Yancoal Australia Ltd

ASX:YAL

Earnings Call Analysis

Yancoal's Strong Performance and Strategic Flexibility in H1 2024

Yancoal reported a solid first half of 2024 with a 7% and 18% increase in ROM and saleable production volumes, respectively. Revenue was $3.14 billion, yielding an operating EBITDA of $990 million at a 32% margin. Despite lower coal prices, the company maintained a strong operating cash margin of $60 per tonne. Yancoal ended the period with $1.5 billion in cash and decided not to declare an interim dividend, favoring potential future corporate initiatives. Looking ahead, the company plans to decrease cash operating costs to $89-$97 per tonne and expects a strong second half to sustain performance improvements.

Strong First Half Performance Amidst Market Softening

Yancoal reported a solid performance for the first half of 2024 despite a general softening in the coal market compared to the previous year. With total revenue reaching $3.14 billion, the company achieved an operating EBITDA of $990 million, maintaining an impressive 32% margin. After-tax profit stood at $420 million. This performance was achieved against the backdrop of decreasing realized coal prices, which averaged AUD 176 per tonne, yet still managed to ensure a strong cash operating margin of $60 per tonne, post $101 per tonne in cash operating costs and $15 per tonne in royalties.

Operational Highlights and Safety Initiatives

Yancoal's production volumes saw healthy growth with ROM (Run-of-Mine) and saleable production up 7% and 18% respectively from the previous year. The company's three major open-cut mines – Moolarben, MTW (Mount Thorley Warkworth), and HVO (Hunter Valley Operations) – played a pivotal role in driving this growth, reflecting the successful implementation of production recovery plans. The safety performance, while below last year's benchmarks, continues to show commitment towards improvement with ongoing initiatives to maintain a safe working environment.

Financial Stability and Shareholder Returns

Despite the impressive financial results, the Board did not declare an interim dividend for the first half of 2024. This decision retains flexibility for the company to consider strategic corporate initiatives. Historically, Yancoal has demonstrated its commitment to creating shareholder value through judicious acquisitions and expansion, having returned $4.3 billion to shareholders over the past six years. The company ended June 2024 holding over $1.5 billion in cash, positioning it well for future growth opportunities and potential future dividend distributions.

Market Dynamics and Product Strategy

The international coal market has shown relative stability over recent months. However, Yancoal navigated through various factors impacting supply and demand, such as high-end user stockpiles and increased coal exports from Australia. The company's strategic product mix and blending operations have allowed it to capture favorable pricing, despite broader market price softening. Thermal coal still comprised 88% of Yancoal's sales, with metallurgical coal making up the remainder, highlighting the company's focus on balancing its portfolio.

Guidance and Future Outlook

Yancoal has maintained its guidance for attributable saleable production at 35-39 million tonnes for 2024. The second half of the year is expected to see higher production, which will help lower the average cash operating cost per tonne to the forecast range of $89 to $97. Capital expenditure is anticipated to be at the lower end of the $650 million to $800 million guidance, with potential shifts in some expenditures to 2025. The company remains well-positioned to sustain its competitive operational edge and financial stability.

Sustainability and Long-term Strategy

Yancoal made strides in advancing its sustainability initiatives by replacing its traditional ESG report with an integrated sustainability report in April 2024. This transition aligns with international sustainability disclosure standards and positions the company to comply with emerging Australian and Hong Kong requirements. As the global energy market transitions, Yancoal acknowledges the continuing role of coal and aims to balance immediate operational efficiency with long-term sustainability goals.

Challenges and Strategic Imperatives

Yancoal faces ongoing challenges from natural factors such as above-average rainfall, which required strategic management to mitigate production impacts. Investments in water storage and management have equipped the company to handle these disruptions effectively. Looking forward, Yancoal is keen to leverage its strong financial position, low-cost base, and operational efficiency to explore and capitalize on growth opportunities, including potential acquisitions of high-value metallurgical coal assets to further diversify its portfolio.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by, and welcome to the Yancoal First Half 2024 Financial Results. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, our Chief Executive Officer, David Moult. Please go ahead.

[David Moult, executive]

Thank you, Victor, and thank you to everyone for joining this briefing on Yancoal's 2024 First Half Financial Results. I'm joined on the call by our CFO, Kevin Su, and several members of the Yancoal executive team.

I will provide an overview of Yancoal's first half performance, then we will open the webcast to questions. The commentary provided is based on the first half 2024 financial results and associated materials published on the ASX and Hong Kong Stock Exchange yesterday. Slides 1 and 2 contain notices and disclaimers relevant to today's presentation and the forward-looking statements it contains. Please make yourself familiar with the content of these 2 slides.

