Good day, thank you for standing by. Welcome to the Yancoal Australia 2022 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star one one on your telephone. You will hear an automated message advising you your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chief Executive Officer, David Moult. Please go ahead.
Thank you, Michelle. Thank you to everyone on the call for joining this recap of Yancoal's remarkable financial performance in 2022. Slides 2 and 3 contain notices and disclaimers relevant to today's presentation. Please make yourself familiar with the content of these 2 slides as they're relevant as we go through for the slide pack. While we are pleased that Yancoal achieved record results in 2022, keeping our workforce safe is always our primary objective. The ongoing gradual improvement in our key safety metrics, despite challenging operating circumstances, is a credit to all the people on Yancoal mine sites. Limiting our production losses to around 20% was as good an outcome as we could have asked for under the adverse circumstances we had. Constrained production was common across the mining sector, contributing to tight market conditions and remarkable realized coal prices.
Yancoal's overall realized coal price more than doubled to AUD 378 per tonne in 2022. Operating cash costs and royalties were also high, but the implied operating cash margin for the year of AUD 251 per tonne drove the company's performance. Revenue doubled to AUD 10.5 billion, and the EBITDA was AUD 7 billion, both company records. After repaying the majority of debt and returning almost AUD 0.53 per share as the interim dividend, Yancoal still finished the year with AUD 2.7 billion of cash. The board has elected to return AUD 924 million of this to shareholders as a fully franked dividend of AUD 0.70 per share. This is the first time Yancoal has been able to provide our shareholders with the benefits of franking credits.
As I mentioned a moment ago, keeping our workforce safe is our first priority. The positive trend in year-on-year safety statistics was a favorable outcome, but the mid-year uptick in the total was a reminder that we have to maintain continual focus on this area. In 2022, Yancoal trialed a vehicle collision awareness system at one of our operations. The trial commenced with light vehicles, and we are pleased to be extending that now to our haul trucks in 2023. Like our safety, our focus on sustainability is continual and ongoing. Yancoal is actively exploring opportunities in the renewable energy sector. The company has commenced development of an enterprise sustainability strategy, which will allow us to better understand the risks and opportunities as we transition to a low carbon economy, increased operational efficiencies and minimizing environmental impacts, and diversifying our business.
This slide summarizes the operational drivers behind Yancoal's 2022 performance. Production and sales volume are about 20% lower due to several factors, most notably, the heavy rains that repeatedly impacted our mines. The lower production, in turn, directly contributed to the 45% higher per ton operating cash costs. The standout feature was our average released coal price, which jumped from AUD 141 per ton to AUD 378 per ton. The teams at all the mines worked tirelessly through the year to minimize production losses and maximize coal market opportunities. Looking at the coal markets, the heavy rainfall and pandemic disruptions were obvious factors contributing to supply shortfalls and tight market conditions.
It's worth considering just how difficult it has been to get new mine approvals and funding for those new mines in recent years. Coal prices would not have reached the levels we've seen in 2022 if new supply had been incentivized. Metallurgical coal indices were on the rise again in early 2023, as auto manufacturing lifts the demand for steel. A factor that could positively influence met coal prices through much of 2023. Thermal coal indices, and in particular the high-energy, low-ash globalCOAL Newcastle Index, performed exceptionally well in 2022. The global demand for coal increased by 1.2% and surpassed 8 billion tons for the first time ever in a calendar year. Since the start of 2023, the globalCOAL Newcastle Index has retreated as a supply recovery is factored in by the market.
Conversely, there may be price support for higher ash thermal coal, such as the API 5 Index, if China resumes imports as it once previously did. So far, Yancoal has sold 2 thermal coal shipments into China this year. Thermal coal indices may have fallen from the record levels seen in 2022. The structural issues influencing the price remain. Global energy markets seem far from settled. Seasonal cycles have the potential to affect price. Yancoal continued to adapt to the evolving thermal coal market conditions in 2022. We retained core customers in Asia and redirected volumes from India to Europe to meet demand. Market conditions allowed sales of high ash product to reach new destinations and premiums to index prices were secured.
While the occasional low-grade met coal our own high energy thermal coal market, for the most part, Yancoal worked to maintain relationships and to supply our metallurgical coal customers. This is a sound strategy now that relationships between thermal coal and metallurgical coal indices are returning to more normal ratios. The production impact in 2022 were the result of three consecutive years of exceptional rainfall and pandemic disruptions. The La Niña weather cycle may have ended, open cut mines in New South Wales remain highly susceptible to rain events because they are still at their water storage limits. Production will recover, it will take time to deliver. The saleable coal production profile follows the run of mine profile on the previous slide.
