Yancoal Australia Ltd

Good day and thank you for standing by. Welcome to the Young Call first half 2024 financial results. At this time, all participants are in listen-only mode. After this previous presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 101 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 101 again. Please be advised that today's conference is being recorded. I would like to hand the conference over to your speaker today, our Chief Executive Officer, David Moult. Please go ahead.

Thank you, Victor, and thank you to everyone for joining this briefing on Yancol's 2024 first half financial results. I'm joined on the call by CFO Kevin Hsu and several members of the Yancol executive team. I'll provide an overview of Yancol's first half performance, then we will open the webcast to questions. The commentary provided is based on the first half 2024 financial results and associated materials published on the SX and Hong Kong Stock Exchange yesterday. Slides one and two contain notices and disclaimers relevant to today's presentation and the forward-looking statements it contains. Please make yourself familiar with the content of these two slides. The first slide gives an overview of our operational and financial results for the first six months of the year. The first aspect I want to highlight is our safety performance. Our primary reporting statistic, the total recordable injury frequency rate, remains below our industry benchmark. That said, we need to improve our performance if we are to return to the level achieved last year. The programs we implemented provided successful and we are committed to sustaining a workplace with a positive safety mindset. Our ROM production volumes and saleable production volumes were 7% and 18% higher than the first half of 2023. Like last year, we aim to deliver increased coal production during the second half of the year. Although our realised coal prices are lower than they were in the first half of last year, an average realised price of $176 per tonne generated a strong operating margin. After cash operating costs of $101 per ton and royalties of $15 per ton, we had an implied cash operating margin of $60 per ton. Our per ton cash operating costs are expected to decrease in the second half, primarily due to the expected increased production profile. For the first half of 2024, we are pleased to report $3.14 billion in revenue. $990 million of operating EBITDA at a 32% margin and $420 million in after-tax profit. We delivered $851 million net cash from our operating activities. After distributing $420 million in April for the 2023 Fully Frank final dividend, we held over $1.5 billion in cash at the end of June. On the topic of shareholder returns, the board has not declared an interim dividend in respect of the six months ended 30 June 2024. The retained cash gives us flexibility to consider potential corporate initiatives and may be distributed in the future if not utilized. We have a proven history of growth through judicious acquisition and expansion, and we are again in a position to pursue various initiatives to the benefit of our shareholders. If such an opportunity transpires, we'll inform the market. Moving to slide four, our safety performance, as I have mentioned, we intend to focus on reinvigorating the program that delivered the sharp improvement in 2023 and reestablish that performance profile in 2024. Keeping our workforce safe is always our first consideration. We are keen to see both metrics return to the levels achieved 12 months ago. Our focus on sustainability, as with safety, is continual and ongoing. This year we moved beyond the environment, social and governance report published in previous years. In April, we replaced it with our first sustainability report, which integrates previous disclosures and begins our transition to align with the international sustainability disclosures. We will align with the Australian sustainability reporting standards as they develop, as well as the requirements of the ASX and Hong Kong Stock Exchange. Slide six summarizes the operational drivers behind Yankol's first-half performance. The production volumes reflect a consolidation of our production recovery plans. Compared to last year, our attributable saleable production increased by 18% to 17 million tons. International coal market conditions were relatively stable during the past six months. In all market settings, we continually seek to maximize our operational performance and product mix to meet our customers' needs. Turning to the coal markets, we observed various factors at work on both supply and demand sides. There were good levels of demand, but also relatively high-end user stockpiles in Japan and South Korea, as well as higher exports from Australia compared to last year. Rainfall and hydropower generation, or the lack of it, influenced coal demand in both China and India in recent months. For the past year, we consider that thermal coal markets have remained relatively balanced, but subject to short-term factors such as seasonal demand drivers and supply disruptions, and this remains our current view. Thermal coal indices have been ranging bound for the past 12 months, and price