The first slide gives an overview of our operational and financial results for the first 6 months of the year. The first aspect I want to highlight is our safety performance. Our primary reporting statistic, the total recordable injury frequency rate remains below our industry benchmark. That said, we need to improve our performance if we are to return to the level achieved last year. The programs we implemented provided successful and we are committed to sustaining a workplace with a positive safety mindset.

Our ROM production volumes and saleable production volumes were 7% and 18% higher than the first half of 2023. Like last year, we aim to deliver increased coal production during the second half of the year. Although our realized coal prices are lower than they were in the first half of last year, an average realized price of AUD 176 per tonne generated a strong operating margin. After cash operating costs of $101 per tonne and royalties of $15 per tonne, we had an implied cash operating margin of $60 per tonne. Our per tonne cash operating costs are expected to decrease in the second half primarily due to the expected increased production profile.

For the first half of 2024, we are pleased to report $3.14 billion in revenue, $990 million of operating EBITDA at a 32% margin and $420 million in after-tax profit. We delivered $851 million net cash from our operating activities after distributing $420 million (sic) [ $429 million ] in April for the 2023 fully franked final dividend. We held over $1.5 billion in cash at the end of June.

On the topic of shareholder returns, the Board has not declared an interim dividend in respect of the 6 months ended 30 June 2024. The retained cash gives us flexibility to consider potential corporate initiatives and may be distributed in the future, if not utilized. We have a proven history of growth through judicious acquisition and expansion, and we are again in a position to pursue various initiatives to the benefit of our shareholders. If such an opportunity transpires, we will inform the market.

Moving to Slide 4. Our safety performance, as I have mentioned, we intend to focus on reinvigorating the program that delivered the sharp improvement in 2023 and reestablished that performance profile in 2024. Keeping our workforce safe is always our first consideration. We are keen to see both metrics return to the levels achieved 12 months ago. Our focus on sustainability as with safety is continual and ongoing.

This year, we moved beyond the environment, social and governance report published in previous years. In April, we replaced it with our first sustainability report, which integrates previous disclosures and begins our transition to align with the international sustainability disclosures. We will align with the Australian Sustainability Reporting Standards as they develop as well as the requirements of the ASX and Hong Kong Stock Exchange.

Slide 6 summarizes the operational drivers behind Yancoal's first half performance. The production volumes reflect the consolidation of our production recovery plans. Compared to last year, our attributable saleable production increased by 18% to 17 million tonnes. International coal market conditions were relatively stable during the past 6 months. In all market settings, we continually seek to maximize our operational performance and product mix to meet our customers' needs.

Turning to the coal markets. We observed various factors at work on both supply and demand sides. There were good levels of demand, but also relatively high-end user stockpiles in Japan and South Korea as well as higher exports from Australia compared to last year. Rainfall and hydro power generation, or the lack of it, influenced coal demand in both China and India in recent months. For the past year, we consider that thermal coal markets have remained relatively balanced, but subject to short-term factors such as seasonal demand drivers and supply disruptions, and this remains our current view.

Thermal coal indices have been ranging bound for the past 12 months and price differentials between coal indices reflect the inherent value of different coal types. In the metallurgical coal markets, reduced supply was countered by reduced demand, typically observed during the Northern Hemisphere summer. Although our met coal sales volume are the lesser component of our sales profile, they are a meaningful contributor to revenue.

As a result of various factors affecting delivery schedules, our realized price during the past 6 months captured pricing from further back in time than is usually the case. The realized price also benefits from our product blending and optimization strategies. During the first half, 88% of our sales were thermal coal, with the balance being lower grade metallurgical coal. This product split varies period to period depending on which coal scenes are in production each mine and how we can maximize the market opportunities.

Turning to Slide 10. We show our customer split. China is once again a significant offtake partner, both on a volume and revenue basis. Our Japanese customers purchased a significant portion of our high-value coal resulting in this market being our second highest revenue generator. As coal market stabilized, the relative dominance of customers in our 4 major markets recovered and sales to other destinations reduced. There are various groups providing forecast for international thermal coal markets.

A common theme we see in recent forecast is the ongoing revision of when coal demand will peak and at what level. Delays to projected closure date for existing coal-fired power generation combined with new facilities coming online or behind the evolving demand profile. In relatively balanced coal markets, a 5% shift in supply or demand can have notable influence on price indices.