Over the past two years, particularly in 2022, mining inventory depleted and saleable coal production was prioritized to maximize the benefit from the elevated coal prices. This proved to be an effective strategy, but mining inventory now needs to be replenished so that optimal productivity and efficiency rates can return. During 2023, the teams at each mine will need to balance several competing operational factors. Out of necessity, their focus will need to shift from simply maximizing output. Operating cash costs increased from AUD 65 per ton in 2021 to AUD 94 per ton in 2022. The lower production volume was a key driver in the change, but volumes only dropped about 20% and the operating cash costs increased by 45%. The cost increase included additional equipment and contractors brought on to aid the production recovery program.
These costs will carry through into 2023 and potentially into 2024. Some of the external cost inflation factors may ease with time, but other elements such as wage inflation and advancing mine parameters tend to be permanent. Although the operating costs increased, and so did the state royalties for that matter, the 4-fold surge in operating margins was unprecedented. It would have been easy to lose track of cost discipline under such operating conditions, but cost control has always been a focus for Yancoal, and keeping the operating cash costs under AUD 94 per ton was a good outcome given the challenges we faced. The cash operating costs should reduce in future periods, but the rate of decline remains subject to many factors, some of which we cannot control.
Another element that needs to be accommodated in 2023 is the recently announced New South Wales Coal Reservation Policy. Yancoal is compelled to make up to 310 available per quarter from April this year until June 2024. We are addressing the practicalities associated with complying with these directions. We will engage with the government impacts of the policy and on the issue of compensation to which Yancoal should be entitled. We remain skeptical that the policy will actually deliver any meaningful cost savings to retail customers because there is nothing in the directions that obligate electricity generators to pass through the benefits they receive from coal costs. Looking at our expectations for 2023, we have a production recovery program that aims to return production to levels experienced in prior years.
To deliver this outcome, we must first rebuild the mining inventory and restore productivity levels. This could take several quarters to achieve, but ideally, there will be a positive trend profile through the recovery. The attributable saleable coal production guidance is 31 to 36 million tonnes for the year. We also aim to bring the per ton cash costs down over time. That said, we must carry forward the additional costs associated with the recovery plan as well as recent cost inflation factors. That is why unit cost reduction is likely to take longer than the production uplift. The attributable cash operating cost guidance is AUD 92 to AUD 102 per ton for the year. Finally, it's worth noting the CapEx figure this year is expected to increase from the prior two years to between AUD 715 million and AUD 900 million.
This increase is due to expenditure on fleet and equipment in order to accelerate the mine recovery program. In 2023 and beyond, to deliver optimal performance for our shareholders, we will need to continually balance Yancoal's output volumes, product quality, efficiency metrics, operating costs, and capital expenditure. This overall flexibility as we respond to international market conditions, the new domestic supply directions, and potential rainfall events. This slide provides an overview of Yancoal's 2022 financial performance. The revenue, EBITDA, and net profit were all records. On the back of the surge in the realized coal price, the revenue almost doubled to $10 billion. The EBITDA almost tripled to $7 billion, and profit was close to five times higher at $5 billion. Yancoal retired almost all of its debt and has held a net cash position since last July.
The two charts on this slide show the correlation between realized price, revenue, EBITDA, and EBITDA margin. This correlation results from the relatively stable pro-process and With the obvious exception being the reduced output and higher costs in 2022 that I have already identified. The profit after tax and operating cash flows tend to replicate the revenue and EBITDA profile. The jump in operating cash flow to AUD 6.5 billion provided the company with an opportunity to rapidly change its financial position. The board elected to effectively clear its debt in 2022 by repaying 2.26 billion U.S., dollars of debt ahead of schedule and holding a net cash position from July. The combined early debt repayments made over 2021 will save the company almost AUD 300 million in financing costs in 2023 alone.
This is cash that can be applied to alternate uses. The board has determined that Yancoal will use $333 million to repay the last of its external interest-bearing loans. After this repayment, Yancoal will have no external interest-bearing loans for the first time since the company was established. Once again, returning cash to shareholders via dividends is the primary use for Yancoal's excess cash. The board has allocated AUD 924 million for the 2022 final dividend. This is AUD 0.70 per share, which when combined with the interim dividend of AUD 0.53 per share, is a 20% dividend yield when calculated on the year-end share price of AUD 6.06. The other important thing to note is that the final dividend is fully franked.
