Yancoal Australia Ltd

ASX:YAL

Earnings Call Analysis

Yancoal Reports Strong Q3 Performance Amid Market Stability

In the third quarter, Yancoal achieved 17.5 million tonnes of ROM coal production, a 26% increase from Q2. Saleable coal production rose 28% to 13.2 million tonnes. The company reported a realization of AUD 170 per tonne, with a cash balance increasing by $430 million to nearly $2 billion. This robust performance aligns with the guidance of 35 to 39 million tonnes for 2024, maintaining cash operating costs between $89 and $97 per tonne. Yancoal anticipates stable thermal coal markets and is focused on balanced growth, particularly in metallurgical coal.

Strong Production Growth in Q3

Yancoal reported a substantial increase in coal production for the third quarter, with a remarkable 26% rise in ROM (Run of Mine) coal production to 17.5 million tonnes and a 28% increase in saleable coal production, which reached 13.2 million tonnes. This surge reflected the company's efforts to boost output during the second half of the year, marking a continuation of their operational strategy aiming for higher production levels.

Resilience Against Disruptions

Despite facing some weather-related disruptions at their mines in New South Wales and Queensland, production impacts were minimal. Investments in water storage and handling capacity contributed significantly to mitigating these effects, demonstrating Yancoal's operational resilience.

Financial Performance Highlights

Yancoal achieved attributable sales volume of 10.4 million tonnes, with a realized coal price of AUD 170 per tonne, which is slightly down by 6% from the previous quarter mainly due to provisional price adjustments. Nevertheless, the cash balance grew by $430 million, amounting to almost $2 billion by the end of September 2024, illustrating the company's robust cash flow and financial health.

Market Dynamics and Coal Demand

In the thermal coal market, demand remains relatively balanced despite fluctuations in supply. China's thermal coal imports have risen year-to-date compared to the first nine months of 2023. This stability, coupled with positive expectations from potential stimulus measures, indicates a favorable outlook for Yancoal's coal products.

Future Guidance and Operational Expectations

Looking ahead, Yancoal maintains a production guidance of 35 million to 39 million tonnes of attributable saleable production for the year, coupled with cash operating costs projected at $89 to $97 per tonne. The upcoming fourth quarter is expected to mirror the strong production levels observed in the third quarter, ensuring Yancoal remains aligned with their annual guidance.

Dividend Policy and Strategic Cash Utilization

Yancoal's Board has reiterated its intention to maintain a dividend distribution policy capturing 50% of NPAT (Net Profit After Tax), highlighting the importance of balancing cash returns with strategic growth opportunities as they assess corporate activity at year-end.

Inclusion in Major Indices

Yancoal's inclusion in the S&P ASX 200 and 300 indices was celebrated as a landmark achievement, anticipated to enhance its visibility within the investment community. Management expects this will lead to a greater diversification of investors in their shares, a significant positive for the company.

Market Sentiment and Strategic Growth Plans

The company's management indicated they are well-positioned to pursue growth opportunities, including potential M&A activities, without the burden of debt. This strategic flexibility stems from their strong cash position and solid operating margins.

Stable Operating Environment

While facing minor equipment disruptions in some mines, overall operational outcomes were positively impacted by effective coal cycle management and mine schedule modifications. This adaptability reflects Yancoal's solid planning and execution capabilities in navigating market challenges.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and thank you for standing by. Welcome to Yancoal Third Quarter 2024 Report Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the call over to your first speaker today, Mr. David Moult, Chief Executive Officer. Thank you. Please go ahead.

[David Moult, executive]

Thank you, Desmond, and thank you to everyone on the call for joining this briefing on Yancoal's third quarter production report for 2024. I'm joined on the call by several members of the Yancoal executive team, including our Chief Financial Officer, Kevin Su, Executive General Manager of Finance, Mike Wells; Executive General Manager, Marketing; Mark Salem; and our Executive General Manager, Environment and External Affairs, Mark Jacobs.

Before discussing the operational performance, I want to acknowledge that during September, an incident occurred at our Austar Coal Mine, which resulted in a fatality. I, along with the Yancoal team are greatly saddened by the loss of a former long-standing employee who was working for a contracting company at the Austar Coal Mine as part of its closure activities when the incident occurred. Our thoughts remain with his family, friends and colleagues. We have offered Yancoal's full support to them and to all our people affected by this event.

