Yancoal Australia Ltd (YAL) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to Yancoal's First Half 2025 Financial Results Webcast. [Operator Instructions] Please be advised that today's conference is is being recorded. I would now like to hand the conference over to your speaker today, Brendan Fitzpatrick, Investor Relations Manager. Please go ahead, sir.

Thank you, Amber, and thank you to everyone for joining this briefing on Yancoal's First Half 2025 Financial Results. My name is Brendan Fitzpatrick, the Investor Relations Manager. To present today's briefing, we have several members of Yancoal's executive leadership team. These include Mr. Yue, Chair of the Executive Committee and Acting CEO; Kevin Su, Chief Financial Officer; Laura Zhang, Company Secretary; David Bennett, EGM Operations; Mark Salem, EGM Marketing; Mike Wells, EGM Finance; Sharif Burra, EGM, Health, Safety and Sustainability; Mark Jacobs, EGM, Environment and External Affairs; Frank Fullam, EGM, Technical Support and Projects; and Sebastien DeConning, EGM, Audit and Risk. After the executive team completes the review, we will move to a question-and-answer session. The commentary provided today is based on the first half 2025 financial results and associated announcements published to the Australian Securities Exchange and the Stock Exchange of Hong Kong yesterday, the 19th of August. Slides 2 and 3 contain notices and disclaimers relevant to today's presentation and the forward-looking statements contained in the presentation. Please make yourself familiar with the content of these 2 slides. Throughout the presentation, we use Australian dollars, unless otherwise stated. Also note that charts utilize different periods on the horizontal axis. Kevin Su will provide the introductory remarks for Yancoal's first half highlights.

Thank you, Brendan, and welcome to everyone on the call. During the first 6 months of the year, we have delivered a great operational performance. ROM coal production was 32.2 million tonnes, and our attributable saleable coal production was 18.9 million tonnes. We're tracking well against our full year production guidance, and with continued momentum, our full year results will potentially be towards the upper end of our guidance range. Our cash operating costs were $93 per tonne. Keeping this flat compared to last year was a great outcome in the current macro setting. And with a strong second half production performance, we may deliver a lower cash cost at the full year results. Our overall realized price for the half was $149 per tonne, giving an implied cash operating margin of $40 per tonne. We achieved revenue of $2.68 billion and an operating EBITDA of $595 million at a 23% margin. Delivering this margin during a period of weak prices is a testament to the quality of our assets and our demonstrated ability to operate them effectively. Our profit after tax was $163 million or $0.12 per share. In accordance with our constitution, the Board has elected to distribute $82 million to shareholders at a $0.062 per share fully franked interim dividend, a 50% payout ratio. The company retains a strong balance sheet with no external debt and $1.8 billion cash as of 30 June. The team will now take you through the details of the first half performance. I'll now hand over to Brendan to continue the review.

Thank you, Kevin. Slide 5 shows our safety performance. The TRIFR statistic improved over the period, but we continue to aim to reduce it further. Safe mines are productive mines. Our push towards strong operational outcomes this year is underpinned by our commitment to improving safety performance through targeted intervention activities. Keeping our workforce safe is always our first priority. And whilst our TRIFR is below the industry average, we intend to improve our relative performance. Our 2024 sustainability report was issued in April. It reviews our first 12 months of performance following the formal adoption of our P4 Change for Tomorrow sustainability strategy. Case studies in the report provide insight into drone seeding, decarbonization initiatives and technology to quantify soil erosion risk. I'll now hand over to David Bennett to take you through our operational performance.