This is the first dividend from Yancoal that provides shareholders with the benefits of franking credits. Paying the balance of AUD 1.5 billion of tax on the AUD 5 billion profit reported for 2022 will be one of the other primary uses of our cash during 2023. The total dividend for 2022 is close to the sum of the dividends paid between 2018 and 2021. A final reminder of what an exceptional year we've had and the capacity of the company to reward its shareholders. The remainder of the slides contain appendices and additional information for reference, I don't intend speaking to them. I'll now hand back to Michelle so that we can commence the question and answer session.
Thank you. As a reminder, if you have a question at this time, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile our Q&A roster. Our first question comes from the line of Jon Olden with Eastern Value. Your line is open. Please go ahead.
Good morning, guys, thanks for great results and dividends. Maybe I'll kick off with 4 questions. I've got more, I won't take too much time. Firstly, can you give any insight into how much tonnage you might have locked in at fixed prices for 2023? I mean, thermal or met coal side, or if it's all going to be based on benchmarks from 3 months back? I think that's what you normally do. If that's all gonna be 100% in that sort of way. Secondly, what's the attitude to M&A? We've got these BHP assets on the block. I know you guys are interested in more met coal production.
I mean, I am prepared to get into a bidding war because there's people like Stanmore, Coronado, Peabody, and Arch, who are probably all gonna be interested. And then there's the question whether the government will, allow a foreign entity to, you know, take control of more assets. Third one, just on the reservation system. 310,000 tons of coal. Now, will that definitely be sold at AUD 125, or is that just a contingency that you might have to sell in the event there's a shortfall from other domestic producers? Just clarify that. I just wonder if you could also give me the rough proportions, for Newcastle 6,000 versus Five Five. I know Five Five is bigger than Newcastle, if you've any further thoughts on that.
Even on the met coal side, if you can give us some idea of the mix, that we can expect. Okay, thanks. I'll come back in a way if I get another chance. Thank you.
Thank you, John. On the first one, the way we're pricing coal this year is no different to the way we priced it last year. We'll be relative to index, whether it be a Newcastle index or an API 5 Index. It will have the same sort of profile that we've worked from previously. We've not changed that position, and that will be going forward into this year as well. On the M&A side, Yes, we're interested in met coal mines, and yes, we will be interested in the BHP Mitsui Coal mines. I think it was a very good comment of yours. We don't want to get in a bidding war. I mean, we're not in our nature to overpay for assets.
We'd be very controlled and sensible with our approach to it. We certainly will be looking at those assets, and we think they will be good, a good addition to our portfolio of mines and balance our thermal met coal balance. As far as foreign investment is concerned, our early discussions with the FIRB here in Australia are very relatively positive. I think with the improving geopolitical position between China and Australia, we don't see any major issues going forward this year. Hopefully, that side of it should be okay. On the reservation policy, it isn't definitely going to sold. You're quite right. It is a contingent holding for each quarter.
Depending on the shortfalls the generators have, and remember, this is across all the operators in New South Wales, not just Yancoal. If they require coal, they can give a direction to produce. There's no guarantee that we'll be selling 310,000 ton every quarter. At the end of each quarter, there is a reset mechanism as we go to the next quarter. It's not a definite sale. It is more one of the last one on Newcastle index API 5 and the met coal. I might defer to Mark Salem to give you an update on our AGM marketing on that one.
Mark might want to comment back on the first one again on coal pricing as well, if there was anything that I've not covered. Mark?
Yeah. Thanks, David. Mark Salem, Executive General Manager – Marketing. Just on in terms of the splits, basically, from a pure thermal coal point of view, about 25% of our thermal coal production is equivalent to 6,000 material. Approximately 50% is of the 5,500 or lower grade, and then the balance is in between the 6,000 to the 5,000 specification. In relation to met coal, now we basically. Met coal only represents about 16% of our production. Of that, approximately a third is PCI and a third is semi-soft or second grade hard coking coal.
In terms of lag pricing, we've always reported that we do have a lag pricing structure, and just in terms of the way sales are performed, in term of the timing of when you actually contract versus the timing of delivery. You know, there's probably about 30% of our Q1 sales will be re-reflecting back on the Q4 periods.
