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Edited Transcript of WHC.AX earnings conference call or presentation 19-Feb-20 11:30pm GMT

Half Year 2020 Whitehaven Coal Ltd Earnings Call

Sydney, NSW Mar 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Whitehaven Coal Ltd earnings conference call or presentation Wednesday, February 19, 2020 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kevin Ball

Whitehaven Coal Limited - CFO

* Paul J. Flynn

Whitehaven Coal Limited - MD, CEO & Director

* Quentin P. Granger

Whitehaven Coal Limited - Executive General Manager - Operations

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Conference Call Participants

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* Glyn Lawcock

UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst

* Kaan Peker

Jefferies LLC, Research Division - Equity Analyst

* Lyndon Fagan

JP Morgan Chase & Co, Research Division - Analyst

* Paul Young

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Sam Webb

Crédit Suisse AG, Research Division - Associate

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Presentation

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Operator [1]

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Welcome to the Whitehaven Coal interim FY 2020 results. (Operator Instructions) Thank you again for joining us today. I'll hand over to our first speaker, Managing Director and CEO, Paul Flynn. Please go ahead.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [2]

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Good morning, everybody, and thank you very much for joining us today for the half year results for financial year 2020 for Whitehaven Coal. I do acknowledge this is a brave new world of using new technology. And from time to time, I know technology has defeated us on 1 or 2 occasions in the past, but thank you for embracing it and joining us through webinar and also the teleconference. So we'll work our way through this.

In keeping with that change, we're going to mix it up a little bit for you too as well in terms of how we present the half year results. So I'm joined here in the room with Kevin Ball, who will do part of the presenting as well for the financial component of the business. And we've also got on the line Quentin Granger, EGM Ops, who's going to participate also through the Q&A section that follows at the end. I believe in webinar -- where it comes to questions from the webinar, we'll read out the question and answer it, whereas those dialing through the phone can pose their own questions verbally themselves.

Without further ado, we'll move on. Thank you for joining us. We'll draw your attention to Slide 2, just in terms of our disclosures as we always should. There are forward-looking statements in the presentation here. So you should read the disclosure. It does also refer to our reserves and resources. Whilst not new, they were previously released back in August. They are included in this pack by way of reference.

So if I can move on to some change, I'm going to deal a little bit about the market before we actually get to our financial results, and then I'll come back after the results to talk about our projects and our growth.

So moving on to Page 5, is where I'll kick off. Looking at our customer base, we've got a chart which you've seen there in previous iterations but reconfigured in this. It's easier to understand. Obviously, we've got a growing customer base across the growth center of the world being Asia, and that's a very good place to be strategically for us. You know that we've got a very good footprint in the thermal coal product with high energy, low trace elements, low ash, low sulfur, low phosphorous, which is a great benefit to the thermal coal users, i.e. electricity uses mainly. And then we've also got a growing footprint with our semi-soft and PCI coals into steel producers and smelting operations across Asia. And being the growth center of the world, the outlook for us is very positive, and we'll go through that as we move through the pack.

Over the page, you can see some stats here in terms of our key markets, population growth, real GDP and urban population growth as well, all of which are key drivers in demand for electricity demand, for infrastructure demand, manufacturing and industrial output more generally.

On Page 7, one of the key determinants of that drive is obviously increasing electricity consumption in our region. And I'm sure you've seen these charts from us before where we've depicted what is, in this instance, actually quite a short-term outlook, evidencing significant growth for electricity across our Asian markets. The good thing about our business is we do have the benefit of proximity to this market. We have the quality they like and an extensive customer footprint, which is expanding year-on-year.

Over the page on 8, electricity consumption is driving thermal coal demand. There's no doubt about that. And although the world is a dynamic place and it differs depending on which part of the world you reside, in our region, the low ash, low sulfur, high energy, low trace element coal that we sell is in very good demand, as is our semi-soft and PCI product. That is driven by the rollout of the installation of HELE plants as it relates to our thermal coal. And with growing demand for infrastructure and the associated building materials that go with that, we're seeing strong take-up of our coal in this region. Of course, in other regions, and that's why we've got it here, the rest of the world, you'll see that there are other dynamics playing out in those markets. And in some these markets, they have cheap gas. Other markets, they have strong nuclear footprints. But in our backyard, neither of those things are as relevant, and we are seeing strong demand for our thermal coal.

On the other side of our business, you realize, obviously, there's the semi-soft and PCI demand, and that is also with a strong outlook as well. These graphs really depict to you the coal as an integral component of the steel and industrial development through to construction materials in our region, and that paints a very strong picture in a relatively short period of time for continued demand for our products.

Over on Page 10, again for our semi-soft and PCI outlook, it is very strong. I think there's no denying despite the short-term interruptions that we see with various trade-related discussions and, more recently, the coronavirus phenomenon, then the backdrop for demand for our growing metallurgical business is very strong. As you know, Australia is the source of the best hard coke in the world, and we're also large producers of PCI and semi-soft. And in New South Wales, in particular, our footprint of semi-soft and PCI has been well received by the market. India now represents half of our metallurgical sales, which is quite a significant change in our business. And with the arrival of our exposure into the hard coke market with Winchester South, I'm sure India will play an increasing part of our outlook as far as our metallurgical sales go.

Now just on to our results and just to come off the highlights quickly. And I know that much of these are numbers which are familiar to you as a result of the December quarter's release, but I will just call these out for you. Our TRIFR at 5.72 is a decent result. As we pointed out, much lower than the average for the New South Wales market, but that's not really the way in which we measure ourselves. Year-on-year, we must improve. And if we're going to produce more tonnes, we must continue to lower the rate of injuries in our business, and we continue to work hard in doing that.

Obviously, we're in a softening -- we've had a softening Newcastle Index backdrop for this first half, which is no surprise to any of you. And our thermal coal prices averaged $70 for the half and $94 for our metallurgical coal products. The Narrabri change-out was our most onerous, our most challenging and longest change-out with the upgrade of our chock cylinders during the relocation from panel 8 to 9, which went very well, on budget and not an injury despite all that complex work that was going which was tremendous.

