Thank you for standing by. Welcome to the Yancoal Australia Q1 report conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. David Moult, Chief Executive Officer. Thank you. Please go ahead.
Thank you, Desmond. Thank you to everyone on the call for joining this briefing on Yancoal's first quarterly production report for 2023. I'm joined on this conference by several members of the Yancoal management team. I will provide a summary of the activities outlined in the Q1 production report, which was released on the ASX and Hong Kong Stock Exchange yesterday. We will then open the call to a question and answer session with the call scheduled to conclude at midday Sydney time. Although there is no presentation pack for this conference, the 2022 financial result presentation pack is available on the Yancoal website for those interested. Yancoal's operation and financial performance is made possible by the people at all our mining operations.
The favorable downward trend in our Total Recordable Injury Frequency Rate, which was 6.6 at the end of March, was an excellent achievement. This outcome was made possible by the diligence of everyone working at our operations. Yancoal started 2023 with another robust financial performance. We increased our cash by $600 million and finished the quarter with cash of $2.8 billion. On the final day of the quarter, we completed the $333 million debt repayment that we flagged in the 2022 results. Yancoal has now repaid $3.1 billion of debt over the past 18 months and no longer has any external interest-bearing loans.
It's a testament to the scale and quality of Yancoal's production profile that we were able to repay so much debt so quickly. Elimination of the group's debt will result in finance cost savings of more than AUD 300 million in 2023. As discussed in the 2022 results, we are prioritizing pre-strip and overburden removal activities at most of the mines during this first half of 2023. This is recovering from the adverse weather over the last couple of years, and this strategy will facilitate better pro-productivity and output later in the year. Although the La Niña weather pattern may have passed, water storage levels carried over from 2022 remain near capacity across our open cut mines.
As a result, our sites will continue to be impacted by any ongoing rainfall until we can meaningfully reduce the water storage levels. Labor shortages across the mining sector have resulted in our total workforce being below the optimum level. This labor shortage has constrained production activity during the periods of good weather. We continue to invest in dewatering infrastructure as well as workers, worker retention and hiring initiatives to further address these two factors. We produced 11.2 million tons of raw coal and 7.7 million tons of sellable coal in the Q1 . These figures were 3% and 9% down from the prior quarter and reflect the cumulative weather impacts and labor shortages, as well as the impact of our focus on rebuilding our mine inventory.
The attributable sellable coal volume was 5.9 million tons, and as indicated previously, we expect production to trend upwards over the year, and we retain our 2023 production guidance of 31 million-36 million tons for the year. The financial performance I described earlier is a direct result of the realized coal prices we achieved in the period. Our realized thermal coal price was AUD 338 per ton, and our realized metallurgical coal price was AUD 383 per ton. The overall realized coal price at AUD 347 per ton was 35% higher than achieved in the Q1 last year.
The index for high energy, low ash thermal coal may have retreated from elevated levels in 2022, but price indices for the thermal and metallurgical coal produced by Yancoal remain well supported. The positive price profiles for semi-soft and low volatile PCI coals over the past nine months are particularly encouraging. The relative improvement in metallurgical coal indices over thermal coal reflects the inherent value of these different coal products. It validates Yancoal's approach of meeting market needs to the best of its abilities and maintaining our market share of metallurgical coal volumes. Winter temperatures in Europe and East Asia were milder than anticipated, and the mild weather, combined with additional LNG supply, resulted in a lower thermal coal demand in the Q1 than expected.
While such seasonal factors can influence coal markets, the elevated prices in 2022 serve as a reminder that the supply side remains structurally constrained. This follows years of restrictions on new mine approvals and limited access to project financing. We look forward to gradually increasing our sales volume as production activities move towards the level Yancoal achieved in prior years. The New South Wales coal reservation directions obligate Yancoal to make some coal available to the domestic market from the 1st of April this year through until the middle of 2024. Yancoal, as a practice, does not disclose details of its commercial contracts. The directions took effect from the 1st of April, we proactively supported one generator by mutually agreeing to bring forward a delivery into March.