This is the first time we've addressed the market since Yancoal's inclusion into the S&P ASX 200 and S&P ASX 300 indices on the 23rd of September. Welcome to any new participants on the call, and welcome to those of you who have joined us on prior calls. The index inclusion is a welcome event in Yancoal's 20th anniversary year and 12 years since listing on the ASX. I will give a summary of the third quarter activities and then open the call to a question-and-answer session.

Our comments are based on the quarterly production report published to the Australian Securities Exchange and the Stock Exchange of Hong Kong yesterday, the 17th of October. There is no presentation pack for this conference call. The Yancoal website holds past presentations for any participants who require additional information in the company.

The total reportable injury frequency rate was 7.2 at the end of September. And while it remains below the industry weighted average of 8.7, we aim to reverse the current increasing trend through targeted safety convention activities.

As we indicated previously, like last year, we are aiming for significantly higher output during the second half, and as anticipated, our third quarter production rate showed a step-up to 17.5 million tonnes of ROM coal production, 26% higher than the second quarter and 13.2 million tonnes of Saleable coal production, 28% higher. These volumes are on a 100% basis.

Our attributable share of the saleable coal production was 10.2 million tonnes, indicative of what our portfolio of assets can achieve when operating with minimal disruptions, particularly the three large-scale open cut mines where saleable coal output increased between 18% and 60%.

It is worth noting our mines in New South Wales and Queensland did encounter some weather disruptions during the quarter. But in most cases, production impacts were modest due to past investment in water storage and handling capacity.

Moolarben had a strong quarter as both underground and open cut operations performed largely to plan. There were minor equipment disruptions at MTW and HVO, but coal cycle management and mine schedule modifications enable the teams to deliver strong operational outcomes.

Yarrabee benefited from improved geotechnical conditions and equipment availability and Middlemount had a steady performance despite the impact of some wet weather.

At Ashton, a planned longwall move during the quarter resulted in lower output. However, following completion of the move, production rates increased with improved mining conditions being experienced.

Our attributable sales volume was 10.4 million tonnes with a typical mix of thermal and metallurgical coal products. The overall realized coal price was AUD 170 per tonne, down 6% from the second quarter. However, this included the impact of a provisional price adjustment from earlier in the year. Prices on an adjusted basis in the third quarter were not too different from second quarter prices, confirming our view that coal markets remain stable.

Over 10 million tonnes of attributable sales at what are still good coal prices generated robust cash inflows. After all operating capital, operating capital and corporate costs, including our monthly tax payments, our cash balance increased by $430 million to almost $2 billion at the end of September.

We see thermal coal markets continuing to experience relatively balanced supply and demand conditions, with small variations in market conditions affecting sentiment on coal indices. Thermal coal indices peaked in mid-August on the back of the Middle East tensions and a hotter-than-average summer in the Northern Hemisphere contributing to additional electricity demand.

Year-to-date thermal coal imports by China are up compared to the first 9 month of 2023. And there is the prospect that stimulus measures will be constructive for both thermal and metallurgical coal markets.

On the supply side of thermal coal markets, various factors constrained export from South Africa, Russia and Colombia. By contrast, Indonesian exports were not constrained and achieved good output levels.

The main thermal coal indices we referenced traded within limited ranges during the quarter. We retain our view that thermal coal markets and coal indices remain subject to short-term drivers. The prospect of a cold winter in the Northern Hemisphere could result in increased demand during the December quarter.

Turning into metallurgical coal markets, we see price indices reflecting weak steel market conditions. The low-vol PCI price benefited from reasonable demand early in the quarter. However, like the hard coking and semi-soft coking indices, demand declined through the quarter, dragging down the price.

Yancoal's large-scale, low-cost production profile is well suited to all coal market conditions. With no interest-bearing loans, a large net cash position and robust operating margins, we have the capacity to pursue suitable growth opportunities as they arise. If such an event materializes, we will inform the market.

In the meantime, we are focused on delivering another robust operational performance in the final quarter of 2024 and delivering on our production guidance of 35 million tonnes to 39 million tonnes of attributable saleable production at cash operating costs of $89 to $97 per tonne.

That concludes the summary of Yancoal's third quarter performance. We will now move to the question-and-answer session, starting with questions from the phone, then moving on to questions submitted by -- submitted via the webcast. So Desmond, could you please initiate the process questions via the phone.

