Whitehaven Coal's (WHITF) CEO Paul Flynn on Q2 2016 Results - Earnings Call Transcript

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Whitehaven Coal Limited (OTCPK:WHITF) Q2 2016 Earnings Conference Call February 4, 2016 6:00 PM ET

Executives

Paul Flynn - MD and CEO

Kevin Ball - CFO

Jamie Frankcombe - EGM Operations

Ian McAleese - IR Manager

Analysts

Paul Young - Deutsche Bank

Peter O'Connor - Merrill Lynch

Paul McTaggart - Credit Suisse

Lyndon Fagan - JP Morgan

Phillip Chippindale - Wilson HTM

Paul Flynn

Good morning everybody, and thank you very much for joining us here for the Half Year Results for Whitehaven Coal for 2016. As usual I’m joined here by Jamie Frankcombe, our Head of Operations, CFO, Kevin Ball, and Ian McAleese, which many of you know. So I’ll go through our presentation as we have done in the past and I’ll try, I won’t belabor too much the physical side of things because you’ve obviously seen the quarterly report come out. We’ll get on into the financials and then the discussion then after. Thanks for making the time.

I think as everybody knew, 2016 was always going to be an important year for Whitehaven, and certainly it’s the first year, if you like, post-construction, that really a plan that was put in place at the time that the merger occurred back in May of 2012, which saw Maules Creek come into the Group. But what you should see this year is certainly Narrabri performing very well in full swing. Construction for Maules Creek is largely complete.

The rest of the operations performing their role really is the bedrock of the business, and all of these operations operating at a level which is on a significantly re-based cost base, when you consider where we were back at the time of that merger, let alone what we’ve achieved since that time. So for us, the business is showing clear signs of what operations should be like post that construction period, and it’s certainly finished the first half consistent with where we ended up the last half of 2015, and that is a glimpse of profit in that last half of ’15, and certainly, as we have guided, profit in this first half after tax in the first half of 2016, so a very good start to the year.

So over to the highlights, look, there’s been many during this period, but I’ll just call out a couple. Clearly that net return to profitability is the major signpost of the future and in terms of where we want to drive this business going forward. The importance of this, I think, is far greater than the size of the individual profit itself. Obviously we’re operating in a part of the cycle which is pretty challenging, but to be able to turn a profit after tax in this point in the cycle, I think, does mark Whitehaven out as quite a unique proposition in our industry.

EBITDA, as we foreshadowed, came in just slightly above our guidance, which is very good and certainly double what we did last year in the previous corresponding period and some 80% already of what we did for the total of the year last year, just at the halfway mark. So that’s very good. Cost reductions, again at the top of our guidance, which is good, and we’ll talk a little bit later about what we can do for the balance of the year. Cash flow generation has been very good. As you know, we’ve had an unwind of creditors from the construction of Maules, so we paid some of those and we’ve given you some numbers that point to that, and also the one-off tax payment that many of you, as we have talked about at length, would have known went out in July.

So even after that, at the end of the day we’ve put money in the bank, and certainly that was the guidance that we gave, and certainly this was just the beginnings of what we see as the ability to de-lever the business over the coming halves and put the business in a position where we’re a more balanced business with a lower gearing ratio, and certainly able, in the future, to capitalize on the lower point of the cycle. Over to our safety, and as you know, safety is always front of mind for us, and we’ve done very, very well in keeping a downward trajectory in our safety stats over the last few years. But inevitably, as the manning of the business has increased substantially and the complexity of our business has changed dramatically, that improvement momentum has plateaued.

We’re not satisfied with that. In fact, just being less than the industry average is not really satisfying at all for us. So we are redoubling our efforts and refocusing to make sure that we can continue the improvement pathway that we've demonstrated, even on this larger scale of business that we’ve got. The operations themselves, the physicals, you would be well aware of those, given the December quarterly report only a few weeks ago, so I’ll only just go across those briefly. The sales, as you know, some 52% up period-on-period is a strong endorsement of the quality of the coal that we’re bringing to the market. I think the appetite for this coal is very, very good, and certainly the premiums that we're starting to achieve now is certainly evidence of the acceptance of the quality that we're bringing to the right markets. The performance basically for the first half is in line with our own expectations for ourselves, and certainly in line with the guidance that we've given for the full year.

ROM coal production, I think again, 59% over period-on-period is a good result, but I think if I look at this slide in particular and I look at the spread of our production across those three buckets that we’ve mentioned there, from Maules Creek, Narrabri, and the Gunnedah ops, it’s actually looking like a much better-balanced business now, from a risk perspective. Narrabri was, when we only had Narrabri without Maules, such a large proportion of the business relative to the whole, and the risk profile of an underground mine tilted the risk profile of the business a little bit away from where we wanted to be, but certainly that was only a point in time observation, because as Maules Creek came on, that risk balance certainly transitions nicely over to two thirds of the operation just at today’s production rates from open-cut operations.

