Whitehaven Coal Limited (WHC) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Whitehaven Coal Fiscal Year '22 Financial Results Media 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 speaker today, to Mr. Paul Flynn, Managing Director and CEO. Please go ahead.

Good morning, everybody, and thanks very much for everyone taking the time to come in through the dial-in and also the webcast for Whitehaven Coal's 2022 full year results presentation. I'm joined here today by: Kevin Ball, our CFO; and Ian Humphris, our EGM Operations. Kevin is going to go through the finance section of the presentation today, and then Ian as ever is waiting for some questions on operations. So, I'll just move over to our presentation and draw your attention to our disclosures on Page 2 of the presentation. There are some forward-looking statements in this presentation today. So, I'll draw your attention to the disclaimer that's there on the screen now. I'll move over to our FY '22 highlights. It has been an incredible year, I think, as everybody has already commented. We saw global energy supply shortfalls intensify during the course of the year as a result of the Ukraine and associated sanctions for Russian coal, gas and oil. And as a result, coal prices are at record levels and customers are very much focused on energy security as a priority. As you would have seen with the various reports of our quarter successfully through the year, coal prices have been very good, and we've leveraged that very well. Realized pricing for the year at AUD 325 for the year in FY '22 compares very favorably to AUD 95 for the previous year. Despite COVID and the related absenteeism went with that and, of course, labor constraints more generally, compounded by weather interruptions, our team delivered a solid operational performance and product quality improvements during the course of FY '22. We delivered $3.1 billion in EBITDA this year and $2 billion in NPAT. And in aggregate, across the FY '22 result [indiscernible]. Pleasingly, our operational performance and our focus on our people has been reflected also in our safety results. We recorded a recordable injury frequency rate of 5.4%, which represents an 8% improvement on the last year. Exceptionally strong cash flows has allowed us to maintain a disciplined approach to our capital allocation, to build the business resilience and deliver shareholder value in the near and longer term. As you know, we have been successfully executing our buyback plan for 10% of the stock, and that we are now returning to fully franked dividend paying as well. And of course, with a total shareholder return of 154% in FY '22, Whitehaven finished the year #1 ranked in the ASX 100. I did want to cover a bit of context on the market before we get to our results. So I'll move across to a couple of slides on market context. Most of you will be aware of this in terms of where we are and who we service. But we are an exporter and the very small amounts going to the domestic market here for the boutique users, but we are very much focused on Asia as the center of our business, although we are seeing emerging interest from Europe, obviously, given the energy scarcity concerns that are playing out there. We're very much focused on Asia as the center of our universe. Our thermal coal is the highest quality and with the highest energy content you can get in the world. Both Russia and Australia are participants in this part of the coal supply market. And so, having scarcity of Russian coal as a result of the sanctions is certainly playing a part in increasing prices, but it's also causing concerns with our customers. This slide here gives you some context in terms of where Whitehaven is positioned relatively across other jurisdictions on the quality perspective. Whitehaven has the highest leverage of all companies to the high-end market of the thermal market, with 89% of our products above 5,500 and 34% of that above 6,200 kcal in the market, which is a very, very unique place. And as we've seen, the distortions between the 5,500 market and the gC NEWC market, Whitehaven has the greatest leverage to that benefit of all the coal companies on the market. And with this supplier squeeze, we're just seeing that market diverge even further between those 2 markets. Now, what's the usefulness of that? Well, of course, our coal delivers more energy per tonne than any of our rivals. And you can see what the relative results of consuming our coal are, when consumed in power stations. So this graphic you would have seen -- Whitehaven watchers would have seen this -- used this in previous years. We've refreshed and updated it for you. So if you look at the coal the comparison from left to right on this slide, and you look at the typical power stations that we are servicing in Japan, say, for instance, and we've thrown into this example, the [ Asoka ] power station in Japan, an ultra-supercritical power station. There is a 44% lower emissions outcome compared to our most inefficient power station operation in Australia, That is the brownfield coal generation in Victoria. Now that's not to say they're not playing a very important part in the security of our energy supply system in Australia, but this gives you a measure of the efficiency delivered by consuming the type of coal that Whitehaven produces with its low impurities. And obviously, our export markets have benefited from that. Now if I go into the page, a little bit more context for you also, provide a little bit more of the notion of how important we are to our various markets. These estimates highlight the daily contribution that we make to the essentials of life in these key markets. Of course, this is just Whitehaven's piece of the puzzle overall, but you can see that we're integral to the daily consumption or the daily provision of electricity across our key markets. So whether that be 22.9 minutes in Korea, Taiwan a little bit more at 27, and up to Japan at 33 minutes of every day. Now these customers are obviously critical markets to us, and -- but we are part of the energy puzzle for them, which they rely on every day to keep the lights on for this amount of time. And so, this is something that we back up every day rather than being weather-dependent for -- to keep the lights on. So, over the page, the challenge here with all of this is, despite that integral nature of our participation in these markets and the reliance that these key customers place on us, there is an emerging gap in the supply of coal, and not just alcohol, but coal more generally. As you can see in this graph, 85% of the world's coal-fired generation capacity will be in emerging and developing countries, but there is -- service these needs. Now this chart obviously reflects a tailing off of coal consumption across the northern hemisphere, but obviously, in Asia, there continues to be very solid growth. But it is the lack of investment which is a product of the collective attempts to convince the world that new sources of coal supply will not be needed, and this has contributed to the ever-widening gap between supply and demand, which is going to take a long time to resolve. And of course, the conflict in Ukraine has only exacerbated this situation. Europe and North Asia have been reliant on high-quality Russian coal, but those sanctions have come into place. Demand for seaborne thermal coal will strengthen further and supplier side has tightened. In FY '22, 12% of the seaborne market originated from Russia. That's [ super mingling ] for our market. About 30% of the high-CV thermal coal came from Russia in our markets, and is estimated that around 56% of Europe's high-CV coal originated from Russia also. So you're going to see a tightening ever more of the supply-demand