Yancoal Australia Ltd

ASX:YAL

Earnings Call Analysis

Yancoal Ends 2023 Debt-Free with Strong Quarter

Yancoal Australia concluded 2023 with a strong financial and operational showing, boasting a final quarter where $477 million was added to their cash position, resulting in a debt-free status and $1.4 billion in bank reserves after allocating over AUD 1.4 billion in dividends to shareholders. The company had a record quarter in coal production, with an increase of 12%, reaching 18.1 million tonnes of run-of-mine (ROM) coal and 12.9 million tonnes of saleable coal, marking the best performance in three years. While the full-year operational cash costs haven't been disclosed, they are expected to align with the middle of the guided AUD 92 to AUD 102 per tonne range. Investors are guided to look out for the full 2023 annual accounts for future production and financial directives, as 2024 guidance has not yet been released.

Yancoal Ends 2023 on a Strong Financial and Operational Footing

In the most recent quarter, Yancoal achieved operational success and delivered on its production goals. The company's recordable injury rate remained well below the industry average, evidencing a strong culture of safety. This operational excellence was accompanied by a significant cash increase of $477 million, contributing to a year-end cash position of $1.4 billion, even after distributing over AUD 1.4 billion to shareholders in dividends. This fortification of financial resources bolsters Yancoal's outlook as the company transitions into 2024.

Quarterly Production Soars Amid Favorable Conditions

Benefiting from good weather, Yancoal not only preserved but augmented its production streak for the fourth consecutive quarter, recording the highest production rates in three years. Total Run of Mine (ROM) coal production peaked at 18.1 million tonnes (a 12% rise), while saleable coal production climbed to 12.9 million tonnes. Aligning with the annual production guidance, the company produced 33.4 million tonnes of saleable coal, situated comfortably within the 31 to 36 million tonnes forecasted range.

Strategic Focus on Pre-Strip and Overburden Removal Pays Off

Yancoal's strategic decision to give priority to pre-strip and overburden removal has paid off, enabling enhanced productivity and maintaining production rates akin to previous years. While the company continues to emphasize production around the rate achieved in the fourth quarter of 2023, various factors are expected to induce fluctuations throughout 2024. In line with emerging fiscal prudence, operating cash costs are projected to align with the mid-point of the previously communicated AUD 92 to AUD 102 per tonne guidance. Capital expenditures for 2023 likely touched the lower end of the AUD 600 million to AUD 750 million guidance range, with certain expenses anticipated to extend into 2024.

Steady Coal Prices and Market Equilibrium

Yancoal managed to sustain its coal prices, with December quarter realized prices for thermal and metallurgical coal reaching $180 and $292 per tonne, respectively. The mean coal price of $196 per tonne was merely 1% lower compared to the prior quarter. Market dynamics entailed a relatively balanced supply and demand across both thermal and metallurgical coal sectors, affected by temporal factors such as weather events and shifts in geopolitics, such as a decline in Russia's exports and demand adjustments in major economies.

Awaiting 2024 Guidance

As of the latest financial disclosures, Yancoal has yet to publish its production, cost, and CapEx guidance for 2024. Investors are encouraged to await the 2023 annual accounts for detailed future guidance, with anticipation that production levels may hold steady in alignment with the fourth quarter of 2023 figures.

Earnings Call Transcript 2023-Q4

[Operator]

Good day. Thank you for standing by. Welcome to Yancoal Australia Fourth Quarter Reports Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Brendan Fitzpatrick, Investor Relations Manager. Please go ahead.

[Brendan Fitzpatrick, executive]

Thank you, Maggie, and thank you to everyone on the call for joining this briefing on Yancoal's fourth quarter production report for 2023. Typically, our CEO, David Moult, provides a summary of the production report, however, Dave is not available to join us today, instead, Kevin Su, our Chief Financial Officer; Mike Wells, our Executive General Manager of Finance; and Mark Salem, our Executive General Manager, Marketing, will summarize the fourth quarter activities. We will then open the call to a question-and-answer session. [Operator Instructions].

