implemented recently, and we're seeing some favourable results there, and we're hoping that that's going to grow. And we continue to ensure that the remuneration and incentives and things that we have to our employees is market competitive, and that continues to move, and we keep following that. And we continue to look at what we can do to grow, train trainees, Indigenous engagement programs and things for our local community. So there's a suite of activities there and we need to keep moving with the market and staying dynamic in that space.

And so Ian, to remain market competitive, I mean, how much kind of pressure is that putting on some of your labour costs?

Well, I mean, we've introduced what we call a market allowance to both our employees and contractors, and we've linked that to a cold price, and I guess the initiative there is to ensure that should the situation change that we're not embedding that cost profile. But, you know, effectively that's upwards of a 10% increase to them on an annual basis while that's in play.

Those are the quarterly retention payments that we've mentioned to you in the past, Paul. But as you say, there's other momentum there, unfortunately, inflationary-wise, as enterprise agreements are up for grabs. So that will be no news to anybody that the requests that are being made there are escalating. And so we're working hard to make sure we can manage the cost of that, but still achieve the outcomes we need from a total FTE perspective. I mean, that is a real battle. And the market isn't obviously one market, of course. And so when one company goes out and does a certain thing, that ripples around the market pretty quickly, and other people are looking for a similar sort of initiative. So, yeah, look, it is a challenging environment, but seeking people from further afield when we've tapped out the local market is a theme that we're having to engage more and more in over time. And if we wanted to bring on more volume through a staged introduction of Vickery, that's only going to compound that issue.

And I think the other one, Paul, you mentioned in a previous call is the housing policy and developing additional housing in the regional areas for those that want to move out there. Now, that's a slightly longer term strategy, but we've kicked it off. And that, I guess, comes back to that sort of plethora of options that we have for different people to meet their various requirements.

So, Paul, then just on the other part of your question, look, that has been That has been a very difficult range of discussion, not just with us, of course, right across the industry. There are people obviously already embedded in the supply relationship for the domestic power generators. And as you rightly pointed out, the type of coal that they've historically sought and supplied and consumed has got nothing, bears no resemblance to the coal that we produce. And so the notion that we would sacrifice high value export revenues for the company, for the state, for the country, to be diverted internally and of course dirty dust in order to be able to be consumed isn't a particularly sensible option. We have raised this as had the other effective producers and of course it makes no sense for us to be giving anybody 6,300 material to burn in a power station that's not designed for that. a 9% or 10% ash product is not useful when they've been historically consuming anywhere between 24% and 28% ash. So yeah, that's difficult. So we're helping the government understand not just the quality dimensions of this and the ramifications of that in the marketplace, but then also the logistical considerations associated with supplying certain power stations. I mean, it's very difficult for everybody to get trains into the Central Coast. We all use much longer trains and the loops there can accommodate, so there's going to be some inefficiencies imposed on that if we're having to use smaller trains. So yeah, there's a lot of dimensions which I think that the bureaucracy, the government bureaucracy who's been charged with evaluating this is coming to terms with and we'll just have to keep helping them understand the limitations of both the product and the physical nature of this. Paul, in my view, at the end of the day here, this is largely a political issue. That is my concern. There's not a shortage of coal going round. It's a price issue. People's electricity bills are looking pretty unfavourable from a government's perspective, especially a government that wants to get re-elected. And so I think it's been caught up in all of this, quite frankly. So... So there is coal available, and if you want to pay an export parity price, then it is available. But that is the market construct that the successive governments over the many terms have orchestrated here. Long-term assets with shorter-term supply agreements attached to them when they were privatised was always going to deliver this exposure to the export parity pricing, and it's now upon them.

Thanks, Paul.

Let's hope sanity prevails. Fingers crossed.

Thank you, Paul. Our next question comes through from Tony Mitchell from Shore and Partners. Please go ahead, Tony.

Thanks very much. Paul, what's the Labor Party's policy on the domestic toll situation here?

Tony, look, I don't think they have a stated position here in this regard. I think they're The only thing that I've heard from them thus far is to echo the government's position is that whilst this thing is afoot, there's no change in royalties and obviously everyone's concerned about that having seen what's going on in Queensland and so we can't be having two of these initiatives compounding the effect negatively for our sector. I don't believe there would be any change from an opposition perspective. I think they're letting the government obviously take the pain on announcing it. But we have been able to extract from – the industry has been able to extract from the government a commitment there will be no royalty changes, and the opposition has echoed that.