And really, what that does is secure the future for the business, because long-wall mines, as you know, run great when they’re running great, but we’ve got, now, this large proportion of our production out of the open cuts to complement what’s a fantastic mine in Narrabri going forth, so a much better-balanced risk proposition for us going forward. And if we’re looking period-on-period, clearly a differentiator for us has been Maules Creek, and the mine has ramped up really well and at the December point you're aware that we hit the annualized rate of 8.5 million tonnes per annum, so that ramp-up has been very positive.

As I said, the coal quality has been warmly welcomed by the market. The premiums are at 7% on average for the half is, very, very good, and met coal's sales are already starting to improve, so that's quite good. About 750,000 tonnes of met coal sales committed already. And that's in line with our ramp-up also, that we said the proportion would be about 15% overall in the first 12 months of operations, commercial operations, and that's certainly on track to do that.

Cost behavior at $58 for Maules, I think is a very good, very good result. We said that once we got the mine up and running we'll be able to drive costs down, and I think this is really just the start of that process. As the mine gets bigger the efficiencies improve. We put big gear into the mine from the very start, and that was a great decision in terms of the access in cost of that equipment, but the mine needed to be a little bigger, as you know, in order to properly fit that big gear in it, and it certainly is that now.

And construction is largely complete, and I think this is an important fact for us. We spent some $700 million, $701 million on a 100% basis, on the project, and it's largely done. We're going to keep $15 million up our sleeve for permanent maintenance workshops and admin buildings, but we don't need to spend that money now. What we've got in place at the moment is entirely sufficient for our needs, but as those needs transition over the next three years, we will put in place the permanent fixtures that are required. It's really just us, and many of you have been to our sites. They're not gold-plated sites. They're fit for purpose and we don't spend a dollar if we don't need to. That same approach is being applied to this. By June, we look like we'll run a ruler off on this project, and in terms of closing the construction project in our books. The decisions that will be made on how we deploy and when we deploy that balance of $15 million will largely be an operations decision rather than a construction project call. And what that means, really, is about $45 million to $50 million in contingency that we haven't had to deploy, given that we've managed the construction of this project very well.

Importantly for Maules Creek, we've always known that there was plenty of upside left in this project, and it's only at its beginning, but we will embark on a project in this next six months to expand the reserve of this project. We know we've got a hell of a lot of data on the balance of the resource, and we believe there's a significant portion of that resource that we can bring into the reserve category.

Over on Narrabri, that really has gone from strength to strength, as you know, and it's interesting just to think that it was only commissioned on 1 November, 2012 and already it's one of the top three mines in the country. Certainly the calendar stats, as we've mentioned over 8 million tonnes for the calendar year certainly is a significant achievement. The key take aways here are just obviously the cost performance of $49 is excellent, but we know it can do better, so we're going to keep driving that. The production, as I mentioned, 8.3 in that calendar year, is fabulous. We do have a change-out at the end of this financial year, as you know, but you can certainly see what the annualized capacity of this mine is, even before we go to the 400 meter face.

Very pleasingly, and a nod to the government for the improvement in their processes to some degree, we lodged an approval obviously to increase the production capacity of Narrabri from 8 million tonnes per annum ROM to 11 million tonnes per annum ROM, and that approval came in just prior to Christmas, which is a pretty snappy turnaround, and also approves, obviously, all the projects necessary for the 400 meter face extension.

So and just to remind people what the benefit of that particular project is, we estimate that will be about 750,000 tonnes per year of incremental production, and about a $3 to $4 dollar per tonne reduction in our costs at Narrabri, so certainly well worth doing for what is a modest spend with about a year and a half payback.

The Narrabri is not finished. In fact, there's plenty of potential here for Narrabri to continue on well past the existing declared reserve. So the face extension is a no-brainer, as we say, a very good project, but beyond that, you're well aware that we do have the Narrabri South lease and so we're starting a project to incorporate what we've already done at a high level, the conceptual integration of the southern panels of Narrabri North into panels in the Narrabri South lease. So you will see that. We will report on this from time to time to give you an update on the progress of this, but it is an exciting project for what is going to be a very material extension to the life of our Narrabri project.

