Coronado Global Resources Inc
ASX:CRN
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
0.875
1.81
|
| Price Target |
|
We'll email you a reminder when the closing price reaches AUD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Coronado Global Resources Inc
You don't have any saved screeners yet
Thank you all for standing by, and welcome to the Coronado Global Resources Second Quarter Investor Call. [Operator Instructions]. I would now like to hand the conference over to Andrew Mooney, Vice President, Investor Relations and Communications. Please go ahead.
Thank you, operator, and thank you, everyone, for joining Coronado's Second Quarter Investor Call. Today, we released our quarterly report to the ASX and SEC, in which we outlined our production and sales volumes as well as other key information related to our safety and financial performance. A more detailed outline of our financial position and results will be released to the market on the 9th of August with our Form 10-Q and half year earnings release.
Today, I am joined by our Managing Director and CEO, Gerry Spindler; and our group CFO, Gerhard Ziems.
Within our report, you will see our notice regarding forward-looking statements and reconciliations of certain non-U.S. GAAP financial measures. We encourage you to review these statements in conjunction with our other filings with the ASX and SEC. I'll also remind everyone that Coronado quotes all numbers in U.S. dollars and metric tonnes, unless otherwise stated.
With that, I'll hand over to Gerry.
Thank you, Andrew. Coronado ended the first half of 2022 in a materially stronger financial position than 12 months ago and with a series of new records and significant achievements to our name. That reinforces our position as the world's leading pure-play metallurgical coal company.
Our business has enjoyed record year-to-date revenues and record met coal price realizations. Coronado has distributed USD 351 million or AUD 0.5 billion in cash dividends to shareholders in the first half of 2022, all while maintaining a strong balance sheet, healthy liquidity levels and retaining a prudent net cash position.
We did not release our half year audited financial results until the 9th of August. However, our first half EBITDA results are anticipated to eclipse the highest full year EBITDA generated in the history of Coronado.
In addition, our strong first half financial results, Coronado has also improved its reportable safety rates year-on-year; released its fourth sustainability report, including emission reduction plans and targets; and completed critical planned maintenance activities as well as improving performance occur from our draglines and newly transitioned fleets under Coronado management; as well as entering the S&P/ASX 200 Index for the first time; and continued to reinvest capital into its existing high-quality met operations.
All of these initiatives underpin improved second half performance and for years to come. These considerable achievements were produced despite headwinds in the form of significant wet weather events in Queensland and growing inflationary cost pressures. These unforeseen events have contributed to higher mining costs in our business similar to our peers. While we anticipate reducing unit costs in the second half, in line with increased production, to date, we revised our full year mining cost per tonne guidance upwards to between $79 and $81 a tonne.
We also guide to the lower end of our previously announced production guidance of 18 million to 19 million tonnes and maintain our CapEx guidance of between $170 million and $190 million. Despite the unplanned factors, I remain extremely confident in our ability to continue providing enhanced value and returns to all shareholders as the year progresses.
Before we elaborate further on our production and financial results, I'll provide an overview of our first half safety results. Safety and well-being of our workforce continues to be Coronado's #1 priority. To that end, I am again pleased to advise the reportable rates in both Australia and the U.S. reflect improvements year-on-year and continue to remain below the relevant industry averages.
In Australia, the 12-month rolling average total reportable injury frequency rate at 30 June was 4.04 -- or excuse me, 4.08 compared to a rate of 5.63 at the end of June 2021, reflecting a 28% year-on-year improvement. In the U.S., the 12-month rolling average total reportable incident rate was 2.01 compared to a rate of 3.04 in the prior year, reflecting a 34% year-on-year improvement.
New and revised health and safety initiatives across all Coronado operations continued to be implemented quarterly. Safety results have improved year-on-year due to several factors, including hazard identification and critical control verification programs, effectiveness audits, and enhanced training programs.
In Australia, Curragh continued to reinforce the importance of safety during the June quarter by developing and communicating to the workforce our lifesaving rules. These rules apply to all employees and contractors on site and reinforce to everyone that safety is our priority and our key accountability.
In the U.S., we continue to focus on training programs for our existing workforce and developing new miners. This has resulted in more than 9,000 hours of discretionary training that has helped set solid expectations for new hires and articulate Coronado's safety culture and focus.
Turning to production. Coronado completed the second quarter with run-of-mine coal production of 5.5 million tonnes, saleable production of 3.3 million tonnes and sales volumes of 3.9 million tonnes. Production and sales were lower than the March quarter due to significant wet weather, planned downtime for key maintenance activities and certain geotechnical issues, on which I will go into more detail.
