Coronado Global Resources Inc
ASX:CRN
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Coronado Global Resources Inc
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Thank you for standing by, and welcome to the Coronado Global Resources Third Quarter Investor Call. [Operator Instructions]
I would now like to hand the conference over to Mr. Andrew Mooney, Vice President, Investor Relations and Communications. Please go ahead.
Thank you, operator, and thank you, everyone, for joining Coronado's third quarter investor call. Today, we released our quarterly report to the ASX and SEC, in which we outline our production and sales volumes, as well as other key information related to our safety results, coal markets and financial performance. A more detailed outline of our financial position and results will be released to the market on the 9th of November with our Form 10-Q 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 a 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 the SEC.
I also remind everyone that Coronado quotes all numbers in U.S. dollars and metric tons, unless otherwise stated.
With that, I'll hand over to Gerry.
Thank you, Andrew, and thank you, everyone, for joining our call today. Before Gerhard and I elaborate on our quarterly performance, I would like to confirm that currently, there is nothing further to report in relation to any potential combination transaction with Peabody Energy. At this time, confidential discussions are continuing, but no transaction has been agreed, and there is no guarantee that discussions will lead to a transaction. Therefore, today, we will not be in a position to answer any questions in relation to any potential deal with Peabody and will respond only to questions related to our September quarterly performance.
During the September quarter, Coronado continued to deliver on its capital management strategy. We continue to manage a strong balance sheet with improved liquidity. We delivered further shareholder returns via dividends. We delivered improved production and sales volumes over the prior June quarter, and also continued to pursue our capital investment plans in both the U.S. and Australia to underpin our strategic growth objectives. Year-to-date, Coronado has delivered record revenues, record price realizations and distributed USD 470 million in cash dividends to shareholders, all while maintaining a strong balance sheet, high liquidity levels and retaining a net cash position.
Coronado is an ASX 200 Index business. We have outperformed the market and generated share price growth, excluding dividends, of approximately 65% year-to-date compared to negative returns from the ASX 200 Index and the S&P 500 Index. We do not release our year-to-date audited financial results until the 9th of November. However, I am pleased to report that Coronado's year-to-date EBITDA results exceed USD 1 billion and easily eclipsed the highest full-year EBITDA results generated in the history of the company as public.
Therefore, today, I am pleased to announce that Coronado declares a third quarter unfranked special dividend to shareholders of USD 0.134 per CDI, totaling USD 225 million. This special dividend will have a record date of 21 November 2022 and will be paid on 12 December 2022. In conjunction with this special dividend, Coronado also makes the senior secured note purchase offer up to the value of $200 million. This purchase offer is made at a purchase price of 104% of the aggregate principal amount of the notes, plus accrued interest. The offer expires on 1 December 2022 and will be paid to noteholders to accept on 5 December 2022. Today's announced dividend and notes purchase offer, aligned with our existing policy of distributing between 60% and 100% of free cash flow, and we do so while expecting to remain in a net cash position post payment.
The entire Coronado team are extremely proud of our strong financial results and distributions year-to-date. However, due to forces outside of our control, our operations have been impacted by unseasonal wet weather and global economic circumstances that are driving higher inflation rates across the globe. These events have contributed to our lower production levels and higher mining costs year-to-date. While we accept that the La Nina weather patterns in Queensland and global inflationary impacts will dissipate in time, today, we revised our full-year 2022 production and cost guidance. As we enter the fourth quarter, I remain extremely confident in our ability to address these challenges due to our strong balance sheet, our exceptional management and associates and capital investment plans which have us well positioned to continue to enhance value for our organization.
Before we elaborate on our results, firstly, I would like to provide an overview of our year-to-date safety results. The safety and well-being of our workforce continues to be Coronado's #1 priority. To that end, I am again pleased to advise that reportable rates in both Australia and the U.S. continue to remain below the relevant industry averages. In Australia, the 12-month rolling average Total Reportable Injury Frequency Rate at 30 September was 4.15. And in the United States, the total reportable incident rate was 2.08.
On a consolidated basis, the group's global total reportable incident rate stands at 1.31 compared to a rate of 1.47 as of 30 September 2023 (sic) [ 2021 ], reflecting an 11% year-on-year improvement. New and revised health and safety initiatives continue to be implemented across Coronado operations quarterly.