There are several aspects of the directions which the company considers to be inequitable. Engagement is still ongoing with counterparties and the government regarding these matters. That said, Yancoal is ensuring it meets all its obligations. I will now hand back to Desmond so that we can commence the question and answer session.
Thank you. As a reminder to ask question on the phone, please press star one one and wait for your name to be announced. If you would like to cancel the request, please press star one one again. Once again, to ask question on the phone, please press star one one. There are currently no questions on the line. Please continue.
Thank you, Desmond. This is Brendan Fitzpatrick from the investor relations team. We do have the ability to also take questions from the webcast. I'll now move to voicing some of those questions on behalf of the people submitting questions via the webcast. You're welcome to submit those questions at any point during the webcast. David, first question comes from George Amphigoreus. It's a two-part question. The first part, how does production in the Q1 compare to your expectations? Are your FY full year production targets impacted?
I think the Q1 production was always going to be a little bit behind what we expected for the rest of the year. We flagged that out in our end of 2022 result presentation. The Q1 was in line with our expectations. I think what we're going to see over the year as we start to rebuild inventories after some of the adverse conditions we've had in the last two years, is that our production will start to build back up to the levels that we've seen previously from Yancoal.
As far as the whole year is concerned, at this moment, we're still confident that we are in line with the guidance that we've issued. We would expect to be achieving our production and cost levels in line with that guidance.
Thanks. The second part of George's question, any comments on the recent news flow about Yancoal considering the BHP assets? Does the company think it would have issues with FIRB?
Thank you. I don't think it would be appropriate to comment or speculate on specific situations that may or may not be underway. However, as one of the largest mining companies in Australia with a strong balance sheet and a clear growth strategy, you can assume that we are continuously exploring growth prospects in high-quality jurisdictions where our expertise can drive and create value for our shareholders. As far as FIRB is concerned, Australia is a region of focus for Yancoal's growth objectives. If we look at this from a non-specific point of view and not any specific assets, Yancoal has been in Australia for many years and is a significant Australian mining company with a long track record of reputable operational performance and corporate good standing.
We've acquired assets in the past that have been subject to FIRB approval, and we encourage and we engage with FIRB on a fairly regular basis in our normal course of business activities. Clearly, given our ownership structure, the rules dictate FIRB approval as a requirement for certain transactions we may consider in the future. Those regulatory processes are not our business and are not in our control. All we can do is to continue to operate in a responsible manner and focus on our business. If we choose to pursue external growth, we may be subject to certain regulatory approvals, just like any other material corporate transaction process.
Thank you. Moving to the next question from Adrian Voh. With the share price so weak, will you be giving some thought to a buyback as a use of the cash stockpile?
I think we've discussed buyback several times, previously, and I might let Kevin comment, but we don't think at the moment, with our share register or structure of our share register, that buyback is right for Yancoal. Kevin?
Thanks, David. Yes, the capital management strategy has been just thoroughly discussed in Yancoal by management and at the board level. Share buyback was definitely considered. However, at the current in the current market environment, we don't think share buyback will be the priority, especially Yancoal will focus on further improve our liquidity in both market. Thanks.
Thank you, Kevin. That was our CFO, Kevin Su. The third question from John Anderson. The report says, anticipate structural imbalances in the international market will support thermal coal prices during 2023. I would be grateful if you can provide some additional color on the imbalances.
I might ask Mark Salem, our EGM Marketing to comment.
Sure. I think in terms of structural imbalances, there's still a lot of uncertainty in terms of recovery of production following the La Niña impacts. We are still encountering issues with Russian supply in our main markets, Japan, Korea, Taiwan, and that will be ongoing whilst the Russian-Ukraine crisis continues. You know, if we look at our other competitors in the marketplace, Indonesia, South Africa, and Colombia, there continues to be sovereign and weather issues that will remain within those countries as well. There still remains a lot of uncertainty and structural imbalances going forward.
Thank you, Mark. The next question from Mark Kelleher. The report implies total cash costs of AUD 1.5 billion for the quarter, equivalent to AUD 245 per ton. How much of this is capital spend?