The Curragh mine, along with most of the Bowen Basin, was significantly impacted by wet weather during the June quarter. Blackwater, the nearest town to Curragh, received 213 millimeters of rain in the quarter, representing nearly a 300% increase on the 10-year average rainfall for the area. At the height of the rain event, the mine was evacuated due to road closures and flooding in the surrounding areas to ensure the safety of our people traveling to and from site. The consistent rain from late April through May was a key contributor to the lower production volumes.
However, despite the impacts of the Bowen -- the Bowen Basin rain events, Curragh successfully executed the first half planned transformational activities within the One Curragh Plan. These included the transition of 3 former contractor fleets to Coronado management, the investment in box cuts to improve dragline strike length and reduce in-pit congestion. The introduction of [indiscernible] delivery resources constrained by infrastructure and completed major planned maintenance activities on the CHPP and 2 draglines in the June quarter. Completion of the maintenance works within our budgeted plans and aligns with the mine second half production goals.
The One Curragh Plan utilizing our new management structure is producing positive results. The continuing focus on our program of improving dragline productivity has resulted in 10% to 11% improvements in 2 of the draglines with focus swaying to the remaining 2 draglines in the remainder of the year.
The newly transitioned excavator fleets, which replace contractor units, operated with 27% lower costs and 30% more operating time, beginning in the second quarter compared with contractors in Curragh North, and we expect to see these changes deliver continually improving results in the remainder of the year. I might add that we will be adding an additional transitioned fleet during the third quarter.
The Curragh mine -- the mine's focus on waste movement in the first half of the year is also evident, with waste movement year-to-date broadly aligned with the same period in prior years despite the heavy rain, as mine management focuses on pre-strip and box cut works to ensure higher sustainable production levels in the second half 2022.
Curragh's focus for the remainder of 2022 is to deliver strong second half production by continuing to drive operational performance for the mine plan. Following the completion of the transformation -- the transformational and crucial maintenance activities and wet weather, the month of June was Curragh's best production month to date. The new focus for all employees and contractors is to replicate these rates in the second half.
The conversion of the fourth contractor fleet to a Coronado operating model at Curragh North is nearly complete, and once complete, will drive greater efficiencies as well the continued provision of mining services by Golding at Curragh Main to the end of 2026.
And our U.S. operations, run-of-mine production mirrored the prior March quarter, but saleable production was lower. This was primarily due to lower yields from the Buchanan Mine as the longwall progressed through a rock intrusion in April. That intrusion is now safely behind us. At Logan, production numbers were higher quarter-on-quarter, as workforce availability rates continued to improve. Despite the lower saleable production tonnages in the quarter, sales volumes mirrored the prior quarter, as we utilized existing stockpiles to meet acquired shipments.
The focus for the U.S. operations in the second half of the year is to continue to optimize production levels to meet demand for U.S. sourced coal, particularly in China and Europe. Compared to other met coal producers Coronado has maintained a competitive advantage, given its geographical diversification and the ability to access the Chinese market, plus the ability to take advantage of existing met pricing arbitrage, which sees the U.S. and Chinese benchmark prices trading at a premium to the Australian index.
I'll now hand over to Gerhard to talk to our financial position and market outlook.
Thank you, Gerry, and good day, everybody. As Gerry stated in his remarks earlier, we delivered record revenues for both in the June quarter and for the half year. June quarter revenue was about $1 billion, up 9% compared to the March quarter. And half year revenues were just short of $2 billion, reflecting a 150% increase over the $800 million of revenues generated in the first half of 2021.
The revenue growth year-on-year reflects well the significant improvement in the met coal markets compared to early 2021. Met coal sales in the June quarter made up 97% of total coal revenues, reinforcing our position as a world's leading pure-play met coal company.
Coronado also achieved record group realized met coal pricings in the June quarter. The average realized met coal price was $321 per tonne, up 20% compared to the March quarter. The average realized price reflects a mixture of all FOB, FOR and fixed cost U.S. domestic sales in the quarter and across all grades of met coal sold.
The strong price environment experienced in the first half of the year saw Coronado distributed $351 million in dividends to shareholders in the June quarter and finished the quarter retaining a net cash balance of $171 million and available liquidity of USD 586 million. Coronado has now returned approximately $1.2 billion in dividends to shareholders since listing on the ASX in 2018.
We will release our first [indiscernible] financial results to the market on the 9th of August. At this time, we will provide the market with further details on our EBITDA and net profit positions as well as details in respect of any potential dividend distributions.
During the June quarter, Coronado also achieved another significant milestone and entered the S&P/ASX 200 Index for the first time. Inclusion in the index demonstrates a significant growth that we have delivered over the past 12 months and reflect our strong financial position.