On Slide 12, we look at projections for net changes in supply. The components in this chart presents a year-on-year change from the prior period. These are not cumulative changes. These projections suggest a gradual supply reduction each year to 2027 at a much sharper deterioration in supply beyond 2027, a time horizon that aligns with the current demand peak depicted on the previous slide. This could support a more robust market in the coming years.

Over time, global demand for coal will diminish as the energy market transitions. That said, there is a growing appreciation that coal has a meaningful role to play during the transition and large-scale, low-cost margins such as ours are a key piece of that of the energy market. Total ROM coal on a 100% basis was almost 28 million tonnes. Our mines are much better placed to handle rainfall events after investing in additional water storage capacity. However, we can -- we still curtail activities during rainfall to ensure safety and to avoid asset damage. This was the case during the first half.

At Moolarben and MTW, we adjusted the mining schedules to offset some of the impact, but there is a limit to what we can achieve without compromising future output. At HVO, additional operational factors constrained its capacity to respond to rain disruptions. The output we achieved in the second half of 2023 demonstrated what can be achieved when the mines are operating at near optimum levels.

Attributable saleable coal production was up 18% compared to the first half of 2023. At the start of last year, we were focused on overburden removal and reestablishing mining inventory. The relative increase in the saleable production is a result of last year's successful mine recovery plans. Like last year, we are aiming for significantly higher output during the second half. Our 3 large open-cut mines drive the overall profile, but all the mines make an important contribution.

We included this slide to put our 3 largest mines in context compared to other Australian thermal coal mines. Total cash costs are on an energy adjusted basis. This counters the influence of coal quality on the operating margin. While there may be some aspects of the comparison not fully captured, the key takeaway is clear. Our 3 largest mines are some of the best thermal coal mines in Australia. We also consider the people we have operating these assets with some of the best in the country.

Cash operating costs were $101 per tonne. This is above the level we targeted for the year. Like last year, the expected production uplift in the second half should result in the per tonne cost falling. As we have explained previously, cost inflation factors from recent years, including labor, explosives, electricity and spare parts are now largely embedded in our cost base. Operating costs also escalate naturally as mines mature, typically resulting in higher strip ratios and increased all distances. Given this is the case, production volumes are the key to lowering our cash operating cost per tonne. That said, our current cost profile has us positioned at the low end of the operating cost base.

Turning to Slide 17, we demonstrate why keeping cash cost operating costs low is crucial. Our implied operating cash margin for the half was $60 per tonne. Keeping costs under control during periods of elevated coal price is often more challenging than when prices are low and there is less activity in the sector. We believe we did a good job in this regard over recent years.

From the 1st of July this year, the New South Wales state government royalty increases came through at 2.6%. Coal sales from our New South Wales mines, which include Moolarben, MTW and HVO, will be charged royalties of 10.8% on open-cut sales and 9.8% on underground sales. Operating our large-scale mines at the low end of the cost curve is essential to our ability to generate margins at all points in the coal price cycle.

Slide 18 provides an overview of Yancoal's financial performance. Lower realized coal prices were the main factor behind revenue dropping by more than $800 million. When looking at the cash flow statement, the 856% increase in the operating cash flow stands out. However, as you may remember, we made a $1.4 billion tax payment in 2023 on our record earnings from 2022. This greatly reduced our operating cash flow in the comparable period from last year. From 2023 onwards, we have made monthly tax repayments on our earnings, and this provides a smoother cash flow profile.

As noted at the start of the call, we held over $1.5 billion in cash at the end of June and other than some finance lease liabilities, we are debt-free. The 2 charts on this slide show the correlation between realized price, revenue, operating EBITDA and operating EBITDA margin. As noted on prior calls, realized coal prices will almost always be the primary driver of our financial results, given our production and cost profiles. $990 million of operating EBITDA and 32% EBITDA margin from a 6-month period in which we produce below our full year target rate is a good outcome. Annualizing the first half EBITDA and taking the share price at the end of June, gives Yancoal and EV-to-EBITDA ratio of less than 4x.

The profit after tax and operating cash flow tend to replicate the revenue and EBITDA profiles. The step down in the operating cash flow incorporates tax payments, hence the first half 2023 profile I mentioned earlier. It is over a year since we repaid the last of our interest-bearing loans. In less than 3 years, we repaid more than USD 3 billion of loans transforming the capital structure of the company. These loan repayments saved us almost $300 million in finance costs last year and should save a similar amount this year. The small difference between the cash position of over $1.5 billion and the net cash position of $1.4 billion primarily relates to lease liabilities recognized on mining equipment.