The Gunnedah operations, as I said, they really have been the bedrock of our business, and it's very pleasing to see that they've continued to underpin the business in this half. Production has been pretty steady period-on-period, and safety has just been outstanding, certainly has led the way in terms of the overall Group's performance. As we go through this period, as you know, these are the older, historic operations and do run at a cost higher than the two newer operations, but even in these difficult price environments, we've certainly been EBITDA positive across all of those operations, which I think is a significant achievement for all the teams on the ground running those assets.

So from a financial performance perspective, really we've turned in what is a pretty respectable set of results here, I think. Profit in the first half, albeit modest, 12.8 million pre-tax and 7.8 million after tax, so like I say, symbolically it's important, but it's certainly just a signpost to the future, and this is just the beginning of where we're going. EBITDA, as I said, has been a fantastic result more than double this period last year. The continued focus on costs will drive a greater result in the future, A$58 is very good, but we're not resting on our laurels, we think there's more to come there.

And the cash flow generation, as I mentioned, the one-off payments, if you took those out, we would have reduced our debt by some A$50 -odd million, A$56 million, even further. But those things were known, they had to be done. It really does point to the second half. Absent those things, what do we think we can do in terms of further debt reduction period-on-period? So over onto P&L and there's just more color there for you. I think that's a good set of results. Clearly average price has come down a little bit, but average cost has certainly come down, and if you look at -- if you cast your mind back a little bit, average price has come down some A$7, but average cost has come down some A$11 when you look back into the 2014 period.

Margins in A dollar terms and U.S. dollar terms have both come down, but they have been relatively stable through this half, which is good, and in fact prompt tonnages are going better than what you'd see at the [GC nuke] indexes as we speak. Of course, you always need to add on to the top of our realized pricing the 7% that I mentioned that premiums are achieving at this time. So as I say, cost performance has been fantastic. If you look back at 2014 as I say A$7 down per tonne on revenue but A$11 down on cost, and I think that's really been part of the story of Whitehaven and what we've been able to do over the last three or four years, in fact, to re-base the cost of the business down to a position where we're able to maintain margins in the face of what's been a pretty soft revenue market overall.

As much as I think the industry, the Australian industry, has done pretty well in doing this, in getting costs out, I think we've done very, very well relative to the Australian average as a whole. The important part of this, I think, is just to reflect on the fact that as we grow, each of the tonnes that we're bringing on from now on in are tonnes which come in at better margin than what we're declaring today. So we're not bringing more tonnes in out of Tarrawonga or Rocglen or Werris. We're actually bringing more tonnes in out of Narrabri and Maules Creek, and they are coming in at a higher average margin than what we report to you today, so as that further volume comes, you get the benefit of the better margins that stem from that.

On to our balance sheet, again, the manifestation of the pretty good outcome for the first six months, we've put cash in the bank, reflecting the improving financial position of the Company. We made all those one-off payments, as you know, which is certainly nice to put those behind us. There will be more clear air in the second half in terms of the payments that we need to make for Maules Creek. The balance of the payments to creditors, just for your knowledge, the balance of the payments to creditors in the second half will be about A$6 million our share, sorry, A$8 million our share, so not a big number and certainly less than the first half. Obviously, there's no other one-offs that we're aware of that we need to factor in here. So debt reduction will be greater in the second half than it has been in the first.

The analysis that we did put there is that based on the existing margins that we know, and we're projecting out three or four years and we're just trying to paint a picture for you in terms of debt reduction capacity that the business has. In three or four years we estimate between A$300 million and A$500 million of free cash flow that could be used for debt reduction. So certainly turned the corner in terms of the construction phase and the outflow of capital, and now into the period of where we'll pay that rebalance of business to a position of gearing that we're comfortable with.

The structure of debt of the facility is well-known to everybody, I think, but what we've also included in the back slides and certainly the statements here that we've had a lot of questions about our balance sheet, and certainly the ICR and other covenants that relate to the facility. I will make the statement to you that if you used the ICR covenant now and applied it to our business today we would more than comfortably exceed the threshold required for compliance under the ICR, more than comfortably.

So we told you all at the quarter that we've, the initial ICR started at a 2 times and ramps up to a 3 times once Maules Creek continues to ramp up and that was done on purpose. Obviously it was sculpted in a way that was reflective of the ramp-up of the business. So as you can see from the numbers here, we're well and truly in compliance, if they were applied today. Of course, they don't apply until December 2016, so 12 months looking back, but that's a very comfortable position for us to be in.

In terms of capital allocation, sustaining CapEx has been lower than what we guided in the past, and we've been judiciously applying that, not with any short-term risks attached to that. It's just really us metering out the CapEx as we see fit and making sure that we can maintain the productive capacity of the business. The Narrabri Mains expenditure, as you know, continues on for a couple of years and will finish in 2019, but they're a life-of-mine asset and need to continue on, and we're funding that comfortably through our CapEx.