Turning to capital expenditure. Half year CapEx for the group was $92 million. Full year 2022 CapEx is expected to be within guidance, as we invest in capital works. Reinvesting in our sales makes sense and underpin increased production rates in the second half of 2022 in future years from the Australian and U.S. operations.
In relation to our costs, first half year mining cost per tonne sold for the group were $85 per tonne. The higher mining cost per tonne are because of higher-than-expected inflation, wet weather events resulting in lost production at Curragh and the completion of planned major maintenance activities at Buchanan and Curragh.
The company expects second half mining cost per tonne to be lower as production plans are weighted to the second half of the year. However, as Gerry said today, we do revise our cost guidance upwards to between $79 and $81 per tonne.
Global inflationary pressure exceeding original budget estimates are a key component of the increased official inflation in the U.S. recently reached a 40-year high of 9.1% and Australia are currently at 5.1%. In some cases, the materials and supplies using our mining operations exceed these average inflation percentages.
Oil market analysts expect inflation to remain at elevated levels for the remainder of 2022. Coronado anticipates that these inflationary impacts and the impacts from the wet weather year-to-date will be partially mitigated by lower FX and incremental productivity improvements in the second half of 2022.
Today, we also have provided some commentary on the anticipated financial impacts of the Queensland royalty regime recently implemented by the Queensland state government, effective from 1st July this year. Unlike some of our peers, I need to highlight here Coronado is geographically diverse met coal producer, with operations in Queensland and the U.S. Our high-quality Buchanan and Logan met coal mines in the U.S. will not be impacted by this royalty increase, only our Australian operations.
Coronado continues to be a significant employer of choice in Queensland and already makes substantial economic contributions to both federal and state government and the community. We continue to pay our share of royalties, corporate tax, payroll tax, land tax, tenement rentals and financial provisioning scheme deposits.
Queensland royalties are determined on a tiered structure linked to price. If you assume a total realized coal price of $250 per tonne under the new royalty structure, that's U.S. dollars per tonne, Coronado estimates the implied royalty rate for the Curragh mine to be approximately 20%. Under the legacy royalty structure, the implied rate at this price level was approximately 12%.
Coronado estimates the second half of 2022 impact on earnings from the policy change could be roughly USD 50 million post-tax based on current spot prices.
Let me look at coal markets. The average Australian premium low-volatile hard coking coal FOB index for the June quarter was $449 (sic) [ $445 ] per tonne and decreased about 8% of the prior quarter. Seaborne met coal prices corrected during the quarter, finishing at $302 per tonne FOB after reaching a record price of $670 per tonne FOB in March.
Pricing as of today is lower. Met coal prices are currently being impacted negatively due to improving met coal supply, the [indiscernible] slower global growth outlook impacting demand, expectations of continued higher inflation and the continuation of the COVID-19 lockdowns in China that have led to disruptions from logistics along the steel value chain, including supply of steel to end users and raw materials to steel mills, lowering domestic steel and met coal demand in the short term.
Despite the recent price decreases, met coal prices and revenues for shipments from our U.S. and Australian operations reached record levels during the quarter due to our contracts generally being on a 3-month lag basis. Given that FOB Index prices remained above $300 per tonne in the June quarter and the discounts for lower quality products are currently smaller, Coronado expects strong price realization in the September quarter.
Coronado met coal price -- Coronado met coal remains in high demand. Our high-quality products and unique geographical diversification allows us to switch products into different geographical markets or market segments that provide the highest return. For example, moving U.S. production from China to Europe, or high-volatile coking coal marketed as thermal coals, to take advantage of the current unique market fundamentals created by the trade restrictions in Russian coal.
For the remainder of 2022, Coronado expects met coal demand to be balanced between downward pressure and steel demand due to the current global growth outlook and upward pressure from the seaborne coal trade restrictions on Russian coal. And despite the uncertainties, met coal prices are expected to remain above historical averages supported by the global automotive sector improving other parts of moving, and high energy costs benefit thermal coal prices providing support to met coal prices in the midterm and long term.
I'll now hand over back to the operator to take any questions.
[Operator Instructions]. Your first question comes from Paul Young of Goldman Sachs.
Can I ask a question first on the new production guidance and the implied, I guess, performance of Curragh for the second half? Could you -- first of all, I guess, the point is -- first point is that you got some maintenance done during wet weather, and it sounds as though the draglines are performing well, Gerry, and yes, record June, as you point out. But if I look at the new guidance at the group level that probably implies that Curragh has to continue to set records and produce it probably above 14 million tonnes per annum on a saleable basis in the second half. So I guess the observation from my perspective is that, yes, things are heading in the right direction, but is the guidance, the new guidance even is it a bit of a stretch target?