[Operator]

[Operator Instructions] Our first question comes from Jonathan Sharp from CLSA.

[Jonathan Sharp, analyst]

Yes. Just my first question on M&A activity. If Yancoal, there is interest in the Anglo assets, we know that. What would be the next step if there wasn't an acquisition there, just with the cash almost $2 billion in cash? Would there be a special dividend? And also, I see Kestrel looks like it's up for sale. Would there be interest in acquiring that since it is a majority hard coking coal products?

[David Moult, executive]

Jonathan, thanks for your question. Like all M&A, we don't specifically comment on any M&A activity that we're involved in or not involved in at any time.

As far as the cash is concerned, I think our position hasn't changed. Our policy remains as it's always been, and our Board will make a strategic decision based upon what activity may or may not be happening and what the approach to returning capital to -- or cash to shareholders should be, which is no different to our normal position.

Again, on Kestrel, I've got no real comment on Kestrel. It's not something I can comment on this call on. I know there were some comments in the press this morning, but no comment from the company.

[Jonathan Sharp, analyst]

Okay. No worries. And just my second question, can you just give us an update on the Moolarben open-cut extension approvals? Has there been any progress there? I believe the underground will be a bit behind the open cut extension. Can you just give us some update on that one?

[David Moult, executive]

Thanks, Jonathan. Yes. Look, I'll let Mark Jacobs comment on that, but they are progressing, and they are going through the process. But Mark, do you want to...

[Mark Jacobs, executive]

Yes. So we're continuing to work with the New South Wales government on the Moolarben open-cut extension. We've got productive dialogue happening with them. I will note though that this is a mine life extension that doesn't change the forecast cap of production as the extension of mine.

[Unknown Analyst]

Okay. Great. And any dates when we can expect to see something there?

[Mark Jacobs, executive]

It's not possible to forecast when we might be able to receive a date. The process still has got to go through the regulatory process, and it is being given priority by both the company and by government.

[David Moult, executive]

I think it's fair say, Jonathan, we don't see any problems with it. It's just like everything that goes through government these days. It takes time, and we just have to follow the process.

[Operator]

[Operator Instructions] Our next question comes from Lawrence Lau from BOCI.

[Lawrence Lau, analyst]

I've got two questions. First of all, I would like to let the company to give us some idea why the realized met coal price in third quarter actually dropping faster than the relevant benchmarks? And second question is, if I don't understand wrong, you are closing down Austar mine. Will we need to make any provision or impairment against this mine?

[David Moult, executive]

Thanks, Lawrence. On the second one first. Austar Mine has been closed for 4 years?

[Unknown Executive]

2020.

[David Moult, executive]

2020. We closed in back in 2020. So it was closed 4 years ago, and we're in the process of rehabilitation and actually closing the mine down completely. So no, there's no other issues as far as impairment or impact on any of our accounts.

The met coal realized place. I might get Mark to comment in a minute. But as I said in my summary, there was a provisional pricing update in that number, and that impacted on that 6% drop. If you look at it down on a straight adjusted quarter-to-quarter basis, we've not seen any major change -- any significant change in the price. But Mark, I'd like let you comment on that.

[Mark Salem, executive]

Sure. Thanks, David. It's Mark Salem speaking. Lawrence, thanks for your question. Lawrence, it's a function of the Yancoal portfolio met coal as well. Yes, it's a function of met coal portfolio. When you look at our portfolio, met coal only makes up around 10% of the overall volume, less than 10% of the overall volume. And we've got a mix of met coals as well in terms of semi-soft coking PCI and lower grade hard coking coals.

So -- and it really depends on the production mix at the time as well. So in addition to what David said, there's also that product mix that comes into play. And in theory, we really weren't necessarily behind the index when you look at it in a different aspect. But yes, I can't comment more than that, unfortunately, Lawrence.

[Operator]

We have a follow-up question from Jonathan Sharp from CLSA.

[Jonathan Sharp, analyst]

Just one more question. Just Moolarben underground. When is the longwall move expected there? And what is the timing of that longwall move?

[David Moult, executive]

Thanks, Jonathan. It will commence at this -- at the end of this year. And if we're running to the first quarter of next year, it will be a slightly extended longwall move to our normal move is due to some poor conditions we've experienced in the development, which have now improved, but the -- it will impact us a little bit on that move.

But it starts at the end of this financial year -- end of our calendar year financial year and will run into the first part of next year.