Okay. Thanks for that. Would you have any interest in buying the BHP mines at either Blackwater or Dornier in Queensland?

Well, we've got plenty on our plate, I think is probably the easiest way to put it. And, you know, we didn't talk about Winchester South. In fact, we haven't mentioned it at all during the course of this call. But I have mentioned Vickery a couple of times and we are looking at that very closely. And so we have a lot on our plate. And whilst we've heard the rumours, of course, everyone's heard the rumours about some assets coming to market. And we look at everything as it comes along. along the way. So I don't want to be caught up in too much of a discussion on that, other than to say we've got plenty on our plate. So I'd rather deal with the prospects of a stage introduction of Vickery. And look, in six months' time, we're hopeful that we'll actually have a state-based approval for Winchester South. That's sort of maybe on the more bolshie side of things, maybe. It might be nine months, but there's no reason why it can't come out in that period. And then, of course, we've got to engage at the federal level. But... You know, met coal mines being developed up in Queensland, that's still a viable prospect, and I think there's no... No-one's debating the structural nature of the shortage in met coal going forward, and Queensland's obviously well-positioned to be able to service those needs in Asia.

So I think that... Yeah. Do you... Go on, Craig. Does the company have a... a planned percentage of your coal that would come from metallurgical coal over the next few years?

Yeah, we want it to be 50-50 was our aspiration. 50-50, right. 50-50, yeah. I mean, we're obviously not shy about our thermal. We've got the best thermal in the market and customers love it. But we do think over time our proposition as a company is better balanced by having more met in the business. And as I mentioned earlier, semi-soft with prices now reverting, met coal prices now reverting, semi-soft inbound interest has been also better than what we've heard in the past, a couple of years in particular. And then of course, so we think we can swing more malls and potentially victory into that. semi-soft market and then, of course, Winchester South would be the game changer from our perspective, from a met composition perspective.

So can you get to that 50-50 by just doing Winchester South and Vickery? Can you achieve that objective over the next few years, just doing those things without acquiring any carbon coal assets?

You'll have to hand the baton on to someone, Tony, after your three questions. But no, you can't get to that with just further met coal sales out of Malls Creek and Vickery and then Winchester South. You'll make a huge difference in bringing Winchester South on, of course, but we're not obviously up there for one asset alone. We think there are other opportunities over time, but we're not racing out to try and create some transformation here.

Can I ask one final question?

Well, not really. No. Your time's up. Come on. Hand it on.

Okay. Sorry. Okay. Thank you.

Come back, Tony, after the other questions have been exhausted if there's still time remaining.

All right. Thank you, Tony. Our next question comes through from Paul Young, Goldman Sachs. Please go ahead, Paul.

Morning, Paul. Morning, Kevin. A lot of the high-level questions have been asked, so I just want to dig into some of the projects. In particular, starting with Narrabri, we're pretty soon flipping over to the southern part of the mine, which will be great for that operation from a production and cost perspective. I just want to focus on the capex spend in Narrabri and a half. It's the one area where you fell short versus the run rate for the full year. Open caps and growth project spend was in line with the full year. But I noticed this on Narrabri, obviously a lot of money is going into the 200 series in the mains development for the future. So just wondering, you know, has there been any impact on potential future production or development because of access to labour, et cetera?

Well, no, I don't think there's been – there's been no impacts of delaying us. No, we have experienced some delays, though. There's no doubt about that in mobilising some of the equipment and – or bringing equipment to site for that work. But as far as development float and so on goes for us, we've got no issues there. We're well covered. But you will see more going out in the second half. As I said earlier, we won't get to the full numbers based on where we are today. It's slid to the right, but we're well within the bounds of our float requirements.

Okay, that's great. And the second question on Vickery, Paul, I mean, you don't have to really go through the history here, but seven years of sort of waiting on permits and talking around sell downs and all sorts of things over time and now we're in a situation where you're looking at a capital light model on a starter project and not much mention on the larger project and obviously go through the feasibility study or recut of the capex estimates etc. I guess the question is what's the end game here in Vicar? Is it still to finish the studies and the capital update on the larger project, the $700 million, $800 million larger project and are you still goal seeking or targeting you know, potential sell-down of this asset. I'm just curious about, you know, the overarching strategy of Vickery now.