We don't believe so. We considered it carefully. The mining plan always weighted to the second half of the year. And we don't really stretch that plan that much in our own predictions. And we have more confidence in the quality of those predictions simply because of the gratifying performance we're getting from the current transitioned fleets and the fact that rain could always be an issue, but the fleets themselves are running better and can produce what we are projecting. We'll just have to wait and see what the weather does.
Okay. And while we're on Curragh and just Queensland versus the U.S. and the new royalty regime and you've quantified some impact there, so that's helpful for at least cross-checking numbers. But just from a strategic perspective and the investment in the Curragh expansion of 13.5, does this somewhat change your view on the speed of that investment? Obviously, some high fixed cost operation. So more tonne down the rail is important. But how do you think about allocating capital to Curragh now and the pace of that versus, say, investing in the U.S.?
We're still considering the impact. As of today, I wouldn't advise any changes. We haven't detected any flaws in the economic analysis. And you probably would confirm that. But it is a matter of continued evaluation because without saying the royalty did not help.
Yes. I'd agree with that. And then last question from me is just on the market and maybe one for all of you, but you see comments around the fact that you think supply is improving because I guess I'm not seeing that from Queensland and in Canada, maybe out of East Coast U.S., that's what you're referring to.
And then we've got, obviously, the 10th (sic) [ 9th ] of August deadline. And the interesting dynamic at the moment, the China prices above the Queensland price even on adjusting for freight, despite China steel lines being on the weaker side. So I'm just trying to fasten on that dynamic more so around what happens post 10th (sic) [ 9th ] of August? And how much rebalancing do you think actually has occurred, i.e., have European mills turned away from Russian PCI and the little met coal that we're exporting more so PCI yet or is that still to come?
Yes. Let me respond to that. So look, it's probably more a demand story at the moment. The demand fundamentals are weak. Let's be honest about it. Blast furnace slowdowns are imminent or have happened. And therefore, we see a decline in import demand, at least, I would say, in quarter 3. I can see [indiscernible] in quarter 4 simply because of the end of the monsoon season at the end of September and China steel demand going up at the same time.
The second one is the sanctions on Russian export from August on will support met coal prices. There's a market consensus that is still supportive. I think the switching happened or boycott of Russian coal happened to some extent, imposed sanctions in Europe have happened, but there's probably still 25%, 30% left of what used to be imported of Russia. So we do believe the market [indiscernible]. There's been a positive impact from the Russian boycott.
But look, overall, at the moment, we see negative steel margins that has impacted the price for -- price dropped to $30 per tonne right now, you're spot-on. The China CFR, although falling, is still sitting at $342 per tonne. I think support will come from -- in quarter 4, particularly from Japan and Korea and the European Union part support as we do see that there this boycott coming and Japan [indiscernible] indicate that they will join the European Union on [indiscernible] boycott.
PCI. Yes, I mean that covers it. So there is, of course, one thing on PCI is that Europe -- sorry, Russia owns about 30% of PCI. So that's about -- yes, global seaborne export, it's about 20 million tonnes. Russia is about 15 million -- 15% of global seaborne met coal. I think high level, when you look at tonnes, Russia exports about 55 million tonnes of met coal, 10 million used to go into Ukraine, so forget this.
So the 45 million remaining tonnes -- there's about 11 million tonnes going away from Europe and another 11 million tonnes going away from Japan and Korea that have to find their way into, let's face it, India and China. India and China is trying hard to take these tonnes, but they simply -- and I said that before, simply don't fit the blend. So it's probably just 5% to 10% of that coal -- 5% to 8% of that coal that can go into Indian and Chinese brands.
So it will be difficult for Russia to place all these tonnes. And then at the same time, it will be difficult, very difficult for Europeans to replace the 11 million tonnes in the South of Russia. So that will give us some support in, my feeling is, September quarter 4 at this stage [indiscernible].
Your next question comes from Lachlan Shaw of UBS.
Just wanted to ask a couple of questions. So just in terms of the revised guidance on costs, you singled out some geological impacts and productivity improvements. Can you just give us a bit more color around what's going on there, please?
Well, a combination of a variety of impacts. In the U.S., the reduced yield on Buchanan should modestly improve for the remainder of the year, although we are not likely to see historical highs until we move to newer panels. The biggest issue -- the biggest positive issue is that since we report costs in U.S. dollars then in Australia, the falling Australian dollar provides us some benefit that offsets some of the inflation. That and the productivity improvements, there is nothing as powerful as the incremental term. The productivity improvements will deliver what we believe, deliver the cost reductions that we anticipate. And Gerhard, do you have any other additional comments?
No, that's it. I mean what we will see in the second half, really, I mean, the question is really how do we maintain the guidance or revised guidance and -- it's simply coming from less rain in the second half, hopefully, and higher productivity based on the transformation we have kicked off, plus also the highway mining equipment we deployed.