I suspect the calculation may be looking at the cash generation on the volumes and netting off that against the tons compared to the prices achieved.
Okay. Mike, do you wanna comment on that?
We might have to take that one on notice, Brendan, and maybe we can feed that back through you.
Sure. Mark, if you'd like to email me directly, and I can follow up with you after the webcast on the specifics of that question. Moving on to the next question from Zhao Ding. How quickly could you resume the production? I suspect we're talking about the production recovery through the year.
I think what we're going to see is as we rebuild these inventories, and the sooner we can rebuild the inventories by focusing on overburden removal in this early part of the year, we'll see a move back towards our normal operating position. I, I'm expecting this to be a gradual increase quarter on quarter as we go through the year, looking toward the end of this year being somewhere around where we were pre the last two years of adverse weather and other issues.
Next question from Jeremy Mache. Sorry, Jeremy Mache. Just wondering if there was an update on the BHP assets being acquired, which we've covered in that earlier question.
Yeah.
I'll move on to the next question from David Zhou. As we saw the year-on-year price decline in the benchmark coal price, why can we achieve year-on-year higher price? How can we better forecast the sales price?
I'll let you answer that one, Mark.
Sure. I think we've made reference to in terms of the quarterly comparisons, we've made reference to lagged pricing structures in terms of our pricing structures. That lag impact has meant that we've been able to achieve better than the market values, the indices that we currently see. That will answer the first part of that question. The second part, in terms of where the market will move to, that really is going to depend on those structural balances and how we view the market. I think our estimates at the moment are reasonable.
Thank you, Mark. The next question from Jiang Wei Wu. Can you give more picture on your production plan in the next nine months? If possible, what's your expectation in the next few years once the La Niña pattern has passed?
Okay. I think I've already given an answer to the first part of that. I think what the production pattern will do is to work through the year such that we will be achieving a production between 31 and 36 million tons that we've got in our guidance. I think we've said a few times that our expectation is that as we go out of 2023 into 2024, we would expect to see a normalization of our production level in line with where we were prior to the last couple of years.
Thank you. The next question from Bruce Wang at Guotai Junan Securities. Can you give us some comments on the outlook of thermal coal and coking coal price for the rest of the year, given both prices have declined in a meaningful magnitude from the peak levels seen last year? Mark?
Yep. Again, price outlooks is always a tricky question, I'll be honest. But what significant changes have happened in the marketplace at the moment is that, you know, we are seeing better weather. We are seeing a realization and an adjustment to the Russian-Ukraine crisis, and the world is coming into a rebalance. We've actually seen met coal prices appreciate from 2022 levels for the Q1 of 2023. That relativity between met and thermal coal prices coming back to historic norms. You know, we've also seen from our cost structure point of view an increase, and that still has to adjust. You know, I think you can comfortably think that prices should reflect those aspects of the marketplace and cost positions at the moment.
Thank you, Mark. Next question from Chang Luo. change of pace. Is there a dividend rate guidance for 2023?
Su?
Yeah. As Yancoal has been publicly declared, we always have a dividend policy, as you know, 50% of NPAT, 50% of free cash flow after tax, whichever is higher. The way as a company, we are not changing this position, unless, you know, the board will have the final, you know, decision power to decide how much dividend will be announced. Thanks.
Thanks, Kevin. Moving back onto the topic of coal markets from Josh Chiat, similar questions around the outlook, but specifically asks, in addition to what the comments were already provided on the coal markets, are we seeing met and thermal coal sales shifting back from Europe to Southeast Asia and China in the current market setting?
Met and sorry, can you just repeat that, Brendan?
Are we seeing met and thermal coal sales shifting back from Europe to the Southeast Asia and China markets?
Ah.
given the change in current conditions?