Thank you, Brendan. Slide 7 summarizes the operational drivers behind our half year performance. As Kevin touched on, we are tracking well against our 2025 production and cash cost guidance. ROM coal and salable coal production were 15% to 16% higher than the first half last year. Attributable sales, by contrast, were effectively flat. As described in our second quarter production report, temporary disruptions to rail and port activity delayed first half shipments. Mark Salem will provide further commentary on the coal markets and our expectations to recover the delayed shipments this quarter. Kevin mentioned that we kept our cash operating costs flat against the 2024 full year at $93 per tonne. The performance was also an 8% improvement over the first half of 2024. Cost control is always important, but even more so in the current coal market. Total ROM coal on a 100% basis was over 32 million tonnes with output from our largest -- our 3 largest Tier 1 mines increasing from the first half of 2024. With 67 million tonnes of production over the past 12 months, this is close to the best performance in Yancoal's history. Our mines are continuing to run well despite the wet weather encountered during the past 6 months. We intend to maintain this momentum and deliver another strong performance in the second half of 2025. Attributable salable coal was up 11% compared to the first half of 2024. We have consistently delivered towards the upper end of our asset and equipment capabilities in recent periods. Unlike past years, our quarterly production profile is much more consistent in 2025, but we are still chasing incremental gains. If we can replicate the second half performance from last year, that would take us towards the top end of the 35 million to 30 million tonne guidance range for the full year. Slide 10 shows our cash operating costs. Brendan mentioned that some charts use different components on the horizontal axis. The prior 2 slides used half year periods, but this slide uses full year periods, except for the final column. As I mentioned, our cash operating costs were $93 per tonne in the first half. We continue to work through extremely hard to keep our costs in check to offset the impacts of wet weather delays and inflationary impacts. Increased production, mine plan optimization as well as equipment reliability and utilization all contribute to compounding cost inflation elements. By showing the cost profile back to 2018, we can see the step change that occurred through a combination of wet weather impacts on volume and high cost inflation with subsequent volume and productivity improvements arresting the increases in cash operating costs. The reality is cash operating costs in the $90 per tonne range is now the new norm. We see our ability to have kept costs flat over the past few years as a great outcome relative to the sector, and this leads to the next slide. Turning to Slide 11. We demonstrate why keeping cash operating costs low is crucial. Our implied operating cash margin in the first half was $40 per tonne. This chart also uses full year periods going back to 2018. It illustrates the expansion and contraction of margins we have experienced over the past 7 years. The margin, while lower than in recent years, remains positive. Fortunately, we no longer have the external loans to service like we did in the past, but we are still working through a significant CapEx cycle. I'll now hand over to Mark Salem to cover the coal market.