Yancoal has rewarded its shareholders well over the past 6 years. We have distributed to shareholders $2.5 billion of unfranked and $1.8 billion of franked dividends, a total of $4.3 billion. This total is approximately 50% of our $8.7 billion market cap at the end of June or closer to 60% if you add back the franking credits.

As I mentioned at the start of this webcast, the Board has not declared an interim dividend in respect of the 6 months and 30 June 2024. The retained cash gives us flexibility to consider potential corporate initiatives and may be distributed in the future, if not utilized. Over the past 20 years, we have grown through acquisition and expansion. The most notable event in recent years was the acquisition of MPW and HVO in 2017, a transaction that transformed the company. We have a very capable team that continually looks at growth opportunities for the business. At this time, we will not be drawn on speculation about specific scenarios. If events warrant disclosure, then we will inform the market in accordance with our regulatory obligations.

Slide 23 has our operational guidance for 2024. These remain unchanged. At the start of the year, we noted the 35 million to 39 million tonnes attributable saleable production guidance allows for some downside disruption events. Unfortunately, this would prove to be the case during the first half. However, like last year, our production is skewed to the second half, and we aim to operate at higher output levels similar over the rest of the year.

We aim to bring cash operating cost per tonne down and are aiming for $89 to $97 per tonne for the full year. Delivering the production uplift in the second half is necessary for our full year cost to fall within guidance. Our capital expenditure guidance is $650 million to $800 million. Some 2024 expenditure appears likely to shift into 2025.

Accordingly, capital expenditure in 2024 is expected to land at the low end of guidance. Each year, we will continually balance volume, product quality, efficiency metrics, operating costs and capital expenditure to deliver the best possible outcome. This year is no different in that regard. Our executive team and people on site are focused on maximizing the company's performance. The remainder of the slides contain appendices and additional information for reference, which I do not intend to speak to.

I will now hand back to Victor so that we can commence question-and-answer session.

[Operator]

[Operator Instructions] Our first question will come from the line of [ Peter Linse Wang ] from China International Capital Corporation.

[Yan Chen, analyst]

This is Yan Chen from CICC. So I have 2 questions for the company. So the first one is, as the Yancoal data production...

[Brendan Fitzpatrick, executive]

Let me interrupt for a second. Victor, Peter, could you control the sound? We're getting a very faint audio signal coming through on our line. Could I please ask you to either speak up or turn up the volume and then restart the question. Sorry for the interruption.

[Yan Chen, analyst]

Do you hear me?

[Brendan Fitzpatrick, executive]

That's a little better. Please go ahead, Peter.

[Yan Chen, analyst]

Do you hear me?

[David Moult, executive]

Yes, Peter. Please speak up.

[Yan Chen, analyst]

Can you hear me?

[David Moult, executive]

We can.

[Yan Chen, analyst]

Yes. So I actually have 2 questions for the company. So the first one is, at the Yancoal average data production guidance for each specific line, if that's so, what will be the production profile from MTW and Hunter Valley Operations this year?

[David Moult, executive]

Thanks, Peter. We don't normally break out our mine-by-mine production data. So no, we don't do that. We look at the group as a whole, and we report on the performance of mine, but not by breaking down to individual mine data.

[Brendan Fitzpatrick, executive]

An additional comment on that topic, Peter. One of the reasons we aggregate is we do often take the opportunity to combine and blend products from across multiple mine sites. So that's why we look at the collective production from the group as opposed to individual production at the mine site level.

[Yan Chen, analyst]

All right. I see. My second question is in terms of the cost of production, AUD 101 million cash operating cost, it's a bit higher than the full year guidance. So with the production ramp in the second half of the year, do you suggest that it's more comfortable that you should see the full year cash operating cost to the high end of the cost guidance, if that's suitable?

[David Moult, executive]

Yes. Thanks, Pete. Look, we are confident the second half is going to be a very, very strong half. And as you're aware, our cost -- our unit costs are driven very much by volume. At this moment in time, we would expect to be well within the range that we have got in our guidance. We don't expect any difficulty of achieving that. So yes, we're expecting a very strong second half as we had last year to deliver that further cost reduction.

[Operator]

And our next question will come from Jun Liu from Huatai Securities.

[Jun Liu, analyst]

I also have 2 questions. The first question is about the volume. We have guidance on the 35 million to 39 million tonnes target for the full year and also believe to achieve our cost reduction, it also depends on our volume increase, which means we have to achieve a half-on-half increase of our production volume in the second half, right? But we've also seen that in the previous second quarter report, we have seen long enough weather observed in Australia, and they are above average raindrop -- rainfall in Australia. So my question is that do we concern about this the above-average rain to affect our production? And do we -- can we share some color on how we prepare to achieve our production volume?