dynamic, particularly as we approach winter in the Northern Hemisphere. Looking over at the metallurgical coal side, we should look at that. In the short-term, we're seeing softness as a result of economic slowdowns, but that remains an essential ingredient to steel making, and is structurally short in the long-term. It's an essential component of the economic recovery, of course. And of course, conflicts and the period post-conflicts always gets rise to greater steel demand also. In this instance, Wood Mac is forecasting strong growth in demand in seaborne metallurgical coal markets in Asia for coming decades, and Whitehaven is well positioned to take advantage of that. Thermal coal prices on the next slide. You will have seen this slide many times, and so I won't belabor this too much other than to say that we are in an extraordinary period. Thermal coal prices are at record levels. The customers' concerns are really about energy security, and price is important to them, of course, but energy security is the greatest confirmed, now that they have a large portion of the seaborne trade missing from the supply feeding their markets. Now, metallurgical coal prices. We've all acknowledged that the difference or the inflection that we've seen where metallurgical coal prices were below thermal coal prices. And whilst we do think this is a short-term matter, it should resolve itself with economic growth continuing. And in the meantime, for our purposes, we are able to switch some of our semi-soft pricing contracts to more gC NEWC linked pricing, which gives us greater exposure to the thermal coal price, which is obviously superior to the current pricing for semi-soft coating coal. This slide really just summarizes all the impacts of these variables that we've encountered during, of course, this very dynamic year. Coal prices are well supported and I think that was happening well before the Russia-Ukraine conflict. Strong demand for all fuel types, particularly high-CV coal, remains very competitive price-wise relative to the alternative fuel sources. But inflationary pressures are ever present and constantly a battle for us. We are very mindful of the fact that we need to manage our costs because we are in a cyclical business. But at the moment, inflation is pretty much across the board. And finally, there's -- weather obviously have affected us, as many of you know. During the course of this year, at Maules Creek and Tarrawonga, we lost access to those mines based flooding across those access. And then since that time, the Hunter Valley has experienced a number of flooding events, which is constrained rail supply in -- down to the port for us. But we're doing all that. We've managed ourselves reasonably well during the course of this financial year. And if we add all that up together, what's impacted FY '22 is extending into FY '23. So it's a very strong and tight supply-demand dynamic that we're seeing in FY '23. Over to the results. Starting with safety. Look, our safety has been a very good result in this year, 8% improvement year-on-year. As we all know, this effort needs to continue. And so, there's no -- this job is never done. We have to say, even though if we look back over the last 5 years, our TRIFR has gone down 22% over the last 5-year period. And if we reference ourselves to our industry benchmarks, we're doing considerably better than the industry average at 12.9% over the last 5-year period. So our people are very engaged in our safety and they're very engaged in the business more generally. Employee engagement is a focus for us, and we've been -- which has been challenging during COVID, and we continue to face challenges in terms of attracting and retaining the right people across our industry. In many respects, employee engagement goes hand in hand with our local community engagement, given the 2,500 of our people live and work in region of New South Wales. Now these are some of the stats here you've seen before in terms of other call-outs here with, $354 million paid to our local suppliers. It's about 200 business [indiscernible] in about a month. And of course, that will include other important aspects of that report, including TCFD reporting which we do, the scenario benchmarking, and we'll also do a presentation there on our profile of Scope 1 and 2 emissions. So financial results for the year. Again, as we -- we'll just go through this quickly. FY '22 has seen record results. As I said before, AUD 325 per tonne translates to $4.9 billion of revenue, and that related to a record EBITDA of $3.1 billion. Cash generated from operations was $2.6 billion, and of course, the NPAT for the year, a record for us at $2 billion. These are great results, and the Board has seen fit to declare a $0.40 dividend fully franked on the 16th of September, and that's on top of the $442 million we've already spent in returns to shareholders, be that through the $0.08 unfranked dividend for the interim. And then, of course, we bought back 7% of the share capital of the company to date, of the 10% program that we announced earlier in the year. And Kevin will talk to you the capital allocation very shortly. Over to our ops and I won't spend too much time on this because you've seen this from our quarterly reports. So just summarizing quickly. 20 million tonnes in total ROM output, 18.8 million tonnes in terms of sales. Maules Creek was here, as I mentioned earlier, as you know. Through rain events and flooding, we lost access to the mine for a couple of weeks. And that meant that we lost about 600,000 to 700,000 tonnes of operations during the course of the year. Our guidance, importantly for this new year is at 11.6 million to 12.6 million tonnes. And the key call-outs of risks around that, as you are well aware, is labor availability with shortages generally across every industry, but ours also. And then, of course, further weather concerns just given that there seems to be extensions of [indiscernible] influenced weather in the first half of this new financial year. At Narrabri it was a good year, in the sense that it was a return to greater consistency and operational rhythm and FY '22 tonnes of 4.8 million tonnes was 18% higher than the previous year. The step around from -- to 110B was conducted with the same diligence and the longwall has kicked off well in 110B. The scheduled relocation from 110B to 203 is expected to be in the final quarter of this new financial year. On the theme of labor and its shortages, the cut and flit operations, which we would have preferred to have been initiating with some volume at the beginning of this new financial year, 1st of July. That has been a slow ramp-up. And in fact, we've changed out the contractors associated with that work to try and minimize the risks associated with this labor tightness in the market. And as we gravitate to -- back into the shallow side of the mine from 203 onwards, the aggregate of cut and flit and longwall production should see us in the range of around the 8 million tonnes per annum, as we re-establish ourselves back on the shallow side of the mine. Our Gunnedah ops did well in this year. And at 4 million tonnes, it's been a decent outcome. Certainly, the highest outcome for the last couple of years. Obviously, everybody knows that Rockman is no longer part of the production puzzle, and Werris Creek is coming to the end of its life with the mine at 2024. In this new year, our production guidance there will be 3.3 million tonnes to 3.7 million tonnes. The split broadly similar to the previous year, although Tarrawonga will be going into an area of slightly higher strip ratio. So the split there is 1.5 million tonnes to -- and 2.2 million tonnes. And with that, I'll hand over to Kevin to go through the financial highlights.