So there's a credible path towards the production guidance, and therefore, lower costs in the second half because the unit cost is a combination of the nominator and denominator. Denominator is impacted by inflation. The denominator is just a function of production. So higher production will help us to achieve the guidance in the second half.
And just a second question. So firstly, just quickly, can you talk to inventory levels, particularly in Queensland at the mine and at the port. And then second part of that, just stepping back, looking at the balance sheet. How are you thinking about capital management, net debt balance sheet targets and metrics going forward?
Let me respond to both. We don't comment really on inventory levels. So on the second part, balance sheet, I'll just say what I said before, number 1 for us is really maintain a strong balance sheet. Number 2 is distributions to shareholders are very important to us and, of course, for you guys, for shareholders. Number 3 is organic growth. And number 4 is inorganic growth. So that hasn't really changed, and we stick to that. Well, that means also that we want to maintain a healthy net cash position or at least have what I always said is like, ideally, we remain net cash, but what I need in terms of liquidity is $200 million.
Your next question comes from Glyn Lawcock of Barrenjoey.
Gerry, just on Curragh, could you actually quantify how many tonnes you actually get in the month of June? You talked about it as a good month. Just if you'll give me some comfort that you can make the new guidance?
I'd rather not give production guidance, but for the month of June, I will say it was a record.
A record just for this year that I thought you said, not for a record for the life of the mine?
No, actually, I think it was very nearly a record for the life of the mine. If I recall correctly, and I think Doug is on the line, so he can correct me, it was the fifth -- the fifth best month the mine ever had.
Okay. But you're not prepared to tell me the number to give me comfort on the back half?
I don't want to begin releasing tonnage information on a month-by-month basis. Once done, it would become available.
Got it. I mean it's just to give us comfort that's all. The second question is around the rock intrusion in Buchanan. And I think you just said on the previous answer to a question, not until we're in new panels. Does that mean this rock intrusion is quite problematic for a number of panels and so their recoveries remain low. So when do you envisage just getting into these new panels such that this current issue of rock Intrusion's lower recoveries will be behind us?
It is -- I will say that we went through the rock intrusion this time. As you're aware, at Buchanan, we have 2 longwall -- 2 sets of longwall equipment, and we operate only 1 phase at a time, except in rare circumstances. So we have the ability to flip back and forth between phases. One phase is mining where we have no rock intrusions. The other one is mining, where we anticipate we will again and the mine plan calls were, in fact, a jump phase later on, which can be ameliorated to the methods that I just indicated. But you will have that impact on the [ rockfall ] in the next panel. Whether you'll see it in the production, since we're going to a jump phase, depends on how well we do that and how much support we get from the alternative phase while we do it.
So Gerry, what are we talking? This is going to be a sort of a back-and-forward issue when you alternate panels for what the next little while until that other longwall is clear?
No, no, no. The next 3 panels. And after that, it remains to be seen. But this is not a continuing impact for -- I mean, the [ rockfall ] itself is not a continuing impact for the next 5 years or 5 panels or anything like that.
This is expected? Or is this just you can't drill it out completely, so you knew that...
No, it was expected. It was expected.
And then just finally, just on the costs. If I look at the chart you provided in the, I guess, the waterfall chart and your cost breakdown, it would appear about $10 increases from inflationary impacts, just highballing the waterfall chart. Just wondering if you could talk to and break down that inflationary impact, how much of that is sticky? Obviously, inflation is running high million, wages are sticky, but how much of that may be is fuel and energy that could come back in time? So if you could sort of help me understand percent sticky versus maybe percent that's just transitory in that inflationary part?
In the U.S., the wages are sticky. The -- we don't have much of an impact from fuel. But the steel has -- steel increases have increased. And I really can't guess that how sticky those may be. In Australia, I would imagine that we will get relief over time from the oil price, but the other issues and the lower inflationary rate, inflation rate will continue to impact the Australian costs. Gerhard, do you have any other comments.
Yes. No, that's spot-on. But I would say it's in line with others. So I just saw that [ Woodmac ] had the number out there that Australian costs increased by actually 25%. So it's really a story of energy, a separate fuel as well because energy prices went up way higher than fuel. But it's a story of energy prices globally went up like crazy levels, fuel went up and labor costs. And some of that is sticky and some of that is reversible. But not reversible, I can't see that to be the reversed this year at this stage.
Yes. No, I appreciate that Gerhard. I just -- yes, sorry, Gerry, go on.
No. I will add to Gerhard's comment. The full impact of how well we're doing here will be revealed as others reveal their costs, both in the U.S. and in Australia. And frankly, I'm confident that it will not do badly in that comparison because we have enjoyed the productivity increases, which offset the impact that everybody suffers from inflation.
