Whitehaven Coal Ltd

ASX:WHC

Earnings Call Analysis

Strong Quarter for Whitehaven Coal with Effective Integration of Queensland Assets

Whitehaven Coal reported strong results this quarter, especially with the integration of newly acquired Queensland operations. The company achieved ROM production of 4.8 million tonnes in Queensland and 4.9 million tonnes in New South Wales, both in line with guidance. Queensland sales were 3.2 million tonnes, slightly lower due to logistical issues. The average coal price was AUD 271 per tonne in Queensland and AUD 207 per tonne in New South Wales. Safety performance improved significantly, with a 30% reduction in TRIFR in New South Wales. Looking forward, the company anticipates continued strong performance and better coal pricing due to supply constraints.

Strong Production Growth in Queensland

The recent earnings call for Whitehaven Coal highlighted a strong start to its fiscal year, particularly following the acquisition of Queensland assets. In the latest quarter, Manageable ROM coal production reached 9.7 million tonnes, a significant increase over the previous year's figures of just 4.4 million tonnes. The company indicated that both Blackwater and Daunia operations had successfully transitioned under Whitehaven’s management, showing healthy production volumes that surpassed expectations.

Impressive Sales and Price Realizations

Sales from Queensland operations totaled 3.2 million tonnes, showcasing robust demand despite experiencing delays due to logistical issues with rail services. The average coal price achieved during the quarter was AUD 271 per tonne, closely in line with historical pricing metrics. For New South Wales, coal sales reached 3.3 million tonnes, bringing total annual equity sales to 13.2 million tonnes. Average prices in New South Wales were slightly lower, with AUD 207 per tonne reported for the quarter.

Challenges and Improvement Initiatives

Despite these positive results, management acknowledged challenges in sales stemming from 'pathway allocation' issues at Daunia, which resulted in some sales slipping into the next quarter. The good news is they are taking immediate steps to heighten rail capacity and are optimistic that once operational issues are resolved, they can normalize production levels back to previously expected pricing realizations of 85% to 90% of hard coke indices.

Financial Guidance Moving Forward

Looking ahead, Whitehaven expects continued growth in production with a full-year guidance for ROM guidance indicating a total of 24.5 million tonnes across all operations, with New South Wales continuing to perform well. Additionally, operational costs were reported to sit slightly above expectations, but management highlighted ongoing inflation in the sector, which they believe will moderate in the future.

Strategic Capital Investments and Future Planning

Capital expenditures were carefully managed, coming in at AUD 380 million, below the bottom end of guidance. The management team projected an important decision regarding capital allocation in newly acquired assets in Queensland, advocating for moderate investments in both Narrabri and Vickery while closely monitoring operational performance. Furthermore, they've manifestly stated they will not pursue additional acquisitions, indicating a commitment to maximally leverage the potential of their existing portfolio.

Market Outlook and Industry Position

The coal market outlook appears favorable as the company anticipates continued upward pricing pressures driven by structural supply constraints. Management suggested that prices are expected to remain strong given the constricted supply environment for both metallurgical and thermal coal. This resilience is bolstered by their strategy of operating across different regions, diversifying logistical risk.

Earnings Call Transcript 2024-Q4

[Operator]

Gentlemen, the Whitehaven Coal Q4 FY '24 quarterly production report. [Operator Instructions] Following management commentary, we will open the call for questions from sell-side analysts. [Operator Instructions] Thank you for joining us today.

I will now hand over to Managing Director and CEO, Paul Flynn. Please go ahead.

[Paul Flynn, executive]

Good morning, everybody, and thanks very much for taking the time to dial in to the June 2024 quarterly production report for Whitehaven, last quarter of the year but also first quarter, if you like, of our ownership of our Queensland operations.

So a little bit of a change in terms of the structure of our report, as you can see. And so I'll go through that in a normal fashion, and then we'll find ourselves at the Q&A session, which I'm looking forward to. Lots of different questions about the various parts of the business.

In summary, it's been a very good quarter for us. Very pleased with the results that we've been able to achieve both in New South Wales and also in our first 3 months of ownership of our Queensland assets.

So strong Queensland production has been very good across both sides. The acquisition completed on the 2nd of April, certainly very positive, and transition has gone exceedingly well and the integration process continues at pace.

Volume-wise, we've done very well, we think, across the first quarter of our ownership, coming in with ROM production of 4.8 million tonnes, in the guidance that we gave. Queensland sales at 3.2 million tonnes reflect some slippage, which will fall into the September quarter, and I'll get to that a little bit later. That's primarily focused on Daunia. So I'll explain that a little bit further.

Average coal price for the quarter of AUD 271 was achieved from the Queensland operations for the quarter, as you all know, a largely inherited position from the book that we've acquired.

Over to New South Wales, just quickly at a high level, also quarter production has gone very well. ROM production there at the managed level, 4.9 million tonnes across the operations, totaling out for the year for New South Wales at 19.7 million tonnes, which is well within our range of guidance as well.

New South Wales equity sales of produced coal of 3.3 million tonnes for the quarter, 13.2 for the full year '24, also within our guidance range.

Average coal price achieved, AUD 207 per tonne for the quarter and AUD 217 per tonne for the full year.

And of course, a couple of movements there in terms of the operational components in our mix. Vickery tonnes have come out for the first time now in the month of June as budget and planned, which is very good, and the completion of mining at Werris Creek in April was obviously a milestone as well.

Flipping over to the group performance quickly. Safety performance has been excellent in New South Wales. We've been really good at continuing the positive trends that we've been exhibiting over the last few periods and down to 3.3 our TRIFR in New South Wales, which is quite incredible, considering the operations is a blend of open cut and underground, so a 30% improvement on FY '23, a terrific performance from our team. The TRIFR for Queensland is 6.6, and so we think there's clearly upside here for improvement as we integrate the assets into our broader group.

Managed ROM production of 9.7 million tonnes for the quarter, and the total for the year, obviously, New South Wales plus 1 quarter of Queensland at 24.5 million tonnes in FY '24, 34% up.

Equity sales does the same thing essentially and

[Technical Difficulty]

[Operator]

This is the operator. We seem to have lost connection with the speaker line. Please hold while we get them reconnected.