Yeah, that's a good question. That's a good question. Stage introduction is what I mentioned a couple of times there with the early mining case at Vickery. And when I say stage, I mean, I'm thinking it's a two-step introduction, a smaller version. If we could get that on quickly, and I'm thinking about accelerating revenue in this period to be able to take advantage of existing surplus capacity at the Gunnedah Prep Plant and also surface take or pay. I think that would be useful. The broader proposition for the full-size Vickery we will put to the board within this year, this calendar year. And so we are interested still in bringing the whole thing on. There's no lack of interest in that regard. But you can imagine there's lots of work going on at the moment because capital estimates are hard to nail down. And so you can imagine the team, our project delivery team is working pretty hard there to try and get the best estimates they can on that because when we do eventually come to the board with not just a small version but then any bigger version, there's going to be an allowance that has to be made for capital inflation.

Yeah, okay, that makes sense. When it goes to board approval, if or when I should say, then you can go out and obviously present that those results, et cetera, open up a data room and then get, you know, potentially look at bringing in a partner.

Yeah, that's right, Paul. Look, energy security concerns being what they are, people are very interested to see the volume come on. There's no doubt about that. But obviously that means us, unless we bring in other people, that means us taking all the risk on that. So we'd like to see if there's other opportunities for us to share that risk. Having said that, as I've mentioned on these calls in previous periods, we are attracted to the idea of having full control unencumbered use of our own coal to spread across our business and blend it as we see fit. That is a very big part of the value proposition that Vickery represents, given you've got big differences in the market between the various segments, between the low-rank coals, the 5500, the GCNUC. You can see that the blending opportunity is very meaningful. It may not be in our interest to have anything structurally in place that impedes our ability to get our hands on our coal, such as we have greater restrictions at Mauls Creek, for instance, but we've inherited that. So we're looking at other means by which people can give us financial support, but perhaps not direct equity into the project.

Yep, okay, that's interesting. Thanks, Paul. That's it for me. Thanks, Paul. You there, operator?

Thank you. Our next question comes through from Glyn Lawcott from Baron Joey. Please go ahead, Glyn.

Morning, Paul. Look, just a very quick one. The buyback, can it start from tomorrow or from today, just from a technical perspective? Any issues?

There's just one buyback issue at the moment, Glyn. It's a good question. Thank you for raising it. Ordinarily, we would start the day after the results go out. Ordinarily, we would. We are holding off that until such time that we think there's an imminent pronouncement from the government on whatever this reservation policy is going to mean. So you won't see this in the market for a day or two until such time that that's – I understand it's imminent, so it's going to be flushed out. I wish it was today so we could talk about it, but there'll be a couple of days before we can move forward, I think. But that's the only thing that's impeding us from moving back into the buyback program.

Okay, and then the federal government, any issues there on the windfall tax or has that gone quiet?

I haven't heard any more discussion. That seems to be more in the media than it is in dialogue with the government. So that part of it seems to have gone away and has had any suggestion of problems with diesel fuel rebates and other considerations.

And then just finally, you've probably zigged and zagged at the wrong time now that coal prices have fallen and you went to 8% met, 82% thermal. How quickly can you go back to your 80-20 if prices stay at this sort of disparity now the other way around?

Yeah, look, I think we've done pretty well out of the zigging and zagging actually. But yeah, the market's re-inflating on the met side. That's great. That's really good. We can move back into that market pretty seamlessly. And so we haven't tied ourselves up commitment-wise for long-dated thermal contracts that will prevent us from moving back into the semi-soft. So we'll be pretty responsive to that on the basis, on the basis, Glyn, that that still makes sense. And I just want to qualify that because even though the semi-soft numbers will start to look very good, they do look good, in terms of the blending opportunity, given the difference between 5,500 material and 6,000, there's still a very strong argument for blending on the thermal side versus a discrete sale on the semi side. So I just want to raise that just in case people start having more expectations on the semi side. We will definitely sell more semi. I can see that coming. But the blending opportunities on the thermal are still very strong.

So just to clarify then, we should be expecting at least in the back half of fiscal 23 to be like

90 to 8 like it was at the moment you can't switch quickly this back half and it will be back into 24 when you maybe can readjust again it'll be early it'll be early in the new financial year that you see a big change there we certainly have unsolved tons in the balance of this financial year so that's possible to move more in there but yes in the early early 24 was when you'll see it all right thanks paul

Thank you, Glenn. There are no further questions at this stage. I'll hand it back over to Paul and the team.

Thanks very much, everybody, for all your time this morning and the questions. I appreciate that. If there's any further questions, I'm sure we'll see many of you during the course of the next couple of weeks, but thanks for the time, and we'll call that to a close now.

Thanks, operator. That concludes the call today. Thank you all for joining. All participants may disconnect.