Whitehaven Coal Ltd

ASX:WHC

Earnings Call Transcript 2019-Q2

[Operator]

Welcome, everybody, to the Whitehaven Coal December Quarter Investor Briefing. [Operator Instructions] Thank you again for joining us today. I'll now hand over to our host speaker, Managing Director and CEO, Paul Flynn. Please go ahead.

[Paul J. Flynn, MD, CEO & Director]

Thank you very much, and welcome, everybody. Happy New Year to you all. Welcome back to work after a good break. I hope everyone's enjoyed it.I'll just go through the quarter as we normally do, the normal routine. I'll just go through the highlights and some detail on each of the operations, and then we'll get to Q&A.So for our December quarter, we think we've had a pretty strong quarter, which is very positive to see and record. I'll just go through the highlights. Our safety has been pretty good, although there are -- I'll talk a little bit about that, but there's a slight softening, but very good performance overall. We've had record quarterly ROM production at 7.4 million tonnes and for the half at 11 million tonnes which is certainly a very solid result, and we are reaffirming our saleable coal production guidance at 22 million to 23 million tonnes for the full year.Saleable coal production is 5.6 million tonnes for the quarter and for the first half at 9.6 million tonnes. Coal sales, including purchased coal, are 5.4 million tonnes for the quarter and 10.3 million tonnes for the first half. Record sales at 2 million tonnes actually on a managed basis for December, and we'll get to the split of production through the quarter and a little bit more color as we go through the mines.And we've had ROM coal production of 4 million tonnes at Maules Creek itself, which has been very good. Tarrawonga will be increased actually to 3 million tonnes in the new financial year, and I'll come to that decision when we discuss Tarra. As you know, the Vickery Extension Project has been open for exhibition during the latter half of last year, and we received 560 public submissions during that period, of which 63% of them pleasingly were actually supportive of the project. And the IPC is scheduling its 2 public hearings for the Vickery Extension Project in February, which we're keen to pursue. And as you know, we did release a revised resource statement for Winchester South of 530 million tonnes.Just quickly over the page to the managed coal production numbers. So December on December, managed ROM tonnes at 7.4 million tonnes versus 5.4 million tonnes, 36% up; managed saleable coal production for the quarter, 5.6 million tonnes versus 5 million tonnes, 11% up; managed total sales at 5.4 million tonnes versus 5-point-nearly-8 million tonnes, 7% down. When you look at the first half, half on half, basically flat on ROM coal at 11 million tonnes; managed saleable coal production at 9.56 million tonnes versus 10.9 million tonnes, 12% down; managed total coal sales at 10.3 million tonnes versus 11.9 million tonnes, 14% down.And I'm sure if someone's gone back and reflected a little bit more on what the first quarters look like -- I'm sorry, the December quarter looked like and also what the first half looks like period on period, you can certainly see that there's no changeouts in the previous corresponding period for Narrabri, which there obviously is in the first half. And interestingly, Narrabri was the onset of conditions which required secondary support actually when we look at the previous corresponding quarter and 6 months, whereas obviously this period, we're certainly seeing the benefit of that hard work coming through.On to safety, 7.57, certainly a very good result by industry standards. We're pleased with that. By our own standards, we're a little bit annoyed. We had a few more incidences, albeit minor, thankfully, during the course of the quarter, which is annoying. So we just need to make sure that we keep reinforcing the message in driving our safety and discipline through the business as we continue in the second half of the year.Into the guidance commentary. As I said, 22 million to 23 million tonnes for our full year saleable coal production is guidance that we're happy to stick by, but we are talking about guidance being revised from a cost perspective from $64, is what we previously said, to $67 for the full year. The main drivers, there are a couple of drivers at work here. Obviously, we've had a weighted average difference on cost, if you like, with less Narrabri coal present obviously in that first quarter, whilst there's obviously a changeout that was largely Narrabri coal free during the first quarter.Obviously, a good result during this quarter. We have -- as a result of the differentials between the various qualities of coal in the market, we've been focusing certainly on maximizing our penetration into the premium end of the thermal market, as you know. So there's been more washing associated with that, and that certainly comes with an incrementally higher cost associated with that and that being such a larger portion of our business. Narrabri and Maules Creek being so large relative to the total, that is certainly resulting in increased costs. But we're certainly getting the revenue benefits of that, which we'll speak about when we come to pricing.As far as the equity coal sales, including purchased coal, for December, we were at 4.3 million tonnes, which is 5% below the previous corresponding period. Equity coal sales, including purchased coal, at 8.37 million tonnes, 9% below the previous corresponding period. The managed coal sales, including those purchases, in December was 5.4 million tonnes, 7% below the previous period. And in the managed coal sales, including purchased coal, for the half year was 10.3 million tonnes, 14% below the previous corresponding period. And again, I make that comment that obviously, this half excluded Narrabri with the changeout, but then obviously, a rush of coal coming out as -- at Maules Creek later in this quarter.So I'm just moving over the page. Sales for the quarter and the half year were down, as I say, from the Narrabri changeout. But