Please note the commentary provided today is based on the production report published to the Australian Securities Exchange and the Stock Exchange of Hong Kong yesterday, 18th January. There is no presentation deck for this conference call. The Yancoal website holds past presentations for any participants that require additional information on the company.

Kevin, could I invite you to provide initial comments on the quarterly?

[Ning Su, executive]

Thanks, Brendan. Good morning, everyone. I will give some initial comments first. 2023 was a year in which Yancoal reestablished its operational profile and delivered on its production guidance. Yancoal's operational and financial performance is made possible by our people. The total recordable injury frequency rate, which was 5.3 at the end of December, that's well below the industry weighted average of 8.3. The continued support from all the people on Yancoal mine site for safety initiatives is a key factor in the overall success of the company. I want to recognize everyone involved in delivering this excellent safety performance.

Turning to the financial performance. We closed out the year with another robust quarter. We added $477 million to our cash position through the December quarter. This increase to the cash balance is after all operating costs, corporate overhead, capital expenditure and a monthly progressive tax payments. It is the clearest indication of Yancoal's performance. We finished the year debt free and with $1.4 billion in the bank. And please bear in mind, this cash position is after we returned over AUD 1.4 billion to shareholders as a fully franked dividend during the year. Yancoal started 2024 in a very strong financial position and with great operational momentum.

So now I will ask Mike to provide further comments on operational performance. Please, Mike.

[Michael Wells, executive]

Thank you, Kevin, and good morning, everyone. The good weather continued for most of the December quarter, and we were able to deliver increased production for a fourth successive quarter. Total ROM coal production for the quarter of 18.1 million tonnes was up 12% and saleable coal production increased to 12.9 million tonnes. These production volumes were the best quarterly performance we've recorded in the past 3 years.

As Kevin mentioned, we hit our production guidance for the year, 33.4 million tonnes of attributable saleable coal, was in the middle of our 31 million to 36 million tonne range for 2023. Throughout the year, we've discussed our need to prioritize pre-strip and overburden removal activities at most of our mines to facilitate better productivity and output in the subsequent quarters. This effort has proven effective with the production rate during the fourth quarter similar to levels we've achieved in prior years.

We are focused on maintaining production around this fourth quarter rate through 2024, noting there will always be some variance in production throughout the year due to the timing of longwall moves, mine sequencing, maintenance schedules and other variables.

We haven't reported our full year operating cash costs. And as is usual the case, we'll report these in our 2023 financial results to be released in February. We expect that when we report, they will fall around the middle of our 2023 guidance range of AUD 92 to AUD 102 per tonne. We will also report our attributable capital expenditure in the 2023 results. The timing of some expenditures slipped late in the year, so the total will likely be at the low end of our AUD 600 million to AUD 750 million guidance range with some capital expenditure activities carried over into 2024.

I will now hand over to Mark to provide comments on the coal markets.

[Mark Salem, executive]

Thanks, Mike, and good morning, everybody. Now the positive cash generation that Kevin described earlier is definitely linked to the increase in production that Mike has just explained, and of course, a realized coal price that was consistent with the prior quarter. Our realized prices for the December quarter were $180 per tonne for thermal coal and $292 per tonne to metallurgical coal. The overall realized coal price of $196 per tonne was just 1% below the September quarterly price.

Our sales volumes exceeded the production volume during the quarter. We realized this towards the end of Q3, and our sales team took initiative to increase and advance sales to ensure a drawdown in stocks, and provide the company the opportunity to optimize sales for the period.

Thermal coal markets appear to be well balanced for much of the December quarter. Looking at the demand factors, we could see the North Asia and European [Technical Difficulty] mild start to the winter and generally carried good stock levels. It was a similar situation in China, but it's worth noting that the overall Chinese thermal coal imports increased by approximately 45% in 2023 compared to 2022. In contrast to these regions, there was incremental demand from India after a weaker monsoon season resulted in lower hydro generation. And in Vietnam, as a result of the increased economic activity, demand remains strong.