[Jonathan Sharp, analyst]

Okay. No, is that like 8 weeks, 4 weeks, 6 weeks for the longwall move?

[David Moult, executive]

A normal longwall move for us is a 4-week move. This is -- this will be longer than I'm expecting it will be somewhere between 4 and 8 weeks.

[Operator]

Thank you for the questions. There are currently no questions from the line. Please continue.

[Brendan Fitzpatrick, executive]

Thank you, Jason. This is Brendan Fitzpatrick. I'll manage the questions coming through on the webcast. I'll start off with one that's operational in nature following on from those comments about the longwall move. We saw a strong pickup in the third quarter production compared to the first two quarters. The company has previously said that production will be second half weighted.

Notwithstanding that comment about the longwall move in the end of the fourth quarter, are we looking at a similar production level for 4Q? Is that possible to clarify without being in the context of the operational guidance that's been maintained for the year?

[David Moult, executive]

Thanks, Brendan. Look, yes, we did say that the second half would be strong. The third quarter was certainly a strong quarter with the three large mines all lifting their production as we expected. That longwall move doesn't impact significantly the fourth quarter. It will come in at the end of the quarter, but it was planned to be in the fourth quarter anyway.

We expected it to be carried out at that time. So yes, we're expecting a similar sort of production level in quarter 4, which, together with our strong third quarter, we'll ensure that we're well in line with those expectations of our guidance.

[Brendan Fitzpatrick, executive]

Thank you. A question that is seeking clarification on the product mix in the portfolio. Mark Salem, you mentioned about 10% met coal. Could you clarify if that's on a 100% basis or it includes our additional managed assets. Often, we have closer to 15% reported in our attributable sales.

[Mark Salem, executive]

Sure. Yes. And I apologize for that, Brendan. From a marketing point of view, because we manage the assets and from a marketing mindset point of view, it is on a 100% basis, and it does include the mines that we also manage.

[Brendan Fitzpatrick, executive]

Thank you, moving on to another topic. We see questions coming through with regard to corporate initiatives, appreciate that we don't speak to specific transactions that may or may not occur, but is there any comment on timing and decision processes and when the Board would be able to determine the use of the existing cash balance?

[David Moult, executive]

I think from a timing -- I think there's a lot of media coverage of what's happening in potential M&A opportunities at the moment without me commenting on them at all. And from a Board point of view, the Board as normal at the end of this year, we'll look at where we are with any corporate activity, but we'll also look strategically at the dividend payment, and we'll make a decision as normal, as we assess our full year results.

[Brendan Fitzpatrick, executive]

Thank you, David. And following up on that concept of potential distributions in the future period, could we get a comment on the likely distribution ratio in a future period if cash is to be returned, and what would guide that process? Perhaps I'll turn to Kevin, our CFO, for a comment.

[Ning Su, executive]

Thanks, Brendan. I think the best indication is still based on Yancoal's previous communication about the position in our constitution, which is about dividend distribution of 50% free cash flow of 50% NPAT whichever is higher. And that position remains never changed.

The Board is able to exercise the discretion to decide. At the end, just as what David mentioned, if there is a strategic growth opportunities, they will balance different priorities.

The cash in the company's account is -- it's very strong as what we discussed. And the cash is not going where actually the cash is generating great yield for the company at the same time as well.

[David Moult, executive]

Thanks, Kevin. Following up on that topic of cash, we reported in the quarterly over $400 million added to the cash balance close to $2 billion held at the end of September. Is there a minimal cash requirement or cash holding that the company needs to maintain once considering various alternatives or applications for the cash?

[Ning Su, executive]

This is Kevin again. The same question was also communicated previously in similar meetings. From company compliance perspective, there's no such thing called minimum cash balance, but we tend to hold some safe cash, make sure the business is going given the size of the business, which is roughly, I would say, about $300 million, $400 million, roughly yes, around that level.

[Brendan Fitzpatrick, executive]

Yes. Turning back to operational commentary. The quarterly report doesn't contain operating, or cash operating costs, we disclose those in the half year and full year periods. Is there some comment that can be made on the cash operating costs in the third quarter given the increase in production tonnage relative to the prior two quarters?