[Paul Flynn, executive]

Back online. My apologies there, I'm not sure what's going on. I'm not sure exactly when I lost you. So I'm just going to quickly go back to safety performance has been excellent for the period. Fantastic. 3.3 is the TRIFR for New South Wales. Queensland came in at 6.6. So some work to be done there, as I say.

Managed ROM coal production at 9.7 million tonnes for the quarter, certainly very good; at full year of New South Wales, 1 quarter of Queensland, 24.5 million tonnes in total for the year.

Sales does the same thing, 6.5 million tonnes for the quarter, 16.4 million tonnes for the full year on an equity basis.

Revenue is 59%, metallurgical coal; 41%, thermal. That mix is slightly up from what we expect from the aggregate of these north and south, or New South Wales and Queensland together, but I'll speak to that a little bit soon. And obviously, we've experienced some bumpiness in terms of train parking at Daunia, so I'll get to that in a minute.

Rounding out the balance sheet, net debt is AUD 1.3 billion at 30 June, reflecting our prudent capital management.

Now the table results are depicted over onto Page 2, just giving you the ROM totals for the quarter, which I've already stated some of them. And just to remind everybody that the equity balance is, of course, all of Queensland and essentially 80% of the managed tonnes of New South Wales, just to remind everybody because the numbers, if you're not fail with them, takes a little bit of reconciling to go through them.

So again, ROM total, 9.7 versus 4.4, up the ROM managed level across the whole business. Saleable coal production at 8.3 versus 3.9. These all reflect a slightly greater than doubling of the volumes and across what you would have seen historically for the business. And again, the equity tonne is still 100% of Queensland, and essentially, we will fund 80% of what you see at the managed level in New South Wales. So 8.75 in the equity ROM coal production tonnes for the period, for this quarter, versus 3.5 for the previous quarter. That trend follows down in this table as you go down.

Queensland, of course, is on a 100% basis, as you can see in the table, 4.8 for ROM coal production; 3.98, total coal production. The sales of 3.2 was previously stated, and our managed coal stocks in Queensland at 1.56 million tonnes for the year-end.

New South Wales numbers I've also mentioned there as well, just so everybody -- I know it will take a little bit of time just to work out the difference between equity and also managed, but that table should be very useful for you.

Over in the Queensland operations, as I say, a strong quarter, very pleased with the production results for the quarter. So I think effective, safe and smooth transition into our hands, I have to say, for these 2 operations, which is very pleasing from our perspective.

Volumes at 4.8 million tonnes is certainly very, very positive. The saleable coal production, as I say, 4 million tonnes with sales of 3.2. Now sales have been affected in this quarter at Daunia, and the cause of that largely is the allocation of pathways to Daunia by the rail service provider out of essentially the bundled package where Daunia was previously managed. Obviously, given the ownership of its previous owner, it was run as part of a portfolio. And the separation of those pathways allocated to us did take some time. And so we have sales, which have slipped into the September quarter.

Now that is, we have brought into service one of the competitors to augment the amount of haulage capacity we had at Daunia, so that has helped. And we see that is normalizing as we continue forward. But there has been some slippage into the September quarter, which we have to acknowledge.

Stock positions as a result in Queensland are pretty healthy. So again, production-wise, we're very pleased with both sides. Daunia at 1.3 million tonnes is probably a little bit lower than what it actually is inherently reflected there just because we were cautious not to load too much product coal onto the stockpile if we were struggling to get the allocated pathways necessary. So we did actually turn our focus a little bit away from coal production on to overburden removal. So even despite that, the total at 1.3, a very good total and certainly reflective of the production averages that we've given you when we announced the deal.

Blackwater also had done very well in that regard, 3.6 million tonnes for ROM coal production. Saleable coal production of 3 million tonnes and sales of 2.3 million tonnes, again, reflected a very, very good transition and I think steers everybody quite clearly to what the productive capacity of these assets are. And we all acknowledge that June quarter in Queensland is typified by decent weather. And so production in the June quarter does generally do pretty well. But I think this point is a very good positive sign in terms of what these assets can do.

I know there's some curiosity about how the sell-down process for Blackwater is going. I can say to you that, that is going well. And we feel pretty good about that process. And I know we do like some more information about that now, but it is coming to the important stage of that process now. Bidders are well engaged. We're very positive about what we see out of that. So just stay tuned for the next month or two as that progresses to something that is solidified.

New South Wales operations, as I said, had done well during the quarter, so very nicely, open cuts done nicely, and Narrabri has certainly shown very good signs of improvement there, as you can see. 4.9 million tonnes was excellent, 13% up quarter-on-quarter and saleable coal production at 4.3 was also higher by 11%. Stocks are healthy at 1.1, more healthier than where they were.

So if I just go to the mines quickly. Maules Creek consistently had performed well during the course of the year, so that's nice to see. 2.6 million tonnes for the quarter, a little bit less than the March quarter, but certainly a consistent performance from Maules Creek across the year, rounding out 11.4 million tonnes, which is very solid, and 20% up on, obviously, a difficult year for last year. It just has come to a solution there, and we have transitioned to 100% [ HSE ] company at the site, which is positive.

Narrabri, as I say, had done well, so 1.5 million tonnes. That's quite a step-up from where we were with a difficult quarter in March and, on an annualized basis, gives you a better indication of where this is trending. So the improvements have been very positive to see. And so even though 4.8 million tonnes for the year was just under the guidance of where we were as a site at 5.1 million tonnes, we still see that as a very positive trend. And the improvements that have been made are continuing into this new year. So that certainly is trending in the right direction.

Gunnedah Open Cuts, if you're not familiar with the GOC acronym, Gunnedah Open Cuts has also done well during the course of the period, 3.5 million tonnes, broadly in line with last year. Obviously, Werris Creek has come to a conclusion, so it made very little contribution during the course of the production totals for this quarter.

But Tarrawonga itself has done 600,000 tonnes in the June quarter, which was very good. And obviously, we've got 100,000 tonnes out of Vickery in line with our plan, which have emerged in June of this year. And so that's pointing in a very good direction. So the quarter itself for New South Wales, I have to say, is positive.

Over to equity coal sales and realized pricing. I know there'll be lots of interest in that. As I mentioned earlier, the split between the products at 59% to 41%, that's not indicative of where we think this goes and where we know it will go. This is obviously a revenue measure, and so it's affected by price and volume. And so I just want to draw a little bit of that out for you and a couple of key stats here in the next paragraph, of course, in this report.