Yes. No, I think you're just spot-on there. But would it be fair to say though that inflationary impacts, which, as I said, looks like highball $10 a tonne, 50% of that is sticking? Would that be too high?
Gerhard, go ahead.
So I would say it's hard to say. It really comes down to fuel and energy. It's a major -- the biggest part of this, fuel and energy. And that's, of course, volatile goals with the market. So it's definitely sticky this year. Some of the labor costs might be sticky, as Gerry said, in the U.S., simply because you need to be in line with the competition. What you have seen in Australia, and I don't just want to make a comment on Coronado, but that's public knowledge that in Australia, people have paid sign-on bonuses and these costs are not sticky, right?
So they are a one-off. So we kind of managed that here as an industry quite well, where that goes is to be seen because interestingly, globally, we see labor shortage in all sorts of sectors. So I can see that over the long run, all kind of labor costs will go up, not only in mining.
So if the U.S. wages would say sticky, what would that be that $10 a tonne, $1 or $2?
A little more than that. But it's not half. It would not be half.
Yes. So energy cyclical come and go, the bonuses in Australia one-off, don't pay them again until the next cycle and then got $2 or $3 a tonne for U.S. Okay. That makes sense.
Your next question comes from Chen Jiang of Bank of America.
Just a follow-up question on the cost. So the cost of the year-to-date is USD 85 by taking the mid guidance of $80 per tonne, that implies second half the cost needs to be $75 per tonne. So that's $10 difference from the year-to-date. But you just mentioned that the inflationary impacts that's the key. Do you think your cost guidance -- revised cost guidance is too conservative given you have to reduce the cost by $10 per tonne in the second half? I have 1 more after this.
We do not. And the -- I cannot emphasize the significance of the productivity reductions in the first half of the year because of rain and even we've had rain, unusual rain events in the U.S. as you have recently seen as well as what we've outlined Australia. So -- and I cannot overemphasize the impact of that on productivity and the follow-on impact on costs. So we do not believe that we are overly optimistic outside the guidance. We are, in fact, planning on some additional rain for the rest of the year, but nothing like we've seen and that is by far the biggest variable we've got to deal with.
Can I please ask a question for your coal mix in hot coking coal PCI, semi and thermal? I know you are a pure-play met coal producer, but I'm wondering, given the spread between thermal and met coal, from operational perspective, how flexible CRN can sale thermal coal to stable market and the capacity? And how about PCI and met coal, any plans to change the mix of producing PCI and met coal?
Let me just...
Gerhard, over to you.
Yes, let me just clarify. Are you asking how fast we can switch into the...
Yes, sorry. Yes. Yes, yes. That's right because the price is kind of -- there's a massive price portion between thermal and met and as well as the PCI spreads used to be 30% PCI to met coal, but now since the Russia and the Ukraine conflict since March, the spread has narrowed to average of 5%. Just wondering if you are going to change your plan or producing PCI met to maximize your price realization in the second half?
Yes. No, no, it's a good point. So look, let me be also [indiscernible] because I can't disclose our contracts. But what I said before was that, of course, the industry would be incentivized to switch. So at the moment, we see met coal sitting at $230 and thermal is above $400 per tonne. So a switch would be very attractive.
There are a few hurdles the industry has to take. Number 1 is really, and everybody is impacted from that, is contract. We usually sit on 1-year or even 3-year contracts, let's call it 1 year contracts. In the U.S., it's definitely 1-year contract for the domestics. But when we look at Australia, where we do have the semi products that would easily be -- that we could easily -- and PCI that we could easily sell into thermal. We have usually the Japanese contracts from April to March. So first, the industry has to really meet their obligations under these contracts. And because of the wet weather situation, not a lot of spot in the market.
The second hurdle is really in order to be able to switch, and that's -- this is where we sit quite well, you need to look at the combination of fuel ratio and the swelling number of coal. And the best coal to convert into thermal ourselves -- thermal is really, as you said, have definitely semi products and PCI. So globally, we see about probably 20 million to 30 million tonnes are able to switch. What I can tell you is that our U.S. coal is well placed to the [ high-vols ], particularly [ high-vol B ] is well placed for the thermal coal market, and there is a big demand for it, and we already participated in this. So that's probably all I can say.
Okay. So just to clarify, your -- the met coal from your U.S. operations can be switched to thermal coal and...
So we are well positioned. We can switch a lot of our coal out of Australia in the thermal and the U.S. The U.S. has already -- they're already participating in this. In Australia, we do sit on these contracts. We do need to see that we need the contractual obligations, but our coal that we do have, particularly semi products and PCR products, can be switched into thermal if we wanted to.