Managed coal production at 7.5 million tonnes is 31% down. Maules Creek, which we'll get to, with a labor shortage and dust events, we've got an update on both those aspects. And of course, the scheduled outage of Narrabri being in change-out. Equity coal sales, including purchased coal at 8.5 million tonnes, is actually period-on-period quite consistent given that we purchased coal and drawn down stocks to maintain our sales profile with our customers. We did close the acquisition of the 7.5% of Narrabri with the purchase from EDF Trading. Longstanding as that is, as many of you have observed, that is concluded, and so we look forward to our improved ownership there at 77.5%.

The Board has declared an unfranked dividend of $0.015 per share, in line with the more subdued coal pricing. But we are continuing to -- continue to pay dividends and, really, we'll reassess this in the second half, which we expect to be a much stronger half than the first. And it's very nice to be able to say that we have concluded the amend and extend of our financing facilities here for our billion-dollar facility very successfully on similar terms to what we've had in the past, and Kevin will talk to this, and now maturing out in 2023.

So we'll just move over to safety. And as I say, safety -- this picture here is -- it demonstrates the right relationship between reducing our injuries and increasing production. And as you've heard us talk in the past, increased production is not sustainable if we don't actually improve our safety. And that is the right relationship to exhibit, but we are looking for further improvements past the 5.72 TRIFR that we have recorded year-to-date. I can say to you that the first couple of months of the year have been improving on that trend, which is nice, but there's more work required here in order for us to continue to deliver on the aspirations of growing the business past the 23 million to 25 million tonnes our current portfolio can produce with the arrival of Vickery and Winchester South.

And with that, I'll hand over to Kevin, and he can present the financial results.

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Kevin Ball, Whitehaven Coal Limited - CFO [3]

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Thanks, Paul. Thanks very much. So let's go to -- you can see on Slide 14 the main numbers, main P&L numbers and balance sheet items. Soft Newcastle pricing for the first 6 months of December '19 had an impact on our earnings, and it's been the biggest impact on our earnings. It is the main cause of the driver of the decrease compared to the previous period. Of course, there was a smaller volume of sales and a smaller volume of production. And with the business that we have, that means that the fixed costs in the business were absorbed over a smaller base, and this has led to an increase in unit costs. We'll talk about that in a little -- in more detail in a few slides. The Board declared a dividend of $0.015 per share unfranked. And the payment for that is scheduled for Friday, 6th of March in 2020. And that fits towards the -- around the 50% of NPAT for the result of the year.

Looking at the balance sheet. Net debt is a little higher than it was at 30 June '19, but that's not unexpected. We did pay out nearly $300 million in dividends in that last 6 months, and that is the main cause of the change of -- change in the value of net debt. But I draw your attention to gearing. We have a range of gearing up to 20%, and we're at 15%, so we're comfortably in that range. And we're reasonably happy with that at the moment.

If I turn the page and talk about the profit and loss, you can see in the revenue line that the revenue line was down from $1.3 billion to $900 million, and that's really just driven by that sales line and the sales price, and we'll show you a little bit of that in the future. Interest expense pretty flat. Included in your operating expenses there are purchased coal. So I draw your attention to the face of the profit and loss statement that we've released to the market, which will give you the purchased coal cost, and that will lead you to understand what our operating cost performance looks like. Rail, port, marketing and royalties are down a touch, not surprisingly because the prices were down. And our EBITDA was down from $550 million to $177 million. That decrease in EBITDA margin is, as I keep saying, mainly a factor of softer pricing. However, the increased cost per tonnes did contribute a little bit. We'll do a bit of a deeper dive coming forward now.

So if you look at the EBITDA bridge that's on Slide 16, you can see that $332 million came around from the price changes and a slight benefit with an FX falling from 72 in first half of fiscal year '19 to 68 in the first half of fiscal year '20. There's a volume that's about 600,000 tonnes less sales of our own coal in there which contributed to that $38 million and costs were about $51 million. Those costs you would expect, as we talked about in the release to market in December, were going to be impacted by labor issues and by dust and smoke events. And we've talked about those before and, certainly, they shouldn't come as any surprise. But I guess the question you're going to have is how do we get from a first half number of about $76 a tonne to second half guidance of $73 to $75, and we'll get to that in the slide as well. But we're coming to unit costs. I think none of this is terribly surprising. We had a first half cost in fiscal year '19 of about $69 a tonne. We finished the first half of fiscal year '20 at $76 a tonne. And in this slide, you can see the places to which we've attributed those cost outcomes. Labor shortages and dust, together with underutilized take-or-pay, come together. We've talked about an increased strip ratio at Maules Creek in the past, and that's certainly come through here. And we've got a program there of increased washing. So we've implemented a revised labor and retention program at Maules Creek. That is delivering. We are seeing more people there. And certainly, on the calls we have each week on production, we're hearing good outcomes from that.

In relation to dust, I'm pleased to say, and I think Paul will talk to this a little bit more, we've had quite a strong return to summer rainfall in the region, and this has addressed the drought and bushfire conditions. And then, as you know, our logistics costs are often fixed in nature, and we have take-or-pay arrangements for them. But in the second half, with our increased or expected increased productions, we are expecting to see those costs and the underutilization of those come off.

We took a conscious decision in our marketing strategy to focus upon positioning these products at Maules Creek and Tarrawonga at the better end of the market. And we're washing more coal there, but that coal attracts a higher price. So the increased quality and the price of the product comes at a higher cost but comes for the better margin for us. So we expect to continue to do that, and it certainly helps our marketing team deliver this coal into the markets of Asia because the market and the environmental benefits that a higher-quality coal bring are well noted. So at the end of fiscal year '20, our unit costs were $1 above the top of our guidance of $75. And we'll just step into how we think that gets from $75 back -- or $76 back into the range of $73 to $75.