In Australia, Curragh has rolled out Our Life-Saving Rules program, implemented upgrades to its safety health management system, increased trading initiatives including FELT leadership and continued to focus on hazard mitigation and -- hazard identification and mitigation plans. In the U.S., we continued to focus on training our existing workforce and developing new miners. This has resulted in more than 58,000 man hours of discretionary training that has helped set solid expectations for new hires and articulate Coronado's safety culture and focus.
Turning to our operational performance. Coronado completed the third quarter with improvements in production and sales volumes compared to the prior June quarter. Group run-of-mine coal production was 6.4 million tonnes, up 16%. Group saleable production was 4.1 million tonnes, up 26%. And group sales volumes were 4.1 million tonnes, up 5% compared to the June quarter. Saleable production in the September quarter from our U.S. operations was 1.7 million tonnes, up 20% compared to the prior June quarter and reflects the U.S. operations best production quarter this year. The production impacts from the rock intrusion experienced at the Buchanan mine in April are now behind us. As a result, the mine has achieved improved production and yield rates. During the quarter, Coronado also commenced mining after new Winifrede Met Coal underground mine, which is part of the Logan Mine Complex. Continued capital works at its Buchanan mine to expand its raw coal storage space and commence construction of a second set of skips. Growth plans in our U.S. operations to produce 6.9 million tonnes by 2025 remain on target.
Consultation and engagement with local communities and state and local governments in our U.S. expansion plans is proceeding well. Coronado has recently worked with local counties and the Governor of Virginia, Mr. Glenn Youngkin, to secure grants and incentives to progress our Buchanan expansion plans. Furthermore, as I mentioned in our half-year presentation, during the quarter, we officially commissioned the Buchanan Ventilation Air Methane abatement project. This project utilizes the latest technology to convert fugitive methane gas emissions to carbon dioxide from our Buchanan operation. It is envisaged that this project will reduce the Buchanan mines emissions intensity by 22x and reduce total emissions from the mine by 61% by 2030. The initial performance from the VAM unit is encouraging with the project achieving 94% emission destruction efficiency in its first few months of operation. While Coronado is also investigating other projects to reduce its carbon footprint, if the VAM projections are achieved, this project alone will meet the group's 30% emissions reduction target by 2030.
The focus for the U.S. operations entering the fourth quarter is to continue to optimize production levels to meet the demands for U.S. sourced coal, particularly in China and Europe. Compared to other met coal producers, Coronado maintains a competitive advantage given its geographic diversification and ability to access the Chinese market from the U.S., plus the unique ability to take advantage of existing met and thermal coal price disparity and switch tonnes into the thermal export market to generate higher margins when it makes sense to do so.
Turning to Australia. Saleable production from the Australian operations of 2.5 million tonnes was 31% higher compared to the June quarter. This significant increase reflects the return of investment made in the first half of the year. The transition of 4 fleets at Curragh North to a Coronado operator model is now complete. Sustained performance improvements from these fleets were a major contributor to the quarter's improved production result. Despite the impacts of the Bowen Basin rain events, year-to-date Curragh has executed its capital investments in the mine plan, specifically investments targeting dragline performance and waste movement, which have translated to improved performance per the expectations of the One Curragh Plan. Year-to-date waste movement is broadly aligned with the same period in the prior year despite the above-average rainfall. Furthermore, in the September quarter, the planned highwall mining operations commenced at Curragh North to liberate restricted coal under the overland conveyor.
While production improvements at Curragh quarter-on-quarter are evident, the rain events in the Bowen Basin continued in the September quarter, which did further hinder coal production levels. The town of Blackwater, the nearest town to Curragh, received 178 millimeters of rain in the quarter, representing rainfall nearly 3x the 10-year average for the area. The consistent rain this year has been a key contributor to the lower production volumes and the higher mining cost per tonne. However, despite the weather, quarter-on-quarter Curragh achieved 29% higher ROM coal production, 31% higher saleable production, 4% higher sales volumes, 14% higher closing coal stockpiled, 12% higher CHPP feed rates and availability, 13% higher dragline utilization and 8% higher operating time from the recently converted 4 contractor fleets.
Capital growth plans of Curragh mine continue in accordance with existing expansion plans to reach 13.5 million tonnes per annum by 2025. During the quarter, we completed activities on the Curragh North underground pre-feasibility study and the Z Pit expansion study. These results are currently under review and are promising.