[David Moult, executive]

Thanks, Brendan. I think the comment I would make is that we reported on our first half cash position, and we have maintained our current guidance, which is unchanged, and that is $89 to $97. So if you look at what our reported cash costs were in the first half and look at where we are aiming to be in our guidance. I think it's fair to assume that the third quarter costs were pretty good and pretty low, enabling us as we move into the end of the year to achieve that $89 to $97 number.

[Brendan Fitzpatrick, executive]

Thanks, David. There was the observation made at the start of the conference call that Yancoal is now included in the ASX 200 and 300 indices. Is there any anticipation for what that will mean for the company going forward?

[David Moult, executive]

I think it's a position that we've been looking to achieve for a while. And I thank everybody knows that the only reason we weren't there because of our free float and we reached that position in September. I think it's a very positive move for the company. I think it gives us exposure to more of the investment community through the ASX 200 and the funds that follow the indices.

So I think overall, it's a very positive move, and I think should encourage a greater diversity of investors in our shares.

[Brendan Fitzpatrick, executive]

A specific question on share trading. It's a query whether Yancoal would be eligible for exchange-traded options in the future. From my perspective as the Investor Relations, this is not something that the company would facilitate, I believe some brokers offer that style of trading as a service, but it would be subject to broker service provision, not company-initiated activities for any style of exchange-traded options.

We're getting close to the end of the webcast submitted questions. If anyone has another question, please submit them. In the meantime, I'll turn back to Desmond to see if there are any further questions coming through the phone line.

[Operator]

[Operator Instructions] We have a questions from the line of [ Xingjian ] Ma from Huatai Securities.

[Unknown Analyst]

So my question is about the cost side. As I mentioned in the New South Wales [indiscernible] division direction last year, we can see that when the directions concluded in June this year. The local government could probably increase the royalty rates starting from July. I am wonderingis that being implemented starting from all the rest of the year? And how that might impact the cost for the rest of the year? And is that already included in our guidance?

[David Moult, executive]

Thank you for the question. Look, yes, the royalty rate in New South Wales was increased from the 1st of July, and that was a 2.6% increase on our royalty rate. That is built into all our forecast and it's built into our guidance. So there is no further impact expected from that. That -- yes. Of course, cash costs are always net of royalty.

So the ones you see in our guidance are net of royalty, but I mean in all our assumptions that we don't expect any further impact, we've built in that royalty change into the way that we look forward with our costs.

[Operator]

There are no questions at this time. Please continue.

[Brendan Fitzpatrick, executive]

Thanks, Desmond. I'll turn back to the webcast questions. As a question related to our realized prices for thermal and met coal in the third quarter, the question asks, what is the usual time lag between the realized price and the underlying benchmarks? And how do those trends typically play out through the year.

[Mark Salem, executive]

Yes. I'll answer that question, Brendan. Thank you. It's Mark Salem speaking. The pricing structures because of the product mix that we have, together with the various markets that we deal in, are very dynamic and very varied, and different contracts have different pricing periods. Typically, a typical lag is 2 to 3 months, but that's a generic comment, given the structure of our business, the structure of our products and the markets we sell to.

[Brendan Fitzpatrick, executive]

Thanks very much. A question going back to the topic of growth and diversification. Is Yancoal intending to move specifically into met coal? Or are there other diversification strategies that could be considered non-coal assets that might be pursued?

[David Moult, executive]

Thanks, Brendan. I think we stated on several occasions that Yancoal stated strategy is to balance our coal portfolio, which means we, from a coal point of view, would be looking predominantly at met coal potential. But as we've said previously, we're a mining company, we are prepared to look at other commodities. And at the moment, we're not doing anything in those commodities, but we will continue to build up our knowledge base. But at the moment, certainly, our focus is to balance that coal portfolio to try to get closer to a 50-50 balance between thermal coal and met coal.

[Brendan Fitzpatrick, executive]

Thank you, David. That's the conclusion of all the questions submitted by the webcast. I'll turn back to Desmond once more for any phone line questions before asking for some closing comments from you, David. Desmond, could you confirm there are no further comments on the phone line?

[Operator]

There are currently no questions from the phone line. Please continue.

[Brendan Fitzpatrick, executive]

Thank you, Desmond. Look, thank you, everyone, for attending this morning. It was a very strong quarter. It was in line with what we have been talking about at previous meetings, we expect the second half to continue to be strong, and we look forward to delivering on our guidance at the end 2024. Thank you for your interest in Yancoal, and I look forward to speaking to you again in the future.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.