Thanks, Paul. So what you see on this slide is 5 years of history, and I don't propose to go through all of it. As Paul mentioned, we've reported a record EBITDA of $3 billion, a record NPAT at $2 billion, and record cash flows from operations of over $2.5 billion to $2.6 billion. This result has really been driven by the higher coal prices, which were $230 higher than those -- the COVID affected year of FY '21. And when you look at this slide, you can see in the results the real impact of COVID in '21 and '20. Over the coming slides, I'll take you through the headline numbers. So let's move on. EBITDA margin. We sold 14.2 million tonnes. Our average revenue, excluding purchased coal and net of royalties was $300. So that makes the math pretty easy with $84 of average cost of sale, a $216 margin or 72% EBITDA margin on sales. When we look across the business, the global demand for energy is very strong. In fact, global economic growth is driving demand for energy and driving up prices for coal, LNG and natural gas in Asia, North America and Europe. You see that in the JKM market price. You see that in the Henry Hub price in the U.S. So energy is short and prices are high. We move on to EBITDA. There's no real surprises in this graph. What it says to you is the price deliverability of $2.9 billion. We picked up a little bit more about $100 million in FX, which really went to offset the costs, and we finished the year with $3.060 billion in EBITDA or $3.1 billion as we round up. I'll go on the costs and take you through that, but let's first have a look at prices. So let's look at the pricing. Our achieved thermal price was USD 239 a tonne relative to USD 68 in the previous year. The lower coal prices in '21 and '20 largely reflected the impact of COVID slowdowns across the globe and real global uncertainty. Adding to that was Whitehaven's own challenges with poor quality fold affected coal production from Narrabri, which meant we were selling a higher proportion of volumes than usual in the sub gC NEWC markets, and you would have seen that in the discounts. That continued into the half 1 of fiscal year '22. However, in the second half, and particularly the fourth quarter, we saw a return to the usual portions of high-quality coal, and a substantial improvement in the realizations. And for the June quarter, we had a 2% discount. And I think, surprisingly, we had a 4% discount of producing coal over the whole year, which is a pretty good outcome given the environment. In a stable pricing environment and given our high-CV coal, we expect Whitehaven to achieve premiums to the gC NEWC index. However, in a rapidly changing market, there's a lag to the index, and that's what we've seen in half 2 of fiscal year '22. Moving into '23, and as prices are holding relatively steady, we're expecting to see a return to our usual pricing outcomes. And overall, we delivered an average coal price of $325 a tonne for thermal and met coal products relative to the $95 in the previous year. So it's a pretty good outcome for the year. Let's go to unit costs. Not surprisingly, everyone in the market, or everyone in the industry has been talking about some of the pressures that exist. So as you can see from the chart, our unit cost moved from $74 a tonne in fiscal year '21 to $84 a tonne of fiscal year '22. But it really wasn't -- in this year, it really wasn't about cost. With the margins where they were, the pressure was to produce the tonnes and move the tonnes with the margin involved. As indicated at the half year, the benefit of having higher coal prices have played a role in the rise in cost because our product quality strategy sees us washing more coal to increase its value. So that dollar increase in cost from yields was well paid out by -- well paid back by the quality of product, and we saw cost increases reflecting underlying cost inflation in diesel, demurrage brought about by the weather events at the second -- at the end of calendar year '21, coming into '22. We saw some flooding effect in the costs, and there are some other roundings there to get you to the $84. You can calculate the unit cost off the face of the P&L. So in the appendices, we've got one there. And for those of you from North America who are more accustomed to seeing a site-based cost, this is a whole of company cost and includes the company overheads. So you take the $84, use the equity coal sales and take the realization, take the royalty off, and you'll get to the EBITDA that we printed. That bounty of EBITDA turned into a very good year for us on balance sheet repositioning. At the start of the year, we had $809 million of net debt. And by the end of April, we were effectively cash positive. By the end of June, we had $1.04 billion net cash on the balance sheet, and that story has continued subsequent to year-end, and prices are