And on Slide 18, you can see here, we think we'll get better productivity at Maules Creek in the second half. We're expecting to see better productivity in Maules Creek in the second half with the labor program that's there. And we expect to see better utilization of our logistics chain as we push more coal down that chain. And again, you'll see increased production will give us a better outcome, mainly because those fixed costs that we had in the business around mine operating overheads and sites will reduce. So that's how we think we get back from $76 to $73 to $75, and we'll move on.

Another -- there are about 2 more lines in here I want to talk about, which was the $116 million of depreciation, which is a step-up from the previous year. And that's -- that -- the unit cost of depreciation in half 1 fiscal year '20 was about $17 a tonne. Whereas in half 1 fiscal year '19, it was about $13. And that change comes from 3 areas. So in '19, we increased our rehabilitation assets. That's cost us about $0.50 a tonne. We had underutilization of assets at Maules Creek because a lot of these assets are amortized on a straight-line basis rather than the units of production, and we think that's cost us about $0.60 a tonne. And because we've put our efforts into overburden movement in this first half, which has led to the reduction in the volume of coal produced, that depreciation charge comes through the P&L. And so there's about $2.80 that comes from that. In the second half, as we turn to balance up the coal production and overburden movement, that number shouldn't be repeated. So -- because we will have a big divisor in the tonnes that we produce.

I wanted to take 2 minutes as well just to take through the interest. You'll see that the interest is down about $2 million from the previous year, so -- or previous half year, from $22 million down to $20 million. And I'll give you some breakups of that. There are some costs in this we incurred because of the nature of business and so they're relatively fixed in nature each half year. Bank guarantee fees and undrawn commitment fees. And there are costs that vary with the level of drawn debt in our senior facility. So while interest rates were cut in '18 from 1.5% to 0.75%, the undrawn commitment for these come at us when we have an undrawn amount on the debt. And as you can see, establishment or upfront fees, which are all spelled out in the financial statements, are really a fixed cost each period.

Over the page to the balance sheet, cash on hand. We normally hold about $100 million of cash on hand. And the bridge on the right-hand side there shows you how we moved from $162 million in net debt to $587 million. And the main change there was the payment of the final and special dividend of $0.30 per share. You'll also see that we spent $132 million on investing in our business, and we'll talk about that. And with the introduction of IFRS 16, we've been steadily refinancing some of our operating leases into finance leases, which brings them into the net debt definition. We have sourced the fleet for Tarrawonga. And again, on the right-hand side there on the lease payments, that's made up of about $40 million worth of payments in actual lease fees and about $40 million worth of equipment that's come on the balance sheet. And just to round it out, the decrease in equity from $3.5 billion to $3.2 billion is really the dividend we paid.

Investing capital expenditure, it was a number of $132 million. But as you can see, we spent about $34 million on sustaining CapEx. In total, $13 million of Narrabri mains development and $21 million in sustaining. But the number that we've spent the most at the moment is $81 million in growth projects. And the first point in that slide, you can see, is we spent $16 million on water security, which was -- with the 2018/'19 year drought, we focused on ensuring that our operations will be uninterrupted by a lack of access to water. We did a lot of work through '18 and '19 to make sure that happened. We bought several parcels of land, which provided us with access to productive sources of groundwater. We've laid pipelines from those sources to Maules Creek, and I'm pleased to say that over the course of that drought, our production has been uninterrupted other than for the dust and smoke events. So I think that's been relatively successful. In the future, we will continue to address water supply and water security in the medium to long term. Okay.

We also sourced a new Tarrawonga fleet. That was about $19 million. We increased the strength of the Narrabri longwall face by replacing an upgrade in the longwall chock cylinders. That was about $13 million. And we spent $13 million on the Vickery expansion project, infrastructure design and studies as part of that program. Spent a little bit of money on Winchester South, again in the studies around that program. Some money on Narrabri Stage 1, and we spent some money at -- on AHS at Maules Creek. And finally, I'm pleased to say that we spent about $17 million on the first tranche payment for the acquisition of EDF 7.5% in Narrabri.

Over the page on the financing, and Paul has -- Paul's referenced this. So yesterday, we closed the refinance of the billion-dollar facility, and that number hasn't changed from the previous amount. We do have quite a good relationship with our financiers, and we have strong banking relationships with a range of Australian banks and international banks. And that might come off as a little bit of a surprise to people who aren't familiar with coal. So our banking relationships is strong. We're really well supported. We do adopt a program of refinancing our senior debt facility about midterm, so on average, we've got no debt -- no less than 2 years left to mature, and that really gives us a good runway into how we structure our capital going forward. This is the facility that we use to fund growth opportunities, and it supports paying shareholder returns. Over the last decade, our syndicate has changed. Originally, it was mainly Australian banks. Now what we're finding is that the end-user customer jurisdictions are coming to the banking market in Australia and providing funding for resource projects in this country, and we're certainly included in that.

As you can see, we have a diversified source. We seek money from the senior debt facility. We use ECA facilities. So when we -- ECA and leasing because that's really how we acquire our yellow goods or our orange goods in the form of Hitachi. And of course, with rehabilitation obligations and obligations around logistics, we have a need for bank guarantees. So we have $424 million at 31 December outstanding in guarantees and that, again, we've refinanced that into a series of bilateral agreements with the members of the senior syndicate. We will keep working on the ECA facilities. We're in discussions with NEXI out of Japan, and we've met with Sinosure out of China, and we already have a Euler Hermes arrangement. So they're important sources of funding for us in a diversified capital structure.