Turning to the supply factors. Australia exports were increased through the [Technical Difficulty] with the country's total exports up 22% from 2022. However, there was a derailment in New South Wales during December that affected exports, but the disruption was only short term. In Indonesia, a weaker monsoon season resulted in less disruption to mining activities in the December quarter, and its total exports for the year increased 12% compared to 2022. However, the situation was different in Russia, where exports fell 15% year-on-year after the imposition of an increased export duties. Elsewhere, South Africa exports remain somewhat restricted due to infrastructure constraints.

In the metallurgical coal markets, soft economic conditions in North Asia and Europe depressed steel demand. Some steel producers elected to bring forward maintenance activity [Technical Difficulty] metallurgical coal demand declined. Demand from India and Vietnam during this period was less impacted. But overall conditions for the metallurgical coal market were weak during the period, with cyclone disruptions to exports from Queensland only creating a temporary supply shortfall.

Across the thermal coal and metallurgical coal markets, supply and demand appear relatively well balanced and subject to the influence of short-term factors.

That concludes the market update, and I'll pass back to you, Brendan, for the next stage of the call.

[Brendan Fitzpatrick, executive]

Kevin, Mike, Mark, thank you for those insights. We will now move on to the question-and-answer session, starting with questions from the phone and then moving on to questions submitted via the webcast. Maggie, could I please invite you to initiate the process for questions coming through via the phone lines?

[Operator]

[Operator Instructions] Brendan, we have no questions queued up at the moment. Do you want to do the web questions first?

[Brendan Fitzpatrick, executive]

Thank you, Maggie. Yes, I'll move to the webcast questions, and we'll return to you for people that submit questions via the phone lines. [Operator Instructions] One of the first questions we have on the webcast comes from [ Song Wei ]. The question relates to our production guidance and outlook for the 2024 year. I'll hand over to Kevin to make some comments.

[Ning Su, executive]

Thanks, Mr. Song. As you know, Yancoal hasn't publicly announced any 2024 production guidance, cost guidance, CapEx guidance yet. So we will appreciate your patience for the company to finish everything in due course. But as you have probably noticed, during the presentation, Mike has made a point way as a company, Yancoal has focused on maintaining the production level around the fourth quarter rate. So hopefully, this will give some initial -- just rough idea, but still we would appreciate your patience to wait for the 2023 annual accounts, and we will see the guidance coming from the company, please. Thank you.

[Brendan Fitzpatrick, executive]

That's right. Kevin has indicated our standard practice is to provide guidance for the current calendar year in the financial results that we released in February, and we'll be following that usual practice.

We have a question coming through from Sara Chan at Morgan Stanley. Sara is asking if we can have some insight into Yancoal's average sales price in 1Q and possibly 2Q. Mark, perhaps I could ask you to provide what limited comments we are able to make on the pricing realization for the current quarter and the future quarter given that we typically don't provide a lot of specific detail in this area.

[Mark Salem, executive]

I suppose it's a bit preliminary to predict what prices we'll actually experience in Q1, Q2. Naturally, that -- a lot of our coal sales are based on indices and the movement in those indices, as we've seen over -- the periods have been very volatile in relation to impacts on issues such as the Russian-Ukraine crisis, weather conditions, et cetera. So -- but generally, as we've explained at the end of Q4, we saw a relatively balanced market. We're not seeing anything substantially different coming into Q1 [Technical Difficulty] still balanced market. And that's just going to be really a function of unexpected circumstances that could impact the pricing.

[Brendan Fitzpatrick, executive]

Maggie, could we turn back to you to check if there are any questions coming through from the phone line, please?

[Operator]

[Operator Instructions] Brendan, I see no questions coming from my side.

[Brendan Fitzpatrick, executive]

I'll continue on with the webcast submitted questions. We have a question submitted by Mr. Jarrod O'Connor. Jarrod has asked: How we see the future of coal mining in terms of the years of production for Yancoal and the mine life expectancy of the different operations?