We provide a little bit more color there just in terms of the face extension project, so we're giving you the total numbers and the narrative on the right-hand side of that slide, and you can see in the body of it there we've actually already spent some of that money necessary, so whilst the total numbers are there at A$56 million and how do we fund it, we've actually already spent a number of nearly A$14 million of that already, so you can tuck that away and it's really just the balance to be expended over the rest of this project.

So all in all, pretty good set of numbers in terms of the financial performance. On our community engagement, you know that we're the largest employer in the area and we're certainly the largest single contributor financially or economically in the region, so we do take this very seriously.

Since 2012, when the merger occurred, we spent some A$840-odd million in the local community. This half alone it’s over A$60 million injected into the community, which has been a great boon for the people in the area. Our Aboriginal engagement, as you know, has been a particular focus for us. 50 Aboriginal people at Maules Creek has been a tremendous result. But also gender diversity has also been given a fantastic boost, with 14% now at Maules Creek as well, so we’re excited about what the prospects of these initiatives mean for the rest of the Group, but certainly from our perspective it’s certainly deepening our connection with the community in the area.

In fact, as we’ve said before, you’ll see us open up an office in Gunnedah as our regional presence, so we’ll have a physical focal point there for our, for all the people who have regional roles in the area. Onto our outlook, I thought it would be just timely just to make a few comments just about coal in the post-COP21 period and just look at some of the aspects of what came out of the lead-up to that and also the couple of weeks’ meetings themselves.

So look, there’s no doubt that many of the NDCs submitted by the various nations around the world incorporated continued use, and in fact many expanding use, of coal going forward, and certainly in our region that was certainly the case. If you summed up all those NDCs and looked at the growth in coal-fire electricity generation, the prediction is from 2013 to 2040 to be some 24% increase in coal-fired generation over that period. Now, in our region those numbers are significantly more than 24%, as we’ll get to in a little bit. So coal is certainly part of the mix for a long time to come, and as we’ve said in the past, it’s not really about one fuel or the other. All fuels, all fuel sources, will remain important pieces of the mix as we go forward.

The role of the high efficiency, low emissions technology, otherwise the ultra-super critical and super critical power stations that we’re seeing deployed in our region, was certainly recognized during the COP21 meetings, and the role of that and importantly the funding of those particular investments in the latest generation of coal-fired generation certainly got a kick along as a result of the OECD agreement that was released just prior to COP21 starting, where there are incentives for countries particularly in our region to adopt the highest level of thermal efficiency technology when building new coal-fired power stations. We can talk to that also a little bit.

In the end, it was recognized that perhaps the incentive regime for renewables has drawn the lion's share of the funding and that CCS and also HELE had not received its proportion of subsidies in recent times, and that that needed to be addressed. In fact, COP21 and the IEA have recognized explicitly that in order to meet the targets that they’re looking to achieve, CCS has to actually come to the fore and play a meaningful role in the future, and if you haven’t been funding it proportionately as you have been funding renewables, then that needs to change if that is your stated objective. So I think that was a very clear message to come out of COP21 and the more recent IEA pronouncements.

But if you look in our area, why do we say all this? Well, we could look at the power station build-out in our region and clearly that’s going to drive strong underlying demand. Our high energy, low sulphur, low ash coal is certainly being welcomed in our region, and it certainly complements the roll-out of super critical and ultra-super critical technology that underpins the build-out of power stations that you see in these graphs here. I know you’ve seen these graphs before, so I won’t belabor it too much, but what is going to drive the regulation around emissions will drive a continual drive for better quality coal, and that benefits Australia as a whole.

There’s no doubt about it. But it certainly benefits Whitehaven differentially, because our coal is some of the best thermal coal in the world, and so we stand to benefit disproportionately from that. The premiums that I mentioned to you before are just evidence of that recognition of the quality of our coal and the increasing underlying demand that we're experiencing for it. Even our most mature markets are certainly expanding, and Japan and Korea are certainly being two of those, which is good to see.

Why are they doing that? I think the simple fact is that it is, of course, coal, the most widespread, most reliable, lowest risk and lowest cost form of generation that you can install, and all these economies recognize that fact. Obviously they’re situated approximate to reliable, long-term sources of this coal, such as Australia, and that very much underpins these 30 year to 50 year type decisions of making and installing new power stations. But China has changed quite a bit in terms of its, not just its overarching consumption of coal, but its participation in the seaborne market. They have reduced their input substantially.