If I can take you over to the next slide, which talks about capital allocation, before handing back to Paul. I just wanted to bring this -- to put a little bit more color about how we think about this. We are prudent debt managers, and that is how our senior syndicate looks at us. And we like to do that because that means we have a strong balance sheet and good banking relationships, and shareholders can expect to see returns continue for years to come. So what you see here is a graph which has a coal price on it from 2015 to 2020. And that improved price between '16 and '19, provide us with lots of opportunities to provide returns to shareholders, to invest in growth in the assets of the company and to retire debt. And the first thing we did when coal prices improved was retire debt because that was the commitment we made to our funding providers. Now going forward, our priorities remain to continue paying dividends. We expect to return surplus cash to shareholders. I think as Paul said, we'll get to the end of the financial year, and the Board will reconsider, depending on our debt levels, where we are with share buybacks. Hopefully, we're expecting those to be better. And we expect to construct Vickery and Winchester South in future years.

So I'll hand back to Paul, and he can talk about the operational performance for the half.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [4]

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Thanks, Kevin. I'm over now on Slide 24 and with the coal production and sales. So again, I won't belabor these too much because you've seen these numbers with the successive quarters through the half. But we'll acknowledge that we set out at the beginning of the year with a small first half, large second half. And certainly, that's going to be the case with the 60-40 split between the 2 halves. The key things to watch, of course, with the second half will be the Maules Creek increased productivity as we continue to fill the workforce slots that we're looking to fill. Narrabri, of course, was expected to be lower in the first half but will -- is returning to normal production levels. It already has done so, in fact, doing quite well since it reinitiated production in panel 9. And then Werris Creek, which, as Kevin has mentioned, was focused significantly on the overburden removal in the first half. It shifts its weight more towards coal production in the second half as we always tap into these thicker and deeper seams in the bottom of the pit seemingly in the second half of every financial year at Werris Creek.

I'm over on 25, looking at our coal sales. Again, this is not a new picture to everybody here. As I mentioned earlier, India is now half of our metallurgical sales, which is quite a change over time. We still enjoy very good support with our customer bases across Japan, Vietnam, Taiwan, Korea. But India certainly has an appetite for both our PCI products, which has traditionally been the coals we sold there. But in more recent times, our semi-soft as well seems like it's hit the right spot with our Indian customers.

Over drilling down into Maules Creek, in particular. Obviously, we're going to have a bigger second half as we've all acknowledged. And as we've talked about quite a bit, we've always had some labor shortages, but we are improving significantly in this area, I have to say. Rejigging the proposition that we're offering to new employees, looking and using different service providers to find the labor for us. We are actually outperforming the forecast buildup of that manning level that underpins the second half's production. So we are ahead of schedule here and very positive about the momentum that's been created with the changes we have made.

On the dust and regional dust event side, things which caused us significant delays in October and November. In fact, we had 30 stoppages during those 2 months alone for regional dust events, which are outside of our control. We did budget for some of that in the second half, but we actually have taken some measures to agree circumstances in which we can continue to operate from a regulatory perspective in these regional dust events. So we don't expect that to be as big a driver of stoppages as it was in the first half.

Of course, our autonomous project at Maules Creek also continues to move on. In fact, over the next 2 or 3 weeks, we will put in place the first fleet in a quarantined area of the pit, which will start overburden removal in an autonomous form. That is an exciting development, and we look forward to the rolling out of that through the balance of the overburden fleet over the next few years.

Narrabri, as I mentioned, as you know, went through a scheduled change at the first half, so production was consequently low as you would have expected. Having said that, as I say, the most complex change that we've done, given that we changed the drift belt and also the chock cylinders was completed very well on time and budget. And Narrabri is back into good production, which is very encouraging. You will see it step back up to its normalized level in the second half. And as Kevin says, that extra volume will see us absorb fully our infrastructure contractual costs at both rail and port, and that will be fully absorbed during the second half, relieving some of that cost burden we experienced in the first half.

Gunnedah ops, again, second weighted of the year, as you know, with Werris Creek, as I've already mentioned. Tarrawonga obviously starting to see the commissioning of much of its fleet and will be running around its 3 million tonne rate at the very end of the year. Rocglen and Sunnyside, as you know, have moved into rehabilitation phase.

We have thrown a slide in here, water security, just to round out the discussion we've been having on that in the past. Water security, as Kevin mentioned, continues to be a focus for us. Just because we've had very good rain across our operations, it doesn't mean we're taking our eye off this because there is a longer-term position that we need to put in place to better "waterproof" our operations and also for Vickery as well. But we have received substantial rain. In fact, we've had some short-term glitches associated with receiving significant rain in a very short period of time, in some instances, 10 inches in 2 weeks which has caught some short-term disruption, but it's welcome to acknowledge that our water facilities are largely full across our operations. And the Namoi River is flowing again after over 12 months of not flowing, and we are able to use our high-security water entitlements to pump from the river during this period, which is certainly relieving some pressure. But again, I think there's more work to be done here in ensuring that whilst welcome these recent rainfalls, not the answer for everything long term, but certainly no problem with water security underpinning our current guidance.

So I might turn to growth. And as you know, we've obviously got a pipeline of growth, and we look to diversify both in product, in geography and certainly customer destination. So I think that you all know the Vickery and Winchester South products represent significant incremental growth. But I will just reflect back on the slide, which we've shown you before. It's not just new projects. Our brownfields projects have upside as well. Maules Creek, as I mentioned, AHS is tied very closely to our drive to move Maules Creek into a position where it could produce 16 million tonnes per annum. The life extension at Narrabri, whilst -- it is aptly described as such, as a life extension. It will actually mean more tonnes once we move into those longer blocks per annum; and Tarra, as you know, moving to 3 million tonnes. So I think all this is moving ahead.

In terms of Vickery, we are waiting for the whole of government report. And as it's frustrating as it is for everybody, not in our control. We know the government's about to conclude its work, so that's positive. You will have an IPC hearing then after. And I think it's realistic to think that, that determination there by the end of this financial year, frustratingly slow as that is. Winchester South continues to do its work with its studies of the various components of its work both on infrastructure, both on mine plans, coal quality. And certainly, we will publish our reserves, the inaugural reserve before the end of this financial year.