this mining sequence issue, which we spoke about in the last quarter, certainly has borne fruit in this second quarter, that we have seen a very strong production of coal from Maules Creek during this -- the back end of this quarter. So hence, the -- I'm sure some of you will have already observed, solid stockpiles that we carry now into the opening quarter, this second half, which will benefit sales and saleable coal production in the second half.Ongoing demand in Asia for the high-quality coal that we produce is certainly good, but that price at $104 average for the quarter was actually lower than the September spike at $118. So if you look at the table there below, you'll see, over March, $103; $105, June; spike $118 in September '18; and then $104, obviously in this most recent quarter.Maules Creek has been doing very well in pushing the premiums on its production, so 9% for our premium Newcastle spec coal out of Maules Creek is certainly a very good result. And you can see we've actually pushed harder into -- as I mentioned, pushed harder into that market, with increased washing with a lower percentage of other coal qualities in our mix this quarter than what you've seen in the last couple.Obviously, coking coal prices have actually been quite stable. And so that's moved a little bit. I would say the spot prices were about $197, I think, more or less, and change at the moment. Whitehaven's achieved strong average price outcomes for our metallurgical coal products, being a blend of both benchmark linked and also spot sales through the quarter at $121.56. So that's quite a decent result for our semisoft and PCI sales.That product differential though is still wide. We're talking $67 from a thermal coal perspective of 5,500 versus, say, $97 for our premium coal -- and then our premiums go on top of that. That's certainly been incentivizing us to drive harder into the premium thermal market, as we said. Having said that, we are actually seeing some further incremental interest in semisoft sales starting to emerge out of China. We haven't been chasing that, but it is interesting to see that change.I'm down to Maules Creek. So ROM coal production for the quarter at 4 million tonnes, so up 57%, is certainly a very good outcome. There's certainly a bunch of records set during the course of this quarter, but there's certainly a lot of production that has emerged during the back end of the quarter, which has brought the strong stock position into this new year. Our full year guidance on a ROM basis at 11.8 million tonnes to 12.2 million tonnes stands. I think we're in a good spot to be able to deliver that. Saleable coal production for the quarter as a result of that strong back-ended performance is 2.4 million tonnes, 13% down on lower -- on the previous corresponding period. Coal sales relatedly at 2.1 million tonnes for the quarter, 10% down on the previous corresponding quarter. As I say, coal stocks are very high as a result of the back-ended ROM production performance in this quarter.So ROM coal production for the half at 6.2 million tonnes is a very good result, 22% above the previous corresponding period. Saleable coal production is, as I say, as a result is 4.4 million tonnes is 4% down. Again, this is back-ended ROM performance. To deliver the stock, it'll take now this quarter to flush that through into sales in this new half.Metallurgical coal production for the quarter was 800,000 tonnes, 33% of the total saleable, and metallurgical sales on a managed basis at 560,000 tonnes, with 27% of the total sales for Maules Creek for the quarter. Over at Narrabri, I'm sure there's been lots of interest in watching this. Narrabri has certainly returned to very good form. ROM coal production for the December quarter at 2.3 million tonnes, 42% above the previous corresponding period, which if you look at it superficially, it looks like there must have been a changeout in the previous corresponding period to report such an uplift. But it wasn't actually. It was as a result of, as I said earlier, those -- the requirement to install that secondary support regime in place.And so that diverted a lot of attention whilst we're dealing with the impacts of that in the previous corresponding period. But certainly, we're announcing the benefit of that and certainly a nice return to form. Saleable coal production and coal sales of 2.1 million tonnes and 1.93 million tonnes, both increases over the previous corresponding period.Our guidance for the year on a ROM basis is 6.5 million tonnes to 6.8 million tonnes, I think, solid. And as previously reported, sales have been impacted by a longwall changeout in our September quarter obviously. ROM coal production for the first half at 2.876 million tonnes, saleable coal production and coal sales at 2.8 million tonnes for both, respectively. Roadway development has been good, certainly for the December quarter at 3.2 kilometers and then for 6 months at 6 kilometers, respectively.We are moving to assemble a team now to work in a focused manner to incorporate or convert certainly our exploration license for Narrabri South into our currently approved Narrabri North mining lease. That is a large exercise and does actually require a significant effort from an approvals process perspective, but we've got a team together now working on that. It is quite complex, but the upside of this is quite large. And certainly, you'll see us reporting on that during the course of this calendar year.Gunnedah ops have been solid at 1.1 million tonnes, 12% below the previous corresponding period. But as you know, there's always a bit of a skewing of production in the Gunnedah ops towards the back end, and that will certainly be the same in this year as well. Saleable coal production, 1 million tonnes, as well as sales the same, were lower than the previous corresponding period. But I think as many -- as we'll talk about individual mines, there will be this weighting towards the second half of the year. But our guidance overall at 4.6 million tonnes to 5 million tonnes ROM production for the year stands.Tarrawonga at 400,000 tonnes