Now the split between the products, between the primary coking products between hard coke and the semi-hard, 55% is low relative to where it is ordinarily through our production year. This is just 1 quarter's data report, and we shouldn't infer too much, but that is what's popped out, obviously, in the course of the production split in this period.

And so 55% to 45%, the primary coking products versus the PCI and semi-soft bundled into the 45%. As we've guided to you before, that should be 65% to 70% in an ordinary year, and this is just a timing difference in the first quarter of our ownership. So I shouldn't be concerned too much about that. And as I said before, the Daunia sales were lower, affecting the revenue total split because of the parting issue that I mentioned earlier. So the rail service provider is obviously working with us to try and recover the ground that we have lost in terms of pathways that we should have been able to achieve during this quarter and now fall into the September quarter. So two dimensions there that need to be taken into account. But otherwise, sales have gone well. Product qualities have gone well.

And we've given you also the realizations for the products there in terms of the 2 product groups there. So if I go to the hard coke and semi-hard, 81% of the PLV hard coking price, for everyone's reference, so that would be a good thing for people to be able to use going forward. And in this market, PCI and semi-soft is achieving about 66% of the PLV hard coke price. Again, another metric that will be useful for you to use as you're modeling out both.

So we know that, that part of the market is heavily influenced by Russian supply into the semi-soft field and the PCI market, so it is lower than you would historically expect from a realization perspective through a cycle. Normally, that's around 75% of the PLV hard coke, as we've noted below. And the primary hard products that we're selling, both out of Daunia and also Blackwater, will get between 85% and 90%, if you reflect historically on how the realizations work. Again, because Daunia, being the better product quality of the group, from Queensland, less represented in this quarter than we otherwise would have because of these parting issues, that obviously has affected the revenue split in this quarter, which you should see normalize to the 65% to 70%, as I mentioned earlier.

New South Wales operations gained AUD 207 realized, good result, $137 for the quarter versus $136 the average of gC NEWC during the quarter. And across the year, we did a little better than that, again, we realized USD 140 versus the USD 136 for the year taken as a whole, so a pretty good situation there.

The market outlook itself, looking at both sides of our business now, we are exposed to what we see as 2 structurally constrained supply dynamics here. Certainly, in the met coal side of things, there's certainly news. I mean recent news has obviously highlighted constraints in supply. And on the thermal side, we also see similar sort of changes coming on as well. So we feel good about the outlook in terms of better pricing in the future and certainly see a muted supply response to what is already very good pricing even today at [ AUD 230, AUD 235 ] for the hard coke versus the [ AUD 135 ] for the Aussie. I mean very good pricing but very muted supplier response that could respond and take advantage of that. So that certainly will put upward pressure on coal prices going forward.

Over the page, production costs, we've come in at $1 over at the upper end of our guidance, $114. This is unaudited, but we feel pretty confident about those numbers. Unit cost at Queensland, obviously, we've only had a couple of months of ownership here and after a few weeks since the close, we'll bring those finalized numbers to you with the FY '24 results in 4 weeks' time, in August. At the same time, I'll give you, obviously, the full year guidance for FY '25.

New South Wales domestic coal reservation scheme, I thought we just -- notice that it sounds glorious as a scheme, it's actually a scam, with about 1 million tonnes totally devoted to that endeavor over the last 5 quarters. That has come to a conclusion. So that is good. Nice to see the back of that. At the same time, obviously, 1st of July came about a change in the royalty rates in New South Wales. So for everyone's calculation, open cut's at 10.8%, underground at 9.8%.

Development projects, so I'll just call out the highlight, our spend during that period, really, is Vickery related. So early mining at Vickery, $31 million went into that, setting it up, as I say, on time and on budget, doing very well and tonnes have emerged in June as expected and on time.

Narrabri Stage 3 continues to move its way through the various stages of activist engagement. And having pleaded this case against the Narrabri Stage 3 EPBC approval, there is a further step required here, which is the activists have sought leave to appeal to the high court. We don't think this has any merit over and above what has already been knocked down twice convincingly in the 2 previous court appearances of this case, and we expect a resolution for this consideration of leave to be granted or not. We think there's low likelihood to be adjudicated in the next month or so. So stay tuned for some movement there.

Winchester South, of course, is going through its various Land Court preparation processes. As everybody knows, anybody who's objected during the course of the exhibition period for the EIS has an opportunity to go to Land Court. That is the way of the Queensland process. And so we're in the prep stages there, both legally and otherwise, to make sure we defend our project.

Just looking at the page, finally, just to wrap up the guidance here. As far as the guidance goes, ROM guidance came into our group guidance well, which is good; managed coal sales within guidance; equity coal sales within guidance. We have come, unaudited, about $1 over the top of our guidance due to inflation and less tonnes from Narrabri than we otherwise would have liked.

And as we've been managing our capital spend, as we alluded to in previous quarters, we were trending towards the bottom end of our guidance. So we're coming around $380, which is under the bottom of our capital guidance for the year. Again, it will be confirmed with the closure of the books off and the auditing process with the full year results.

So overall, a very good quarter. We're very pleased with both ends of this. New South Wales has done very well in closing out the year, first quarter of Queensland, certainly, a pretty handy, safe and seamless transition into our hands for both Blackwater and Daunia. We will be giving guidance to you as we close out the full year financials on the 22nd of August. And of course, we've highlighted in the March report in terms of the format in which that guidance will take.

So with that, thanks for your attention. Hope you stay on for a bit of Q&A, and I'll hand back to the operator to get the Q&A started. And again, apologies for the technical glitch that saw us drop the line there during the course of the discussion. Thank you.

[Operator]

[Operator Instructions] First question comes from Rahul Anand from Morgan Stanley.

[Rahul Anand, analyst]

Look, thank you for clarifying that you're expecting to go back to the 65-35 split in the Queensland assets in terms of semi-soft products. That's helpful. I just wanted to understand perhaps two things as a follow-on from that comment, when roughly do you envision getting there? And then how does the coal quality look like over the next 5 years, I guess, is there any variability in the coal coming out of those mines that we need to be aware of in terms of the pricing side of things? That's the first one, and I'll come back with a second.