So overall, we provide a graphic on 33, which sort of tried to overlay all of these projects together across the time line, which should help you understand the intersection of each of these projects across the outlook period. I won't talk too much more about them, but at least it gives you a sense of how these projects will fit together. And obviously, it is obviously a graphical representation that there's clearly a body of work going on in the business to execute across a broad field of endeavor.

And now to manage all that growth, we have actually changed the structure of our leadership team. So I know that we've talked about this a little bit, but there's a graphic just here. I might just explain this quickly for you. We do absolutely acknowledge we need further capacity to manage a bigger business. So we are investing in new skills and talents for the executive team to be able to do that. And I'll just highlight a couple here -- items here. Obviously, we've reconfigured the EGM Ops role, taken out of it people and culture and HSE and elevated that to the executive table. And as we've mentioned in the past, Leigh Martin, who's taken on the P&C role, is already with us and is now some 6 weeks into her time and really making a difference. Mark Stevens has taken on the reconfigured EGM of Project Delivery, and so that project delivery role is significantly bigger than what it has been in the past. Brian Cole is retiring and having done a great job for the company, but it is time for him to retire. Mark has now taken on responsibility for not just Vickery and Winchester South but also Stage 3 in Narrabri. So vastly different from what's been a singular focus on the singular development project in the past. And our HSE EGM role is -- we're currently in the recruitment for that. And we're awash with very high-quality candidates, I have to say, which is a nice position to be in. And I look to make a -- to file that down into a preferred candidate over the next month.

And just on to our guidance, no change on our guidance here. I just wanted to reiterate both on the production sales and also the CapEx guidance. The only changes there that some of the capital has slipped down into the new year, obviously, with the delays associated with Vickery. Again, outside of our control, but that will be dealt with in FY '21.

And just to conclude, our focus for the year, obviously, operational discipline for this -- for the balance of this year and going forward, obviously, is very important for us. We obviously want to make sure that we improve utilization and productivity of the fleet at Maules Creek. The AHS rollout at Maules Creek is a very exciting project, and we look forward to making sure that, that actually underpins that productivity drive at Maules Creek as well. We're chasing down, as you know, the Vickery project approval, and we'll look to explore the joint venture opportunity that, that represents for us as well. Finalize Winchester South reserves and resources. And again, as Kevin's mentioned, we'll look at returning surplus capital to shareholders with a bigger second half.

So thank you all for your time this morning and going through that presentation in this changed format. I'll move on with some trepidation to the new technological domain that is the intersection of webinar and teleconference. I know I'm sounding like a Luddite, but let's pull the Band-Aid off and get on to it.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Paul Young from Goldman Sachs.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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Paul, great that there's no change to production guidance. Just on that, can you maybe just add a bit more detail around how Narrabri and Maules Creek have been performing in February? And around Maules Creek, just with the later restaffing and the impact from the rains, is the operation back at the 13 million -- around 13 million-tonne mark and Narrabri back up to the sort of 8 million to 9 million-tonne mark? First question.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [3]

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You're an ambitious guy, Paul. Thank you for that question. 8 million to 9 million for Narrabri in the second half annualized. Let me get on to that. Look -- yes, look, the reiteration of the guidance is, obviously, affirming that we do have a big second half. So -- and that pathway for that big second half at Maules Creek is underpinned by a similar forecast of being able to fill the seats of each of our pieces of equipment to drive utilization and productivity we want. As I mentioned a little earlier, we are actually achieving better than forecast in terms of attracting and securing the labor required to do exactly that. So I think that the changes that we made there are certainly yielding positive results ahead of schedule. So that is comforting, Paul.

Narrabri has kicked back into gear very nicely. The goaf formed very quickly there, which is really good to be able to get out of that risky period at the beginning of any panel. And so -- and in fact, we've actually seen small weighting events during the last month, which our improved chocks managed very well. And so that's, again, a very good early sign there. Coal quality is nice as well because we're in ground which does -- is not affected by faults or anything like that. And -- but for a couple of little commissioning sort of niggles, I think those 2 big assets are in line to do what they're supposed to be doing.

I do -- you mentioned the weather, and I think it would be wrong not to acknowledge that. Whilst that weather is great, to have received all that water, we did receive it very quickly, and that has caused us some short-term disruption. Interestingly, not at Maules Creek. It's actually with the smaller assets where they are less able to deal with the big inflows in that regard. So less material, Paul, is the answer to you there but very welcome to have our dams full. I do note that there's more water or seems to be more rain on the way, and so we are making sure that we manage ourselves when we have full dams. We obviously need to be able to receive more waters, more rains coming, and we just need to be able to balance that equation. But yes, it's temporary disruptions but welcome to have relief from our tighter water environment that we've been managing now for over 12 months.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [4]

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Yes. Great. Paul, just to clarify that 8 to 9. I mean you did 2 million tonnes of ROM in the first half and you guided to 6 to 6.5 for the full year. So that implies, obviously, an 8 to 9 run rate for the second half, if my math is correct.

Just a question now for Kevin on -- 2 actually, Kev. One is on working cap. You had $100 million working cap release in the half, if I just look at receivables, payables and inventories. What are you looking at for this half on working cap? Build or release?

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Kevin Ball, Whitehaven Coal Limited - CFO [5]

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Well, I think we'll do a little bit better [overall]. We should do okay on working capital release. It's going to -- we're going to build some stocks in the second half, right? And just -- it's going to depend a little bit, Paul, on the timing of sales. But really, I mean our terms on thermal sales are 7 to 10 days. So we might see a little bit of an inventory build and a little bit of receivables build depending on price at the back end of the period. So -- but look, I just forecast it flat at the moment and go from there because I'll get an improvement from other parts of the business as well.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [6]

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Okay. Great. And then Kevin, on the target gearing and leverage ratios, just to confirm that -- with that, that doesn't include leases, correct?