higher. Volumes are consistent with what we've been selling, and we've been doing well. So by the end of June, we had $1.40 billion. That was after we've returned $439 million to shareholders through the interim dividend and progressing the buyback. And we put about $177 million into sustaining capital in the business. Let's go on to what happened with the cash. As I said, $177 million has been invested in the business. $774 million was used to retire the senior bank facility, the ECA and lease principal payments. We've earmarked $552 million to pay to the federal government for FY '22's income tax bill, and we'll pay that in December. And this will fill the company's franking account, and that's why the dividend for -- the final dividend is fully franked. We purchased $19 million for shares in the employee share trust. So we populated that early in the second half at lower costs. And that left us with about $1 billion of cash remaining. All of that has pretty much been returned to shareholders, between $550 million paid or earmarked for a buyback and the $450 million in dividends -- in a different way. What are we going to do with $1.40 billion. Well, $1.40 million, as I said, we've got $550 million earmarked for tax. We're going to complete the buyback up to that $550 million. We've got a final dividend for FY '22, and that leaves us a little bit drawn over net cash or negative net cash after that point, but we're pretty happy with our outcome. Come over the page to balance sheet. The global energy crisis continues. Prices remain elevated, and we continue to see strong monthly cash flows. We've got the balance sheet repositioned to a position of strength by repaying all of the senior bank debt. That facility expires in July 23, and we'll work to replace that facility in this next coming year. But with the balance sheet in such pristine condition, we're looking at debt capital markets. Our rating position should have improved as a result of the strength of the balance sheet, but we see little need to enter those markets just yet. We expect to reposition our funding sources and structures over the next 18 months in a manner that reflects the strong ratings outcomes, and our long-term relationships with suppliers of debt capital. Now I know a lot of you will be interested in the capital allocation framework that we rolled out in February. So let's take a little more time there. With our strong operating cash flows, we maintained a disciplined approach to capital allocation. You would have seen that in the CapEx that we spent in the year. But first, we'll use cash to maintain and optimize existing operations, and that is important. Second, we built cash on the balance sheet or retired debt. So we put the balance sheet in very good order. The cash we retain is likely to vary. And I know people keep asking this question to the analysts, but it's going to vary, and we're likely to take a more than 12-month view when we make those deliberations. So, be patient with us. And third, we'll return capital to shareholders. And that's what we've done this year. We've given you 100% of the cash -- the surplus cash back. And from our perspective, we think that's sensible and prudent. After those priorities, we used surplus cash to invest in growth, if that is the best use of capital. The growth investments might include M&A to increase our equity stakes in our existing businesses or where there are opportunities to grow in metallurgical coal, and diversify our operations out of the Gunnedah Basin, or it might include investing in our Vickery or Winchester South development projects. But we'll only invest in this growth opportunities if they deliver appropriate returns for our shareholders. Buying back shares has provided compelling returns. And in the future, as buybacks offer more attractive -- if buybacks offer more attractive returns and growth opportunities, we'll deploy surplus capital into additional share buybacks. Our aim is to return up to 50% of NPAT to shareholders through dividends and buybacks, but if buying back additional shares continues to be more attractive than investing in growth, then our payout ratio may be higher. Share buybacks have been and are expected to remain an efficient and value-creating way to return capital to our shareholders, particularly if the share price is undervalued in the company, which we firmly believe is currently the case. And we're going to look at analyst expectations of EBITDA for FY '22 and the EV to EBITDA ratio here in this business is fairly compelling. So capital allocation in FY '22, I don't propose to go through this. You can see where all the money went and how we deployed that capital, and you can see that from these earlier slides. So I'll turn it back to Paul because I think people are going to want to talk at some point and ask questions.