[Paul Flynn, executive]

Yes. Thanks, Rahul. And I've got, as you know, Ian and Kevin here with me as well, so they can jump in and assist with answers to questions along the way. Look, there's nothing unusual, I would have said, to draw out of the coal split other than the fact that this is just what we've inherited in terms of timing of the sales at the fourth -- through the quarter. The sales that we booked in this quarter really had nothing to do with our control of the operational dimensions of the potential line we can take ownership for because that's been under our stewardship. But the book of sales and the timing of when PCI is delivered versus the hard coke, that was just in train as it is.

And as you know, there's been a fair queue of fuel coke boats off the coast looking to be loaded, so that the timing of them even coming into the port has been a challenge. And there are quite a few sales in the book, which have been caught up, where there have been co-shipper related activities there, where we've delivered one part of the hold and another shipper has contributed another piece from a blending perspective. And that also has influenced when that particular coal quality was delivered as opposed to another.

And so look, there's nothing too much to infer from any of that. But over a year, we should be gravitating back to our 65-70 split of the primary coking products versus the secondary, if I can call them that. And as I say, putting the hard coke and the semi-hard in the primary bucket and obviously, the semi-soft and the PCI in the secondary bucket. But nothing you should infer from that. The 65% to 70% across a year, we're happy with that split, and this is just short term.

Obviously, if we had put, as I said, more of the Daunia tonnes in there, and this is -- what I'm trying to explain there is just we've had less than the necessary uncontracted pathways allocated to Daunia than we would have liked and we're contractually entitled to, I might add. But there was a bit of a glitch in terms of the, if you like, segregation of Daunia out of the previous owner's contractual and portfolio-managed position set up as a stand-alone allocation to us. There was a glitch in that. And so we received less pathways than we would do. And so we've been working with them closely to make sure that's recovered as quickly as possible, and so some sales have slipped into the September quarter.

But Daunia is coming back. To the point I was making about realization, Daunia obviously is the higher end of all those products, and so that has influenced the split of revenue in this particular quarter. So then we'll see more of that fall into Q1 of the new financial year.

[Rahul Anand, analyst]

Okay. So does that then suggest, Paul, that your stocks that currently sit in the Queensland assets are probably quite heavy on the primary product versus the secondary?

[Paul Flynn, executive]

Yes. Look, well, the product stocks themselves are healthy for two reasons: firstly, Daunia, because of that issue I've just spent some time discussing; and then secondly, we've actually got some healthy stocks at Blackwater as well. Nothing sales related in terms of the logistics movement, that is obviously on a separate line and moving well and no problems there. But we have built some stocks ahead of our planned shutdown in the September quarter for the CHPP just to hold a bit more stock back. So product stock levels are good for those two reasons.

[Rahul Anand, analyst]

Okay. So if the production splits are at 65-35 already, then it sounds like it's just that the sales book has been skewed and that's what's caused your revenue differential, I guess.

And then the second part of my question was just around the coal quality and if it changes in the foreseeable future. You've had the case for about a quarter now. Any sort of update there?

[Paul Flynn, executive]

Nothing changed from our assumptions there at all, Rahul. We're quite happy with what we're seeing there. So that's all quite reassuring.

[Rahul Anand, analyst]

Perfect. Okay. Look, my second and final question is around Narrabri Stage 3. You've called it out in the release today as well that it seems to be progressing in the right direction. I guess my question was more around, from a top-down perspective for the group, in order to -- once you have made the Blackwater sale and once you've got the cash through the door, I guess you're going to have two ways to deploy that capital. One is going to be Narrabri Stage 3, but then the other is perhaps to build Vickery full scale.

Given how Narrabri has performed in the past 2 years, do you think that still takes precedence over that Vickery development? Or do you think you'll go down Vickery before going down an expansion at Narrabri and maybe just keep it at a lower production setting or something of that nature that you can do there?

[Paul Flynn, executive]

Yes. Look, it's a good question and probably requires a little bit more time than we have here, Rahul, but it's a very good question. I'll try to answer the best I can within the time constraints that we've got.

In terms of Narrabri's performance, we've talked about obviously it being disappointing in this year. And so we've talked about a close examination of the capital involved in Narrabri Stage 3. And you can see that we've wound that back considerably from where we've been in the past. And when we come out with our guidance for that as well as part of FY '25 guidance on the 22nd of August, you'll see a further moderation in terms of how capital will be allocated to Narrabri.

Now we think Narrabri is improving nicely, don't get me wrong, that's good. But we certainly have taken the opportunity, with the advent of the Queensland business arriving into the portfolio, to examine what is the best use of capital across the entire book. And that includes Narrabri, and that includes Vickery, as you noted.

So I'm not going to answer the question here, but what I'm saying is that, from an expectation perspective, our view is that there'll be no immediate requirement to purchase a longwall or replace a longwall over the next few years. And so I know that we've talked about that in the past being part of Stage 3, but of course, these delays that we've experienced, and the operational performance, does contribute to a reassessment of what you think the appropriate allocation of capital is given the performance of the site.

[Rahul Anand, analyst]

Okay. That's excellent. That does answer a lot of what I was asking. Look, I had one more question around cost, but I'll leave that to someone else, so I'll queue up again.

[Paul Flynn, executive]

Okay. Thank you.

[Operator]

Your next question comes from Lachlan Shaw from UBS.

[Lachlan Shaw, analyst]

So just a quick clarification on Daunia. So you're suggesting that the catch-up on rail is more September quarter rather than December half, is that the way we should think about it?

[Paul Flynn, executive]

Say that again?

[Lachlan Shaw, analyst]

Sorry, just the catch-up on rail shipments in Daunia, out of Daunia, is that a September quarter issue? Or is it more of a December half -- quarter issue?

[Paul Flynn, executive]

Yes. Look, I'd like to say as much as we can in September, but I think it would be difficult for us to say that there might not be some slippage into the December quarter. Obviously, we don't control all of that. We have taken steps, obviously, to bring in a competitor into this to obviously give the encumbered a bit of a hurry up.

But there's two dimensions here, so it's not just the rail part, and that is the primary issue. So it's the below rail piece of it that has been the primary issue. Then it's obviously the number of trains turning up when you do have parts. And so I think September, we'll see the bulk of it addressed. But I wouldn't say that there wouldn't be a little bit of slippage into the December quarter. I think it's a little early to be calling that one.