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Kevin Ball, Whitehaven Coal Limited - CFO [7]

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It doesn't include the right-of-use asset leases, but it does include finance leases, Paul. And with that change, we're pretty happy with that 15%. As we said here -- I said -- we said with number of people over the years, we've said probably $400 million to $600 million on a through-the-cycle basis is what we want to carry as net debt. We're sort of in that range, and we're expecting a stronger second half. So I'm pretty comfortable with that net debt. And particularly, you look at the refinance, was really well subscribed, really well supported. So our bankers are backing us up in terms of how we're managing the balance sheet.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [8]

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Yes. Great. Kevin, last question. Do you need to see an improvement in the Aussie dollar per tonne coal price to actually push ahead with Vickery in the next 18 months, so a significant spend?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [9]

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No. No, Paul. We don't need to see that. And in fact, I did the math to someone earlier today, just as a previous question on this. Today, it's $68 and acknowledging we have 2 very good products here. Both those products are better than Maules Creek's equivalents. And so acknowledging that. But at $68 just for the thermal, you're going to get between $75 and $77 just for the thermal component of it, right? So -- and that's without overlaying any premium for the semi-soft, which the capacity of Vickery's about 60% of. So at that level, and it takes $77 because I haven't added any semi-soft into that, but at today's currency where we're 68, less your 8% royalty, you'll do Vickery on those numbers.

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Kevin Ball, Whitehaven Coal Limited - CFO [10]

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Yes. I think -- Paul, I think when I look at it, I go like Paul says, we're getting a really good premium out of Maules, but Vickery is a better product again. So as Paul said, the math there, we get 78% from Maules product, and this has got a higher energy content again. So let's work our way through that conversation. But we like the product. Our customers like the product, more importantly. And it really does give us a really good, strong semi-soft coking coal going into that market.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [11]

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Yes. You'd love to see a better underlying Newcastle price. Of course, we would love to see it. But the point I'm making to you, Paul, at these levels, it's in the game.

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Operator [12]

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Your next question comes from Lyndon Fagan from JPMorgan.

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Lyndon Fagan, JP Morgan Chase & Co, Research Division - Analyst [13]

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I'm hoping to just explore the projects a little more. So I guess between Vickery, Winchester and Narrabri South, we're looking at almost $2 billion of CapEx. And yes, we've got a sort of 20% gearing cap. I'm just wondering how you can execute on all of those projects but maintain your gearing ratio within that range. And I guess maybe that's a through-the-cycle target. Where would you expect net debt to peak at in pursuing all of that?

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Kevin Ball, Whitehaven Coal Limited - CFO [14]

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So Lyndon, the way we clarify that is we say that we would have a 15% to 20% gearing ratio -- or up to 20% on a through-the-cycle basis, although we would stretch ourselves, and this is the difference between equity and debt. Equity, we'll look at that number in the rear-vision mirror. And debt, we'll look at it as though we've spent the money and is contributing EBITDA to our line. So we're happy to invest on a value-accretive asset. But we would expect contributions from cash flow to help fund some of those projects, and those projects aren't all being run concurrently. And we still have that program. We're waiting for the whole of government report come out and the approval to come out. And then I think we'll engage in conversations with potential joint ventures. And you can see from that net coal mix slide that's there that we're reaching into places that are outside of traditional Japanese joint venture partners there. So we've got pretty good interest in what is a very strong semi-soft product coming out of this.

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Lyndon Fagan, JP Morgan Chase & Co, Research Division - Analyst [15]

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I guess, Kevin, putting it another way, where would you be comfortable for net debt to peak out at while you're building all these things?

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Kevin Ball, Whitehaven Coal Limited - CFO [16]

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How about you leave me alone on that one, and I'll -- we'll work out when we get our approvals? And we'll work out what our capital program looks like. And we'll work out what our joint venture program looks like. And we'll end up with a package that keeps. I think, Lyndon, if you go back to the slide where we talk about being prudent debt managers, that's what we'll be.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [17]

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And I think there's -- you're still in the zone of this way. You need to think about this on a sequential basis. They're still sequential in nature. We're annoyed that the Vickery -- the government has wasted a lot of time on Vickery. We're annoyed by that because that does bring a little -- Vickery a little bit closer to Winchester South, and it definitely does do that. So that's annoying. But it is still sequential in nature, and Vickery will produce good revenue and EBITDA for us when meaningful capital for Winchester South commences.

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Lyndon Fagan, JP Morgan Chase & Co, Research Division - Analyst [18]

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Okay. And maybe just on Winchester then. It looks like from the new slide diagrams, perhaps the timing for construction has been pushed out a year or so. Is that interpretation correct? Or is it just the way the image looks on the slide?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [19]

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It's just the way the image looks on the slide, Lyndon. Sorry about that. It's -- nothing's changed there. The only thing -- the comment I would make on the reserves and resources, and I think it's important to make because that's the important piece of the puzzle here. And I know a couple of people have asked, where is that? Because you said it was coming a little bit earlier. What we have done here is that there's a 2-part process here is the way we've divided this up. There's an easy answer on the reserves and resources. The Leichardt, the Vermont seams well understood, well understood. And if you wanted to cut out reserve quickly on that, no problem. We already know what those numbers look like. But we are interested to maintain the optionality for the Fort Coopers, which is a big piece of the overall resource puzzle there. And so we're taking the extra time to work out how much of that we want to drag in, in the short term. And then there's a whole lot more upside associated with those Fort Cooper resources given how close they are to the bottom of the Vermont sea. So that's really the work that we're going through at the moment, which is, we feel, deserves extra time to make sure we get that answer right. Otherwise, you could just publish a Leichardt and Vermont-based reserve quickly here. And those seams and the quality is well understood by all the surrounding operations that you'll be aware of around Winchester South.

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Lyndon Fagan, JP Morgan Chase & Co, Research Division - Analyst [20]

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Okay. So just to finalize, we really shouldn't be modeling any overlap between the spend of Vickery and Winchester South even though Vickery is sort of still facing a bit of a delay?