for the quarter and 800,000 tonnes for the first half are decent results. Saleable coal production at 500,000 tonnes for the quarter and 1 million tonnes for the full -- the first half has been solid results as well. Importantly for Tarrawonga, we have taken the decision to move production to its fully approved 3 million tonne production limit, which will require a new fleet, and we have taken that decision. So you'll see that those orders will be placed shortly. And you'll see that on the ground, not in this financial year, but certainly early in the new 2020 financial year, which will go some way to replacing the production that will fall away with the completion of mining at Rocglen, which on to that, 266,000 tonnes for the quarter and 400,000 tonnes in the first half is a solid result. Mining will cease just after the year-end at Rocglen. So as I say, we will ramp up Tarrawonga to replace a good portion of those tonnes that we'll see leave when Rocglen closes.Werris Creek has had a relatively modest first half but certainly will have a bigger second half. It produced 340,000 tonnes for the quarter and 0.5 million tonnes for the first half. Saleable coal production similarly has been low, 260,000 tonnes for the quarter, and then -- but for the first half, we've had 730,000 tonnes. We are now past the areas which were affected by the underground workings, and you'll see getting to the [ ES&G ] scenes where there's certainly a lot more coal emerging in the back end of this financial year. So that will have a big run home. In fact, it will be a big run home, over 2 quarters rather than just being skewed towards last quarter, which is welcome from our perspective.Sunnyside is doing what it needs to be doing, and the remaining mining effort there that's being conducted on its rehabilitation project is going according to plan. Saleable coal production and coal sales there, just 100,000 tonnes for the quarter and the half at just under 200,000 tonnes.The Vickery Extension Project, which we've talked about. Look, it's going through the regulatory hoops. The exhibition period, as I say, it resulted in a very positive expression of support for the project from the local community, which we were very pleased with, although people who are less enamored with the idea of the Vickery Project, I think the vast majority of them, weren't actually local people. So that sort of goes to the type of people who are focused on these things. But certainly, local support is very strong.There are 2 hearings, as I mentioned, scheduled for February for the IPC, one in Boggabri and one in Gunnedah, which we look forward to the conduct of those. Not just an opportunity for the community to say their piece, but certainly, the company will be also presenting there as well. So I think, look, this is -- we'll update you during the course of the year, but I do think it's still realistic to expect that we'll get an approval within this calendar year now, 2019.Winchester South, I won't go over that too much again, other than to note again that, of course, we had the upgraded resources there, 530 million tonnes there. And we will be establishing a drilling campaign up there shortly, which will be valuable information to determine product splits and yields and therefore plant designs and so on necessary to move this project forward as soon as possible. Interest levels up in Queensland are very high on this project, so we're very keen to bring it on as quickly as we can.Over to the corporate section of our quarterly report. You would have seen -- some of you may have been interested to see, we did put out a very small release related to a statement of claim that we had received from Nathan Tinkler wanting to be -- to represent the Boardwalk Resources Trust and entity, which we note is in liquidation. And if anyone wants to go into a little bit more color that's in there, there is that release that was released on the 24th of December. But this claim, he purports to represent a number of parties who have been issued Milestone Shares as a result of the merger of Aston and Whitehaven back in May of 2012. Needless to say, Whitehaven denies any wrongdoing here in any way in the strongest possible terms, and we will be vigorously defending these proceedings and seek to have them dismissed at the earliest possible opportunity, which I think is probably in February.From a coal outlook perspective, obviously the market is certainly interesting and coal prices are being resilient. Of course, $104 is less than the $118 that I mentioned before. But certainly, demand for the physical high-quality coal is very good. And so that seems [ $115 ] is what I think will be a very good second half as well, not just the first half.There is obviously continuing to be this quite large differential between the 5,500 market and the 6,000. And as I say, I think today it's 64 versus 97. So like us, others have also been motivated to try and move coal out of those lower-ranked markets into the higher. We're obviously not exposed to the Chinese market, but even in our instance, if we're able to move Korea into Japan, we certainly have been doing that and receiving a very good benefit from doing that.Demand for met coal certainly seems to be robust, and the outlook there also looks pretty solid from a high coal perspective. But I think that probably still means that for the second half, we probably will be -- despite these more recent incoming interest in semisoft sales, we still will be preferring to move our high-quality thermal coal into the premium thermal markets. And so I think that will still continue to be the focus for Maules Creek in particular for the second half of the year. So overall, very solid, very solid quarter from our perspective. We're pleased to be able to turn into the second half of the year with a good set of results under our belt given that there was a relatively subdued start to the year with the first quarter with Narrabri being out of action during changeout. So that's good to be able to report. So I just might move along now to the Q&A and hand back to you, operator.