And as we said before we thought Indonesia would bear the brunt of that transition. And that’s certainly been the case. And it’s quite an interesting mirror image that as China has reduced its imports by virtue of these new policies that are reducing or implying new quality tests and also import restrictions from a quota system, that Indonesia certainly has had to adjust itself very quickly to accommodate that change. The impact on the Australian producers has been less because we weren't as big a proportion as a seller into China as Indonesia was obviously. In Whitehaven’s case we’re not selling coal to China.

So we don’t participate directly in that area but obviously the global oversupply situation at the moment certainly is pervasive in the price we're seeing for coal today. So we look at our outlook and our growth. This growth path has been pretty consistent over the last couple of years. This slide -- you're probably all sick of seeing this one but it's certainly been consistent. We're on track to deliver it. I think that that's important. We're getting far better margins for the far better quality that we're bringing on. We're putting those tonnes into the right markets. I think that's the most important aspect of this. Extra volume with greater margins means more profits and certainly as our first priority have stronger capacity to deliver in the short-term.

Our Narrabri mine obviously has plenty of upside as we've mentioned. There's a far greater amount of that to come. Maules Creek in terms of its expansion in those orange pieces of that slide is really a low risk expansion option. It really just is more mobile equipment as all the infrastructure to be able to manage the 13 million tonnes per annum run rate is already built. And as we said we've done that substantially cheaper than what was already a very competitive total cost budget for that project. So we see this growth really quite reliable, quite low risk. As I say more volume with higher margin tonnes increases our capacity to deliver in the future.

And all that is without considering the upside of our Vickery project on top of that as well. Just a quick update on that, as you know we are doing a lot of work to submit a revised EIS for another approval for Vickery. As you all know it's approved at 4.5 million tonnes already. But we are up-scaling that project now to 10 million tonnes. We look to submit an EIS consistent with that in June of this year. But this brings into our -- obviously our pipeline another large scale, high quality coal deposit that could be a significant step up in volume for the Group as a whole once Maules Creek is fully ramped.

So in terms of overall outlook and our guidance, what do we see for the period ahead? Safety, clearly we're not satisfied with our performance to date. We're -- better than industry is great but we need to be better than what we are. So we're going to continue to focus on that over the next six months to regain that improvement momentum that we've seen in more recent times.

Our outlook for ROM production we have uplifted as you know. So we are now talking in the range of 19.5 million to 20.1 million tonnes. As I say Maules Creek and Narrabri will continue to deliver more tonnes of higher margin, so they're at the right position on the cost curve certainly going into the right markets and those premiums bear that out. We will continue to drive costs in the second half. So another $1 or $2 on top of the $58 per tonne that we've got at the moment is our expectation for the second half of this year. This is certainly a point of focus which we're not going to give up on.

As I mentioned with these margins and these extra tonnes our debt reduction capacity certainly looks a whole lot better. At 300 million to 500 million of free cash flow available for debt reduction over the next three or four years, that certainly stands us in a very good position financially.

Thanks all for taking the time. I think we've delivered a pretty good outcome for the first six months. It's just the beginning. We obviously need to bring the second half of the year home consistent with the first. It will be a better half. Volumetrically we're going to produce more tonnes in the second half than we did in the first. We're going to do those incremental tonnes at better margins as I mentioned. But thanks for your support for the first half. We look forward to that continued support as we report back to you over the next two quarters as we round out the full year, back to the operator.

Question-and-Answer Session

Operator

[Operator Instructions] And you do have a question coming from the line of Paul Young. Please go ahead.

Q - Paul Young

Hi gents, I'm on. First of all Paul thanks for all the additional information on CapEx, balance sheet covenants, it's really appreciated. The first question I have is actually on the costs. I know I've asked this in the past but I think you're approach of being conservative and under-promising it's clearly working. I think that's great but looking at your costs for the half, particularly at Maules Creek at $58 a tonne -- I mean you're ramping up and yet your guidance for the full year previously was $61 or $62 so you'd be there by $3 a tonne. And at Narrabri you had a long change-out and yet those costs are $49 a tonne, that was a great performance. So just thinking -- trying to match it up with your guidance of a further $1 to $2 a tonne drop in the second half, with respect to the fact that Maules Creek is now running at full capacity and Narrabri will have a clean run, can you just maybe give some thoughts on that. Thanks.

Paul Flynn

Yes, okay. Thanks Paul. Maules Creek as you know I mean it's only six months in terms of commercial operations. So we're certainly learning a lot about the ways in which we can drive this asset harder. So as you know we didn't want to make foolish claims about what we thought we could do in advance of actually operating the thing in the commercial form. So the 61, 62 number we have you before certainly was the number we thought we could achieve. But as we say, as we're testing the boundaries of what we're able to achieve their onsite we're able to drive our costs down even further. And certainly that improvement in this period should give you some confidence about our ability to deliver the guidance in the second half.