differentials between coal indices reflect the inherent value of different coal types. In the metallurgical coal markets, reduced supply was countered by reduced demand, typically observed during the northern hemisphere summer. Although our met coal sale volume are the lesser component of our sales profile, they are a meaningful contributor to revenue. As a result of various factors affecting delivery schedules, our realized price during the past six months captured pricing from further back in time than is usually the case. The realized price also benefits from our product blending and optimization strategies. During the first half, 88% of our sales were thermal coal, with the balance being lower grade metallurgical coal. This product split varies period to period, depending on which coal seams are in production at each mine and how we can maximize the market opportunities. Turning to slide 10, we show our customer split. China is once again a significant offtake partner, both on a volume and revenue basis. Our Japanese customers purchase a significant portion of our high value coal, resulting in this market being our second highest revenue generator. As coal markets stabilized, the relative dominance of customers in our four major markets recovered and sales to other destinations reduced. There are various groups providing forecasts for international thermal coal markets. A common theme we see in recent forecasts is the ongoing revision of when coal demand will peak and at what level. Delays to projected closure dates for existing coal-fired power generation, combined with new facilities coming online, are behind the evolving demand profile. In relatively balanced coal markets, a 5% shift in supply or demand can have notable influence on price indices. On slide 12, we look at projections for net changes in supply. The components in this chart present a year-on-year change from the prior period. These are not cumulative changes. These projections suggest a gradual supply reduction each year to 2027 than a much sharper deterioration in supply beyond 2027. A time horizon that aligns with the current demand peak depicted on the previous slide. This could support a more robust market in the coming years. Over time, Global demand for coal will diminish as the energy market transitions. That said, there is a growing appreciation that coal has a meaningful role to play during the transition, and large-scale, low-cost mines such as ours are a key piece of the energy market. Total ROM coal on a 100% basis was almost 28 million tons. Our mines are a much better place to handle rainfall events after investing in additional water storage capacity. However, we still curtail activities during rainfall to ensure safety and to avoid asset damage. This was the case during the first half. At Malaman and MTW, we adjusted the mining schedules to offset some of the impact, but there is a limit to what we can achieve without compromising future output. At HVL, additional operational factors constrained its capacity to respond to rain disruptions. The output we achieved in the second half of 2023 demonstrated what can be achieved when the mines are operating at near optimum levels. Attributable saleable coal production was up 18% compared to the first half of 2023. At the start of last year, we were focused on overburden removal and re-establishing mining inventory. The relative increase in saleable production is a result of last year's successful mine recovery plans. Like last year, we are aiming for significantly higher output during the second half. Our three large open-cut mines drive the overall profile, but all the mines make an important contribution. We included this slide to put our three largest mines in context compared to other Australian thermal coal mines. Total cash costs are on an energy-adjusted basis. This counters the influence of coal quality on the operating margin. While there may be some aspects of the comparison not fully captured, The key takeaway is clear. Our three largest mines are some of the best thermal coal mines in Australia. We also consider the people we have operating these assets as some of the best in the country. Cash operating costs were $101 per tonne. This is above the level we targeted for the year. Like last year, the expected production uplift in the second half should result in the per tonne costs falling. As we have explained previously, cost inflation factors from recent years, including labor, explosives, electricity, and spare parts, are now largely embedded in our cost base. Operating costs also escalate naturally as mines mature, typically resulting in higher strip ratios and increased haul distances. Given this is the case, production volumes are the key to lowering our cash operating costs per class. That said, our current cost profile has us positioned at the low end of the operating costs. Turning to slide 17, we demonstrate why keeping cash operating costs low is crucial. Our implied operating cash margin for the half was $60 per tonne. Keeping costs under control during periods of elevated coal price is often more challenging than when prices are low and there is less activity in the sector. We believe we did a good job in this