During the quarter, significant progress was also made on our rehabilitation plans at Curragh. We can report today that Curragh has successfully rehabilitated 143 hectares of land in the quarter, with plans for further work scheduled as the year progresses. In addition, progress -- a project at Curragh targeting the capture and use of coal seam methane as a diesel substitute commenced in the quarter. Drill contractors are mobilizing to site -- the site to commence a drilling program in the fourth quarter. This project forms part of Coronado's strategy to reduce emissions from open cut mining operations.
Curragh's focus for the fourth quarter is to drive operational performance to the mine plan and execute higher production levels, subject to weather. The conversion of the 4 contractor fleets will continue to generate operating efficiencies as the year progresses, as will the investments in box-cuts to enable higher dragline utilization and improved strike length. Box-cut investments in new mining areas is progressing well and will ultimately decrease congestion in existing pits, allowing improved productivities to flow and underpin higher CHPP utilization.
Turning to our guidance. Today, I am pleased to report Coronado's North American annual contract negotiations for fiscal year 2023 are largely complete. Coronado anticipates a volume weighted average price across all grades of met coal, inclusive of thermal switching of approximately $201 per metric ton FOR, reflecting a price that is $14 per metric ton higher than prices contracted in fiscal year 2022. These fixed-price met and thermal tonnages are expected to cover approximately 40% of U.S. production and approximately 90% of anticipated U.S. mine costs and royalties for the year 2023.
As I mentioned earlier, Coronado today also revises its production and cost guidance. Today, we announced that saleable production guidance for fiscal year 2022 is revised to between 16.9 and 17.1 million tonnes due to the year-to-date impacts of wet weather at our Curragh operation. Rainfall totals between April and September for the town of Blackwater just for this quarter have totaled 391 millimeters which is 3.3x higher than the 10-year average for the town over that period. The revised guidance has been determined based on the impacts of wet weather year-to-date and our production plans for the fourth quarter and is subject to change based on rainfall levels between October and December. The revised guidance incorporates fourth quarter production estimates for the group of between 5.3 million and 5.5 million tonnes.
Average mining cost guidance for fiscal year 2022 is also revised to between $81 and $83 per tonne due to persistently high global inflationary pressures. Year-to-date wet weather impacts and geological issues impacting production. Inflation levels in both the U.S. and Australia remained elevated at 8.2% and 7.3%, respectively. Coronado anticipates that these impacts will be partially mitigated by lower FX and incremental productivity improvements as the year progresses. The revised guidance estimate average mining cost for the fourth quarter to be between $68 and $70 subject to the achievement of the production plan, inflation rates remaining stable and a fourth quarter FX assumption of AUD 0.65 per U.S. dollar. Today, I can confirm no changes to our capital expenditure guidance of $170 million to $190 million.
I now hand over to Gerhard to talk to our financial position and market outlook.
Yes. Thank you, Gerry, and good day, everybody. As Gerry mentioned earlier, year-to-date, Coronado has delivered strong financial results and continues to execute its capital management strategy. Year-to-date, group revenues were at a record level of USD 2.8 billion and that results achieved over the same period in 2021 last year of $1.4 billion. September quarter revenue was USD 875 million, down 15% compared to the prior record June quarter as met coal prices fell during the quarter. The group realized price per tonne of met coal sold for the September quarter, which is a mixture of FOB, FOR and domestic pricing was USD 253 per tonne, an increase of -- a decrease of 21% from the June quarter, given that prices have come down. Overall, a pretty good price realization in percentage terms, particularly in Australia, driven by the lag from very high quarter 2 prices in product mix.
Australia's realized met coal price was USD 313 per tonne for the September quarter, a decrease of 12% compared to the previous record June quarter. Similarly, the U.S. operations achieved a realized met coal price of USD 192 per tonne, that was 33% lower than the prior record June quarter. Realized price decreases, of course, a range of Coronado other products were directly related to the fall in the Australian and U.S. met coal indices during the quarter.
We will officially release our full suite of financial results, including EBITDA and net profit positions to the market on the 9th of November. However, as Gerry mentioned, I'll reiterate that our year-to-date results are a record for our company and our EBITDA position for the 9 months ended 30 September exceeds USD 1 billion.