[David Moult, executive]

Okay. Thank you for that question. I'll sort of take it back to front and talk a little bit about the weather impacts and the fact that we invested last year significantly in water storage but also pumping and facilities for dealing with higher-than-average rainfall events. And that's what's helped us in this early part of this year. Yes, we've had rain, but there have been no significant issues with the rain. And we're confident now going forward that we have the facilities to deal with what we classify as more of the last few years' average rather than looking at the longer-term average. So I think we're now very confident that we are dealing with rain a lot better.

As I said on the cost, and it's the same comment on the volume. We're very comfortable that we're well in the range of our guidance. We are expecting an extremely strong second half of the year. And it is all about where we start in our mining sequences at the beginning of the year as to how the coal flows. So over the full 12 months, we expect to have a very strong year, and we expect to have a very strong end to the year in the second half from a production and cost point of view.

[Jun Liu, analyst]

Okay. Okay. My second question -- Yes. My second question is about the price. Yes, we are seeing the thermal coal price is kind of slightly rebounded, leading by the natural gas price globally. But we are constant and we are seeing the metal coal price, especially in China has seen a lot of pressure. So what -- could you please share some colors on your view on the global or the [ seaborne ], the thermal coal and metal coal price trend in the second half and what we expect to see on the price trend.

[David Moult, executive]

Thank you for that question as well. And I'll give a bit of a general comment, but then I might hand over to Mark Salem, my EGM of Marketing to give you a bit more detail. I mean we've been talking now for quite a while about certainly the thermal coal market, the market being far more balanced. And yes, we're getting variations that we're getting -- and we're getting lift, but they're not huge variations. They are moving within a range. And we think that's all to do with the fact that the market from a supply and demand point of view is far more balanced than it has been in previous years. But I mean that's a more general comments. So what I might do is hand over to Mark and let him put a bit more detail on your comment about thermal and met coal.

[Mark Salem, executive]

Sure. Thanks, David. Thank you. Thank you for your question. I think Slide 7 in the presentation pack that we've just demonstrated just shows, and particularly in the thermal coal market, how balanced that market is. And you can see that both the main indices, the API 5 and the GCNewc, there's been relatively very little volatility over the last 18 months and typical ranges. So that supports the comment that David made in relation to being a very balanced market.

In terms of moving forward, again, we're not seeing any significant changes in the marketplace from a demand and supply point of view. So as long as there's no significant outbreak, we did see a spike in the GCNewc prices as a result of some of the conflict in the Middle East and the impact that could have on gas. And there's issues like that, that we just have to keep a very watchful eye on but very hard to predict at the same point in time. In relation to the met coal market, the met coal market is still under a little bit of pressure in terms of steel prices. And -- but it's holding up and it's maintaining its position. And so moving forward, again, we're expecting a relatively balanced position moving forward.

[Jun Liu, analyst]

Okay. Maybe I follow up one question on the metal (sic) [ metallurgical ] coal. Also the slide, we have mentioned India as the demand is lower during the second quarter and the Japan import is also like weakening and truly seeing China, the steel market is quite soft in the second quarter, right? So could you please share some colors on what we are seeing in the third quarter for Japan or India, what we can expect those demand change?

[Mark Salem, executive]

Yes. Look, at the moment, we follow the activity in the steel industry. The fuel prices have softened a little bit, and that will have flow-on effects. But in terms of our met coal business, we're not expecting that to have a significant impact on our met coal pricing structures.

[Operator]

[Operator Instructions] Currently, we're not showing any questions over the phone lines.

[Brendan Fitzpatrick, executive]

Thank you, Victor. I'll move on to the questions submitted via the webcast. We see several questions coming through, some of them are similar in nature or touch on similar topics. I'll amalgamate and combine some of the questions so we can effectively answer the topics being raised. I'll start with the topics of dividends. There are several questions coming through on that front. Could we start with a reiteration of the decision made for the interim period and put that in context of past activities and perhaps extend to a comment on the existing policy that we have in our company constitution.

[Ning Su, executive]

Thanks, Brendan. This is Kevin, the CFO of the company. Maybe I can just, first of all, talk about the company's dividend policy, which is unchanged very, very clearly. We still have the policy in our constitution, which is 50% of free cash flow and then all 50% NPAT, whichever is higher. Then referring to what [ the wages ] announced last night with a decision, no interim dividend distribution.