Thank you, David. Starting with the production mix on Slide 12. 83% of our sales were thermal coal with the balance being low-vol PCI and semi-soft coking metallurgical coals. This product split varies from period to period, depending on which coal seams are in production at each mine and how we can maximize the market opportunities. You would have noted back on Slide 7 that we had 18.9 million tonnes of attributable production, but only 16.6 million tonnes of attributable sales, a variance of 2.3 million tonnes. This differential is primarily the result of 2 factors. Firstly, in 2024, we had 0.8 million tonnes more sales than production. We optimized our sales, reducing our stocks. And at the time when the forward market was in backwardation, this was the right thing to do. To continue to optimize our position this year, we had to allow for some stock rebuild in early 2025. Secondly, as David mentioned, the differential was mostly due to weather disruptions. In Q2, Yancoal sales and logistics were heavily disrupted by high swells, heavy rains and fresh water in Newcastle Harbour, restricting rail and vessel movements. As advised on the second quarter call, we are aiming to recover as much of this first half sales deficit during the third quarter. And in July, our attributable sales exceeded production by 0.9 million tonnes. So even allowing for the more recent weather events, we still view this as an achievable target. Turning to Slide 13. We show our market split. We contrast the first half against the full year 2024. But over the last couple of years, our customer mix has been quite stable. We optimized the revenue contributions of our various coal products to specific markets. China is a significant offtake partner, both on a volume and revenue basis. Our customers in China tend to take a higher portion of our API5 5,500 net as received calorific value quality coal. Our Japanese customers, in contrast, purchased a significant portion of our higher calorific value thermal coal, our low-vol PCI and our semi-soft coking coal. This market, therefore, is very important to revenue contributions. Strong supply and benign demand conditions persisted in the international thermal coal markets through the first half of 2025. Geopolitical events in the Middle East, temporary port disruptions at Newcastle, as mentioned, and economic initiatives in China influenced trading sentiment, but not fundamental coal market drivers. We did observe cuts to supply over the first 7 months of 2025 compared to 2024. Indonesia cut 12% and Colombia cut 24%, which is constructive, but further supply reductions is needed to underpin a recovery in the international thermal coal prices. We price our thermal coal against the API5 and Global Coal Newcastle indices. Our realized price in U.S. dollar terms sits between these indices as shown on the chart. In Australian dollar terms, our realized thermal coal price was $138 per tonne, down 12% from the first half of 2024. Our metallurgical coal markets have seen sluggish demand because of weak global economic conditions, global trade tariffs concerns and the export of excess steel and coke supply from China. China was also reported to be exporting metallurgical coal, displacing some seaborne supply in the region. Across the global metallurgical coal markets, there are signs of mine closures and supply curtailment in response to weak prices. In Australian dollar terms, our realized met coal price was $207 per tonne for the year, down 35% from the first half of 2024, in line with market movements. Slide 16 will look familiar to people who have seen our prior presentations. We include something similar in the past to display our 3 largest mines in context of other Australian thermal coal mines. The total cash costs are on an energy adjusted basis to counter the influence of coal quality on the operating margins. In this presentation, we show the same data set 6 months apart with June 2025 compared to December 2024. The industry average cost may have reduced marginally, but you can see several mines appear to have total cash costs above the current market price. While the underlying data might be backwards looking, the key takeaway remains large-scale, low-cost mines such as ours will remain viable when many other mines struggle through coal price cycles. There are various groups providing forecasts for international thermal coal markets, but a common theme we see in recent forecast is the ongoing revisions of when coal demand will peak and at what level. Delays to projected closure dates of existing coal-fired power generation, combined with new facilities coming online, drive the evolving demand profile. Since we last included this slide, the first half of 2025 revision to the forecast removes some of the near-term demand but retained the peak in 2029. On Slide 18, we look at projections for seaborne supply over the next 10 years. Approval and financing challenges for new mines compound natural reserve depletion in the coming years. There is a growing appreciation that coal still has a meaningful role in the global energy mix, and there is the potential for a supply shortfall in the coming years. Even in a relatively balanced coal market, a 5% shift in supply or demand can have a notable influence on prices. Since we last provided this profile, the projection for supply in 2028 to 2030 has been trimmed, the same period where demand is projected to peak. In the seaborne metallurgical coal market, demand for mature regions like Europe and Northern Asian likely declines over the next 15 years. However, this could be outpaced by growing demand from emerging economies leading to an increase in total demand. Unlike the thermal coal market, some supply growth is required in the seaborne metallurgical coal market over the next 15 years to meet this demand. Unless the additional supply entering the market has a total cash cost profile lower than the existing supply, which seems very unlikely. This situation should necessitate higher met coal prices in the forward years. I will now hand over to Michael Wells to cover our financial performance.

Thank you, Mark. Starting with the key numbers on Slide 21. David and Mark both referred to our lower average realized coal price. This, together with the delayed sales volumes, contributed to a 15% decrease in our first half revenue that naturally flows down to our operating EBITDA result. Similarly, looking at the cash flow statement, the 44% reduction in operating cash flow reflects the 40% decrease in operating EBITDA. The final 2024 dividend of $687 million was settled in April, together with the first half capital spend of $407 million. Overall, we retain a strong financial position with $1.8 billion of cash at 30 June and minimal lease liabilities. The 2 charts on Slide 22 demonstrate the close correlation between average realized price, revenue, operating EBITDA and the operating EBITDA margin. As we've said on prior calls, realized coal price is the primary driver of our financial results given our production and cost profiles. The chart also provides a view back to the last coal price downturn in 2022. Looking at Slide 23, noting that we've reverted to half year periods on the horizontal axis, the profit after tax and operating cash flow profiles also tend to replicate the revenue and operating EBITDA profiles that can also be subject to accounting adjustments, one-off items or timing differences. The first half of 2023 was one such example where a one-off tax payment was made related to the 2022 earnings. I will now hand over to Kevin to complete the presentation.