[Lachlan Shaw, analyst]

Yes. Okay. Got it. Understood. And then just my second question quickly. So just maybe for Queensland overall, you've got fairly healthy inventories right now. Could you maybe comment -- notwithstanding the maintenance issues that you're sort of getting prepared for, could you comment on the inventory? Is that where you sort of see it in steady state? And then I guess related to that, just any sort of, again, insight. You've had the case of Blackwater now for a quarter, any insight there in terms of the pre-stripping and what shape that's in?

[Paul Flynn, executive]

Yes. Look, the stock levels, I'd say, a little bit higher than what we'd otherwise see. I would expect that to come down a little bit, both in the case of Daunia, obviously, for the reasons we just described, and also because we do have a shut coming next quarter at Blackwater. Look, the Blackwater's railings and logistics system has been working absolutely fine, nothing to see there. So we feel very comfortable about all that. And generally, the transition at Blackwater has gone very, very well.

You've raised a good point about the stripping. So I've got Ian handy here. He's been very keen to have a chat about that for everybody. So I'll hand over to Ian to describe where we're at with that.

[Ian Humphris, executive]

Yes. So Lachlan, a fair bit of focus on the drill and blast aspect there. Now we've got ourselves into a balance of short stock that allow us to keep everything running efficiently. I mean our target is to increase that. But we've transitioned over -- well, the final transition was June, July, but over the quarter, transitioned the explosive supplier at Blackwater, and we're seeing some very positive upside there. We've worked on increasing license capacity and bringing the teams onboard. Whitehaven brings a high level of expertise in that space. So that's all progressing.

I think the other thing I'd point out re stocks that probably people a bit different to Whitehaven evolve with dragline pits, the coal gets uncovered and it's fairly lumpy. It's not uncommon. A day or 2 can sort of be another difference of 1 million tonnes plus in the pit as the strip becomes available. So you will see a little bit of that going forward, too.

[Paul Flynn, executive]

Just to add to Ian's summary there, I think as we've highlighted, we knew that there's obviously an investment in stripping required here in the pit. And as Ian described, it's blasted inventories as well as just pre-strip, so we haven't owned that for some time. And as we talked about before, we did have protections in the contract to deal with the pre-strip. So the pre-strip -- the asset was handed over to us in compliance with the strip ratio requirements of the contract. But we do think the inventories are pretty drilled and blasted, ground and overburden in advance are low for what we want in terms of the steady-state operational outputs we're looking for. And so we do need to invest in that. So I think that's just worthwhile stating. And that doesn't happen overnight, of course. You'll see us doing that over the next 12 months at least.

[Ian Humphris, executive]

And that May performance in the pre-strip was the best month they've had. It's sort of public, too, you guys should know very well.

[Paul Flynn, executive]

Yes.

[Operator]

Your next question comes from Rob Stein from Macquarie.

[Robert Stein, analyst]

Just a question on the BHP contingent payments, how will they be treated from an accounting point of view in upcoming results? Just wondering whether they're an impact against realized pricing, whether they flow through to cash, how will they be reflected? And I've got a follow-up.

[Kevin Ball, executive]

Yes, I'm happy to answer that question. So you need to sit down and work out what you think you're actually going to pay over the period. So we'll do that probability-based assessment based on what we think coal price is going to look like and what volume is going to look like after that period. And then what happens is that you establish a -- you put a liability on your balance sheet for that expected payment. And in effect, that just finishes up in part the purchase price. So it doesn't impact your realizations, your realizations of what you send out the door in an invoice. And how it comes through as an amortization charge effectively is an amortization charge on the mineral tenements you've acquired, Rob.

[Robert Stein, analyst]

And in terms of capital allocation going forward, with those contingent payments going out, with the CapEx expected, how should we think about allocation back to shareholders in that context?

[Kevin Ball, executive]

I think you should think about that the same way we've been saying probably since about last September, October, how we've described that is that the dividend policy -- or the capital allocation policy remains the same. The dividend is likely to be out of the New South Wales business rather than out of the Queensland business because the cash flow from the Queensland business will be used to retire the deferred payments to BMA and the buyback is on hold for a couple of years while we do that. So we think we reward shareholders with dividends out of New South Wales, and we'll have that decision in August out of the Board for the final dividend and look forward to resuming the full suite of approaches we've got available to us in an appropriate time in the future.

[Robert Stein, analyst]

That's really good. And just sorry, one last one, just a modeling question. When should we think about the timing of those cash outflows to BHP? Is that at the end of the financial year, end of quarter?

[Kevin Ball, executive]

There are two points. So for the benefit of the model, so I hope to answer a few questions for a few people here. The payment of BHP or BMA, the deferred payments that aren't contingent, are due like in the first week of the June quarter each year, and the payments for the contingent amounts are due in the first week of the September quarter each year.

[Operator]

Your next question comes from Jon Sharp from CLSA.

[Jonathon Sharp, analyst]

The first one on the CHPP closure in September of Blackwater, what's the planned shutdown period? And is it just normal scheduled maintenance or is there something specific? Did BHP keep up the planned maintenance there or is there extra work to do? And how do you see affecting sales, any unwatched product coming through? And also, is there any other CHPP shutdowns during the quarter?

[Ian Humphris, executive]

Look, it's pretty normal. It's an annual shutdown they do in sort of July each year, as I understand it, nothing special. It's all on track and progressing and should be done very shortly.

[Jonathon Sharp, analyst]

Okay. Any time hearing that?

[Ian Humphris, executive]

It will be done by the end of this month.

[Jonathon Sharp, analyst]

Okay. And just on Narrabri, a good comeback there after the issues you've had. Have you still got the washout in the face? Does it extend into the next block? Also, when is the next longwall move planned? And also, do you see Narrabri ever getting back to 7 million tonnes? Or can we think of it more of a 5 million tonnes to 6 million tonnes hit now?

[Ian Humphris, executive]

Okay. I'll try and take those in order. So yes, we've still got washouts in the face. But as you've seen in this quarter, the site's ability to manage those is we've got good consistent production going on. That's on the back of a lot of the work we've done in and around the chain and flight bars, et cetera. I think we've explained to you before a lot of work going on as far as longwall health more broadly. And it's a question of trying to keep good consistent production there, steady, avoid delays. And again, I think we talked to you about sort of changing the maintenance regimes to have more smaller ones, et cetera. And that all appears to be working, and that's what's delivering that sort of constant production levels you started to see in the quarter.