Thanks, Kevin. Now, looking at the full year guidance in FY '23, we expect to deliver another strong year. The guidance for volume at a ROM level is 20 million tonnes to 22 million tonnes for the year, and for managed coal sales, 17.5 million tonnes to 18.5 million tonnes for the year also. Our costs are up, reflecting the inflationary environment we're working within, and that's manifest itself through high diesel cost, electricity, labor, as we talked about repeatedly during the course of this discussion. And our guidance for costs this year are up at AUD 89 to AUD 96 for this year. All businesses that we note are experiencing inflationary cost pressures, and we're no different in that regard, but we are very mindful of the need to retain flexibility to the extent we can in our cost base, because we are in a cyclical business. Capital expenditure in this year does step up. So we've given you a range there of $287 million to $360 million, which sounds like a lot, but there's actually a big focus here on Narrabri and putting in place some capital expenditure now right to establish the southern areas of the mine. And there is an appendix in the back of this presentation that will go through a little bit more detail for each year in terms of what we're allocating capital to, at each of the operations, and of course, Narrabri itself. We are expecting to allocate in the range of $70 million to $95 million just across our development projects. We want to make sure that they are shovel ready to the extent we can degree, obviously, being fully approved, which is still pursuing its state-based approval. That compares to about $34 million when we constrained that last year at both Vickery and Winchester South. And there are a number of one-off items at each of these sites that we can go through in the Q&A section to give people a little bit more color. And as I say, there's an appendix in the back of the slide deck for you. And over to our outlook, and I'll just make a couple of comments just on that outlook. Look, Energy security, as you heard us repeatedly remark on during the quarter -- this -- and the quarters before this, clearly is front of mind for all our customers, and we think this is likely to take several years before supply and demand is able to rebalance. I suppose, in addition to that, high-quality coal and high-CV coals such as ours will be required for a multi-decade period, of that, we have little doubt. Prices will continue to be well supported. Russian sanctions and, of course, weather-related events in the Hunter Valley, will further support prices in the near term. In terms of the met coal, there currently is some volatility as we have all observed, but we think longer-term outlook here is very, very solid, and the price environment will remain very positive. In terms of the key focus for FY '23, we're focused on continuing to improve our safety, environmental and sustainability performance. We're all about optimizing our margins in this market, including the -- maximizing our thermal coal volumes and managing costs as best we can in this inflationary environment. And as I say, those projects, we'd like to push them as close as we can to be shovel ready. We're looking forward to another good year ahead, and I'd like to thank our team, our entire team and our Board, for all their effort and support during this challenging but a year that's been very rewarding for our shareholders as well. So with that, thanks for listening to the presentation. We'll hand back to the operator and move on with the Q&A session.