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Kevin Ball, Whitehaven Coal Limited - CFO [21]

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Yes. Look, I'll step in here before Paul. But I would say it's always been our intention to do them sequentially and certainly not to try and run 2 large projects concurrently. So you shouldn't do that, no.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [22]

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Exactly.

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Operator [23]

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Your next question comes from Kaan Peker from Jefferies.

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Kaan Peker, Jefferies LLC, Research Division - Equity Analyst [24]

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Just 2 from me. The first one, just wanted to touch on operating cost. So can you talk through how much is leverage to volume? From Slide 17 and 18, it looks through like it's around $2.50 a tonne. And just on that, maybe can you give an update of what you expect to receive in terms of cost/benefit from Maules in-pit dumping in the next 12 months?

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Kevin Ball, Whitehaven Coal Limited - CFO [25]

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Yes. I think, Kaan, you've pretty much nailed that. It's around that $3 a tonne that we see coming through in both operating cost in the pit and coming through in logistics. And because the first half tonnes were where they were, we have a piece of those unutilized logistics coming through. In the second half, with tonnes stepping back up and Narrabri coming back in and, look, Werris Creek and Tarrawonga producing more tonnes and selling them, then we would expect to see that logistics charge reduced and would expect to see things like our administration cost and our site overheads absorbed over more tonnes. So that's why we think that increase or we think that reverts about $2 or $3 in the second half, and that's how we end up coming back from $76 in the first half to falling in this guidance here between $73 and $75.

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Kaan Peker, Jefferies LLC, Research Division - Equity Analyst [26]

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Sure. Just on second question, just more around capital allocation. Just wondering how sort of Whitehaven views up or weighs up buy or build decisions. Some of your peers have publicly indicated thermal coal assets are no longer part of their long-term portfolio. And it seems like in the current stage of the cycle, it's probably more favorable to buy rather than build it, particularly in thermal coal. I mean not looking for specific assets, just wondering how this stage of the cycle was being viewed.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [27]

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Yes. Thanks, Kaan. Yes, look, it's an interesting question that you pose and we don't look at this thing in a one-or-the-other type approach. We do look at all the assets that come up around the place, and we have pretty firm views on what we like. But we're also balancing that. We also know that we create more value for shareholders over time if we use all of our skills. And when I say all of our skills, we have the capacity, obviously, to navigate our way through the regulatory processes to get greenfield projects up. And we can build things cheaply, and we can run them well. And when you do those 3 things, we create more value. There's no doubt about that. Having said that, with our current portfolio, most will observe that we've probably got plenty of greenfields-associated risk profile in the portfolio, and you may not need too much more of that for the immediate future. To the extent that there are other things on the market that makes sense, then, as I say, we look at all things. But I think you just got to be disciplined in making sure that you understand what it is that's going to add value to your business and your shareholders as opposed to decisions that other companies may make from time to time in respect to the interest of their own shareholders. And the shareholder groups may not often align in terms of those 2 groups. So we do look at that equation, buy or build, a lot. But I think we've got a lot on our plate and to be buying stuff right now, it'd have to be something incredibly compelling to want to distract you from all the work that's going on in the company today.

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Quentin P. Granger, Whitehaven Coal Limited - Executive General Manager - Operations [28]

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And I think the final point I'd make on Paul's comment is we see the quality end of that market as being the important place to play. So that is the lens through which we look at these assets.

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Operator [29]

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Your next question comes from Sam Webb from Crédit Suisse.

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Sam Webb, Crédit Suisse AG, Research Division - Associate [30]

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Just a couple of quick ones. Just with Maules going to 16, looking at the same schematic too on Slide 33. Ramping up to 16, so it looks halfway between 20 and 24. How long does it actually take to ramp to 16 once you get approvals? I just want to understand that period of time, make sure that we're not putting 16 in our numbers too early or too late.

Second question on the labor program, ahead of schedule. Just give us a sense -- I know we talked about a lot at the quarterly. Does this program actually go into FY '21? Or is this a remediation work that you're doing with the labor force? Is that all largely done by the end of this financial year?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [31]

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Sam, I'll try and answer that first one. Look, I don't think you should assume that, that's -- going to 16 is an easy thing. So I think you're going to have a couple of years post-approval to achieve that. And the reason for saying that is it sounds simple, an extra 3 million tonnes, but there is a bit of work infrastructure-wise to be upgraded. And these are not massive pieces of work, but you've got implications for stockpile footprint, say, for instance. You've got any implications for the bypass circuit there, the processing capacity for the CHPP, which need to be factored in there as well. So I would consider that to be a 2-year thing. So yes, don't think that's just magically going to occur in one 12-month period.

And the second part of the question?

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Sam Webb, Crédit Suisse AG, Research Division - Associate [32]

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Labor?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [33]

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The labor? Well, look, I think labor aspects of the business, I think, are as I said earlier, we're on the better side of where we thought we'd be forecast-wise for the improvement in labor. So I think April, May, we'll see us at the position we want to be in, the way we're tracking.

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Sam Webb, Crédit Suisse AG, Research Division - Associate [34]

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Okay. That's helpful. So just with the Maules. So I understand -- I mean what sort of capital would it take to get those incremental tonnes?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [35]

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We haven't published numbers there. All we've done is -- and we've mentioned the pieces of infrastructure, firstly, that would be affected by an increase to about 3 million tonnes. And we've also acknowledged that the 3 million tonnes, obviously, would dictate further coaling capacity. We think we've got -- with an AHS-enabled overburden fleet, capacity there to do the 16, although the dirt associated with that. And then -- but we do think that there's further coaling capacity, so an additional fleet to be able to manage that.

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Operator [36]

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Your next question comes from Glyn Lawcock from UBS.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [37]

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Just wanted to investigate a little bit more around Maules Creek and this new labor. I mean you talked about labor hire. So I would have thought that was quick. So is this task of getting full labor up by sort of middle of the year, is that getting to a full permanent workforce? Or is that just labor hire? And then how does that impact this new arrangement you want for labor? Will it have a long-lasting impact on costs? And how does that impact your views around labor for Vickery? Because I would have thought you're looking at another 600 permanent people maybe for Vickery, if I'm not mistaken. Just is it possible to get that sort of labor in the region on a full-time basis? That's Maules Creek.