We should go into the move December, January. So that's all being scheduled and worked through at the moment. And I think previously, as we've indicated, that if you look at the washouts, if you're trying to put them in a sort of percentage basis, that will be about 50% of what we've seen in this block, in the following block. Obviously, they go across. But as we progress in the subsequent blocks, they reduce in number.

[Operator]

Your next question comes from Chen Jiang from Bank of America.

[Chen Jiang, analyst]

Congrats first quarter of operating the newly acquired Blackwater in Daunia and Queensland. That is the state Whitehaven never operated before. Two questions from me, please. So firstly, on the Daunia transition-related railing constraints, I understand it's now resolved or improved. But given it's your first time operating in Queensland, like rail issues or logistics from Queensland is kind of common and it could be a recurring issue, I'm just wondering what have been done to avoid this happening again? And how does the rail allocation work for Blackwater and Daunia to Whitehaven after BHP from the rail operator?

[Paul Flynn, executive]

Yes. Thanks, Chen. Yes, good questions. Look, a couple of things I'll just try to draw out. Firstly, it's worthwhile just noting, obviously, the different rail systems that the 2 mines work in. So Blackwater rail system, no problem, feeling very good about that. We've got plenty of capacity there for above and below and port, so we feel very good about that. No disruptions you should see there other than the normal things with planned maintenance and so on that the service providers would normally bake into the system.

Daunia is a separate matter because that system, obviously, is a very, as you know, in the central zone in the Bowen Basin, congested area and does, as you rightly point out, from time to time, have its issues. The issue we observed, and I can't speak to anyone else but I can just speak to our experience and our interaction with Aurizon in managing this issue, there are obviously two pieces of that puzzle, the below rail service, obviously, the pathways that we refer to that we haven't had sufficient haul, is distinct and separate from obviously the haulage side of things. And so just, again, noticing that, that should be part of your thinking as well.

Now our understanding is that historically, Daunia has just been part of the broader BMA portfolio. And so they moved pathways through their group as they saw fit, depending on who's got coal, who doesn't, whatever they want to do, whatever blending and outcomes, who want it. Now with the sale of Daunia, that required Daunia's allocation to be excised from the contractual position that BMA had and be set up separately to service our needs. And we understand that there was some challenges in the technology underpinning that, that didn't allocate to us for a series of weeks an appropriate contractual pathway position. And so obviously, we've raised that with the service provider and worked with them to try and remedy that situation.

Now they have, to their credit, certainly responded, and we were seeing more pathways to allow us to catch up the deficit. But obviously, we weren't able to deal with all of that within the quarter. And so we did bring in a second service provider to augment the capacity, to make sure that we could sell all the tonnes we wanted to sell. And so that has assisted us in doing that and we still are using that, quite frankly because we want to recover the ground that we've lost from the pathways that we didn't get during the second half of the quarter. That, as I say, that will spill into the September quarter.

But as you rightly point out, Chen, the system up there obviously is different from what we've experienced in New South Wales. It doesn't have the equivalent of the HVCCC that we have in New South Wales, so the way of working there is different. But we have a good relationship, obviously, with all the companies that we're using here, be that Aurizon or PN, given that we obviously use them and we are a very large customer of theirs in New South Wales. So we're working with them to remedy this situation. It's unfortunate, but it is a timing-related matter. And these sales are not lost, they just slip, unfortunately, into the September quarter. That's not our preference, but they'll just slip into the September quarter.

[Chen Jiang, analyst]

Yes, sure. Just a follow-up, so you're happy with Blackwater rail allocation, but Daunia now is allocated separately to Whitehaven because it used to belong to the BMA as a group. Is the second service provider, in addition to Aurizon a permanent solution for Daunia's rail allocation?

[Paul Flynn, executive]

No, look, I mean, just logistically, these mines are very, very far apart, Chen, and they are on different rail systems, right, going to different ports. And that's the benefit of the portfolio we got here that, obviously, what might affect one doesn't affect the other because they are different rail parts in different ports. So that's a nice diversification, lower risk as a result. Fortunately, and so as I said before, we've got plenty of above, below and port capacity for Blackwater, no issues there at all, happy with the way that system is working.

The Daunia one, as I say, is different. The extra service provision that we're receiving at the moment is a temporary surge capacity arrangement. No decision has been made as to whether or not we need something like that as a longer-term proposition. Obviously, the first port of call is to meet the immediate short needs of the site so that we can continue to operate seamlessly and to resolve these issues with the incumbent. And obviously, there is no opportunity to change the below rail service provision. That is a monopoly. But obviously, you could from a haulage perspective. But obviously, we want to resolve these issues as quickly as we can and get back to normal business.

[Chen Jiang, analyst]

Sure, I appreciate that. And then maybe last one, I know it's still early stage, but you have been operating at Blackwater for 3 months or over 3 months now. Are you then able to comment on the pre-stripping, in the additional work that BHP hadn't been done in the last few years that you need to do in the next 12 to 18 months? And how should I think about cost and especially the yield from the additional work and pre-stripping?

[Paul Flynn, executive]

Yes. Chen, look, as we've noted along the way, there's definitely an investment required in working capital here. We said that consistently since prior to even owning the assets, and that investment will continue to be made. That investment we'll highlight for you when we give our guidance in the new year. I mean that will be embedded in the cost. It is a cash flow impact. As I mentioned earlier, that exercise is not something that can be achieved overnight. It's going to have to be a consistent and diligent function of the mine plan to deliver increased inventories at blasted inventories but also pre-strip inventories. And as I say, that's not done overnight. So we will be investing in that over the next 12 months for sure, and we'll call that out for you when we give our guidance on the 22nd of August.

[Operator]

Your next question comes from Paul McTaggart from Citigroup.

[Paul McTaggart, analyst]

So I just want to follow back or go back to the realized pricing. So I think you pretty well explained, Paul, the difference between the kind of primary and secondary product mixes out of Queensland. But even for your -- and we talked a little about price utilizations for the secondary mix given the Russian product, et cetera. But even for the primary products, where it was 81% of the plant index site, the prime index, could you give us a sense of what you expect to get back for that primary product in terms of what it should be against the index? Because my recollection was, from prior guidance, it was more like 90% for prime and 85% for the -- sorry, 90% hard coke product, 85% semi-hard product, which would be over in the high 80s. So can you give us some clarification, please?