Thank you very much, Mark.
If that answers your-
Sorry, just a quick clarification. One third PCI, one third semi-soft. Is the other one third the sort of benchmark hard coking coal?
No, no. Sorry. Sorry. Of the 16%, PCI represents about... Sorry, I'm looking at a table here as well and calculating the percentages as I'm going. PCI represents about one third of production. it's not really prime hard coking coal. We don't actually produce prime hard coking coal. It's the balance is more semi-soft and tier two coking coal.
I see. Thanks. Middlemount, I mean that's a JV. What's the mix on that one?
We're 50% of the Middlemount joint venture, so our numbers would be 50% of that. Middlemount is a wrangle coal measure. It's not a prime hard coking coal.
Sorry, Middlemount is second ranked coking coal.
Yeah.
Yeah.
Yeah.
Okay, great. Thank you very much indeed. I'll come back with more questions if I get another opportunity. Thanks.
Thank you. Michelle, are there more questions online? I have some submitted via the webcast that I can go to next if we don't have any questions coming on the conference call.
I'm showing no further questions on the phone lines at this time.
Thank you, Michelle. On behalf of the people on the webcast, I'll read out some of the questions that we've had submitted. From Roger Yuan: Hello. The newest coal reserve report shows the markable reserve down 22%. Could you please give more details on that bigger change? Thanks for the question. The majority of that is due to the impairment of the Donaldson Mine. 62 million ton of the 88 was the Donaldson reserves that we impaired at the end of 2022. The remainder really is just depletion on a normal working profile for the reserves reduced. The vast majority of it was the Donaldson Mine.
For those that may not be familiar with all the assets, the Donaldson Mine is not a producing mine. It was a project that was potentially coming into production at some point in the future. No change to the forecast production profile the company already has in place. The next question from Jessica Wong: Could the company please elaborate on its acquisition plans for 2023? In which geographies will it seek to make acquisitions? What kind of renewable energy, mineral and coal assets would be most attractive? Is there a targeted timeframe for acquisitions? Does Yancoal need to raise capital for acquisitions?
The first part is, we've talked already about the BHP met coal assets which are coming to market, and we're aware of key focus of our team as we start this year looking at those assets. On renewable energy, we're really at the moment only looking at repurposing one of our old mine sites that will become available in a couple of years, by developing as part of the rehabilitation plan for that mine, a renewable energy hub. We're at the moment still going through the feasibility. That's a few years away. That mine finishes operation, which is the Stratford Mine in 2024.
On the assumption the feasibility is attractive, we'll be looking to rehabilitate that mine site by incorporating a renewable energy site within its rehabilitation plans. On other minerals, we continue to build a knowledge base, where I think we've said this a few times previously, we're not rushing into other minerals. Coal is our product, and coal is what drives Yancoal. We will continue to look, and we will look at different opportunities. Australia will always be our first choice of locality for any asset, whether it be coal or any other product. We will monitor other areas of the world for opportunities both in coal and other minerals, especially considering what opportunities might arise.
Okay. I have one. AUD 1.5 billion tax liabilities, when will Yancoal pay it? For the future years, how do you deal with tax liabilities given the magnitude of the tax payments required?
I'm CFO of Yancoal. I will take this question. First of all, as everyone noticed with the AUD 2.7 billion cash we carried from year 2022, has actually a very big portion reserved for the liability, tax liability, in 2022 accrual. It's going to be paid around May, the end of May, early June. That's the plan. For the future, yes, you know, all the tax provided in Yancoal make money, right? We make money and then we reserve 50%. Most importantly to all Australian and Hong Kong investors benefit, the fully franked dividend providing tax benefit to the tax, you know, tax frankly investors. Also, very important investors used to suffer 30% withholding tax. Actually now the 30% withholding tax is gone.
We just wanna say is actually quite a positive start to all the investors as well. Thank you.
Thanks, Kevin. Michelle, are there any questions on the conference call for us to take?
We do have a few questions. One moment. Our next question on the phone line comes from the line of Linfang Li with CMBI. Your line is open. Please go ahead.
Thanks very much for the call and congratulations on the record earnings last year. I have two questions. First of all, about the cost. Last year, in particular in the second half, we had a really a big increase in unit costs. Could you just give some color on the breakdown related to coal washing, operating the leverage because of the lower volume and the inflation in general? What factors contribute most in the cost increase? Regarding the guidance this year, you mentioned that in the second half of this year, we're expecting a lower cost versus first half. What's the major driver on the cost reduction? My second question is about the financial.