I just want to make -- the point here is this is a strategic decision from the Board for the company as what David mentioned earlier to prepare for some corporate activities. And then now it's very much about just balancing between the dividend return and the strategic growth. And also, we want to reinforce the position our dividend policy is about to maximize shareholders' value.

So once again, this is about to balance a short-term dividend return with a long-term shareholders' value potential growth. And then finally, I just want to make the point. The cash clearly is still there. As you can see, there's a close to $1.6 billion cash there. So the cash will be available potentially for future distribution if the opportunities may not be available, then yes, will be opportunities for the money to be further distributed potentially.

[Brendan Fitzpatrick, executive]

Thank you, Kevin. Continuing on the topic of dividends, with regards to the policy, could we clarify the policy does not specifically refer to interim periods or final periods. It applies on an annual basis. And therefore, there is flexibility within any discrete period.

[Ning Su, executive]

Yes. We can compound that.

[Brendan Fitzpatrick, executive]

And to the ability that you can speak to forward events and subjects, which are still subject to Board decision, is there any outward-looking comment on dividend for the full year?

[Ning Su, executive]

The policy, as we just mentioned, stayed the same, it's unchanged. But this is a Board decision as what we just mentioned, and the Board will make their strategic view on the priority about our capital management. Thanks.

[Brendan Fitzpatrick, executive]

Thank you, Kevin. The discussion around dividends tends to lead into a secondary discussion around the alternative use of the cash. We've made some commentary through the presentation and the announcements released overnight and again, in the webcast today, what capacity do we have to comment on the potential use of cash and strategic initiatives that might be pursued?

[David Moult, executive]

I think that it's really been in a strong position to take advantage of whatever opportunities might present themselves to us. And it's not for me to comment really on specific situations that may be there. However, we're very conscious that there are opportunities out there. We want to be in a strong position. We want to be in a position where we can respond, and we want to be in a position where we can respond in a way where we can acquire if they become available assets that will add further value to shareholders' investments.

[Brendan Fitzpatrick, executive]

And there's question here, which relates to past activities. The company has grown through acquisitions in the past. Is it pursuing similar styles of initiatives going forward? Or is it looking for broader scenarios to consider?

[David Moult, executive]

We can answer that question, we look at all opportunities that might present themselves. But of course, the last one, as we talked about earlier on, which was the acquisition of Mount Thorley Warkworth and Hunter Valley Operations, was a very, very successful acquisition of 2 very low-cost Tier 1 operations. And of course, if those opportunities present themselves again, we'd be very interested to look at them. So -- but yes, we have a broad view. We look around. We assess what's available. But at the end of the day, it's all about adding value to shareholders. So we will be looking at what potential opportunities they are in the way of value add.

[Brendan Fitzpatrick, executive]

On the concept of strategic initiatives, is there any capacity to comment on the magnitude or scope that the company possesses for strategic initiatives. And I expect the question is relating to a dollar value that the company could contemplate?

[David Moult, executive]

I'm not sure it's for us to put a dollar value on what we think we can and can't do. However, I think by looking at the strength of our balance sheet and looking at our position where we are debt free with net cash, I think most analysts to be able to work out that we're in a very strong position to finance whatever opportunities present themselves at the moment.

[Brendan Fitzpatrick, executive]

A similar question on this topic, but from a slightly different angle. With the cash retained, if it's not utilized for corporate initiatives, will there be alternate activities that might be considered such as a buyback is something we have touched on in previous conversations.

[Ning Su, executive]

We -- yes, the same topic was discussed previously. Right now, buyback is not being considered due to the free float, liquidity concerns. And we will make this point again. Yes. Thanks.

[Brendan Fitzpatrick, executive]

Thank you. Interestingly, that topic of free float and liquidity draws us into the next area of conversation, the observation coming through that Yancoal is close to a 30% free float and has the potential for index inclusion, ASX 200 or better index inclusion. What are we able to say about that topic of free float and potential index inclusion?

[Ning Su, executive]

This is Kevin again. Yes, we also noticed the free float is very close to 30%. Whether the company will be incorporated into the ASX 200 or 300, is very much subject to S&P's assessment. The company is being wishful to see such thing happen, and we will be observing the market and then hopefully, we will see more free float available to the market.

[Brendan Fitzpatrick, executive]

Thank you, Kevin. Turning slightly away from growth through outside -- opportunities outside the company to those within the company. What observations can we provide on expansions or potential expansions that might exist within the existing portfolio of assets?