[Paul Flynn, executive]

Yes. Two different things there, Paul, just to call those out. Certainly, the 81%, obviously, is what the realizations currently are. The 85% to 90% that we're referring to is a historical perspective on the realizations that these products have achieved. So a reversion back to that is what we're talking about. That's the paragraph that sits below in the report and also the numbers that we've given you when we announced the deal back in the October pack. That pack, just for everyone's benefit, does have some useful information there in terms of what the historical realizations have been for these products. So the 81% that we've achieved in the short term is actually in line with our expectations, but that is the blend of two things, though, to get. That is the hard coke at Daunia and the semi-hard at Blackwater. So that is an average across those 2 different products.

Now as we've said before, the Daunia is the higher quality of the two, but it is the smaller portion of the sales mix. And so that's what I was referring to before in terms of the 59-41 is low. For those reasons, the mix is different and also the total volume is different in this quarter because of those logistics issues, I mentioned before, at the mine, Daunia, that has the higher realization product.

[Paul McTaggart, analyst]

All right. So it sounds like you're confident that once you get the Daunia production normalized, and it sounds like it is now, you'll be back in that 85% to 90% range for that primary realization. Is that right?

[Paul Flynn, executive]

Again, the 85% to 90% range that we've given is the historical averages. That's the historical average realization. So to the extent that there are period-on-period variations, we will have to live with that. That is part and parcel of being in the met coal market. We're happy that the guidance of that historical reflection remains true. And the only one which is the anomaly at the moment, as you know, is in the secondary products, where semi-soft historically had been 75%. But as you well know, Paul, that hasn't been that way for some time. And of course, the distortion is even greater at the moment because of the Russian influence on that part of the market.

[Paul McTaggart, analyst]

And one last one, just that surge capacity that you're using at the minute, the cost of that, is that kind of a normal level of cost? Or are you getting stung for that?

[Paul Flynn, executive]

Look, obviously, surge comes at a cost greater than your normal contractual costs. Who bears that cost? I think that's an open question. But yes, it does come at an incrementally higher cost in the short term. But we want to move -- these prices are good. We've got coal there that needs to move. We want to get it going.

[Operator]

Your next question comes from Glyn Lawcock from Barrenjoey.

[Glyn Lawcock, analyst]

Paul, look, it's obviously a good production quarter from Queensland and you've annualized it at 16 million tonnes. But if I look at the last 12 months, those 2 mines only did 14 million tonnes. So is that what I'm hearing through all your commentary, "I've got to catch up on inventory for stripping," et cetera? The June quarter doesn't have maintenance. Weather's good. They don't annualize it. I know you're going to give us guidance, but is that what you're sort of trying to intimate that it was only 14 million tonnes produced for the last 12 months and you've still got a lot of work to do to grow it from there?

[Paul Flynn, executive]

Are you referring to ROM, Glyn?

[Glyn Lawcock, analyst]

No, that was just saleable production, sorry.

[Paul Flynn, executive]

Yes. Look, all I'm saying there is that both mines have done well, production-wise. I think that's those numbers look pretty good. I do notice we have the benefit of good weather. So okay, you can put a little bit of variation into your numbers as a result of the March quarter usually has a bit more rain and cyclone activity, et cetera, et cetera. But no, I'm not saying that the numbers should be a lot lower than that. No, I think we're actually at pretty consistent levels.

And all I'm pointing to is, I think, it actually points to the potential of these sites because, as Ian referenced earlier, we have seen quite a few productivity improvements at Blackwater already. And so site records from the productivity and dirt movements have been achieved in the short time that we've had ownership there. And you may recall that we've actually added some more capacity into that total movement of dirt capacity. So we have put orders down for 2 new large 800-tonne diggers, which will replace ones on site. That's a rented unit that hasn't been as productive as we would like. So we are putting 2 new units in there. So there will be an uplift in capacity there as well.

Obviously, if we're going to do it another way, it means there's no more coal to be mined. Yes, so look, just acknowledging that the quarter has been a good one. The weather has been favorable. But I'm not talking down the balance of the year as a result, but people should be making major discounts on the quarterly performance on an annualized basis.

[Glyn Lawcock, analyst]

That's fine. And then just help me understand, what is the quantum of allocation you have like in tonnage per year for the 2 Queensland mines for both port and rail?

[Paul Flynn, executive]

We haven't given those numbers out, Glyn. But needless to say, there's no issue with Blackwater that is surplus to current run rate requirements for both above and below rail and also port. So you should not be concerned about constraints there. But contractual positions for Daunia have pretty closely matched to those 5-year averages. And so that's an interesting position. The question is, do you need more? Do you need less? What do you need? Our view, obviously, is we would like to ramp these mines up a bit more, Daunia in particular. And so if we're currently matched to the 5-year average, we may need to take on a bit more to do.

[Glyn Lawcock, analyst]

And that's available, do you think?

[Paul Flynn, executive]

Well, I can see lower volumes through that system in recent times for other reasons. And so talking to other players in the marketplace, we think there's capacity available.

[Glyn Lawcock, analyst]

Okay. And just a final question, just on the Blackwater sell-down. You mentioned 20%, but I think in a response to a question I asked 6 months ago, you said potentially up to as much as 30%. Is that still the case? Or is it just definitely only 20% now?

[Paul Flynn, executive]

Glyn, we have interest well in excess of the 20% that we would like to sell. We've initially outlined to everybody that also we have, like I said, determined and credible offers for more. And so we have some flexibility in our thinking in that regard. I don't suspect it will be more than 30%. Well, it won't. But the Board has not made a call yet because the process has still got a little bit of way to travel, but I wouldn't exclude the possibility of up to 30%.

[Glyn Lawcock, analyst]

And to still get the cash in the door for Christmas, what's the latest do you think you can close the deal to get the cash in the door by Christmas?

[Paul Flynn, executive]

Yes. Look, again, that's not entirely under our control. As I said, we would like to see positive movements in the next month or so in this process. But then you have to go through the regulatory processes of competition clearances and FERB and so on, and we can't control that aspect of it. But I would like to see this closed out within the next 2 months in order to be able to see catch around the end of the financial year. But again, it's subject to the regulatory things that we don't control.

[Kevin Ball, executive]

Calendar.

[Paul Flynn, executive]

Sorry, yes, calendar year, sorry. Thank you.