Because we have around AUD 538 million of the sales of purchased coal, which is a negative figure on the revenue. Could you give some color on that figure? Thanks very much.
Okay. On the cost side, you are quite right, were higher, and that was due to the adverse weather and the additional equipment we started to bring online to recover the mines after the last two years of adverse weather. We have also some other uncontrollable costs like state royalties, actually went up as well. But the majority of the cost increase was due to the volume reduction because of course we are a volume player and inflation repression. Inflation repression impacted diesel, impacted our explosives, and many of our consumables. Labor also is in short supply in Australia at this moment in time, but also the wage inflation of course plus the mining industry last year came under pressure.
The second question, please.
Yeah. The second question, probably I can give to Kevin to reply. Matthew's called revenue actually derived from a contract. It is a pilot contract, BLCT contract, which we inherited from the CNA acquisition. Not talking about any financial or commercial terms here. It's basically a low, fixed price contract. As a result, we have to source our coal from our internal arm's length JV entities, JV mines, and then at a market price. We have to unsell those coal at what we previously fixed the low price. That's why you can see the net that way.
Oh, thanks very much.
Thank you. One moment for our next phone question. Our next question comes from uncertain with uncertain. Your line is open. Please go ahead.
Hi. Hi. Good morning. Just 2 questions. First question, is on the dividend, payout ratio. I think the final ratio was 45%. You know, it seems to fluctuate a bit. It was over 100 last year. Just trying to think in terms of, you know, is like on what basis was this formulated on and, what can we expect going forward? That's my first question. Thank you.
This is Kevin. Yes. This is very good question. Obviously, avoiding our shareholders is the priority of the management team and the board. I just wanna do a very quick calculation to show how these, you know, payout ratio will be started. Basically, Yancoal still committed to maximize our dividend distribution. If you recall from our balance sheet, AUD 1 billion was carried into 2023, and then we had to earmark more than AUD 1.5 billion as the tax liability to be paid, as I just mentioned, in May and June. After deducting the potential tax liabilities, there is a very last piece of Yancoal loan, a $333 million US dollar loan that we just mentioned.
That facility to getting very, very expensive. We have to repay it as well to clear all Yancoal's borrowing loan. After these two big items, pretty much all the cash, if you calculate it, Yancoal actually all plan to distribute it, to be distributed to our investors. That's why this payout ratio, you know, just naturally landing at this percentage. Thanks.
Thank you. Just to follow on to that. Now that you've extinguished all your debt, going, let's say in 2023, and hopefully, you know, we have normalized market conditions in terms of production and price, what guidance can you give us for the payout ratio?
Way from the public guidance perspective, Yancoal never change our position, which is, we prefer a 50% NPAT and a 50% free cash flow, whichever is higher. This position is the guidance never been changed. We need to put a condition here at this, at end of day, is subject to the board discretion considering any funding requirement, liquidity requirement, and planning. As a result, the board will have the final decision-making authority to decide how much dividend could be paid. The guidance remain the same.
Thank you. My second question is on CapEx. In 2023, you have CapEx going up to AUD 750 million-AUD 900 million, I think, from AUD 550 million in 2022. I'm just wondering, you know, the comments are that this is for the fleet replacement cycle. Just trying to understand, is it just 2023 that where CapEx goes up, or do we expect, you know, continued step up in CapEx in 2024, 2025, all things remaining equal? Thank you.
The CapEx, and then I'll let Kevin comment as well. The CapEx that you're seeing at the moment is a combination of two things. Well, it's a combination of re-equipping the mines, and I think we mentioned this in previous presentations, that the two big mines we acquired back in 2017 from Coal & Allied had no money spent on them for many years. Our two of our tier one operations, we are, and have been re-equipping over the last couple of years. That will continue this year and will go all the way into 2024. Not more, not at this high level, but we will continue to until we've done it.
The second issue is we have brought on additional equipment this year, to recover the mines faster, to get ourselves back up to our optimum production level, with our inventories recovered. They're the two main... We would expect over the next few years for those capital levels to come back down to the levels that historically we've been averaging. We are going through this bit of a bow wave, this surge at the moment, while we re-equip these large tier one mines, and get them and get their equipment back into the optimal position. Which of course, yes, we pay, but we also get... We start to see some improvements within our operating costs as well.