So in regards to this, what we have said previously, Jarrod, is we detailed the reserves and resources position each year. That information is usually made available at or around the time of the financial results in February. The mine life is related to the production profile. You can see the production parameters coming through in the quarterly report we just provided. There will always be some natural variation as the mine production and schedule advances over time, but rough indications are most of the mines operate for around a 15- to 20-year horizon. That roughly aligns with the normal period we tend to encounter with market discussions around transition in the energy markets, migration towards net 0 targets domestically and abroad.

So in a very broad context, our mine life naturally align with the transition profile. Yancoal recognizes there is a transition in the energy markets, and we're certainly looking to those forward horizons where we will manage the mine life profile, the end-of-life periods and potentially transition into new activities as and when something suitable is available. In that regard, we'll be informing the market.

The question coming through from the webcast, a follow-up from Sara Chan of Morgan Stanley. Do we see any change in our export market's mix in 2024 compared to 2023? And does Yancoal's marketing group focus on any particular country?

Mark, are you able to provide some comments on our export mix for the outward year and our focus for country-specific...

[Mark Salem, executive]

Yes, sure. Yes. Thanks, Brendan. And thanks, Sara. In terms of do I foresee any change in our market mix from 2023 to 2024, the short answer to that question is no. In 2023, we saw China resume imports from Australia and China then has become a major portion of our sales, but that also reflects our quality mix and our product mix. And so going into 2024 because our product mix is very similar to 2023, we're not expecting any change. Our dominant markets will continue to be China, Japan, Korea, Taiwan and Thailand, and that's a reflection of not only our wish to be a diversified [Technical Difficulty] mix. It's also a reflection of our product mix as well.

[Brendan Fitzpatrick, executive]

Another question coming through from the webcast from [ Zhao Ting ]. The question is, why was the sales volume in the fourth quarter larger than the production volume? And subsequently, what is the effect on sales and profits of providing coals to the local electricity market?

Mark, could we again turn to you for comments on these 2 topics?

[Mark Salem, executive]

In terms -- our sales, we try to align our sales with production. And as I stated, coming towards the end of Q3, we saw production improvements because 2023 was a recovery year after all the floods in 2022. We saw production improvements commencing at the end of Q3. And therefore, from a sales point of view, in terms of our scheduling and our activities to secure more sales as well as to bring forward term contract positions, we were able to achieve that and [Technical Difficulty] result -- our sales exceeding our production levels. And because we also have the stocks available at the end of Q3 to accommodate that position, which then contributed positively to the overall sales performance.

In terms of the New South Wales directive, we are still performing under government policy, our required levels. That policy will be in place until June 2024, and we'll continue to honor our obligations in that regard.

[Brendan Fitzpatrick, executive]

And worth noting in that domestic sales, we've provided the comment in the quarterly production report, the domestic sales for the quarter were just 0.22 million tonnes compared to the 10 million tonnes of attributable sales we have, so it's a very small component of the relative sales mix that we carry.

The webcast questions have all been conducted at this time. I'll turn back to Maggie one more time to see if there's any questions on the phone line.

[Operator]

Brendan, I have no questions on the phone line.

[Brendan Fitzpatrick, executive]

Okay. For people on the webcast, I'll stand by for another 30 seconds. If you'd like to type and submit a question, we'll give you one more opportunity. I do appreciate for everyone on the line. It is a busy time of year, lots of companies reporting quarterly production figures. We appreciate the time people made available to us.

I don't see any questions coming through on the webcast. Perhaps if I could turn back to Kevin one more time just for closing comments and reiterate some of those key messages that we delivered at the start of the conference call.

[Ning Su, executive]

Same as Brendan, we highly appreciate all your support to Yancoal. We recognize it is a very strong performance for the fourth quarter. We will keep the momentum, and we will make sure we deliver the best quality of management to this company. Thank you.

[Brendan Fitzpatrick, executive]

Thank you, Kevin. Thank you to all the management team for the support this morning. And of course, once again, thank you to all the people who made their time available joining us on this review of Yancoal's fourth quarter 2023 performance. Maggie, could I please hand back to you to close the conference call.

[Operator]

Thank you, Brendan. This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day, everyone.