[Glyn Lawcock, analyst]

Yes, so within the next 2 months, you might then still get it in your Christmas stocking?

[Paul Flynn, executive]

That would be nice.

[Operator]

Your next question comes from Lachlan Shaw from UBS.

[Lachlan Shaw, analyst]

So maybe just to come back, a quick one on realized pricing, in particular around PCI, semi-soft. Obviously, it is weak at the moment versus history. But just interested in how you think about this sort of medium term in respect of your customers' steel mills and how they might start to tinker with responding to reduce their carbon.

[Paul Flynn, executive]

Yes. That's an interesting question. It might require a meeting actually, that one.

[Kevin Ball, executive]

It will require a meeting.

[Paul Flynn, executive]

That's a hard one. But look, I thought you're going in another direction rather than it being the carbon footprint. I mean, obviously, all our customers are conscious on their carbon footprint and obviously working through their various plans to decarbonize over time. In terms of the medium time frame you're talking about, and let's assume we're talking about the next maybe 5 years, 10 years, I thought you were trending more towards where does the secondary product -- the interest in the secondary products go. And my view of that is that I think that the interest in them increases. And the reason why I say that is because the primary hard has a relatively constrained production base. There's just not much expansion potential there. And we have a growing customer appetite for this stuff.

So semi-soft and the PCIs, I think, figure more in the mix in terms of as time progresses. And of course, how individual customers deal with their decarbonization objectives will be many and vary depending on the different steel companies using these products. So I don't see that being the big driver for these products. I see actually the underlying demand and the inability to bring on meaningful supply responses for that strong demand pointing to better pricing over time.

[Lachlan Shaw, analyst]

Yes, it's really interesting. And then, look, maybe just one quick one. So just a small detail here, Narrabri inventories sort of stepped up quite a bit in the quarter. How do you think about that? Is that sort of a healthy level on a go-forward basis? How should we think about that going forward?

[Paul Flynn, executive]

It did step up, which is good. That's positive. It was actually a little skinny there, obviously, with the lower production. So it's really just consistent with the more consistent production that's been coming out from the mine. So yes, I mean, that's positive. I don't see anything negative out of that at all. That's a good thing. So the more coal we have available to us, the more liberally we can blend across the group, and that's our objective. So we always want to have a bit of stock on the ground at the mine and also at the port at NCIG that allows us to optimize the blends. When we have less of one quality or another, be that the high CV or the mid-CV, that is constraining because then you don't have the flexibility to blend at will. So having a bit more stock on the ground is actually a good thing.

[Operator]

Your next question comes from Rahul Anand from Morgan Stanley.

[Rahul Anand, analyst]

Look, the only one I wanted to follow up really on was some comments in the release around inflationary pressures. And we obviously had a year where cost performance was just above guidance, and that's obviously been impacted by your production numbers this year. But you have called out continuing inflation in the market. We've seen several job losses coming about in the Western part of Australia. But how are you seeing New South Wales and Queensland going into the next year in terms of inputs and labor, et cetera, in terms of inflationary pressures?

[Paul Flynn, executive]

Yes. Good question, Rahul. Look, we are still seeing inflation in the business, no doubt about that. It's probably easy to answer your question in terms of how do you feel about the outlook. You pointed out the job losses obviously in the sector on the other side of the country, for sure, that will influence things. Availability of labor is better. We're not seeing that truly reflected in the price of labor yet. I do expect that to emerge and to be a softening there.

In Queensland, obviously, recent activities, you've seen job losses there as well. I suspect there'll be more of that to come. That will take the pressure out of the labor market, I suspect. So directionally, I think the labor component of inflation should moderate. But we are seeing materials still within the business. And so parts materials, we are still seeing inflation in there, and services. And so that definitely is still rife, if I can say that.

As I was pointing to in the release, obviously, volumetrically, having less of our cheapest tonnes, Narrabri that is, obviously influence the cost base. And I might just throw one further comment in there just on the labor side of things, circling back to that. I mean, the prospects of same job, same pay elevating labor costs across the industry is obviously front and center of our concerns. And we've seen the opening gamut of that playing out with a couple of players already. That is going to add more pressure to labor inflation.

[Operator]

Your next question comes from Chen Jiang from Bank of America.

[Chen Jiang, analyst]

Just a quick one on Narrabri. By looking at the fourth quarter, ROM coal, 1.5 million tonnes. That is annualized at 6 million tonnes overall on Narrabri. I'm wondering, are you being able to maintain the fourth quarter annualized level given if you think Narrabri is going to deliver stability or steady production? Or can you increase further? That's my last question.

[Paul Flynn, executive]

Thanks, Chen. Good question, too. Yes, look, the run rate is much improved. I'm very pleased with that. The only point I'll note is that we are seeing, obviously, as I mentioned earlier, a continued improvement in that regard. So that's looking nice and consistent falling into this new year. But when we give you guidance on the 22nd of August, I do have to acknowledge here that there is a change-out in this next financial year, which there wasn't in this. And so there will be some downtime associated with the change-out, so it's a good call-out. Thank you.

[Operator]

Your next question comes from Glyn Lawcock from Barrenjoey.

[Glyn Lawcock, analyst]

Paul, I'll get this quick. So your comments around CapEx, you're going to postpone it while you integrate Queensland and you got your payments to BMA. But you've got assets coming up for sale again. They're probably only going to come up once. You can then buy and sell down like you're doing with Blackwater. So does that mean you have no interest in Anglo's assets? Or do you still think it's a possibility on your play?

[Paul Flynn, executive]

No, we are not interested in doing anything there at all, Glyn. We've got our hands full. We've got a great acquisition. We want to make sure that goes well. The sell-down of our process is proceeding very well. So we've got enough to do here. So we are not participating in that process.

[Operator]

There are no further questions at this time. I'll now hand back to Mr. Flynn for closing remarks.

[Paul Flynn, executive]

Again, thanks very much, everybody, for taking the time to dial in. A lot of ground to cover, I know. My apologies for the glitch in technology. A good quarter, as I say, very pleased with how the new assets are going. And all the while, whilst our focus is on Queensland, New South Wales had done very well, which is terrific. But if you've got any residual questions that come from that, you know where to find us. I'm looking forward to engaging with you over the coming weeks. Thanks very much.

[Operator]

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.