Thank you, Mike. Looking at Slide 24, it's worth reminding that in the 3 years to early 2023, we repaid more than USD 3 billion of loans. This debt repayment transformed the capital structure of the company. As a result of the debt reduction, our financial position is far more secure than it was the last time we faced a cyclical low in coal prices. Turning to Slide 25. We look at how well Yancoal has rewarded the shareholders during the past 7 years. Including the 2025 interim dividend, the company will have distributed $2.5 billion of unfranked and $2.6 billion of franked dividends since 2018, a total of over $5.1 billion or around $3.9 per share. During the last market downturn in 2020, the company suspended dividend payments. Today, we are in a much stronger financial position. And as noted at the start of the call, the directors have declared a fully franked interim dividend of $0.062 per share with a payout ratio of 50%, in line with our constitution. Slide 26 has our operational guidance for 2025. We are looking to improve further on our strong operational recovery in 2024. We have retained attributable saleable production guidance of 35 million to 39 million tonnes, but note that at the half year, we were ahead of the guidance midpoint and the full year results will potentially be toward the upper end of the range. Our guidance range for cash operating cost per tonne is $89 to $97 per tonne. For the first half, we were at the midpoint of the range and the full year may move below the middle of the range. Our capital expenditure guidance is $750 million to $900 million with $407 million of spend during the first half. Continued reinvestment is required to ensure our large-scale mines remain productive low-cost mines. The 2025 capital cost incorporates ongoing mining fleet replacement, some carryover of 2024 stance and additional underground development work. We continue to balance production volumes, product quality, efficiency metrics, cash operating costs and capital expenditure to deliver the best possible outcome for shareholders. This year is no different, and our executive team and the people on site are focused on delivering. I will now hand back to Brendan to coordinate the Q&A session, please.

Thank you, Kevin. As usual, we have included appendices and additional information for reference at the end of the presentation pack, which we published to the 2 stock exchanges. We will now take questions from the phone lines and written questions submitted via the webcast. Let's start with questions from the phones. Amber, could you please start the process for questions?

[Operator Instructions] We will now take our first question from the line of Lawrence Lau from BOCI.

I just have one question. If you look at the Appendix 4D of your financial statement, there's a table showing the profit from each mine. I noticed that the decline in profit of [indiscernible] is actually much more drastic than the other major mines. Can the management share with us why this is the case?

Thanks, Lawrence. I appreciate the question coming through. In terms of providing a response, I'll hand over to Kevin, our Chief Financial Officer, in the first instance.

Lawrence, this is largely driven by the unfortunate API5 price drop and which, unfortunately, as a result, we lost margin, especially from this kind of low CV coal, is the short answer.

[Operator Instructions] We will now take our next question from the line of Peter Wang from CICC.

It's Peter from CICC. I just want to clarify, is it the year-over-year increase in the coal royalty per sellable tonne largely attributable to the royalty rate change effective from July last year?

Peter, the phone line was a little faint coming through. Could you repeat the question for us one more time?

Yes. I just wanted to clarify, is it a year-over-year increase in the coal royalty per sellable tonne largely attributable to the royalty rate change effective from July of last year?

Okay. The year-on-year increase in the royalties. In an absolute component, there'll be a royalty rate increase, but the price is also relevant. Mike, perhaps you'd like to make an additional comment?

Yes. Thanks, Peter. Yes, look, you're absolutely right. There's 2 offsetting factors. Generally, the royalty is lower because the coal price is lower. But in New South Wales, with the increase in the royalty rate effective from 1 July last year, the prior year period did not have the effect of that increase in royalty, whereas the first half of this year did have that effect. And those 2 factors kind of offset resulting in the royalty being relatively flat across the 2 periods.

Thank you, Mark. Peter, is there anything further from you? Or should we move on to the next question?

[indiscernible]

We will now take our next question from Hannah Yang from Morgan Stanley.

I have a few questions. One is previously in the first half, I think because of the railway issue, there is an inventory pileup, and we have catch up on the sales volume by 0.9 million tonnes in July. Just wondering, how likely do we think all the inventory on hand will be digested by the year-end? So the -- yes, that's my first question. And my second question is, I noticed on the PPT that management think the coking coal in the global will see a slightly tight market. Can we elaborate more on the potential demand increase globally? Like do we see any specific coking coal demand increase like outside of China? That's my second question. And my third question is, do we have any plan on further expand our coal production volume on both thermal coal and coking coal side, like potential M&A to expand our capacities in the long term?

Okay. Hannah, I appreciate the 3 questions. Let's start back at the first question with the stockpile reduction, and I'll ask Mark Salem to reiterate some of the comments that we shared earlier.