And then just interested to explore a bit more the corporate facility. I think Kevin said something about you did lose some banks out of the refi, but you've obviously picked others. Just if you could sort of talk a little bit more in detail around which banks are you losing, who are you picking up. And if we continue to see that trend of banks dropping off, what are the alternatives for that facility or we should not be concerned?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [38]

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I'll try and answer the first part, and Kevin can try and deal with the second. Look, when I refer to labor, I didn't really highlight the terms labor in the context of contractual labor, labor hire businesses. I mean we use all of them. As you know, we have a labor -- we have a contract labor component of each of our sites. And we actually use them in a permanent fashion, but we actually also use them in conjunction with our own recruitment activities as part of the front-end recruitment of people. And there's a bit of -- you're able to bring people on and because they can use their national footprint, these labor hire companies, to bring people from other places. And then you're able to assess once on the ground whether or not they're the people you want to bring on to your payroll. And so we've rejigged what we've offered them. It's not -- it's -- to allay your concerns here from a cost perspective, it's not material in that regard. But we have relaxed and enhanced some other parts of the overall package because it's not just about dollars per hour in order to attract the people we need. As I said, we're ahead of schedule there, which is good.

I do think the way in which we're managing this in the past perhaps wasn't delivering the right outcomes. And when it wasn't delivering the right outcomes, perhaps the blame was on the people not being there. And as I said earlier, we found people quickly once we've made some appropriate changes, and we're ahead of schedule in being able to ramp that up.

As it relates to Vickery, we will be with Maules, obviously, with the rollout of AHS, liberating a number of people from the roles of truck driving, which we retrained for other roles. Now that's not a net -- that's not a complete displacement of those people. There are actually new roles that come with AHS, that many people are already putting their hands up because they're interested in the technology. And so we think for Vickery, there's probably about 400 to 450, somewhere in that order net, that you'll need to find. Now there's more capacity in the local environment. There's no doubt about that. But we are obviously going to need to convince people to come to a region in the same way we have done with Maules and very successfully with Narrabri. Narrabri went through this whole issue now nearly 2 years ago, and currently is fully manned. So I think we've dealt with this before. Perhaps site-based leadership wasn't dealing with that in the way in which they needed to previously. We've made some very good changes, and that's yielding results. So I don't think this is going to be as big a matter as what it would appear to be temporarily at this time. Kevin?

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Kevin Ball, Whitehaven Coal Limited - CFO [39]

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Yes. Look, I'm happy to talk about the corporate facility. Our corporate facility, and I'm not sure where you get the statement that I said banks were dropping out, but that might be in the media and the AFR. And that's certainly been the conversation that's been going on in this country for probably the last 4 or 5 years, Glyn. So -- but what I can tell you is that we had $1 billion facility in '15 that was refinanced to $1.2 billion as syndicated. We reduced that to $1 billion in '17, and we refinanced it to $1 billion in early '20 here. So -- and over the course of that, there have been some banks that have come and some banks that have gone.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [40]

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Or reweighted.

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Kevin Ball, Whitehaven Coal Limited - CFO [41]

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Or reweighted or -- and because we run this amend and extend program every 2 years, what we feel from particular banks that are either coming into the country or are growing in their presence in the country, they will come to us and express an interest that they want to come into the facility. So I'm really happy with the group of banks that remain there and the group of banks that have come in. And I think we've got a really strong facility and a strong relationship with those banks. So I'm not trying to oversell it. It just -- it evolves over time like many other things.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [42]

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Sorry, Kevin. Maybe I can ask it a different way then. Is the pool of banks to choose from shrinking?

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Kevin Ball, Whitehaven Coal Limited - CFO [43]

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Well, you're going to see -- I think, on the thermal side, there's no real surprise there, Glyn, that the European banks left the market about 3 years ago. And they haven't been there. So we had a couple of those in the '15 refinance that left, and we had probably 1 or 2 that left in '17. And we've replaced those banks with other banks, typically Asian. So our syndicate has moved between 2012 and 2020. We started out here with an Australian -- basically an Australian banking syndicate with a small Asian contingent to really being balanced between Australia and offshore.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [44]

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Okay. But you don't see it shrinking further, or I guess it's too hard to tell at this stage if the pool's deep enough.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [45]

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Well, I think -- so I think, Glyn, one of the things that we did, and Kevin and his team's done very successfully now over 3 successive amend and extends here, so over the last 6 years, say, for instance, is we have -- we think there's great merit in aligning our business to our end-user markets who fund us, who invest in us, who are large members of our share register, who are equity members in our projects, who sell us equipment there and where we sell most of our product. So we see great symmetry there. And so we brought more Asian participation into our syndicate over those 6 years, and we think that -- we think we'll further migrate that. It doesn't mean people leave, but there has been reweighting over time as we brought others in who are knocking on the door. I think we'll continue to do that.

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Operator [46]

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Your next question comes from Paul Young from Goldman Sachs.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [47]

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Okay, Paul. No? We lost Paul.

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Operator [48]

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He might be on mute. Okay. Paul, you must have muted your phone.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [49]

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Another question while we wait? No?

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Operator [50]

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Okay. Unless there's any other questions, I'll be closing the question-and-answer session and handing over to you, Paul.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [51]

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Well, Rachel, thanks very much for that, for everybody. And of course, if there are any questions that you haven't been able to ask, whether you'd like to explore from the previous questions asked, feel free to contact us. We'll -- I'm sure we'll see many of you over the next few days, anyway, as part of the results rollout. But I appreciate you again making the time, and I look forward to catching up with you all soon. Thank you.

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Operator [52]

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Thank you, Paul. That concludes the Whitehaven Coal interim FY 2020 results. Thank you once again for joining us today. You may all disconnect.