Sure. Yeah, understand. In terms of our sales profile, I think, yeah, we did sell a significant portion of our sales into Europe last year on the back of the Russian-Ukraine crisis and shortfalls. David explained in his introduction that the Europeans experienced a mild winter, and they were reasonably well-stocked, and but they have expressed interest, if their stocks do come down, going into Q3, Q4. That's something we're keeping a very close watchful eye on. Yeah, of course that we're selling it now more coal into Asia. We are fully sold, and we will maintain that position in terms of the market demand.
Thanks, Mark. A follow-up question from Jeremy Mache on the coal market. Is there any appetite for longer-term contracts being struck for thermal coal? It's not clear if it's speaking about the market more broadly or it's Yancoal specific.
From a Yancoal specific point of view, we're always in the market for longer-term contracts and have the foundation of security of offtake and a lot of the longer-term prices are still typically based on index movements, but the guarantee of contract volume performances. That's always one of our objectives to a certain level, and we always like to keep a certain foot in the door in the spot market to act to any current movements in markets as well.
Thanks. Perhaps on behalf of the people listening, when we're talking about longer-term contracts, are we talking volume with price resets or price and volumes both being set on a longer-term basis?
Typically in the market today, there's only very few buyers who look at term contracts and I classify a term contract of 12 months or greater at a fixed price. They also do not wanna take the risk on fixed price movements. It exposes them just as much as it exposes us, and they do try to base it on index or index-type formulas.
Okay. Thank you. Moving back to an operational style question, a follow-up from Mark Kelleher on the questions earlier. We state that the cash operating costs expectations for the year are AUD 92-AUD 102 per ton. What do we include in this figure? For example, does it include cost per mine resequencing, overburn removal, et cetera? What additional costs need to be added, such as royalties, capital costs, logistics, et cetera?
Mike, do you wanna answer?
Yeah. It's Mike Wells here. Yeah, the cash cost that we look at is an all-inclusive operating cash cost, which would capture any additional costs of pre-stripping and overburn removal as part of the mine recovery plans. It would also include logistics costs in terms of port and rail costs. It's effectively quoted on an FOB basis. It would not include royalties, and it would also not include capital items.
Thanks, Mike. Another question on the topic of costs from Jeremy. Will there be a lower production cost expected with the increase in tonnage? I assume we're talking about a quarter-on-quarter change through the year with that question.
Julie.
Yeah. It's Mike again. Absolutely. As we've seen historically, coal mining companies are very much volume driven, and so as the volumes recover throughout the year, that should ultimately lead to a reduction in costs as we better recover our fixed overheads.
Thanks, Mike. Question from Yung Pa, also on the topic of costs. Diesel prices have fallen significantly. How much cost savings would this generate if prices remain at spot levels? Whether we can speak to those levels of specifics.
I mean, again. It's Mike. I mean, it's a bit of a question of the relative, relativity of the starting position. We look at forecast pricing over the remainder of the year. In terms of what we would say relative to last year, I wouldn't really wanna get into specifics of that.
Yeah. Perhaps worth noting, we can look at the 2022 financial results. We give the cost breakdowns by components, and we can see transport as one of those elements there. We can see the increase in the transport component from 2021- 2022. If someone was to look at diesel prices year-on-year historically, that would give some sense of the impact the diesel price in the cost components. Moving on to a question from Viktor Vellkov. In regards to the dividend payout ratio, given the net cash position and the tax position, will the payout ratio likely increase given the balance sheet strength?
Okay, this is Kevin. first of all, from my perspective. The default position, we will follow the guidance. We just mentioned the 50% free cash flow and a 50% NPAT, whichever is higher. Also, I think that's a very good point, I just noted. The tax component must be considered as there will be significant tax bill to be paid. Yes, there might be changes, over or under, but this is fundamentally the board decision, will leave to the board to decide. Thanks.
Thanks, Kevin. Looking at the questions coming through on the webcast. It's a similar question to the one we had a moment ago. David Zhao is confirming that the AUD 92-AUD 102 ton per ton cash cost is calculated based on the production volume we projected. If less than projected volume, the unit cash cost will be realized at a higher level. Yes, just to confirm what we said earlier, there's a direct relationship between volumes and unit cost per ton, and the per ton component will influence the unit cost per ton achieved across the full year. Moving on to a different topic, a question from John Anderson. What are your concerns with the New South Wales government coal price policy?