Narrabri certainly has performed very, very well. Look the change-out in the half conceptually or theoretically shouldn't actually drive a big change in the cost behavior for the mine because as you know the change-out costs are deferred and amortized over the tonnes that come out of the panel. So that should already be incorporated in it as you obviously confront another change-out at the end of this year. We had stock on the stockpiles to be able to sell right through the change-out as you know. We'll certainly do that again as we address the change-out that's going to start in the last quarter of this year. So I think with certainly the numbers we put out we don't put them out unless we think we can do them. That's been our way. I think A$1 or A$2 per tonne across the whole Group that is, don't forget it's not just Maules Creek. This is an impact across the whole Group. We think we can deliver in the second half.

Paul Young

Alright, well I'll look forward to seeing the number beaten again. The second question Paul is actually on your segmental of your more detailed accounts of any four day and on page 15 on the segmental reporting. You've actually got an unallocated line there in EBITDA of negative or negative EBITDA of negative A$12 million. You've got a note there that's probably one for Kevin but includes contract discounts and coal trading. That number is a bit bigger than I was looking for. I was wondering if you could just expand on that a little bit more. Should we consider that sort of number to continue going forward?

Paul Flynn

I'll just let Kevin take this. This is nothing new Paul in our business. This is really just us drawing something out and separating it out for separate disclosure. But Kevin I wonder if you could address that.

Kevin Ball

It's also got in there, it's also got your corporate in there as well because the underground and overcut operations are part of those. The change in there is around a little bit of sundry revenue. So I would think that that number, you wouldn't expect to see that turn up in the second half, that same size.

Paul Young

So you're saying the majority is the actual head office costs?

Kevin Ball

A fair chunk of it is, Paul, yes. If you go back to the front page of the P&L you'll see there's about A$12 million in administration costs. I think the administration expense is A$9.1 million. In the second then in the other half is about A$11.2 million. So there will just be other income coming through there. The first half in FY14 had about A$7 million in other income. That will be coming through there as well to offset the previous set of numbers.

Paul Young

No problem. Lastly just that comment includes contract discounts. Can you expand on that?

Kevin Ball

Well as you know back in the merger, sorry when Whitehaven came to market originally there was a contract there with a client that had had an imbedded discount. That discount comes through that line rather than being burdened on the mining operations.

Paul Young

Yes, okay. I know which one that is. Thanks. I'll pass it on. Cheers.

Operator

And your next question comes from the line of Peter O'Connor. Please go ahead.

Peter O'Connor

I've got two questions. Firstly on Vickery, what thought have you given to an earlier sale and maybe an option based sale where you seek your JV sell-down sooner with respect to the process with the government ongoing, but trying to structure a price so you can get a deal up front. I ask this with the view of the market in mind that people want you to retire debt sooner or generate more net debt reduction sooner. Is that something you've given thought to or is it really worth waiting for the full government approvals before you go out to market?

Paul Flynn

Thanks Peter. This is a good question because we contemplate this ourselves and have addressed it with discussions with various parties already. Our judgment is though that the project in its current approved form, the numbers given the pricing that we see today, in its current approved form just aren't compelling. So the expansion of the project delivers significant upside in terms of the economics of the Vickery project. So the movement onto the rail and onsite processing, not to mention the related benefits that that's going to have for Tarrawonga say for instance. We'll put that aside just for the moment. Those additions are really quite compelling and certainly makes, us think that it's better to just wait a little while longer. It won't be too long because we're going to lodge this EIS in June.

We said once that's lodged then we would open up the process. So there's not long to wait before we get to that point. But underlying some of the concerns I have to say of potential participants in a Vickery joint venture are well essentially are overseas parties expressing uncertainty around the regulatory framework in Australia. So their concern is that approvals aren't as easy to get in Australia as what they used to be. They would rather happy to pay for something that's approved in that form but the option that they're willing to contemplate, pre-approval, have heavy discounts applied to them in the same way that I suppose the equity market is applying discounts to the value of Vickery today. So there's my answer Peter.

Peter O'Connor

Okay, just secondly and of a similar vein, I've drunk your Kool-Aid. I kind of get where you're going, I said I congratulate you on what you've done, so well done. What do you do next? You've managed the operations; you've managed the finances. You're running the business very, very well. The share price is clearly not telling us that. What's the disconnect? What do you do next as a team trying to fulfill your duty to shareholders to maximize returns? I know the share price should follow when you deliver. But thoughts on what you do where you go and trying to bridge that disconnect between the two?

