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Edited Transcript of WHC.AX earnings conference call or presentation 15-Aug-19 12:30am GMT

Full Year 2019 Whitehaven Coal Ltd Earnings Call

Sydney, NSW Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Whitehaven Coal Ltd earnings conference call or presentation Thursday, August 15, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jamie R. Frankcombe

Whitehaven Coal Limited - COO

* Kevin Ball

Whitehaven Coal Limited - CFO & Executive General Manager of HR

* Paul J. Flynn

Whitehaven Coal Limited - MD, CEO & Director

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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

* Hayden Bairstow

Macquarie Research - Analyst

* James Redfern

BofA Merrill Lynch, Research Division - VP

* Lyndon Fagan

JP Morgan Chase & Co, Research Division - Analyst

* Paul Young

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Paul Joseph McTaggart

Citigroup Inc, Research Division - Metal and Mining Analyst

* Peter O'Connor

Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining

* Rahul Anand

Morgan Stanley, Research Division - Equity Analyst

* Sam Webb

Crédit Suisse AG, Research Division - Associate

* Melanie Burton

* Peter Ker

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Presentation

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Operator [1]

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Hello, everyone, and welcome to the Whitehaven Coal 2019 Full Year Results Presentation. (Operator Instructions)

I'll now hand over to our first speaker, Paul Flynn. Please go ahead, Paul.

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

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Good morning, everybody, and welcome to Whitehaven Coal's Full Year Results Presentation for 2019. Thanks very much for dialing in and making the time to join us.

I'm joined here by the usual members of our team, participating in these calls, Jamie Frankcombe, our COO; Kevin Ball, our CFO; Ian McAleese, our GM Investor Relations. There is, obviously, a standard format to this, which we followed in the past, and we'll continue with that convention. So I'll go straight through into our discussion.

It has, as you all know, been a very good year for us, and we've recorded a number of high watermarks and records, which we'll highlight during the course of this presentation, and I look forward to the discussion that we have at the end of the presentation itself.

I'd draw your attention to the disclosure note there on Page 2. There are a number of forward-looking statements in our presentation. And it does also cover the reserves and resources statement implied as well.

So if I move over to our highlights page, you can certainly see that 2019 has been a good year. But I'm sure many of you knew that already, given the course of our reports through the quarters as they've unfolded. It's been a very good year. And this has been our best financial year ever. Safety has done well all year, which is very pleasing. So we've had a year-on-year improvement, which is good with the TRIFR down at 6.16, which is a credible result. We have produced record ROM tonnes at the equity level of 18.4 million tonnes for the year, up on 17.7 million for the previous. We sold 17.6 million tonnes at the equity level, slightly up on last year.

Our underlying EBITDA numbers has cracked the billion-dollar mark, $1.04 billion for the year, which is a record for the company. And accordingly, we've recorded our highest ever impact at $564 million before significant items.

Consequently, we have declared a record dividend, which is very positive also for shareholders. We'll speak to that a little bit more, but a total dividend of -- and our final dividend for this year at $0.30 per share. That is on top of the $0.20 that we paid at the interim. I'm sure you'll agree that 2019 has been a very productive year for the company.

Over on safety, as I say, year-on-year, it's been very encouraging. We certainly work very hard to try and maintain momentum and reduce the number of incidents in our business, and we certainly done that, down to 6.16 down from 6.91 in the previous year. But with a growing business and a business increasing in complexity, this is a constant challenge. And more recent tragic events, not just in our sector, but in related sectors as well, serve to remind us that we must be ever vigilant to ensure that everybody gets to go home safely. And these are pointed reminders for us to redouble our efforts to achieve this aim.

The financial highlights, as I say, have been very strong. So look at these numbers, we feel heartened that we've been able to deliver a pretty good result for the year, both EBITDA and NPAT, as I say, incrementally better from last year. And the results of pretty good pricing for most of the year. Solid results pricing-wise are certainly evident for the first 3 quarters, the final quarter moderating as we mentioned.

This cascades through the financial outcomes for shareholders, as I've said. We are declaring a $0.13 per share ordinary dividend, franked to the extent of $0.50 -- 50%, sorry, and a final dividend of $0.17, a special dividend which is unfranked. That takes our payout ratio to 88% of our underlying impact, which is a very strong result, up on last year's payout ratio of 80% of impact.

On this page, you'll also see net debt, I'm sure which will be the topic of some discussion at various points, although not because we've got much debt, but more because various companies will be transitioning the IFRS 16 leases standard. And we have provided some extra detail in our appendices here for you to get your head around that. So I know Kevin's on standby to answer any particular questions about IFRS 16.