During the September quarter, Coronado completed the payment to shareholders of the half-year ordinary dividend. Today, we declared a further special dividend to shareholders totaling USD 225 million and the senior secured notes purchase of totaling USD 200 million. And given our strong year-to-date results, we are in a position to make these payments to shareholders and noteholders from available cash, and we expect to remain in a net cash position post payment in December. Total declared and paid distributions year-to-date are in accordance with our distribution policy of distributing between 60% to 100% of free cash flow. And after the payment of today's declared dividend, Coronado will have returned USD 699 million in cash dividends to shareholders in 2022.
Strong cash flow generation in the September quarter saw Coronado maintained a strong balance sheet and healthy liquidity. As of 30 September 2022, the company's net cash position was USD 386 million after the payment of all year-to-date dividends, and we maintain available liquidity of USD 798 million.
Turning to capital expenditure. Year-to-date, CapEx for the group was USD 140 million. That was the level from the same period in 2021. And as previously guided, FY 2022 capital expenditure is higher as the group invests in capital works while pricing remains elevated to increase future production rates from the Australian and U.S. operating segments.
In relation to our costs, year-to-date average mining costs for the group were USD 87.6 per tonne. The higher mining costs are a result of continued inflationary pressures, wet weather events resulting in lost production at Curragh, and the completion of planned major maintenance activities at Buchanan and Curragh in the first half of the year. Global inflationary pressure are a key component behind the higher cost profile. Inflation levels in the U.S. and Australia remain very high, and in some cases, in certain materials and supplies used in our mining operations exceed current official inflation rates. As Gerry outlined before today, we have revised our cost guidance up due to the impact of inflation and the lost production in the year due to wet weather. However, Coronado anticipates that these pressures will be partially mitigated by lower FX and incremental productivity improvements as the year progresses.
Looking at coal markets. The benchmark Australian premium low-vol HCC FOB average index price for the September quarter was $250 per tonne, down from an average of $445 per tonne in the June quarter. The U.S. East Coast low-vol HCC average index price of the September quarter was $259 per tonne down from an average of $431 per tonne in the June quarter. In the short-term, global economic environment and steel demand outlook remains subdued due to the conflict in Ukraine, the resulting energy crisis in Europe and high inflation rates. However, these factors are being offset by a combination of low spot met coal supply availability and met coal crossover trades into the thermal market, which have seen price support and stability return to the benchmark, Australian met coal index, which was trading at $300 per tonne in late October. I think today it sits at close to $312 per tonne.
As Gerry mentioned earlier, the annual contracting arrangements for customers in North America is nearly complete. These arrangements reflect an increase in the realized prices in 2023 compared to 2022 and effectively act as a hedge for our business. The revenue earned from these fixed contract arrangements cover approximately 90% of our anticipated U.S. segment mine cash costs and royalties for the 2023 financial year.
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. We have the capacity to move some U.S. production from China to Europe as appropriate, depending on the market. We can also market high-volatile coking coals from the U.S. as thermal coals as required to take advantage of the current unique market fundamentals created by the trade restriction on Russian coal.
Met coal prices have recently stabilized above $300 per tonne, supported by recent supply concerns from Australia and Canada and record high thermal coal prices continuing to support the movement of met coal crossover tonnes into the thermal market. Coronado has continued to take advantage of this price arbitrage with planned sales of approximately 410,000 tonnes into the thermal market in quarter 4 2022. For the remainder of 2022 and into 2023, Coronado expects met coal prices to remain elevated and well above historical averages. Pricing will remain higher for longer as we see more met coal tonnes being switched into the thermal market, given the high demand for energy as winter approaches in the Northern Hemisphere, continued supply from disruption from Australia due to weather and the ongoing trade flow impacts from Russian sanctions.
I will now hand back over to the operator to take questions. Thank you.
[Operator Instructions] Your first question comes from Lachlan Shaw from UBS.
So a couple from me. Just can you -- in terms of the results at Curragh and the wet weather, can you just talk to how preparations are ahead of the wet season in Queensland? How would you describe the mine plan readiness for the upcoming wet season?
We are in good shape at Curragh. The -- and frankly, Curragh is somewhat blessed by having a very good drainage right to the middle of the property. So none of the problems we have involve excessive pit flooding that might result in the nightmare of the booms from a dragline sticking out above the water. What has happened this year that is unusual, though, is that, the ground is now saturated. And at the beginning of most rainy seasons, it does not have as much routine water as it currently does. So we've got fairly good drainage pits in the coal benches and in fact, drainage on all the benches to continuously manage water and keep it off the bench, keep it off of the work area. By and large, though, the biggest issue with rain at Curragh as with most mines is the conditions on the haul road. And we simply cannot run the haul trucks on the Red Dog shale mine roads that tend to be slick when wet. Those are the only particular circumstances this year. There's more retained water in the alluvial material and in the highwall and -- but that's being handled well in the pits. And the issue with the roadways is an ongoing issue.