Paul Flynn

Yes look, it's a perplexing issue as you can see. I mean we're not the only one in this basket as you know. I think we're executing pretty well. So the underlying strength of the business is improving all the time. We’re certainly exploring all means to make sure that we can bridge that gap. I think we’re certainly in a, there’s a bear-ish sentiment around the coal fanatic generally. We hear the noise that people talking about in our instance in particular, capital raisings and the like and so on like that. I mean clearly you can see by the basis of the numbers that we’re disclosing that the business is able to fend for itself and will deliver naturally through the operations as we expand the business.

So there certainly is a disconnect. It’s frustrating for us and our shareholders. We want to see our shareholders receive better value. It’s annoying that transactions in the marketplace evidence better values but it seems like at times no one wants to recognize those values unless you’re trading an asset. But I think that won’t last. That will change. The underlying value of the business will emerge. And certainly we don’t want to do anything silly. Our shareholders are saying to us, don’t do anything silly that’s of a short-term nature just because of the disconnect that you’ve pointed to.

Operator

And your next question comes from the line of Paul McTaggart. Please go ahead.

Paul McTaggart

Hi Paul, just a quick one, the 7% premium you’re getting out of Newcastle from Maules Creek, is that just energy adjustment or are you finding that you’re also getting value for having lower ash levels? If that’s the case do you think we can do better in terms of as this coal gets to be known better, do you think we can squeeze out a better premium through time?

Paul Flynn

Thank Paul. Yes, I absolutely do. Those premiums are widening out quite nicely in fact. So certainly it’s not just the energy benefit which as you know we’re putting 200 points or 300 points over the 6000. So there’s part of it. But then on top of that you’re getting at the low point $2 a tonne and at the higher point you’re seeing at times even $5 a tonne on top of that. So that’s been a pretty solid outcome. But we do see those spreads improving over time for a range of reasons, not just our customers struggling to find a sufficient level of quality that they want, but also as I say we’ve talked about this before, you’ve got people in the market looking to sweeten up cargoes to get into other markets. And certainly we’re a reliable source of the coal that can do that.

So look it’s been very good. That’s certainly been very pleasing to see the market acceptance for a brand new mine in Maules Creek improving. Having said that, the margins also on Narrabri which is better understood because it’s now been operating three years, the premiums that we’re receiving there are also improving which is underpinning this whole premium calculation. As you know that will just improve as we are able to penetrate the market even further into the semi-soft and PCI markets. Because I think that’s the other part of this equation that often gets overlooked. Because even at semi-soft prices today that’s still a very compelling thing for us to do to move as many tonnes as we can into the semi-soft and PCI market given obviously the low yield losses that we have when we wash our coal.

Paul McTaggart

And can I just follow up with a quick clarification? In the presentation we say that the Gunnedah open cuts are EBITDA positive. Is that inclusive, that EBITDA, is inclusive of royalties or is that kind of on a pre-royalties basis?

Paul Flynn

No that’s plus royalties.

Operator

And your next question comes from the line of Lyndon Fagan. Please go ahead.

Lyndon Fagan

Hi guys. Just a couple from me, the first one, can you provide some CapEx guidance for the next half and possibly for FY17?

Paul Flynn

Lyndon, what we’ve said in the past is A$1 a tonne for the open cuts. You need to put aside A$2 for the underground. You’ve got guidance already just on the Narrabri Mains because that will continue in the second half. So that’s in addition to that. We haven’t given any guidance for FY17 explicitly but there’s nothing major other than the face extension which again we’ve given you some numbers so you can work out what flows out there into ’17 year. I mean this is all going to be built by about April 2017 so there's not a long tail here for you to project out.

Lyndon Fagan

Okay great. The second question I’ve got is I guess the longer term production profile at Maules, the guidance is to get to 50/50 MET thermal but I’m just wondering how confident you are about increasing that met coal production given the current state of markets and whether that sort of guidance is under review at all.

Paul Flynn

No it’s certainly not under review. No. The sign-up of supply brims already at 750,000 tonnes for met coal ready for Maules Creek underpins our guidance. And what we’re seeing actually in the end user market is the proportion of blending the semi-soft into the coke mix is actually increasing. And so it’s quite interesting. At the moment you see quite a strong rebound in semi-soft prompt tonnages. They look very much like the index price at the moment. Whereas before the spot market was seeing quite a differential between the index and what you can get for prompt tonnages.

In our business dynamic as I mentioned just to Paul, we can produce the premium coals. We don't have anything to fear from washing. Washing yields are very high with us, washing costs are very low with us. There's more margin in a semi-soft and PCI tonne than there is in our thermal tonnes. So certainly we're not minded to wind back our aspiration if you like in terms of where we think we can take this because it's not -- there's nothing in the physical market that says we should.