The new equipment will be far cheaper to operate from a maintenance point of view. Kevin, is there anything else you want to add?
No, no. That's the model there. Thanks, yeah.
Got it. Thanks a lot. Thanks a lot.
Thanks, Yong. Michelle, I'll take a few more questions from the webcast at this point. Next one from Michael Leung: Cash operating costs, raw material component increased by AUD 10 per ton. Was that mainly due to externally purchased coal from blending in order to optimize the sales profile? The second question. There's discussion around the API 5 markets and the potential for China imports to resume. Given the current API 5 price is sitting around $110 a ton or AUD 160, and the overall cash cost guided for the coming year is around about AUD 100 per ton. There seems to be less margin in that particular product, let alone the volumes that would potentially go to the New South Wales Coal Reservation Policy.
Could you provide comments on the product mix and the margins that Yancoal is looking for?
Okay. On the first one, raw materials are our raw materials, so they're the things that we buy. The diesel, our explosives, the things that we have to spend money on to operate a mine. What you're seeing when you see the raw materials figure in that, in that presentation is yes, is the inflationary factors coming through in all those areas. The second one, electricity. That's the other raw material that comes into, within that category as well. Second one, what you saw in the cost pressure is an industry reflection. We're not on our own. Our cost base, yes, has gone up, and it's gone up because of the factors that we talked about earlier on. So has everybody else's.
Relatively speaking, we're still in the same position we were in previously, which was at the bottom end of the cost curve compared to the other producers in Australia. Our coal comes from different mines. Overall, we have that, you're quite right, we have that overall cost, but each of our mines have a different cost profile. Our lower quality coal mines tend to be also our lower cost operating mines as well. The margins that we get from some of the lower price coals are actually very strong because that coal is being delivered out of our lowest cost operations.
Vice versa, when you get to some of the better quality coals that tends to be deeper, therefore it tends to, the mines that produce them, have a higher profile, cost profile as well. Again, relatively speaking, you're maintaining your margins from that point of view. Yes, margins will get squeezed as coal price comes down. Our intention is over the next year and then as we run into 2024, to focus on getting all our controllable costs back down. Getting back down to our normal operating levels, getting our volume back up to its operating level and recovering some of that cost differential to our optimal our margin.
Next question from Zhong Wei Wu. Notes that the saleable coal volume from Mount Thorley-Warkworth was lower than the volume from Hunter Valley operations in 2022. Is there any reason or comment on the production differential from those two mines?
I'll just pull it up the slide deck to look. The mines actually were very similar in terms. There was a differential, but it's only a small differential. They both got impacted by adverse weather in the Hunter Valley. The main difference between the two operations is that Hunter Valley operations is a very much larger mining area. It has three operating areas, whereas only now has one big mining area. Also has the capacity to move water out of the operating areas faster than .
Anything that you see in differential, and it's not a huge differential, but anything you see in differential is mainly due to the operating footprint of HBL being a larger than it is at MTW.
Okay. Next question from James Carmichael. Makes the observation, it's a great financial result with a record profit, fully franked, final dividend of AUD 0.70 per share and a P/E ratio of just 2. James makes the observation, there's the potential for a 30% increase in coal volumes this year should weather and labor which should underpin a strong result for 2023. In that context, is there consideration for a potential share buyback?
Share buyback is something we've or has been discussed with our board on several occasions. At the moment, the main focus for the board is the liquidity of our shares and maintaining that liquidity. We think that at the moment, a share buyback would more than likely actually adversely impact liquidity. At the moment, we think doing what we're doing, which is looking to increase liquidity, increase our free float, and reward share is the right way to move forward.
Peter Chen asked a question which touches on two of the topics we've already discussed. Let's bring them together. Can the company go through the dividend suggested? Seems that the lower than 50% payout in free cash flow in 2022, and is that connected to potential M&A activities in the future?
I think Kevin gave a good breakdown on how the dividend calculation was. The board took a decision on all the factors when it came to that dividend position and taking account of the additional small amount of debt repayment to clear all our debt. As far as M&A is concerned, we're very conscious of it and we are looking at how we're gonna fund any potential M&A as we move forward this year. That will be another discussion for the board. We are still in a strong position from a cash generation side, and we would look at other opportunities, of course, as we move forward if we were successful in our bid with any of these opportunities that may be out there.
A question that ties in once again from Sean Shen. Assuming the healthy profits going forward, does Yancoal still plan to pay both interim and final dividends in future periods?