[Operator]

[Operator Instructions] Your first question is from Rahul Anand from Morgan Stanley.

[Rahul Anand, Equity Analyst]

Just one for me really and that's on Maules. I just wanted to understand, that ROM stock buildup seems quite sizable, 1.5 million tonnes. Is there anything related to the wash plant that probably led to that? Or is it just mine sequencing and the ramp-up, as you mentioned? Because given the size of it, I was quite curious.

[Paul J. Flynn, MD, CEO & Director]

Yes, Rahul, there's no issue for the wash plant. In fact, the wash -- far from it. In fact, quite the reverse. The wash plant has actually recently gone through a bit of a debottlenecking process, and we're very confident that it's got the full 13 million tonne capacity run rate available to us for washing. It's really just mining sequence that's delivered a bounty of coal towards the end of the quarter. And as I say, this will -- carrying this in, we've got plenty of railing capacity, plenty of pathways on the rail, not just the trains themselves. The port capacity is also there. So we think that, that puts us in a pretty strong position in the second half to convert this -- yes, what's a large, there's no doubt, working capital buildup in inventory but into cash very quickly.

[Operator]

Next question is from James Redfern from Merrill Lynch.

[James Redfern, Vice President]

Paul, just 2 questions, please. Just firstly the cost guidance, $67 per tonne for the full year. Is it safe to assume $69 in the December half and then dropping down to $65 in the June half next year just due to normalization of operations? And then the second question I had was just on Vickery. In terms of the [ 1/3 ] of submissions that opposed the project, as you say, they were from people not in the local area, what were the main reasons for those objections? And how confident are you that the EIS will be approved later this year?

[Paul J. Flynn, MD, CEO & Director]

Thanks, James. Look, the cost picture, we'll unpack for you with the full presentation that comes with the half year results. There's no doubt, as I mentioned, there's a couple of different reasons. We'll probably explain that a little bit better given the opportunity to do that for the half. But $67, pretty happy with that. I think that's a prudent result that we're guiding to. But yes, look, I think all things being equal, we're pretty comfortable that, that's a number we'll stick by. So I'd rather reserve that discussion because we'll give you more -- better information in about 4 weeks' time. And sorry, the second stage of your...

[James Redfern, Vice President]

Vickery, yes, just -- yes, sorry. Go ahead.

[Paul J. Flynn, MD, CEO & Director]

The general sentiment -- the general sentiment are on predictable areas. So I mean, we're in drought, so people are worried about water. Obviously, there's things like rail, additional rail traffic on the line which -- the line itself has got plenty of capacity, but people note that, that means maybe 4, on average, 4 or 5 trains a day extra passing through. The noise and dust type things are predictable extending from that. There's -- and from people from further afield, obviously there's the broader climate change questions that come from this. So nothing unexpected, thankfully. But more importantly, I think the strong expression of local support -- and it also came from further afield as well, I must say, but the strong expression of local support in particular, from our perspective, was fabulous. And I'll note the Department of Planning themselves noted that, that was quite an extraordinary thing. They've never seen that before. And so look, I don't think there's anything that we've seen that's new or that's out of the blue that would upset the apple cart in that regard. The IPC has had a couple of reschedules, unfortunately, of their time line, which has caused a little bit of disruption and delay. But they say that they can manage that within their approvals time line that they're working to. So it's just internal machinations for them getting the right people lined up at the right time to be able to hold those hearings. I do think it's actually a good thing that there's actually a move to 2 hearings, one in Boggabri and one in Gunnedah. I think that will be a good thing. But there's nothing unexpected there that caused me to be concerned that within this calendar year, we'll see approvals. There's nothing there that I can see that does that. All those -- by the way, if you're curious, all those submissions are available on the IPC's website, if anyone's got the time to be able to go through those.

[Unknown Executive]

Planning's website.

[Paul J. Flynn, MD, CEO & Director]

Oh, Planning, sorry. I'm being corrected. The Planning website. So you can go in there and have a look at them. They're quite interesting if you're minded to do that.

[Operator]

Next question is from Sam Webb from Credit Suisse.

[Sam Webb, Associate]

Just 3 quick ones, please, if I can. Tarrawonga expansion, what capital is required for the fleet replacement in that expansion? Are you able to provide a net debt, net cash position as at the end of December? And just more high level, in regards to M&A, notwithstanding Vickery and Winchester South to focus on, what's the propensity to explore more M&A in 2019?

[Paul J. Flynn, MD, CEO & Director]

All right, okay. I was remiss in not saying that I've got Jamie and Kevin and Ian here by my side. So there's certainly dimensions to those questions, I'll just rope them into. But look, Tarrawonga, we haven't given numbers there, but it's about 100 million basically that's involved in that expansion. I mean, it's a very logical thing for us to do. The fleet itself there, we've run that hard and run it long. There's -- it's been the recipient of a bunch of hand-me-downs from other sites. Tarra took some fleet out of Werris when we ramped it up to 2.5 many years ago when some new trucks came in there, and so it's been laboring on. It's time for a birthday. So in order to maximize the remaining life of Tarra, a fleet now will certainly see it through its remaining life. So that's a positive thing. Anything else, Jamie, you want to add to that?

[Jamie R. Frankcombe, Chief Operating Officer]

No. I mean, the only thing I guess in terms of -- there's a bit of commonality in the fleet that we've selected across both Tarrawonga and Maules Creek. So I guess there's some benefits we got out of there in terms of spare holding and knowledge in terms of maintenance of the fleets. But timing-wise, we'd expect those fleets to start arrive -- and excavators arrive April, May. And trucks will start rolling in around about August. So the ramp-up to the 3 million will really be in that -- the back end of this calendar year.

[Paul J. Flynn, MD, CEO & Director]

The debt numbers, I think, we'll all wait for 4 weeks, won't we, Kevin, until we -- it's been a good half. You'll see that in all its color in the half year results.

[Kevin Ball]

I think the only color I'd add to that is that you've got a strong December spend, which is going to be reflected in working capital. And really, I'm looking forward to a strong second half with the buildup of stocks [ there ]. So typically, when we've got to pay a divvy that we've been net cash the week before we pay the divvy. So we'll let you know all about this when we get to the result.