[David Moult, executive]

Yes. Thank you for that question. I think as you all know from some of our reporting, we have organic opportunities. We do have a couple of our big operations, especially Moolarben areas where we are applying for the approvals to increase the reserve base of that mine.

At our Mount Thorley Warkworth operation, we're in the final stages of a prefeasibility value engineering exercise looking at an underground operation of Mount Thorley Warkworth, and we would hope to have that completed by the end of this year and assuming that there was no fatal flows identified, and we'll be looking to move into the final stages of feasibility of that. So that would be a good opportunity for Mount Thorley Warkworth. It's good quality thermal coal but also semi-soft coking coal and would increase the life of that mining complex. So we do have a few opportunities from a coal point of view internally. And of course, potentially, we do have our renewable energy project to Stratford mine, which is just closed, which is again looking at repurposing an old mine site at the end of its life.

[Brendan Fitzpatrick, executive]

Thank you, David. Before I continue on with the webcast questions, Victor, could I ask you if there are any further questions coming through on the phone line, please.

[Operator]

[Operator Instructions] And I'm still not showing any questions on the phone lines.

[Brendan Fitzpatrick, executive]

Thank you, Victor. I'll return to webcast questions. One coming through on the topic of coal markets. The question says compared to our forecast from 1 to 2 years ago has more thermal or met supply come into the market than we might have expected. And does this change the way we think about coal markets going forward? I'm mindful that we don't have specific coal market forecasts that we share publicly. But in the context of our views on the coal markets, perhaps I'll turn to Mark Salem for some comments on what we've seen in Evolution over the last 1 to 2 years.

[Mark Salem, executive]

Sure. Thanks, Brendan. I think in terms of our production profile over the last 1 or 2 years, it's naturally been impinged by COVID and heavy rains and therefore, has suppressed the production profile and so therefore, coming out of the rains and, as David mentioned, our water management plan, we were prepared for the growth in our production for this year, in particular. So in terms of our marketing plan and our marketing strategy, yes, we did have a plan to ensure that our sales are well placed and are being well placed into the marketplace in terms of accommodating that change in production profiles.

[Brendan Fitzpatrick, executive]

Thank you, Mark. There is -- on the topic of coal markets and particularly coal prices that we realized, there's an observation that we reported a realized coal price of $180 per tonne in our 2Q second quarter production report. And then in the first half result, the average realized price is revised to $176 a tonne. Could I turn to Mark for a comment on the provisional pricing impact, please?

[Mark Salem, executive]

Yes. Thanks, Brendan. So I think as most people understand, our contracts or many of our contracts include provisional pricing, where we receive revenue based on that provisional price and then where the price is linked to an index or related price negotiation, a final agreed price, it is settled on at some point later in time. At the time of the Q2 report, we only report the revenue based on the invoice sales at that point in time. But as part of our 30 June half year accounts, we're required to include an estimate of what we think the difference between the provisional and that final estimate will be. And that $4 price difference takes account of that expected differential.

[Brendan Fitzpatrick, executive]

And to clarify, this is a regular and ongoing event, perhaps more noticeable in this particular period than it has been at other times. Is that correct?

[Mark Salem, executive]

Yes.

[Brendan Fitzpatrick, executive]

Thank you, Mark. Victor, I'll give you one last opportunity for any questions coming through on the phone line.

[Operator]

[Operator Instructions] And still no questions over the phone lines.

[Brendan Fitzpatrick, executive]

Thanks, Victor. One of the advantages of having a real-time webcast and shareholder interaction. We've got some observations coming through on the initial share price reaction to the announcements overnight. The initial observation internally is all the cash is retained. It still sits within the company, but perhaps we could reiterate and revisit the commentary around the utilization of the cash, the flexibility it provides us going forward and what we have achieved in past years through corporate initiatives.

[David Moult, executive]

Thanks, Brendan. I'll touch on this one. But I think it's well worth reiterating it. I mean we and I think most shareholders like to see growth in our -- in the company, but we only grow in a way that adds value to our shareholders. And that's -- if you look back and look at 2017 and how that transformed Yancoal at the time and the value that's brought to shareholders over the last few years, what we're doing at the moment is strengthening ourselves.

We've got a strong balance sheet. We've got no debt. We are retaining cash. There are many opportunities out there at the moment that may or may not present and we may or may not be involved, but we need to be in a very strong position to do it because we think they will add significant value to shareholders going forward. If they didn't and don't eventualize -- eventuate, then the cash is still in the business. It is still shareholders' cash. And of course, we will look at that going forward, depending on what we do later this year. And there is the opportunity and the potential that it can be returned to shareholders through dividends or whatever at the end of this year. However, our focus at the moment is keeping ourselves in a strong position because we need to be able to respond and be competitive in whatever the market opportunities are.