That really goes back to what I just said. The board will consider each dividend payment on its merits at the time. Consider what other demands there are on our cash at that time.
A question from Roger Yuan. In addition to the tax liability, it looks like the tax rate is around 29%-30%. Is the expectation this will be consistent or change in the future?
This is Kevin. The short answer is, 30% is correct. The small difference always caused by the difference between accounting profit and the taxable profit, but overall, 30% is correct. Thank you.
A question now from Zhaojing, looking at the coal markets and interested in a comment on the relativity in the average realized sale price for the thermal coal indexes. Notes that there is the big gap between the GC Newcastle 6,000 kilocalorie index and the API 5 5,500 kilocalorie index. The former is falling sharply. Is there some comment on how we see these coal markets performing?
I might hand over to Mark Salem to address that question. Mark?
Yeah. Thanks, David. Mark Salem. Zhaojing, thanks. Look, the two indices are very independent in relation to the markets that they and the pro-quality of coal that they reflect. We are seeing the globalCOAL Newcastle fall in so far this year, as a result, as David mentioned, as a result of excess supply and plus a lot warmer winter and lower gas prices in the European Atlantic Basin. We are getting some alignment. In terms of realized pricing, you know, we keep a very balanced book in relation to both fixed and floating indexes.
We try to manage that in terms of, as a risk management structure. It, again, it really depends on the product mix, as I explained before, in terms of the proportion of, high grade 6,000 material versus the low grade API 5 5,500 product.
Thank you, Mark. Changing topics now. We have a question from Henry Wu. Can you provide background information or thoughts on the benefits of being included in the Hang Seng Composite Index?
This is Kevin. It's a very good question. First of all, due to low liquidity issues over years, Yanco hasn't been included in any sort of index. I think a few days ago, the news for Yanco to be actually changed the whole game here. As you know, Hong Kong not only has its own very massive capital market, it also have a potential connection with very deep Chinese capital market as well. To be participating such Chinese investors, it got to be a we call a Shanghai Connect, Shenzhen Connect with Hong Kong, and then with one of the preconditions to be part of index. Not only being in the index itself to be covered by the fund manager the door of potential Chinese, mainland Chinese investors to participate.
A Hong Kong Connect or Hong Kong Connect program, which is currently being reviewed by, you know, different regulators or stock exchanges, which way yet to know, but we are being very hopeful. As without being part of index, we'll never be able to achieve that. Thank you.
We have a question which ties into that commentary that you've just provided, Kevin, from Peter Chen. Is there any schedule or timeframe that we are familiar with for potential inclusion or participation in the Shanghai Hong Kong Connect scheme?
From a company perspective, we are doing everything we can to explore the possibility. We have to say, we don't have a clear schedule as if or whether a person is familiar with that concept. The two conditions need to be ticked. One is the part of index, ticked already. The second one, as a foreign company, like Yancoal, need to be accepted by the exchange, the Shanghai Connect. We currently know, there is a change to regulation covering the potential foreign companies, but the details of the policy is yet to be published. We think it may need another two or three months to get all the details clarified. Thank you.
Thank you, Kevin. We have a question from Will Cang. He's asking for some further comments on the renewable energy projects, and extends that question to ask, would there be a scenario where there could be some sort of division created within the company, I believe, for the renewable energy project endeavors?
The renewable energy project, as I said previously, is part of the rehabilitation of one of our mines, which comes to the end of its life next year in 2024. As I think everybody knows, we are legally obligated to rehabilitate our mines. It's not a cheap option. It's an expensive option. We looked at, is there a better way of repurposing the mine site? We have big holes in the ground, we have water, and we have hill sides. When we looked at it, we came to an obvious conclusion that maybe it would be suitable to install a pumped hydro renewable energy hub with some solar support. We're in the feasibility at the moment. Once we get that completed, we'll have a better understanding.
It does have other benefits to us. I mean, it will generate carbon credits, which for us in the future we think may be important because of the changing federal government and the introduction of the changes to the Safeguard Mechanism, which looks at your emissions cap on across the company. As far as the structure, we haven't, we will be looking at how we structure this in the future. We haven't come to a landing on structure as far as whether we hold it within Yancoal or we look at putting together a separate entity to hold.
We also haven't come to a landing on whether we will do it on our own or whether we will talk to other people and in this area and look for other expertise. I think it's too early to answer the question fully, but they will be areas that we'll review as we get to the end of the feasibility.