regard over the recent years. From the 1st of July this year, the New South Wales state government royalty increases came through at 2.6%. Coal sales from our New South Wales mines, which include Malabon, MTW and HVO, will be charged royalties of 10.8% on open cut sales and 9.8% on underground sales. Operating our large-scale mines at the low end of the cost curve is essential to our ability to generate margins at all points in the coal price cycle. Slide 18 provides an overview of Yancourt's financial performance. Lower realized coal prices were the main factor behind revenue dropping by more than $800 million. When looking at the cash flow statement, the 856% increase in the operating cash flow stands out. However, as you may remember, we made a $1.4 billion tax payment in 2023 on our record earnings from 2022. This greatly reduced our operating cash flow in a comparable period from last year. From 2023 onwards, we have made monthly tax repayments on our earnings, and this provides a smoother cash flow profile. As noted at the start of the call, we held over $1.5 billion in cash at the end of June, and other than some finance lease liabilities, we are debt-free. The two charts on this slide show the correlation between realized price, revenue, operating EBITDA, and operating EBITDA margins. As noted on prior calls, realized coal prices will almost always be the primary driver of our financial results, given our production and cost profiles. $990 million of operating EBITDA and 32% EBITDA margin from a six-month period in which we produce below our four-year target rate is a good outcome. Annualizing the first half EBITDA and taking the share price at the end of June gives Yanko an EV to EBITDA ratio of less than four times. The profit after tax and operating cash flow tend to replicate the revenue and EBITDA profiles. The step down in the operating cash flow incorporates tax payments, and the first half 2023 profile I mentioned earlier. It is over a year since we repaid the last of our interest-bearing loans. In less than three years, we repaid more than $3 billion of loans, transforming the capital structure of the company. These loan repayments saved us almost $300 million in finance costs last year and should save a similar amount this year. The small difference between the cash position of over $1.5 billion and the net cash position of $1.4 billion primarily relates to lease liabilities recognized on mining equipment. Yankole has rewarded its shareholders well over the past six years. We have distributed to shareholders $2.5 billion of unfranked and $1.8 billion of frank dividends, a total of $4.3 billion. This total is approximately 50% of our $8.7 billion market cap at the end of June, or closer to 60% if you add back the franking credits. As I mentioned at the start of this webcast, the Board has not declared an interim dividend in respect of the six months and 30 June 2024. The retained cash gives us flexibility to consider potential corporate initiatives and may be distributed in the future if not utilized. Over the past 20 years, we have grown through acquisition and expansion. The most notable event in recent years was the acquisition of MTW and HVO in 2017, a transaction that transformed the company. We have a very capable team that continually looks at growth opportunities for the business. At this time, we will not be drawn on speculation about specific scenarios. If events warrant disclosure, then we will inform the market in accordance with our regulatory obligations. Slide 23 has our operational guidance for 2024. These remain unchanged. At the start of the year, we noted that 35 to 39 million tonnes attributable saleable production guidance allows for some downside disruption events. Unfortunately, this was proved to be the case during the first half. However, like last year, our production is skewed to the second half and we aim to operate at higher output levels similar over the rest of the year. We aim to bring cash operating costs per ton down and are aiming for $89 to $97 per ton for the full year. Delivering the production uplift from the second half is necessary for our full year cost to fall within guidance. Our capital expenditure guidance is $650 to $800 million. Some 2024 expenditure appears likely to sit into 2025. Accordingly, capital expenditure in 2024 is expected to land at the low end of guidance. Each year, we will continually balance volume, product quality, efficiency metrics, operating costs, and capital expenditure to deliver the best possible outcome. This year is no different in that regard. Our executive team and people on site are focused on maximizing the company's performance. The remainder of the slides contain appendices and additional information for reference, which I do not intend to speak to. I will now hand back to Victor so that we can commence the question and answer session.

Thank you. At this time, we'll conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by. We'll compile the Q&A roster. Once again, that's star 11 for questions, star 11. One moment for our first question. Our first question will come from the line of Peter Lingzi Wang from China International Capital Corporation. You may begin.