[Paul J. Flynn, MD, CEO & Director]

Yes. Yes. And M&A, Sam, you've asked. Look, that's not our focus, to tell you the truth. We've got a lot before us. Vickery has obviously consumed a lot of our time. Narrabri is a big project just to incorporate from a mine planning perspective the Narrabri South exploration license into our mining lease in the North. And Winchester South, as we've noted, whilst we haven't talked about it much, there's lots of activity going on from a data analytics perspective, from a planning perspective, from a coal quality perspective. So it's not really front of mind, I have to say. And similarly, it doesn't actually feel like the right time in the cycle to be necessarily doing that either, I have to say. It'd have to be something compelling that was one of those opportunities you couldn't bear to miss if you wanted to do something. So our focus is really on our internal pipeline given how compelling that is.

[Operator]

Next question is from Lyndon Fagan from JPMorgan.

[Lyndon Fagan, Analyst]

Look, just a simple one from me. Can you give us an update, please, on the opportunity to increase your stake at Narrabri? With that preemptive, maybe what's the latest on that? And is there any resolution to the timing?

[Paul J. Flynn, MD, CEO & Director]

Yes. Thanks, Lyndon. Yes, look, that one, I must admit, that one's in a bit of a go-slow mode at the moment. Obviously, Narrabri is doing well. It's nice to see it return to the form that we think it certainly deserves and should be performing at. But because of the scale of the work and change in complexity of this planning exercise to incorporate Narrabri South into Narrabri North, that sort of -- that type of question has been just put on the back burner until that work lands. I mean, to do justice, we are talking about obviously the opportunity to take a piece off our joint venturer who is currently our joint venturer. And so in order to be transparent in that process with them, and we are the driver of all this work in terms of the analysis, the mine planning, the coal quality, the geotechnical work, everything that's currently now an exploration license that needs to be converted to a mining lease with the proper mine plan put around it, we need to do this in a way that's transparent for them so that there is -- we put them in, from a knowledge perspective, in the same position that we are. But given there's so many variables in doing that, what type of equipment would you deploy? What about these long panels? What type of maintenance regime goes with that? Can we cut higher? Can we cut lower? All these sorts of things that are big questions that require proper analysis, and both parties want to be well informed when that decision comes back around. And I think we just said, look, let's back off. We'll do the work. We probably expect there's a good at least 6 months of work involved in that before we can probably revisit that discussion. So not in this financial year would be my view on that.

[Lyndon Fagan, Analyst]

Okay. Great. And I guess further to that, Stage 3, would there be any opportunity to increase production? And is there any change to the coal quality or coal mix when you're into that area?

[Paul J. Flynn, MD, CEO & Director]

Yes, look, I think part of these -- those are 2 important questions that will come out as we continue to do this work. Production-wise, in those long panels, you'd have to say there's a benefit there. If you're able to go, say, for instance, 6 or 8 from the panel, you're at least a couple of years there with no changeouts. So there's got to be a related benefit in cutting time during that period. We do know that the ash does increase slightly as you go to the South. We do know that. But then again, on the other side of that, we do know that gas levels, CO2 levels, decrease as you go to the South. So that increases cutting time.

[Jamie R. Frankcombe, Chief Operating Officer]

It's 3 years down.

[Paul J. Flynn, MD, CEO & Director]

Yes, yes. So there's a number of factors there that need to be weighed up. We think it's very interesting in perspective. So it's -- but again, we just got to do the right thing by our joint venturers because there are other people with rights in that equation other than us, so the other joint venturers as well. And we've all acknowledged that's important information that we need to have on the table in order to make a proper decision.

[Operator]

The next question comes from James Gurry from Deutsche Bank.

[James Gurry]

Just Kevin mentioned it before and with the half year not far away, has there been any progress on thinking about how to return excess capital to shareholders? Previously, it's obviously been focused on dividends. Kevin just mentioned dividends. But any thoughts towards a buyback, which seems to be featured heavily amongst the peer group?

[Kevin Ball]

I think that's up for discussion in the -- for further consideration over the next 2 board meetings leading to the results release. But they're all good questions. They're all -- your observations, they're all things that the Board is considering. Clearly, returning capital to shareholders given the strength of the business is -- I wouldn't say front and center, but it's an important matter being considered.

[Paul J. Flynn, MD, CEO & Director]

Yes. All those avenues are on the table, but it's just a matter of what's the right combination of measures given the various preferences that shareholders have been kind enough to give us feedback on and blend that into an outcome, which is hopefully beneficial for all. I mean, the answer is surplus capital is coming back to shareholders. I mean, we've said that clearly, that we're not going to retain capital. We don't think we need to. We can fund Vickery without having to retain capital in the business. We talked about M&A. That's not front of mind. So there's no need there. So it's a good and important question that the Board's turned its mind to. And with the half year results, you'll see the Board confirm their views in this regard as it relates to how to return capital for the first half.

[James Gurry]

Yes, okay. And can I just follow up with 2 other questions? With Maules Creek operating at 13 million tonne per annum rate, if you operate at that rate or even slightly above that rate, how do you measure that? So do you have to recalibrate your production levels going forward if you hit 13 million tonnes or a little bit above that? Is it measured over a month or a quarter? Or is it over a 12-month period?

[Paul J. Flynn, MD, CEO & Director]

Yes, that's a good question.

[James Gurry]

Yes. And just on the cost guidance, is it -- I assume that you're assuming higher cost in the first half and better production in the second half, is that right? And have you factored in general inflation as well as higher wash costs and whatnot?