[Operator Instructions] I show our first question comes from the line of Rahul Anand from Morgan Stanley.

Look, first one is around operating costs for next year. So Paul, perhaps if you can help us understand what part of these costs do you see as transient currently? And what's the underlying level we should be thinking of on a go-forward basis? And then the second part in sticking to guidance is basically around Maules, the 13 million tonnes license. The guidance is a bit below that. I wanted to get a bit of color on that, please.

Rahul, I'll start off with a few remarks and then hand over to Kevin for some remarks on the costs. I mean we're seeing inflation right across the business, as you know. And this is no stranger to you, I'm sure, with all the companies reporting their various results and drawing out the same observations. But labor clearly is an important issue. Diesel, we've all observed that on a daily basis as being influential in terms of where our cost base goes. From our perspective, there are other different structural changes, which are in our cost, which won't disappear in the short-term, the first of which is acceleration of debt at NCIG. I think we're -- everyone is obviously deleveraging at the company level. And you can see our infrastructure providers which were a large shareholder in NCIG, made the sensible decision to accelerate debt reduction there. And so, there's an element that's in those costs. Kevin, do you want to expand?

Yes. Look, Rahul, the way we think about this is that diesel is going to remain elevated. And if diesel remains elevated, then the global energy complex remains elevated and price remains elevated. But the things that are in the business that we've seen quite a lot of pressure on recently is, like suppliers who are struggling like many companies in this country to actually find labor to deliver, and more importantly, around trades. It's hard to find trades in this -- on the East Coast. Our labor, people are trying to pick -- or other companies and other industries, you've got a big state government spend going on here in construction. So there's pressure on labor. There's pressure on trades. The diesel price remains high. The NCIG piece is really about deleveraging that balance sheet to the point where it's de-geared over the next 4 or 5 years, and that's going to stay there. I do think the -- whilst ever the spread exists between API 5 and gC NEWC, it's in our interest to wash as much coal as clean as possible and sell into those higher markets because that's spread encourages. So I guess I'd be saying to you that I'm waiting for a turn in the economy before I start telling you the costs are going to -- cost start coming out of the business.

And just on the Maules part of the question, the challenge there is, as it always is, is the presentation of the Braymont Seam in your mine sequence in a particular year. We've given you a range there that we're cautious on. We're caution -- within this current year. So we've calibrated that with a measure of caution in terms of where we think that will play out during the course of the year. Of course, we'd like to be closer to the 13 million tonne rate, but I don't think that's prudent given all the factors that we've spoken about during the course of this presentation and that Kevin has also just highlighted.

And look, just the last one, sticking with guidance in terms of CapEx now, perhaps fall into next year. You did point out the $70 million to $95 million in project capital. Is that -- any part of that in terms of perhaps Vickery long lead items or something? What exactly is that spend going into?

No, there's a range of things in there. There's not long lead items. No, we're not -- well, it depends on how you define that, I suppose, Rahul. There are aspects of this which are land based. So there's land required for that project. There is some element of offsets required also for that project given that, that is now fully approved. But majority of it, there is drilling -- there is exploration drilling associated with the geotechnical work for the rail corridor as part of the budget for this new year. There's exploration drilling also further for geotechnical reasons up at Winchester South during the course of this year also. But there's nothing in there for ordering long lead time items.

And if you go to Slide 46, Rahul, which you'll get to in due course, you'll see there's a couple of things then there. We've got a little bit of work on minimizing emissions. We're in early stages of looking at putting a solar farm on Narrabri. We've got housing in the Gunnedah Basin. We want to try and build more capacity out there because we've got a need for people in years to come, and we want to make sure that housing isn't the barrier of entry, at least for partners. So there's a few things in there, and we can take people through these at a later point. The other point I'd probably just clarify for you with NCIG is, we expect that to be a 4- or 5-year program there, and that's all around -- while prices remain elevated, that additional amortization charge comes through. And when that comes through and is finalized, I'm expecting that NCIG becomes probably the last cost port operator on the East Coast.

Yes, I was going to actually ask. Do you have an order of magnitude perhaps, Kevin, in terms of what kind of dollar savings could be, if it was completely debt-free?

I think NCIG. NCIG's operating costs, you'd expect that to be somewhere in the $2 billion to $3 billion range if you run the whole -- if you ran that port. And you get the benefit of cargo assembly at the port. So you're delinking the logistics chain. You're just basically railing and railing and railing to a stockpile. So I think that port at the back end of the 2020, so 2027 to 2030 and beyond, is going to be the best port to be in in New South Wales.

And I show our next question comes from the line of Alex Ren from Credit Suisse.

Congrats on solid results, and an incredible year, like you mentioned. So from me, please, Slide 5. Could you remind us what's your volume exposure to the $735 a tonne Japanese reference price, please? Then the next one is -- would be on Slide 31, net cash waterfall chart. So going back to $74 million net debt, but this calculation is based on $1 billion net cash as of June 30. Just thinking post June 30, correct me if I'm wrong, you maintained about $400 million free cash flow a month. So as of today, that gives you roughly $300 million headroom for cash management. Just wondering, is this a ballpark number you're considering for the next round of buybacks at the AGM? That's it.

5% is the answer to the first question.

And the answer to the second question is that, we look at it year-on-year, Alex. So we're not in the rating in the first quarter of fiscal year '23 to support the '22 result. The buyback, you'll see a notice of meeting come out. Board has approved an increase to go back to shareholders and seek approval to increase the buyback limit. That should be out, I'd say, in the next week or 2. Sorry, Paul, when is the norm coming out?

In about a month's time.

In about a month's time. But it'll [indiscernible] in buying back shares, and we'll really kick off this buyback -- the current buyback that's outstanding tomorrow, with the trading window open tomorrow. And your estimate on the math is pretty much on the money. As far as what you're putting the fourth quarter is running into the fourth quarter of '22, is running into the first quarter of '23 at the same numbers.

And I show our next question comes from the line of Paul Young from Goldman Sachs.