Okay. Great. And then next question, so just around the cost guidance for December quarter, $68 to $70 with stable inflation and Aussie/USD at $0.65. Can you just talk to -- I mean, do you think that the worst of this inflation recycle might be behind us? Are we peaking at current levels? Are we going to see perhaps some good news on the cost front heading into 2023?
I'm standing here on the eve of midterm elections in the U.S. I can pick up a prediction either way, any minute. So I couldn't even begin to tell you, and I'm not sure who can. The Democrats predict waning inflation and improved growth and the Republicans don't, and you can get an economist on either side to face something at any given day.
Point taken. And then just one quick one, hopefully, and then I'll pass it on. So just for realized pricing on met coal sales from Curragh, can you just remind us on the typical lag that you see in the sales book across the portfolio?
Gerhard, do you want to...
Yes. Look, I mean, you can see that -- particularly in Australia, you can see the price realization in percentage term to the benchmark sitting at 105%, that shows you exactly the price lag. A lot of these high prices we have seen in quarter 2 have migrated into the September results and price realization. Although prices came down from $357 in the Australian segment to $313, our price realization was sitting at 125%. So we -- by and large, it's what we said before, the price lag for different reasons, it's about 3 months in the U.S. and in Australia. And, of course, the U.S. is impacted by the fixed price that we agreed in October 2021 for the financial year 2022. So that's always a little bit lower than the Australian price realization. But what I just said that it's also in the price utilization of 101% for quarter 3 for the combined group, which is a pretty good outcome.
Your next question comes from Caleb Heiner from Goldman Sachs.
It's actually Paul Young here. Can I ask a question around consolidation in the industry. I know that you've got nothing specific to say on the discussion of the Peabody at the moment. But clearly, there's a desire to consolidate here. You were in discussions with Arch, I think, 6 months ago, you're in discussions with Peabody now. I'm just curious around the rationale for the consolidation considering that if you look at Peabody's assets, there are no obvious synergies from my perspective, operationally or blending, et cetera., as there was a little bit Gerry to Logan and the port setup in the East Coast U.S. there. So I'm just curious around what is actually driving these discussions. Is it the fact that -- is it the cost of debt argument? Is it future consolidation? Is that you just need to get larger to have relevance? So I'm just curious around your high level thoughts on the discussions.
The only thing I can say is that, in an industry where debt is restricted and an industry that is volatile as ours, consolidation is an attractive vehicle for everyone, even absent operating synergies. Having said that, that's about all I can say. That's a general answer.
That's fine. General is good at this point. So I appreciate that. And then moving on to the U.S. domestic contracts. Good outcome getting a little bit of a bump or a decent bump, I should say, on 2023 contracted domestic steel mills. I thought though that just based on the setup with met coal switching to thermal, particularly out of the U.S. and just how tight certainly Queensland or Aussie coal suppliers, maybe the outcome could have been a little bit better. Is it the fact that U.S. domestic steel mills, they're struggling a little bit now on a profitability basis? And obviously, Europe steel mills are struggling a little bit. Is that the reason why that maybe that number wasn't higher?
I think from the standpoint of the steel mills, we did pretty well. The steel mills in the U.S. aren't expanding. But I think the competitive pressures from Europe in the thermal sector was a fairly good result. The one thing we didn't get, the one thing that our numbers won't reflect is the presence of much switching because what we're reporting here is contracts and much of the switching does not happen under our contract. It becomes -- it's a short-term shipment, either international or domestic and not with the contract, and that puts it outside the realm of the numbers we reported.
Yes. Understood. Last one, maybe for Gerhard, just around the dividend, Gerhard. I might have missed it previously about the official switch to quarterly declared dividends. But I just want to confirm, is that the case that's a thermal switch now? And then secondly, I know you haven't released your results to financial to come out of 9 November, but just broadly, what is the $200 million-odd divi and the notes purchase? What does that actually represent free cash flow for the quarter, roughly?
Yes. So first of all, it's not a switching to quarterly dividend. It's a special dividend. And if we assume that all noteholders will take up the $200 million of bench offer, which is unlikely, Paul, to be quite honest. But let's assume that we would be sitting below 100%. I think it's about 96%.