I have many concerns with the New South Wales government's coal price policy. I think the starting point is we didn't agree with it in the first place. We pushed back on it and of course, it's not a voluntary process. It's done by direction. However, they can do it, and they are doing it. We're still working with government as I said earlier, and the regulator on some of the final parts of how it works and how the compensation works. We're ensuring that we get the best possible deal for the coal that we do provide under that policy from the generators.
Thank you, David. The last question I have on the webcast before I go back to Desmond to see if we have any questions coming through on the conference call. Has there been more appetite to purchase coal from Chinese companies since the last announcements in March? Does Yancoal see Chinese purchasers taking up a greater percentage of geographic sales in line with pre-2020?
The sale not the purchase.
Mm-hmm.
Look, we have resumed exporting tons to China. We will continue to pursue those market opportunities in terms of optimizing the best outcome that we can achieve, depending on the coal we have available to sell at any particular time. If China demonstrates to be the best market for that, we will entertain sales into the Chinese market.
I think it's worth commenting, Mark, that, you know, we've always said over the last few years that China, for the quality of the coal they want, is an important market to us.
Correct.
We will continue to look for opportunities in China and, if those opportunities add value, then we'll be taking up those opportunities.
Definitely, yes.
Okay. I do have more questions on the webcast. I'll come to them in a moment. Desmond, I'll just hand back to you for a moment to see if there are any questions coming through or to give the invitation for people to ask questions through the teleconference.
As a reminder, if you'd like to ask question on the phone, please press star one one. There are no questions for the line at this time. Please continue.
Thank you. Continuing on with the questions through the webcast. It's a dividend question from Peter Chen. In 2022, the final dividend is fully franked for the investors in Hong Kong. Will 2023 and 2024 also be franked dividends?
Thanks, Peter. The short answer is yes.
Always subject to the board determination and the board decisions on dividends going forward.
That's correct. Yeah. Thanks, Brendan.
You're welcome. Another question on the coal markets. Do you expect that there may be a surplus of coal for the reservation, given it's possible that less coal will be required for domestic purposes? I said coal markets, it's effectively the New South Wales coal reservation directions we're talking about here.
I think the coal companies have always argued with the state government that they were overestimating the coal burn in New South Wales, especially with the closure of the Liddell power plant this year. I think we still believe there will be more coal available for export out of what is being reserved for domestic use at the moment. However, as the year develops, we'll get a better feel for that. We're still firmly of the opinion that the state government has overestimated their coal burn because they've based it on historic figures.
Thank you, David. A follow-up question from George, who was asking about the transaction scenarios earlier. George would like to know, how should we think about valuation multiples that Yancoal might be willing to pay for M&A assets? Would they be willing to pay a higher multiple than Yancoal's own current earnings multiple in order to secure strategic assets? Goes on to a third component. What should we think of as a floor or ceiling in terms of purchase multiple?
George, I think the answer to your question is gonna be a very short one, and the short one is we take every opportunity individually, and we would assess all those points you just raised, depending on the strength of the asset and what we were looking at.
Thanks, David. The last question currently coming through on the webcast from John Anderson. Are we able to share any information on the timing of the sale of BHP assets?
Look, I haven't got anything else to add to the BHP assets other than what we said earlier on. We have no indication at all.
Thank you, David. That's all the questions I see coming through on the webcast at this point in time. Desmond, I'll give you one last opportunity to invite questions on the conference call.
As a reminder to ask question, please press star one one. There are no question at this time. I would like to hand the call back to the management for closing.
Okay. Thank you, Desmond. Thank you everyone for joining us this morning. If there are any other questions, as always, Brendan is available and his contact details are on the quarterly report. We will address those questions as they come forward. Thank you again, and I hope you all have a good day.
Thanks, David. Thanks, Desmond.
That concludes today's conference call. Thank you for your participation. You may now disconnect.