A question on the market, Paul, and on the Slide 5. That's actually really helpful as far as understanding the customer mix. Chris, about 2 things. One is that the sales into Poland. I know 2 customers, small volumes there. But what's the outlook for, I guess, increasing sales to Europe, noting that I think Russia stopped selling coal into Western Europe around the sort of end of July there? And then second one is around what customer demand is like at the moment for locking in fixed prices in -- for 2023 at/above new coal at premiums? And what's your appetite for that?

Yes. Look, sales -- and everybody knows that we obviously contributed to the humanitarian aid that went into Poland. But in addition to that, we've obviously had a couple of opportunities to sell metallurgical coal into Europe. So there's some trials going on there. There are inbound inquiries, Paul. But I have to say, our traditional customers in Asia are also exhibiting anxiety around security of supply. So we need to balance all that with them, given the long-standing nature of those relationships. But there's plenty of inbound inquiry coming out of here. I see almost on a daily basi there seems to be new announcements coming out of Europe about facilitation of greater coal consumption across Europe, be that power station has been reinvigorated, be that rail haulage given preference on the rail lines over passenger traffic for coal shipments. It's -- there's just a series of pronouncements coming out there. So we think that's just going to drive greater demand. We know that everybody in the European ports has been filling up their stockpiles ahead of the incoming winter, and that was happening very vigorously before the sanctions came into place in early August. In terms of your second question, in terms of locking things in, we have been opportunistically taking opportunities to lobby in higher prices where that's been an opportunity that's available to us. We have some contracts where that is available. But having said that, we've been in a rising market for a while now. And so, every time we've done that, we've seen the prices continue to progress further northward. So we're a little cautious on doing that. The previous question, obviously, was about the JFY number, and that's -- about 5% of that is obviously locked in. Korean tonnes generally are locked in for 12 months as well. But we are at the moment, I have to say, preferring to stay at the market rather than trying to lock in numbers. Our focus is locking in the premiums, as we've talked about in the past. We want to make sure that the index may vary, although we think it's going to be stronger for longer here. But our focus is looking those premiums on our sales as a means by which we can set that marker as high as we can for the next 6 to 12 months.

Just last one is around the coal trading. And you did really well. I mean, I think it's probably a record EBITDA from coal trading. In the -- can you just explain how that sort of came about, what opportunity there was and how you're approaching that -- your coal trading or coal purchases at the moment?

Yes, Young. I think in -- there is the -- what you see in the open cut and underground is the value of the coal delivered out of those. And then what you see in the coal trading and blending segment is really the portfolio benefit of lifting products out of markets that they ordinarily would fall into. But pull it together, you get a real uplift on results. And that's the $200 million that flows through pretty much out of blending benefits. The coal trading in the current year. I'll probably say Jason and the team have done pretty well down there. But really with the demurrage and the weather events, the real coal purchasing has been about helping customers and delivering coal to customers and defraying demurrage rather than trying to make a margin on it. We do like the fact that, that 5,500 product is being priced at a big discount to gC NEWC, and with a business in better performance in '23, I'm hoping and looking forward to coal trading coming back into the fold.

I think generally, it's the benefit of having access to the high-CV coal.

To blend.

We kind of blend $55 million with $55 million and $200 million. So that's truly the benefit of having free access to that higher value coal, which is being able to take advantage of that spread.

Yes. But that arbitrage is still there [ Jens ], I mean, on those 2 gold products, [indiscernible] versus [ 400 ]. We can probably assume that you'll get further -- you continue to benefit from blending, I presume, this market?

Yes.

And I show our next question comes from the line of Chen Jiang from Bank of America.

A few questions from me, please. Just looking at your capital allocation. It seems like Whitehaven prefers buyback versus franked dividends. Just wondering how should we think of the split between buyback and dividends going forward? And could you please also remind us your franking credit at the end of FY '22? And any franking credit you are expecting for FY '23? I have more after this.

Last question first. We'll pay $551 million in tax to the ATO in the first week of December, which will fill the franking account and allow the full year final dividend to be fully franked. So that was that question. So remind me again your first one?

Yes, sorry. First one is about…

Buyback?

How should we think of the -- yes, split between buyback and dividends, because it seems like Whitehaven prefers buyback at this stage because your policy of 20% to 50% included buybacks?

Yes, I think that's a very good question. Look -- and I think when you've got a free cash flow yield of about 70% in the business, buying back the stock is as good a choice as you can. I think -- we think when the share price starts to show value, then clearly within that 20% to 50%, this space is to play. But I think you should work on 20% of NPAT being paid as a dividend until the business gets back to a realistic set of valuation metrics, and the balance coming out of buybacks. And as we said in that capital allocation framework, if we can't find a good use for it, we'll put it to work on further buybacks. And that's why we're going back to the shareholders in October seeking an increase in the refresh of the 10% in the 12-month period.