Your next question comes from Glyn Lawcock from Barrenjoey.
Gerry, I look at October's rainfall, and it was 160 millimeters up at Blackwater for the month. That's almost as much as what you suffered in the entire third quarter. Can you help me understand how you've weathered through the month? How much volume have you lost with all that rain in the month of October? Because your guidance, as you say, implies 5.3 million tonnes at the bottom end, you haven't done that sort of volume since 2019. And with what is the second wettest month this year, May was 164 mills. I'm surprised you've got such an ambitious target for the quarter. So I'm not trying to understand how you think you can do it.
We -- first, let me say that we've got Doug Thompson available. I'll ask him to add his observations. But for the fourth quarter, we don't attempt to try and predict the level of rainfall. We have a standard amount of days that we have portioned throughout the year that we know we'll lose to rain, and we've maintained that for the fourth quarter. But we haven't -- it's still subject to additional -- we're still subject and at risk for additional well above average rain. But -- there's no way we can predict that. Doug, what else would you like to add?
Yes, Gerry, I think that's fundamental on mine plans based on long-term average, and it is subject to whether it's beyond our ability to forecast to be [ bright ] if I attempted to. But more importantly, as demonstrated in the results from the last quarter that the investment we made in the first half of the year where we have structurally changed the mine in the way in which the mine plan is executed has weathered us well in last quarter. We've finished the transition of the 4 contractor fleets, and that's performing well and continues to show improved performance. Our draglines have quarter-on-quarter continued to show improved performance and rolling this quarter as well by the investment made in the mine plan. And then likewise into the [ pit plan ], the downtime that we had in that the reliability in the uptime hours gives us more flexibility and choice in the second -- in the last quarter to manage around the wet weather. But I think reflected in everybody's results is the challenges of last quarter and seeing the weather of this quarter.
Gerry and team, look I understand that. But, I mean, you budget a certain number. You just had 160 mills in the month. So, I mean, have you lost all your days for this quarter now as a result of the rainfall in October?
Not all of them, no, and we've accounted for the ones we have lost. But keep in mind, this is always -- this is the fourth quarter, particularly December, there's always going to be the biggest month of coal movement that we had all year. And that is the -- in our case...
Yes. Okay. We'll see how you go, Gerry. Gerry, another question for you. You've repeatedly said on these calls, you're not interested in thermal coal, right? You've said it many times. Is your view changing now? Like how do I reconcile your previous comments with what's happening?
I think it has to change simply because it evidently is not in any way, shape or form in the interest of our shareholders to simply take the view that we're not going to participate in the thermal coal market. Right now, from the standpoint of pricing of product, thermal coal is priced above met coal, something we haven't seen for this length of time in as long as I can remember, and something which seems to have persistent legs. It continues to -- there continues to be an arbitrage between the thermal coal and the met coal, it's shrinking, but it hasn't disappeared. And you get a double benefit because if you are going across the border with met coal into the thermal coal markets, you don't [ wash ] it as hard. You don't try to maintain the metallurgical characteristics and your recoveries are generally better. So there's a lot of argument to go for improved margins with thermal coal, in any case.
The second thing is from the standpoint of EBITDA multiples, where share price, I can't determine that the market rewards the purity of intent that you start with by hoping to adhere to a met coal profile. Right now there are thermal coal companies with higher multiples than we've got, higher multiples than other met coal companies have got and they are significantly higher. So it would be -- frankly, I'd like to find a reason to do it, but I cannot find a reason to persistently stay away from the thermal coal market for those coals that you can, in fact, transfer into the thermal coal market simply because you said you wouldn't. And you're ignoring the higher margins. I can't find that to be in our shareholders' interest.
No, I appreciate that, Gerry. I mean, the switching bit, I get, that can be short in nature. Once you do a transaction, you're locking it in for a long period of time. So today, it's a very different market to what I think we've seen historically. So I don't know, I wait and see what sort of deal you may or may not come up with.
Your next question comes from Chen Jiang from Bank of America.
A few follow-ups from me, please. Just on your cash cost. Year-to-date cash cost USD 87.6 per tonne. While in fourth quarter, based on your revised guidance, you are expecting $68 to $70 per tonne. I'm just wondering what contributed or drive a 21% decline in cash cost in 3 months' time? And I have a few after that.