Lyndon Fagan

Okay great and just one final question. Obviously you've been talking about a potential sell-down of Vickery but if coal markets were to take another nosedive, would you consider selling part of either Maules or Narrabri?

Paul Flynn

Look I think if prices had another leap down and obviously that would be challenging for lots of people, probably challenging for lots of people in a way much more extreme than what it would be for us, but of course that would be difficult and I think if that was to occur, we would evaluate all sensible options.

Operator

[Operator instructions] There are no further questions coming through at this time.

Ian McAleese

A couple of questions off the net, why are selling distribution expenses up by almost 50% from the prior half? Kevin?

Kevin Ball

Simple answer for that is that the tonnage that we sold was up 52% but the cost was only up 44% and that selling and distribution cost is port and rail and all the costs in moving it post pit to putting it over the bow of the boat.

Ian McAleese

The second one is, will the interest expense remain at around 34 million per half assuming debt levels remain unchanged?

Kevin Ball

We've given a little bit more color around the interest expense and the net financial expense. It's a combination of the amortized cost and some other things are in there and the actual interest. When you look at the interest expense itself in note six, you'll find that the interest we actually pay is going to end up about mid 50 million and then there's some amortized costs on top of that and then there's some other accounting jiggery-pokery is not the right word but it's close enough for description which is interest unwinds on rehabilitation provisions and some other things that are all non-cash. So note six to those accounts I think gives you far more detail on the breakup of that and helps provide you some color around what net interest should look like for a half and for a year. And today the margin is -- the debt's at its peak so we would expect interest to fall over time as we de-lever and the current it's a margin over swap rate, so that swap rate currently is about 200 basis points. If that changes, then our interest changes again.

Paul Flynn

I think just to add to Kevin's explanation there, it's just that absent an interest rate change, which obviously is a market wide thing, absent that change, our interest costs at the moment are at their peak. The debt has peaked June 30, 2015 debt, the draw down that facility at $900 million that is the peak. So the financing costs that come with that have peaked, but what hasn't peaked is our ability to meet those costs and that comes with more tonnes at better margins. So our capacity to actually manage this and you can already see that the conceptual, the theoretical calculation we've already put in that slide. Our capacity to deal with this and meet our covenants is very good and it only gets better as we throw up more tonnes from these two low cost mines that brings better margins.

Ian McAleese

Nothing else.

Paul Flynn

All right Operator. It looks like it's the balance of questions that we've seen on the screen, so if you've got no further questions then we might…

Operator

We've just actually -- yes we've just actually had one pop in. We do have a question from Phillip Chippindale. Please go ahead.

Phillip Chippindale

Just firstly, just on the Narrabri, the next longwall change out there, can you just give some rough guidance as to the timing on that? I don't think you mentioned that in the call?

Paul Flynn

Jamie?

Jamie Frankcombe

Yes, just on the next longwall change, we expect that to start probably last week in April. So typically what we've seen in the past is that is normally complete in the six weeks or slightly shorter than the six weeks' timeframe so we do see that we will be up and running and producing in June and there will be some more tonnes come into this financial year when we complete that longwall change.

Phillip Chippindale

And just finally just the timeframe for the expenditure on the balance of the CapEx for the 400 meter wide face at Narrabri?

Jamie Frankcombe

Yes well as Paul mentioned earlier, that project is due -- I mean we'll see that 400 meter longwall face start in April of 2017 so that capital is starting around about now. Already we've started made some pre-commitments to the long lead items for that expense, yes, so that will start from now and will tail out through April 2017 -- the balance will be complete by 2017.

Paul Flynn

I think the number there about 14.

Jamie Frankcombe

Yes.

Paul Flynn

We've spent 14 million already of the 56 million total cost to us for that project. Funded, you know, with a combination of [indiscernible] and cash from operational cash flow. So I mean I don't think it's going to be a major thing. Phillip, you could probably draw a straight line with that between now and then and the April 2017 time in terms of the outflows.

Phillip Chippindale

Yes okay, so about A$40 million over 15 months?

Jamie Frankcombe

Yes.

Paul Flynn

Yes partially as we said in that guidance from the ECA and then part from cash flow.

Operator

And no further audio questions at this time.

Paul Flynn

All right thank you Operator. We might draw that to a close and of course if there are any other questions, you know where to find us but thanks again for your attendance and we'll look forward to catching you up over the coming days and months. Thank you.

Operator

Ladies and gentlemen, that concludes our conference for today. We thank you for participating, you may now disconnect.

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