Over on the P&L. Those good average prices, as you would imagine, have led to a high watermark on our revenue line as well, $2.5 billion nearly, which is -- was certainly an outstanding result. As I said, that leasing question, Kevin is happy to deal with this after the meeting, to deal with the depreciation, amortization. And the numbers that we're comparing against here are obviously rebased numbers given the application as an early adopter of this standard.

Now there are a number of adjustments we took in significant items this year, not particularly material in component, but they are the product of a revision of closure cost associated with regulatory changes that was subjected to for rehabilitation. This covers both producing assets and closing and assets which are closed. In the case of producing assets, these are just balance sheet adjustments, which we've made. In the case of closed assets, such as Rocglen, Sunnyside and some other legacy properties that have been conferred to us by our predecessor organizations, those charges have been taken through the P&L, and you can see the after-tax impact of that, $37 million.

I'm over on Page 10 now. And to say the average revenue up for the year. Now this has been enough to cover cost increases during the quarter. And I know that media commentators and other parts of the economy are worried about the lack of inflation for the broader economy, but that's certainly not the case in our sector at all. So I know there will be plenty of questions about what we're seeing there. But inflationary pressures in all quarters of our business are quite significant and at times a multiple of these low national average numbers that we constantly hear spoken about in the media.

Narrabri obviously, is operating in deeper ground. So we have experienced additional cost, as everybody knows, in relation to that. And 2019 does fortunately mark the last year of the 100% out of pit dumping that Maules Creek has -- been a necessary piece of their operating plan to get this mine to its full size. So in this new year 2020, we will see in the second half, the commencement of some in-pit dumping opportunity, which gives us some alleviation of cost.

Which brings us to Page 11, and I'd really wanted to categorize the discussion on cost under a couple of headings here, and if I try and allocate now between strategic, structural and market-related factors. As we've spoken about during the course of the year, we know we changed to a 3-product strategy at Maules Creek, which does mean that we're washing more. But this does lock in our premiums for our thermal product, and it certainly utilizes the available capacity we have at our big plant, which can wash the entirety of the production of Maules Creek or none at all.

Narrabri, as you know, has been operating in deeper ground, and so cost per tonne have increased. And this is a structural aspect of this business, although our productivity rates have been improving, which is good. But the reduction of those structural costs really won't be evident until we flip over to the southern side of our mains and come back into that shallow ground on the eastern side, and that's a couple of years away.

Market-wise, fuel and currency, as a general statement, have not been our friend during the course of this last 12 months. But obviously, currency has moderated in more recent times. And Maules Creek, as I said, is not really at its most efficient. In fact, it's probably at its most inefficient. But 2020, we'll see a change in that regard. Labor costs, as I mentioned, are tight, in a tight market. Any service that we're procuring at the moment, which has a high labor component, we're certainly seeing inflationary impacts.

We did produce a few less tonnes than we had planned to. In this current year, we would like to produce some more. So we do actually have a little bit of underutilized port capacity, which is evident in our cost base in this past year.

Looking at the balance sheet. I'm not going to spend too much time on this because it's looking pretty good. As you all have observed, the IFRS stuff, I won't cover at all. But we really do have a well-positioned balance sheet, which is ready for the advent of our growth projects. And we certainly have the funding capacity to devote to the needs of Vickery, Winchester South and of course, the Stage 3 project at Narrabri.

On 13 just speaks to how we deployed the capital for the year. And the great proportion of this, obviously, is dividends in terms of cash paid during the course of the year. We have $496 million -- $500 million going out to shareholders, which is a tremendous result.

I'll just call out a couple of little points here in the investing column just given the size of that. Debt reduction and lease payment speak for themselves. But in that investing column here, we've got Winchester South, which you know, we paid the final payment of that, converted in Aussie dollars, of course. Included in that number there is the stamp duty associated with that last acquisition, the Winchester South property.

We've got a range of initiatives there. You can see with the sustaining CapEx. We've got mains development at Narrabri. And we have spent some money already on Narrabri South on the southern side of the mains and also some limited capital as well for mains development on Stage 3.

Again, just turning over on Page 14, the returns that we delivered over the last couple of years, which have been quite significant. And in aggregate, we're talking about a $1.10 a share over the last 2 years, which is substantial contribution into shareholders' coffers.

Over to cost guidance. And as you know, over the last few quarters, we've been trying to corral our various contributions to guidance into a single place. And so this is probably a better expression of our cost guidance here for you for the 2020 year. ROM production, we've struck guidance in terms of 22 million to 23.5 million tonnes production for the year at the managed level, and we have changed from managed salable coal production to managed coal sales. And the reason we've done this is simply because, over the years, what we found is there's been a lot of discussion in terms of reconciling from ROM to salable production. And that's obviously caused some confusion for many people just in terms of stockpile movements and so on, whether it's actually ROM, or whether it's product. And we thought we'd simplify that after having run around a number of you just to see how you use that data and whether or not sales would be a better guidance number for you to use. And so we've moved over to coal sales, and our target for this year is 20 million to 21 million tonnes in coal sales.