Well, let me -- it's very simple. The main driver is volume in quarter 4.
Right. Okay. So it's mainly volume driven, I guess, that you [indiscernible].
Apart from this, yes, as I've mentioned probably on previous calls, we have undertaken some transformation activity that is quite successful and that will yield also in pure dollar cost savings, but the main driver here is really volume.
All right. Okay. Maybe another one just on production you mentioned. I'm wondering if you can comment or not, Curragh's production run rate like in the month of October, given you have 2 months left. I'm wondering if you have good run rate last month, is it fair to say the downside risk to your FY '22 production guidance will be limited?
The second half for Gerry.
No, I don't think we can comment on -- we cannot comment on monthly results. So we haven't yet. So we'll have to wait and see how the end of the quarter works out. Doug, do you have anything to add?
No Gerry, I think you had -- that is exactly right. We don't comment on month-to-month. It will make it impossible to report on our [ managed ] business accordingly.
Yes, I understand. Sure. Just another question on the pricing. Just on the lagging. I'm just wondering, proportionately congrats to -- you have a great quarter of price realization above the average index of the hard coking coal. I'm just wondering proportionately, is that mainly due to the lagging the timing? Or do you think that's because the PCI coal price now trade close to the hard coking coal? Are we expecting -- I'm just trying to pick out those 2, one is the time lagging and another is the PCI coal now, previously 30% discount to hard coking coal. Yes.
It's an excellent question, I thought. No, I think the main driver is really lag, but you have another element in here where you see -- as an example, you see PCI trading now at 100% to the benchmark or close to the 100%. So that definitely has an impact as well, there's really a lot of combination.
It's -- I guess, yes, that sort of a combination of both. So which means are we expecting to take price realization because the PCI coal trading close to hard coking coal, are we expecting to see your price realization close to the corresponding quarter hard coking coal price in the fourth quarter or at least in the next few quarters as long as the PCI is trading close to the hard coking coal? Is that fair to say?
We don't want to give an outlook on this. But as long as PCI prices are trading at benchmark prices, you see definitely higher price realization than in the past. So it's a positive impact. But that also the [ product ] depends on many other factors as well.
Right. Okay. May I have the last question, please? Just on your met and thermal coal split. I've noticed the met coal split have reduced from 83% to 79%. I guess, that's because you are doing switching from met coal to thermal. I'm just wondering if there's still room for you to switch from met coal to thermal, given, I mean, 1/3 of your met coal from U.S.A. is contracted.
Yes. Let me respond at a very high level because we don't want to give away our marketing strategy either. But, yes, as long as there is an arbitrage between the met coal and thermal coal price, there's always an incentive to switch, and we are able to do so. And I think I mentioned that we are planning to switch 410,000 tonnes in quarter 4 this year. So as long as you see an arbitrage, there is an incentive and we are able to switch, right? We can switch the product out of Australia, but we can also particularly switch the products, the highwall products out of the U.S. Yes, I'll leave it there.
I guess, even some of your met coal are contracted, do you think you still have the room to switch?
Yes, absolutely. Not all of the met coal is contracted. As we said, out of the U.S., only 40% is contracted for 2023. So that leaves a little bit of room to switch. Now, one thing you got to remember and get into details, but the arbitrage has shrunk between the thermal coal and met coal price. So it becomes -- as met coal keeps going up as a function of lack of supply of which switching is one element. As met coal goes up and thermal coal goes down, it becomes also less and less attractive to switch. But at the moment, that incentive is still there.
Your next question comes from Tim Elliott from Regal.
I just want to pick up on going to interesting questions before about rain. I guess, the question is, when you reforecast guidance, I presume you did that in the last week or so, and I presume you did that knowing any effects of rain in October on the business. Is that right?
Well, probably not all of the full effects in October, but then you never do. The change in guidance was considered immediately after the end of the quarter. But we stick with it for the rest of the quarter and 1 month doesn't make a quarter. So we have allocated days in every month, if we've had 160 mills of rain in October, then theoretically, if the averages hold, then this signals for less rain in November and December, and we have the opportunity to make it up. But we cannot predict the rain. We did our fourth quarter projection on what we thought was the allowed number of days remaining in the rainfall we'd had month-to-date when we made the projection.
Thank you. There are no further questions at this time. I'll now hand back to Gerry for closing remarks.
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That does conclude our conference for today. Thank you for participating. You may now disconnect.