[Brendan Fitzpatrick, executive]

Thank you, David. In regards to market opportunities earlier in the presentation, we highlighted the strength of our existing asset portfolio, particularly our position in the thermal coal market with those large-scale, low-cost assets, which drive the business through all parts of the coal cycle. The question coming through is, do we have any preference with regards to metallurgical or thermal coal opportunities going forward?

[David Moult, executive]

I think we've made it quite clear over recent times that our preference would be for metallurgical asset if it became available. We do look at other thermal assets. But at the end of the day, we've got, in my opinion, the 3 best thermal coal mines in Australia. We're already the owner of those mines, and they are our 3 Tier 1 operations that account for around 80% of everything we do.

What we would like to do is balance that portfolio. We've had quite a few questions about thermal and met coal markets this morning. And I think one of the things we'd like to do is to put some balance in there and increase our exposure to met coal. So we are looking for the same sort of opportunities that we developed when we acquired the Coal & Allied mines back in 2017, and we're looking for that similar sort of opportunity in met coal to try to balance our portfolio.

[Brendan Fitzpatrick, executive]

And on that concept of potential opportunities with regards to funding scenarios, is there any comment we can make on the level of support we anticipate from the existing shareholder base and whether we would have an appetite for debt finance, having recently removed all of our corporate debt to save for those finance lease liabilities you mentioned.

[Ning Su, executive]

That's a very good question. From shareholder support perspective, if we look at Yancoal's history, there is very consistent shareholder strong support to the company. It's like a support work are believed to be there all the time. And then from the debt funding perspective, the company currently, as David just mentioned, is debt-free, which means there's a strong capacity available to the company. We may or may not use it, but it really depends on the scenario or any particular opportunity if we feel that's the way we should pursue and a way as a company, as a management team, we will explore different possibilities. Thanks.

[Brendan Fitzpatrick, executive]

Thank you, Kevin. We're getting towards the end of the questions. One in relation to a time line horizon, do we have any capacity to make an observation on whether we would have resolution on various scenarios ahead of the full year results due next February and the Board decisions that would be made at that time with regards to utilization of existing cash?

[David Moult, executive]

I think it's a little bit early for us to discuss what's going to be happening in the next 6 months and how that's going to impact our full year reporting. If there's anything that we think we should be disclosing to shareholders, then we would certainly be disclosing them to shareholders. And depending on what happens in that period, really will depend how the Board decides to make a decision on future dividends and then capital management within Yancoal. But it's certainly, if there is anything that we think we need to inform shareholders of, we will do that through our normal disclosures.

[Brendan Fitzpatrick, executive]

Thank you, David. I've worked through all the questions on the webcast, having amalgamated and bundled them up as appropriate. Victor, could I turn back to you one last time to confirm if there are any phone line questions before I hand to David for closing remarks.

[Operator]

And I'm not showing any phone line questions at this moment.

[Brendan Fitzpatrick, executive]

Okay. Thank you, Victor. David, closing remarks and please.

[David Moult, executive]

Well, thank you for everyone attending this morning's teleconference and listening to Yancoal's first half results. I believe we've had a very strong performance in this first half. We have had a few challenges. And we've talked quite a bit about the market. And yes, it has softened. But if you look at the market, it's still very strong if you compare it to historic averages. So even though it softened year-on-year, it's still a very competent, very strong, supportive market.

I think the other point to note out of this morning is the strength of our 3 Tier 1 operations. And those mines are 3 of the most efficient mines in Australia. And the slide that was in the pack gives a good indication of where they sit. But they drive our low cost base. And I think what you'll see is that, that cost base will continue to come down over this second half of the year as we forecast it will. And I think if you do your comparisons across the industry, you'll see that we're sitting at the bottom end of the cost curve, which is the only place to be because no matter what happens to the market, if you're at the bottom or lowest point of the cost curve, then you're in the strongest position.

So I want to thank everybody again for coming this morning. Yancoal is in a strong financial position. We've talked about our balance sheet. We've talked about the cash that we're carrying. If -- and it puts us in a very strong position to take advantage of what of our opportunities might present to us during this next 6 months. So thank you again, and I hope you all have a good day.

[Brendan Fitzpatrick, executive]

Thank you, David. Can I hand back to Victor to close the call.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.