[Paul J. Flynn, MD, CEO & Director]

Yes, yes. For the cost question, again, I think we'll give you more color on that. There's more to it than just that, obviously. The weighted average impact of not having as much Werris, say, for instance, and as much Narrabri in the half as we would have liked is pervasive in terms of what the weighted average cost outcome is. So it's not just that. Increased washing, obviously, as a deliberate decision based on our product strategies, also increases those costs. But as I say, we'll put some more color into this into the half year results.

[Jamie R. Frankcombe, Chief Operating Officer]

Yes. And in your first question in relation to Maules Creek, the measurement period, I guess, is from the project approval. So it's a calendar year. So it's 13 million tonnes run-of-mine production in a calendar year.

[Paul J. Flynn, MD, CEO & Director]

Which you can't exceed on a calendar year. You can intra year.

[James Gurry]

Yes, yes, exactly right. Yes, okay, yes. And you're currently at that rate, right? And you might have been at that rate in the last part of the last calendar year also?

[Jamie R. Frankcombe, Chief Operating Officer]

Yes, we've been ramping up to that ramp. I mean, the assets are now fully on-site, I guess, as we've reported previously. And as you saw the rate in the quarter, we're certainly well above the 13 million tonne rate capacity. I guess certainly we would say now that the mine is fully configured for a 13 million tonne per annum rate.

[James Gurry]

I suppose that's what you would expect on a calendar year basis for 2019?

[Jamie R. Frankcombe, Chief Operating Officer]

Calendar year, yes.

[Operator]

Next question is from Tim Hannon from NewGate Capital.

[Tim Hannon, MD & Chief Investment Officer]

I just wanted to hopefully have you further elaborate on capital management. I suppose that the dividends versus buyback argument -- and from where we sit, buyback is much more tax effective given you don't have franking credits there, at least in the short term, and buyback is just much more tax effective for a shareholder. And yes, sort of just, if you could just respond to that, I suppose. And I just want to get an idea how you're thinking about the logic of buyback versus dividends and its tax effectiveness for shareholders.

[Paul J. Flynn, MD, CEO & Director]

Yes. Thanks, Tim. No problem. Thanks for the question. Look, we can explain it a little bit, as I say, and we'll come back to this as far as the half year results go. But obviously, we've been deep into the consumption of our available tax losses. And coming towards the end of this year, we'll have exhausted them. And so you will see us start to generate franking credits. So that will be actually in quite the short term that, that will start to emerge. Not in a big way, but certainly, we'll have used those losses. So from then on in, subject to generation of further losses or deductions, we will be tax paying. So in the past, we've said we'll flush out dividends and just pay specials over and above. It's been easier to do that. But for the capital return, which we did last year, which was a one-off thing, an efficient way from a tax perspective to give money back to our shareholders. If -- on the buyback side of things, certainly we're minded to look at this. You get lots of feedback from various actors in this whole dynamic, and we just got to be cautious about that feedback, I suppose, in some ways because that feedback at times seems to emerge or be more -- be louder at certain times of the year than others. And motivation for that could be many and varied, I'm sure. But our large holders offshore are very cautious of any large buybacks. So we do take that into account as well. Their view is whilst they like the float that we've got today, their size of their hold relative to that float is something that they watch intently. And so they're cautious about us doing anything that compresses float. And given that from all our discussions, there's been not a hint that we're about to increase the float in any way, and I think that's absolutely right. So that's important to us as well, although we do take your point that there certainly is, from some quarters of the sector, a strong interest in buybacks. And I think the Board's minded to try and weigh all this up and put it in a place that is actually part of a longer-term strategy rather than just something we dip in and out as and when. And as I say, for the half year, you'll get a better view of that with our announcements as to what we do with surplus capital for the half.

[Tim Hannon, MD & Chief Investment Officer]

I'll also take away from that, that we made a compromise. It could be sort of buyback and specials or buyback and dividends, the combination of the 2. Could I read that?

[Paul J. Flynn, MD, CEO & Director]

Well, if you want to take that out for 4 weeks, I'm just saying hold your horses for 4 weeks, and you'll get -- you won't have to draw out too much, you'll actually hear it.

[Operator]

Next question is from Andrew Hodge from Macquarie.

[Andrew Hodge, Research Analyst]

I just had a couple of questions. I'm assuming on the cost side, you probably won't be able to answer it, but I just wanted to see how much higher oil prices and therefore diesel costs have been for you guys and then, again, whether or not that would make a difference into the second half. The second question is just about in terms of the volume that you guys have been doing on the ROM side, particularly at Narrabri. If you can have -- continue those numbers into the second half, it looks as though you could be putting out some pretty meaningful numbers and so potentially beating your own guidance and just wanted to get a sense of like what kind of constrains that range of 6.5 million to 6.8 million.

[Paul J. Flynn, MD, CEO & Director]

Sorry, what was the last bit?

[Andrew Hodge, Research Analyst]

Yes, the range of 6.5 million to 6.8 million.

[Paul J. Flynn, MD, CEO & Director]

Our guidance?

[Andrew Hodge, Research Analyst]

Yes.

[Paul J. Flynn, MD, CEO & Director]

Diesel, diesel fuel...