The missing piece of the puzzle that you will need to reconcile these things is obviously the yield to convert that ROM into coal sales. And so we have provided that in the schedule for the back of -- in the appendices here on a mine-by-mine basis, so you'll be able to work your way through that.

Costs for this next year are going to be a little higher at about $70, and a number of things contributing to that. Maules Creek is going through a transition, as you all know, into this in-pit dumping opportunity. But it's come off essentially the areas of the longwall coal and is moving now into a flat and broader pit structure. And so there is a transition that will see us mining at about 7 to 1 during this next 12 months.

There is no change in the life of mine strip ratio that we've been talking about before, and that you all observed 6.4:1 for the first 20 years. No change there, but it is a transition that the mine needs to go to. Tarrawonga moves to its life of mine average it at 10 to 1, which you're all aware. And Narrabri's entire production will be essentially under areas, which are preconditioned as a result of work we've done over the previous panels, and where we've experienced weighting, eventually taking a step to precondition. That essentially allows us to mine under precondition ground for the [party] this year. That does obviously come as a cost that unwinds. If you've spent it in previous years, it will unwind during the course of this year. And there's obviously a change out in November and December, as you all observe.

Capital guidance, I'm over now on Page 17. In terms of capital guidance, open cut guidance just in terms of breaking these numbers down for you in terms of cost per tonne. We're about $1.80 for open cuts; and underground, about $4.50. So the mains development for the year, as you can see there, 22 million to 26 million tonnes (sic) [$22 million to $26 million]. There is a small tail of this, which spills over into the next financial year '21, and that will essentially do the mains as far as the mining lease currently goes.

For growth capital, there's a number of different (inaudible) going on here. And we've got $50 million to $60 million essentially with growth projects, if you like. At Tarrawonga, we've got truck upgrade, which everybody is well aware of, and we've got an autonomous fleet rollout, which we hope to commence at the very back end of this first half of the year.

Winchester South and Vickery have got study-related works. We've got some Narrabri mains, about $20 million, also to spend there. So there are a range of projects, as you know, which are going on, which will consume a good amount of capital during the course of this year. There are some land acquisitions, which we've tidied up for the Stage 3 life extension at Narrabri just in this new year. So that's nice to have all those things settled.

And one item, which I'll call out just so we know which may actually not get spent in the year, but it is included in the growth projects number. There's about $40 million to $50 million of CapEx that we've budgeted for Vickery, the Vickery construction, which is largely dependent, obviously, on the timing of an approval for Vickery. So that one is, obviously, it's committed in terms of our intent. But its timing may change given that the approval is not something we can directly control.

If I move over to our growth section. I'm now into Pages 19. We thought we'd just talk about the pipeline, firstly, growth at (inaudible) all together. And I think this is an important area to focus on, because over the next 6 to 12 months, we're actually going to bring to life a lot of the details and color of our pipeline of projects, which really does mark us out as a significantly different company, not just from coal companies, but for resources companies more generally. So this time line helps you with the chronology of the various highlights of projects, which are coming to the fore during the next few years.

But in terms of over the next 6 months to 12 months, in particular, I just thought I'd call out a couple of things, which you should keep an eye on. Obviously, we'll -- with Winchester South, we're going to bring down our first statement of reserves. At the time that we do that, that will allow us to highlight also estimates of at least a preliminary feasibility level for construction costs, for OpEx. And of course, in doing so, we'll also be talking to you about the coal quality split. I know most people are curious to see how that's looking.

During this period also, we should have a public hearing, the final public hearing for the Vickery project, which will be great. And all things being equal, that should happen in the next, say, 3 months from now. As I mentioned before, AHS, the Autonomous Haulage System, rollout will commence in a small form, hopefully by Christmas in fact. That will be a very encouraging thing to do, and I'll talk about a little bit more about that shortly.

And of course, with Vickery we'll highlight a greater level of definition for our construction cost and our operating cost and operating plans there at Vickery. So there's lots to do. We are doing lots, and there's lots to observe over the next 6 to 12 months. As you see, this pipeline of our starts to materialize in concrete fashion through these various projects.

I'm flicking over to Page 20. And you've seen this chart many, many times before, so I won't really focus on it too much, other than to say that there is a significant transition that the company is going through now. And that is that we're currently, as you know, 5 mines producing about 23 million tonnes. And then over the course of this period, we're going to transition to 4 major mines producing nearly 40 million tonnes of rock. So it is quite a big change that we're going through, very exciting and lots of work going on many fronts.