Yes. I just in terms of the sales and the plan to reduce the inventory, Brendan, there are also some questions on screen that have asked the same -- a similar question, and I'll take it online to answer all those questions, if that's okay. In regard to our plan to draw down inventory, the answer to your question is yes. In terms of our target to catch up on our first half underperformance, we are on schedule to achieve that within the Q3, all going well. And we should have that achieved by the end of September -- by the end of August, early September, all going well. And then our plan is to continue to draw down our stocks in the same way we did in 2024 and optimize our revenue positions. And that is part of our overall strategy. So that is definitely on our agenda. In terms of the second question, which I'll also take on board, which is talking about the coking coal global market tightness and growth opportunities outside China. Hannah, very simply, if you look at the chart, there's a lot of growth opportunities in India and a lot of growth opportunities in Southeast Asia. The Indian growth opportunity is real. The advantage of the Indian market is that India does not produce its own metallurgical coal unlike China. And therefore, based on their GDP growth assumptions and this demand profile is based on their infrastructure plans, et cetera, they will need the coking coal, the metallurgical coal to meet that growth requirement. In addition to that, there's a lot of growth happening in Southeast Asia, in Vietnam and Malaysia and other Southeastern countries, which will also supplement the declining growth or the decline in demand from our traditional markets, Japan, Korea, Taiwan, et cetera. So we are very confident that based on those economic assumptions that there will be that global tightness of coking coal in the future. The third question in terms of expanding our production, I'll probably have to pass that to back to you, Brendan.

Thank you, Mark. Yes, I appreciate the third question. You were talking about the potential expansion of the production profile. I took that to mean at a company level, not at an industry level. We do have some conceptual projects that are under study, but the short answer is our existing production profile is fairly steady state at this point in time. We do look for incremental gains. And perhaps I'll just take the opportunity to ask David Bennett to come back online and discuss in a little detail where we see the opportunity to maximize the performance out of our portfolio of assets. Over to you, David.

Yes. Thanks, Brendan, and thank you for the question. As we've spoken before in investor presentations at various stages, we -- at Yancoal, we always try to optimize the performance of our mines through our assets, our geological assets, our equipment assets, our labor assets to maximize our productivity, which basically uncovers more coal, gives us the ability to sell that coal, increase our revenue and build solid margin. We do all of those productivity improvements across all of our fleets where we focus on fleet reliability, fleet productivity and the like and getting the most return on that investment that we've put into our mines. So despite the price cycle, we're always looking to improve in the productivity space. Like I say, ultimately, that ends up in a profit outcome for the business at the end of the day.

Thanks, David. Hannah, did that satisfy all your questions?

We may have a follow-up question from the line of Peter Wang from CICC. [Operator Instructions]

Thanks, Amber. Whilst we wait for the question queue to repopulate, I'll start looking through some of the questions on the webcast. I note that there are some overlap in the questions, and they may have been addressed through commentary already provided either during the scripted comments or through the Q&A. But let's look at -- we'll start with some of the operational and market drivers. There's one here from Mark Patterson at Bell Potter. He asked about the comment we made the reduction in Indonesian exports and observed that it was at least partially related to wet weather and asked whether we expect these volumes would come back into the seaborne market.

Yes, sure. Thanks, Mark, for your question. Interesting, Indonesia is the world's largest exporter of seaborne thermal coal. And so it's a very pertinent question. The reduction is twofold. Yes, it was wet weather. Indonesia has faced a lot of wet weather, which has impacted production. But the other aspect to Indonesia was that the Indonesian government also put a restriction on export prices in terms of what the Indonesians could sell at. And therefore, with that restriction, they were unable to sell a lot of their coal or restricted a lot of the buyers buying that material. And that also influenced that demand and impacted the reduction in imports. Reflecting back on that, I mean, will they come back into the market? Their own domestic demand is very strong as well. So a lot of that coal that couldn't find homes on the export market did find homes domestically due to the growth in their own power utility demand. So in short, if they're able to export at prices that are at good margins, then they will come back into the market. It could keep the growth of the prices a little bit at bay, but not significantly based on their own demand profile. I hope that answers your question, Mark.