Thanks, David. Question linking back to early discussions on the tax payments, could we get some confirmation on the timeframe for the tax payments that will be made on the 2022 earnings? Is there any potential for taxes to be deferred in the future for Yancoal?
Yes. We confirm we have to pay 2022 tax as what we stated in our financial accounts. We follow ATO tax rule, like PAYG mass installment. As for the installment itself, could be individually negotiated with ATO if necessary. So far, we haven't seen much opportunity either for Yancoal, you know, to delay this kind of payment. This may also impose Yancoal tax avoidance risks. we will just follow the reg-. Thank you.
Michelle, I'm mindful that we're coming up to the end of our allotted time. I'll come back to you to see if there are any final questions the line, and then we'll move to the conclusion of the call.
I am showing we do have a follow-up line to or a follow-up question. Just a moment. Our follow-up question comes from the line of Jon Ogden with Eastern Value.
Thanks, guys. I'll just try and make them very quick. A bit more on the China reopening. Is China particularly keen on API 5,500 kcal? I think that's probably, you know, the company was originally orientated that way. I just wonder if the Chinese power stations particularly looking for that kind of product. I'm noting that you were at 20% of your volume was going to China before the ban. Are you expecting to rapidly get back to 20% of levels, or is that gonna be a very slow grind? Noting that China was looking to do more internal coal, now maybe they've had a few accidents, maybe looking back to imports again, any thoughts on that would be good.
Secondly, just a quickie on the write-downs that you had, AUD 350 million. Any more of that to come, or have we kind of got rid of all of those out of there? A third one is just on the royalties. Obviously, Queensland, you know, imposed these very high royalties. We've got an election, I think, in New South Wales in May, maybe switching over to Labor also. Any thoughts on how royalties might change if there's a change of government or maybe too early to say on that? Those are the additional ones I've got there. Thank you.
Thanks, John. China reopening, yes, they do like the API 5 quality. We think that with the growth in that market again from Australia, that will actually underpin the API 5 price. I think it's fair to say that China's coming out of what was it? Well, it started to open up after COVID. COVID, of course, took off during that period. I think China is now coming out. The industry is starting to ramp back up. Therefore, coal use will start to go back up as well. We feel confident of that. Yes, there it's slow at the moment, but I think we've managed to sell two cargos in there satisfactorily.
We would expect we have some extremely good customers in China, and we expect them to be looking to resume their offtake. On the impairments, we do our impairment assessments every year. And we impaired these two assets at the end of December. At this moment in time, there's nothing else that would otherwise, we would have had to have done it. Nothing at the moment out there. Like every company, every 12 months, we do a complete check across all our operations. Royalties, very disappointing what happened in Queensland. You know, the country has been pushing very hard against that. I think it is too early to say in New South Wales.
Our industry association in New South Wales has been lobbying very strongly with the company, our company and the other major companies' support. Labor are saying if they get in there that they have no intention of increasing royalties. We'll see what happens. I think it's too early to say. Hopefully they stand by what they've said to us pre-election if they were to win the election. I don't think the coalition government, if they were to get in again, would put royalties up. We don't know. A bit early stage, I think.
Thank you very much. One other quick additional one. Just on the Coal & Allied acquisition, which came with this contract which you have to meet every year. Any idea you can give us on the volumes that is involved or on pricing, just so we can sort of incorporate that in the model?
I'll jump in there, John. It's again, with all of our contracts, there's commercial confidentiality around them. It is a small volume. In years gone by, it hasn't been a material impact in terms of what appears in the accounts. It was just more noticeable this year, due to the relative difference in the coal price indices. I can take you through that a little bit more in detail offline as a follow-up. Really it's what we've got in the accounts is the extent of the information that we have in terms of contracts structures.
Thank you, Brendan.
Michelle, I think if that's okay, we'll make our closing remarks. David, over to you.
Thanks, Brendan. Thank everybody on the call, and thank everyone for those questions. I think they were well thought out questions and explored most of the areas that we expected our investors to be looking at. Thank you all for your support. We had a fabulous year last year. We're looking forward to another good year this year. Yes, there are still some challenges, but we're hoping that some of the external challenges that we had last year will leave us, especially when it comes to weather and hopefully the COVID issues. We look forward to delivering further value for shareholders during 2023. Thank you all for your involvement this morning.
This concludes today's conference call. Thank you for participating. You may now disconnect.