So refresh of 10%, you mean additional 10%? Are we referring to -- do you have any preference of our market buyback -- of market buyback which can utilize the franking credits?

Yes. Look, I think the way we think about that is that we'll refresh the 10%. We'll execute on the balance of the 10%, the first buyback. Our inclination is to -- following the AGM. If shareholders approve that resolution, then we would seek to launch another on-market buyback. And then with the franking account populated, it's probably either late in the second half or in FY '24 -- early in FY '24 when we'd be able to contemplate an off-market buyback. But there's a bit of water to go under the bridge there, and there's a lot of work to get done. But that's our preference at the moment -- not our preference, that's probably our way of thinking at the moment.

Chen, what we're signaling here is that the buyback that we're undertaking now is not a single expedition into the market. We see value in continuing to follow this up, as Kevin has just outlined, and is subject to shareholder approval. We believe we'll take the balance of the 3% of the first buyback tranche, if I can call it that, by the time of the AGM, more or less, based on the pace at which we've been executing that program. But there's value -- there's very strong value in the stock, and we think the buyback has been very good for shareholders over the last 6 months. And so, we'd like to finish that program around then. But assuming that shareholders view that favorably, then we'll be able to continue on into the post AGM period, and with a further tranche, as we're saying, on market, and then that will facilitate the opportunity whereby the Board can then contemplate after that.

Just a follow-up. So what happened is -- comfortable and confident that because you have $180 million roughly pending from the original $550 million buyback. And I guess what happened is it's competent to complete the remaining in few month?

Yes.

Roughly speaking in like... Okay. Can I switch gear to your CapEx guided for FY '23, please? It looks like CapEx from Narrabri has tripled by looking at the FY '23 guidance. I'm just wondering, are all those CapEx in FY '23 sustaining CapEx? If they are, is that the level we are expecting from Narrabri going forward?

Yes, Chen, I'll make a few remarks, and then I might even hand it Ian because I know he's been waiting eagerly for some questions. You're right to focus on Narrabri. And certainly, the tripling is certainly interesting. This is not a tripling of sustaining CapEx. That's not the case. There's a significant body of work here that's required, I think, as we've been talking to people about progressively over time, moving into the southern domain of the mine. And so, the establishment of mines -- and you would have seen in the current areas where we're mining, we incrementally advance the mines in advance of production of the associated panel nearby. But in moving to the south, you do actually have to put in a separate set of mines in there. And so, there's not just mines, but there's all the infrastructure that goes with that, that is required, ventilation shafts and so on. And then, of course, there's a small amount of CapEx involved here which is -- which whilst is necessary for the 200 series panels. It does have the added benefit of -- and is necessary sequentially to be developed before we move to the 300 series panels as well. So there is some infrastructure here which has an enduring benefit for the life of mine, that needs to be put in place in order to open up those panels.

I think the only sort of addition to that, Paul, is, there a few lumpy things. For example, we're building what we call Brine dam for the regulatory approval, and that should see us complete in that area for a period of a few years. So, there's some lumpiness associated with next year's costs there.

Yes. And then, of course, there's the Stage 3 biodiversity offsets we've called out separately there. That does cross the boundary of being the 200 panels and the 300 panels in effect, because having now had that life extension approved at a state level, it does trigger the requirement to put in place all the bidders, the offsets for the combined 200 and 300 series panels.

Can I please ask last question on your Slide 40, your options to grow? I'm just wondering -- maybe it's a question for Kevin. Do you have any target on gearing and net debt that you are comfortable to develop Winchester South and Vickery? And how should we think the timing to develop those projects? Because you mentioned you only undertake one development project at a time?

Look, thermal coal assets, I think you'll find --will be difficult to find funding for. And so, that will need to be funded off the balance sheet or through sell-downs or through other structures. And those things are all on the table. I think the energy security debate is now causing customers to focus on incremental supply into the market. And that debate, I think, will evolve over the next year as people try or as countries try and solve their energy needs, and put in place a little bit of a buffer so they don't suffer what they're currently going through. On the Winchester South program, that's a couple of years behind Vickery in terms of getting an approval. However, we're very confident that the funding for our met coal project is available, and that's certainly our expectations. In terms of gearing, I think we would safely say to you that having had a geared balance sheet for most of the time that Paul and I have been here, our view on that in our thermal coal business is, don't do it. It's -- the world is not there at the moment, supporting that arrangement, at least in the equity markets. And -- but having said that, our met coal business will support some level of gearing. So, I think you're going to have to wait and see how the portfolio emerges and develops over the next 2, 3, 4, 5 years, and then we'll see some gearing come back into one side of the business being the met coal side of the business.