[Kevin Ball]

Diesel -- the guidance -- the original guidance was based on a diesel price which really has been pretty close. I mean, if you tracked, crude prices jumped between April '18, I think, in '18. And really our guidance for that first half was the diesel price was pretty much on the money. Today, crude's back -- Brent crude's back about $61, and the diesel price we're getting is probably about 10% below what's embedded in that guidance for the second half. So if crude stays a little bit lower, we might do a little bit better. But your guess is as good as anyone's there, Andrew, as to where the crude price is going to finish. But we think the guidance is based on some pretty good numbers around diesel.

[Paul J. Flynn, MD, CEO & Director]

And Narrabri for the second half, good numbers there. Definitely good quarter. We're pleased with that. I think a lot of the initiatives of our operational team were put in place to be able to deliver what we see as expected performance for Narrabri, and that's going well. But your question is based on that rate, were you going to give your guidance a bit of a run for its money in the second half? Don't forget, we do have a fault in the second half that we're going to drive through. And so we have derated our cutting -- well, our production during that time that we're cutting through the fault. And so the 6.5 million to 6.8 million is a product of derating production during that period. And so whilst we didn't really successfully drive through the fault -- that same fault as it manifests itself in the previous panel, and we totally expect to be able to do that again this time, it's wise because it's factual. Latest call comes out during the time when say, for instance, 1/3 of the cutting face is actually in stone rather than in coal. So I think the guidance is good. We'll stick by that and no need to change from what we see today.

[Operator]

Next question is from William Morgan from Intrinsic Investment Management.

[William Morgan, Portfolio Manager]

Paul, congratulations. Just the M&A question, not necessarily about what you might do because you've got your hands full with expansion, but it's more a reflection of -- given your interaction with other asset owners privately and publicly -- owners, we've had asset sales that have come out due to reasons other than sort of economic interest, for political reasons or whatever and providing you and Glencore with great opportunity. Just in terms of the reflection of these sales and what might -- I guess what's the direction of asset owners, I guess, the private ones, et cetera? Is it something we're likely to see more of these assets coming up because of -- for want of a better description -- political decisions within corporates? How is it playing out?

[Paul J. Flynn, MD, CEO & Director]

William, I think that's probably a question you best direct to those other players in the market. Yes, we're the beneficiary of obviously one of those, obviously, Winchester South. We're delighted to have it, and we think it's going to be a tremendous project for the company. I'm sure Glencore feels the same way about the assets they've picked up. But as to whether or not there's any more of that coming, it's really not a question we can answer. I don't see any obvious ones just from our own perspective, but we could never second-guess the internal goings-on of other organizations, just as I'm sure others couldn't do that in predicting ours. But we're committed to coal. We've got plenty of opportunity before us, and we're focused on delivering on our pipeline.

[Operator]

Next question is from Peter O'Connor from Shaw and Partners.

[Peter O'Connor, Senior Analyst of Metals and Mining]

Three questions. Firstly, with the cost guidance you've talked about, if you flip to Page 2 of your release where you detail it, you talk about associated demurrage and underutilized logistics costs. Now you've given a lot of other explanations in the commentary today about it but not those 2 factors in the release. I was just wondering if you could flesh that out. Secondly, I just wanted to flip M&A question on the head and say on divestments, thoughts on Vickery sell down at this time, where you're at with that? And lastly, an extension to that as well. You're asked about M&A, and then you came back and said it was not the right time of the cycle. I'm intrigued. What does that mean?

[Paul J. Flynn, MD, CEO & Director]

All right. Thanks, Peter. Look, sorry if we've been a little bit succinct in our description of those because I thought people would have got that, to tell you the truth, because obviously, we had a low quarter, a low quarter production-wise in September. And that comes with associated demurrage and take-or-pay that was underutilized. So that's what we're referring to there. My apologies. And then -- and obviously, production and sales in the second quarter, December, as we just highlighted, it was skewed towards production, more production during the back end of the period. So the sales were -- the sales are fine, but we could have done more had that production been more evenly spread throughout the quarter. So that's what we're referring to there. The Vickery process, plenty of interest in that. I was in Asia just prior to Christmas, and the expressions of interest in Vickery were loud and clear. So we feel confident with that. We've got to do a lot of the work to assemble our data and others, other information, finalize mine plans and so on. So what we've said is that, that process would run concurrently with the approval process. And we would look to be in a position to bottom that out at the same time an approval arrives because all of those parties, interested parties, they are high-quality parties, that they are -- all are interested in the 10 million tonne version, not the 4.5 million tonne version. So that's -- we feel good about that. M&A, the reason why I say that is because coal prices are high. That's nothing more than that. Coal prices look pretty robust. It feels like you'd be paying a lot at this point in time with coal prices high than you would have 2 years ago.

[Kevin Ball]

And there's quite a delta between the Wood Mac numbers and the broker consensus numbers. So if you bought something at Wood Mac numbers, you're just going to disappoint brokers.

[Paul J. Flynn, MD, CEO & Director]

No one's selling on the forward curve. Everyone wants to get mark to market on today's spot. So we're not interested in doing that. That's what I'm saying.

[Peter O'Connor, Senior Analyst of Metals and Mining]

Given the market's an efficient market and you're telling me that coal price is high and assets have fully priced, have you looked inwardly and reflected on that?

[Paul J. Flynn, MD, CEO & Director]

Yes, we've looked inwardly, thank you. Yes, we have. Yes. I'm glad you're reaffirming the efficiency of the market.

[Operator]

Our next question is from Glyn Lawcock from UBS.