All right. Can I ask the last question? I know you cannot comment on the upcoming dividends next month. I'm just wondering for the declared dividends in February of USD 151 million, is that included in last year's dividend calculation or going to be included in this year's dividend calculation of that 60% to 100% of your free cash flow?
So let me unpack this. So the $351 million dividends we have paid in the June quarter, of that is $100 million related to last year as we put it basically on the share from the unresponsive bond buybacks. The balance is in just cash flow from this year. And what we are -- I mean it's up to the board on the 9th of August, to declare a dividend. If you declare a dividend, then it will be in line with our policy that we distribute 60% to 100% of our cash flow in -- as distributions to shareholders.
Your next question comes from Nate Martin of The Benchmark Company.
Maybe just to drill down a little bit more on that last question regarding the spread currently between met and thermal pricing, with thermal being relatively higher. Gerhard, I guess, going back to your point, you have contracts on a lot of your Australian family products in PCI. At what point would those maybe roll off so you could participate in the crossover market assuming that the spreads remain?
Just repeat that for me, please, the question.
Yes. So again, just going back to the potential to cross over met tonnes into the thermal market, giving the [indiscernible] prices today the thermal getting higher. You mentioned, Gerhard, some of your contracts in Australia, I think you run maybe from April to March. At what point do you see some of your tonnes [indiscernible] your PCI rolling out of contracts and being available...
Yes, I got it now. Got it now. No, look, I mean, as I said, so the industry in Australia, the met coal industry is sitting on Japanese contracts. So you would see some of that coal switching over into thermal if there are spot-ons. The challenge is that spot-ons have been impacted by reversal. So there is not a lot of spot-ons available. And that's exactly why you don't see a lot of switching happening right now. And then the vast majority, of course, comes off in March.
So I think you will see a bigger switch in March, although I think we can start seeing some of that coming through in the fourth quarter as well, simply because of steel demand is slowing down and some customers might want to slow down the offtake and push back on cargoes.
So I think from here on, we see an increase in switching, but the biggest increase would come in March, but I do believe that during that coal prices will remain at elevated levels given the situation there in Europe.
Now again, I have to highlight our U.S. business. The U.S. business is very different to all Australian met coal producers. We have only 30% of our coal is contracted on fixed price plus annual contract with volume attached to it. The rest is basically on a negotiated basis. And we -- as I said before, we are able to switch. The [ high-vol ] products are -- they fit the metrics for thermal coal.
And those [ high-vol ] products in the U.S., Gerhard, is mainly from the Logan complex?
Yes, I don't want to go into details, but yes, I mean, the Logan has the [ high-vol B ].
Okay. Got it. Perfect. And then maybe sticking with the U.S. for a second. Just curious if I could get your latest thoughts on transportation and logistics, maybe both on the domestic and export side, especially as we've seen labor at the rails continue to be a challenge to the network [indiscernible].
Let me go ahead with that one, Gerhard. In the U.S., we ship to export principally through [indiscernible], while it pains me to complement railroads, and I won't go that far, has been relatively reliable in their performance. We -- when we ship on the CSX, we do so domestically. And domestic performance on the CSX has been better than export performance. So relative to others, the rail issues in the U.S. have impacted us less than they have others.
Good to hear, Gerry. I appreciate that. And then maybe just kind of a point of clarification. You guys mentioned in your prepared remarks expansion that Curragh is expected to get to somewhere around 13.5 million tonnes by 2025. Any color on what that pace of growth could look like?
Not yet. We will be reporting on that later, but I don't want to preempt that now.
Okay. Fair enough, Gerry. I guess maybe just one final thing, Gerhard, I know you touched on this in your prepared remarks as well. But maybe you could walk us through the example in the release, maybe you talked about the second half impact on earnings from the Queensland royalty chain. You said it would be about $50 million based on spot prices. Maybe you could just let us know how many tonnes you're assuming there in that scenario, what spot price do you assume?
How many tonnes, what did you say? How many tonnes spot price, I assume, in the second half?
Yes. In the second half, when you noted the second half impact on earnings from the Queensland royalty chain would be about $50 million, you said based on spot prices. So what spot price would you assume given the met prices keep continue to fall? I mean, how many [indiscernible] are you assuming in that [indiscernible]?
Yes. Now look, I just give you an example, and that's just an example, not what I assume. But as an example, I said -- I don't have my notes here, but I said USD 250 per tonne, the royalty would be 20%. The new royalty regime would be 20% as opposed to 12% under the legacy royalty regime. So what I'm assuming in the second half in my cash forecast, I don't want to disclose, but I can tell you that it is higher than the average met coal price achieved. And what we see in the market right now over the last few weeks, you can say that the met coal price has collapsed to the benchmark it has collapsed, including the U.S. East Coast, and if you like, even the CFR has collapsed, let's stick to the benchmark $230 per tonne.