[Glyn Lawcock]

Look, just quickly on Maules Creek, you said the 13 million tonnes capacity for washing is available to you. Just at 90% yield, that would have meant production 20% above what you achieved in the quarter. Can you sort of just square the circle a little bit for me?

[Paul J. Flynn, MD, CEO & Director]

Yes. Look, I think Glyn, that's a good question. And as I say, it comes back -- just back to the sequencing that we mentioned through the first quarter that flows into the second quarter. As we said, in the last quarter of last year, the guys had worked really hard perhaps on a tactical basis rather than a strategic longer term mine planning basis. And what we've done is, we've spent the last 6 months working hard to straighten out the mining sequence in Maules Creek for a longer-term sustainable 13 million tonne per annum run rate. During this -- during these 6 months, and particularly as it related to October, it was, we did shut the plant down for a period and went through a debottlenecking process so that we know we've got the full 13 million tonne capacity available to us. So there were some overhauls for crushers, but there was certainly the debottlenecking within the plant itself. But as that wave of production came out later in the quarter itself, there was less demand on the plant itself. But as I say, carrying those stocks into this first -- the first few months of this new half and this quarter now, the third quarter, you'll see us convert a lot of that ROM stock into saleable coal production and sales and cash, pretty smartly. So our projections as far as stocks go, that we can pull them down pretty quickly over this next half to a more reasonable position as we narrow in on our year-end.

[Glyn Lawcock]

So Paul, just if I can ask a follow-on to that then, please. If we say you put 13 million tonnes, your plant's running 13, should I think of it as like a 90% yield? Or could it be higher than that because you're running sort of less than 50% net, you're running sort of, as you said, the quarter just gone 33? Because you've got 2,000 tonnes an hour of bypass. Are you actually washing some coal to produce an even better quality thermal? Or does it not need to be washed at all to generate that sort of 9% premium to the [ Newc ] Index?

[Paul J. Flynn, MD, CEO & Director]

Yes, unfortunately -- it's a good question, Glyn, but unfortunately, it just doesn't happen in that way. I mean, there's a mining sequence that we need to follow. So certain seams that have different characteristics which appear at certain times that we're working through, which require different bypass and washing and blending strategy. As you know, we're now dipping down below the Braymont, which is, if you like, the halfway mark, but 30% of the total reserves there, the halfway mark in terms of the mining sequence as the seams present themselves. And as we've always said, as we get deeper, we know that the ash levels do come up a little bit, but the coking properties improve. So the washing capacity, being able to wash at that rate was all about being able -- once we're on the other side of the Braymont, to be able to do that at the full 13 million tonnes as required. So to come back to the -- if you're really running at 13 for a whole year as you've said, which we obviously haven't been, but we're ramping up to be able to do with the mining sequence that supports that year in, year out as opposed to, as I said, the more tactical approach that was evident in the mining sequence at the back end of last financial year, times by an overall yield which you've put at 90%, I think that's not unreasonable if you had a 50-50 split, but it might be slightly higher, as you say, if we're focusing more on the thermal. Obviously, it hasn't started that way. It's now ramped up nicely. So second half will look similar, I think, in terms of total numbers. So our guidance, we're very satisfied with the guidance position we're in. But you're right, you can bypass more into the thermal market. And certainly, that's been beneficial, and you'll see that in the financial results in 4 weeks' time.

[Operator]

So we're down to our final question, which is a follow-up from James Gurry from Deutsche Bank.

[James Gurry]

Yes, I just wanted to relate 2 topics that you probably don't want to talk about, the Boardwalk and a buyback. I just want to clarify, those 34 million shares, right, they are part of your issued capital at the moment, yes? And that 3% of capital. Are they likely to get canceled, right, if you do nothing with those -- if those assets don't progress under a certain time line? Can you just clarify that?

[Paul J. Flynn, MD, CEO & Director]

Thanks, James. Those shares are fully paid ordinary shares. They are on foot but they are subject to restriction deed. If you go back and have a look at the merger documents, that's all spelled out in color there for you, if you're so minded to do it. So they don't change. They don't expire. The rights don't change unless there's -- some of the projects over which they had -- they were attached, were issued a mining lease or there's a change in control of the company. So those are the only 2 instances in which those rights -- those restrictions -- that restriction deed is released. But otherwise, they're fully paid ordinary shares, they've got no voting rights, no dividend rights. They just sit there until either of those 2 events occur. But they are in the overall 1.03 billion shares that we have on issue.

[James Gurry]

And the [ entity ] who holds them, can't transfer them.

[Paul J. Flynn, MD, CEO & Director]

Can't transfer them, that's right. Can't transfer them.

[Operator]

Thank you. We've got no further questions in queue, so I'll hand back to you, Mr. Flynn, for any closing remarks.

[Paul J. Flynn, MD, CEO & Director]

Thanks very much, everybody, for dialing in. Appreciate the time. Thanks very much for listening in to what we think is a good quarter. And we're certainly keen to bring on the second half and the run home into a very good year for us overall. Any other questions, please, you know where Mike -- to find Mike from a media perspective or the rest of us from any of the other follow-ons from today's discussion. Thank you.

[Operator]

Thank you so much, ladies and gentlemen. That concludes the Whitehaven Coal December Quarter Investor Briefing. Thank you once again for joining us today. You may all disconnect.