What we have seen in the last few weeks, there's probably no one in the market who wanted to catch a falling knife there. So it kept falling and falling. What we do see now is it bottomed out at $230 per tonne over the last few days. It feels like -- it feels like now there is appetite in the market at this price level to buy. I'm not saying it cannot fall further, but I think it's probably the level -- this year is probably the level where you're going to see it for some time.
Market consensus, including mine is that we might see a kicker in mid-August -- yes, from mid-August, I think it could -- there could be lag to September where prices go up simply because of the 22 million tonnes I mentioned before that Russia cannot sell into Europe and Eastern -- Japan and Korea anymore. I think there will be kicker and that could be $20 for the benchmark, maybe a little bit more. And just to confirm this, the forward curve is [indiscernible] as well. So I think the forward curve sees some equally strong development and support for met coal prices.
Got it. And I appreciate those other thoughts. I mean I wasn't looking for your internal projections, really just what you used for that one scenario you hypothesized [indiscernible] today.
Yes, that was USD 250.
Your next question comes from Lachlan Shaw of UBS.
I just wanted to kind of pick up on a couple of the previous questions. So you talked about the high-vol B switching in the U.S., particularly. How much of that do you think has happened in the market? Has it all been done? Is there a lot more to go? Just any interest -- any insight you can provide around that would be helpful.
Within the U.S. -- if we're looking at the U.S., there's a lot more coal in the U.S. that will make thermal, then we'll make met. And I can -- I've seen the thermal price higher than the met price maybe 5x in my career and it never last for very long. If you look at the U.S. sources of thermal coal, you can add production in the Powder River Basin, you can add production in the Midwest, far more quickly than you can convert -- you can prior weight met coal from the market sits on and start moving even the higher cost met coal into a thermal market.
And what we sell as far as met coal is, is washed hard, it's low ash, it would be a relatively expensive product on the thermal market. And you'd have some adjustments to make in your gravities and your washing mechanisms to get the best margins out of those coals as a thermal coal anyway. And there's not going to be a lot of people based on past history of the durability of this kind of arbitrage.
There's not going to be a lot of people who'll be making those kind of investments and making that change and then they wouldn't need to. The whole point here is, is that the current price, particularly in the U.S. of met -- of thermal coal has got to be viewed as temporary and going to come down.
Understood. That will make sense. And then just one quick one. So obviously, a bit of chatter out there about China potentially winding back the embargo on Australian met coal imports around August, September. I guess, what are you hearing? And secondly, how do you view that in terms of potential sales mix going forward?
Well, let me just talk to that. Look, first of all, there's a lot of media coverage about this, saying that China is opening the doors and gates to Australian coal. Let's look at the benefits for China. On thermal coal, they can -- there's probably no benefit. They can source it internally. I mean you got to look at China's production. They produce 3.5 billion tonnes of coal every year. So we've got to digest that, that's just a tiny increase of that number provides them with a lot of thermal coal. There's actually no need for China to import thermal coal.
Met coal is a slightly different story. And there could be -- I mean, when you look at the prices, $342 CFR, take $20 off, you said that $320 versus $230 benchmark, there's clearly an arbitrage. If they opened the gates to Australian met coal, what you would see is that these arbitrage is disappearing. You see price converging. Your CFR comes down and the benchmark probably goes up a little bit in the short term. But the fact of the matter is, despite all the media coverage, there is actually no substance to it at this stage.
So we hear that there is not really any official decision made and all -- my logic previously was and I maintain the logic is that the biggest steel producer on the planet should deal logically with the biggest met coal producer on the planet, and that will happen at some stage. I can't see that happening before quarter 4 this year at best, but at the moment, this is all media talk and no substance behind it.
Great. And then in terms of your product mix and your sales mix, how would you sort of respond if that was to happen?
Well, I mean, the positive thing is that we -- out of Australia, we never really were -- our supply chain was never really exposed to China anyway. So for us, it probably means that we are diverting more coal back into Europe, which we do at the moment anyway. So I don't think it's a massive impact on us. Overall, for the industry, I think it will be in the short-term positive impact simply because of price converging. But then the normal market dynamics come into play and you see prices developing as they would. There's always just a time markets recalibrated. When China walked away from Australia, everyone told me that prices stay at $110 per tonne forever. And I said markets would recalibrate and they did. And the same will happen when China comes back, markets will take time to recalibrate, but it will happen over 6 months.
There are no further questions at this time. I'd now like to hand the phone back to Gerry for any closing remarks.
That does conclude our conference for today. I want to thank you for participating. Operator, you may now disconnect.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.