But that chart's not solely just about new projects coming on. There are optimization of existing mines, as you know, which I just really want to focus on briefly. So over on Page 21, Tarrawonga, as you know, expanding to 3 million tonnes, the new fleet in the course of arriving as we speak.

Narrabri Stage 3, a significant project here. And that is a life extension, as you know, will go out to 2045. The prize here is, obviously, these 8- to 10-kilometer long panels that we'd love to be able to exploit, but it is a significant approvals effort that's required to do that. Underground mining is less contentious these days, frankly, than the open cut mining in term -- from an approvals perspective. So I think it's just the passage of time necessary to execute on this, but that's going to be a fantastic result for Narrabri.

One of the key objectives here is not just to get into 8- to 10-kilometer panels. But obviously, when you flip over to those southern domain in the eastern side, in particular, with those long panels, you can stay in that shallower, cheaper ground for longer, which is very attractive to us. And Maules Creek is not just one project here, 16 million tonnes. It's actually 3 optimization initiatives that will go on there.

And in terms of the chronological impact of these things, I thought I'd just call them out. So as we mentioned, AHS, we're looking to see that -- the early beginnings of that this side of Christmas, which would be fabulous to see that. The second is transitioning in that second half with some in-pit dumping opportunities starting to open up there, which will be very encouraging to see. And the third is the submission of the actual approval to go to 16 million tonnes. And we expect to see that probably in about 12 months' time. But the combination of those 3 elements will really put the wind into a Maules Creek sale, this fantastic asset, but we just think there's plenty more that it can do to be able to attain its best.

So back to the projects themselves. Vickery, and here's another time line here, which just depicts the milestones there for Vickery at a high level. As I say, our key objective here is an approval, [full decree] over next 12 months, but we have to acknowledge at least there is a highly uncontrollable component of that. That is the workings of the IPC, which we must work with. But we'll say construction falls into next year and the ramp-up to the 10 million tonnes ROM will take 4 to 5 years.

Just over the page, as I say, the IPC being the key thing for us. Just in terms of where our status is today in this process, many of the Vickery watchers will have seen, maybe even read, the IPC's report to the Department of Planning, which was an aggregation of the early issues report, the public hearing depositions and submissions that came then after collated into what was quite a voluminous report back to the Department of Planning. The onus is then on us in planning to work through those matters. We're about a week or 2 away from finalizing the submissions and responses to each of those matters raised, which puts the ball back in the court of Department of Planning. They will then write a report, a determination report, which we'll attach to it draft conditions, which we believe will be the subject of the final public hearing for this project. As I said, love to see that out in the next 3 or 4 months in order to be able to advance this project through to approval based on what we know. First quarter calendar 20 is our estimation.

Over in Winchester South, indicative time line here for you, again, just [4] milestones here. During the last 6 months, you'll note that the project has been declared a coordinated project, which is very positive. We did declare during the course of the year our first resource, 530 million tonnes. And as I mentioned at around the time of our AGM, somewhere around there, we'd love to have the reserve declared as well, which would be another positive step forward. We have conducted, as you know, a large campaign of large diameter drilling for the purpose of defining the quality at Winchester South, and that work is now being analyzed in labs and tested for its coking properties and so on.

We have got an ongoing drilling campaign there now just to define the structural aspects of the geological model there to wrap our mine plan around. That is ongoing and quite a significant number of holes being drilled there as we speak.

But what I can say from the early examples of the work that's coming out is that thankfully and predictably, the Leichardt and Vermont seams is -- as are mined in the regions around us, certainly are predicting to do -- deliver the same types of quality outcomes for us, which is very encouraging. And as we know, at a 5:1 strip ratio, this is a pretty shallow deposit.

Over on our operations now, now that I've covered off our growth projects. The sales, as you know, you've seen that during the course of the preceding quarter. So I won't labor this too much other than to say, there's a pretty good and consistent results year-on-year through our portfolio. Our sales mix hasn't really changed too much on the thermal side, at least. But mix is actually quite nicely balanced, and India has come to the fore now as our largest met market, which has been an interesting development during the last 12 months. ROM production again on 29. We won't really belabor that too much as you've seen these numbers during the course of the year.

And I'll move over to Maules Creek. Obviously, the ramp-up continues there with the [final numbers up] this year. The total Maules Creek this past year, 11.7 million tonnes, was a good result, a little bit less than what we would have liked to have. As I mentioned, Maules Creek is a hot bed of activity with those various projects going on, and the quality, the coal continues to be well received in the market, and our premiums have been increasing year-on-year and serving us very well, particularly the time when we haven't been particularly motivated to chase semisoft sales.

Over at Narrabri at 31. Finished the year well, actually, it was a very good quarter, given that it had some troubles in late January with a couple of roof falls, but certainly recovered well and delivered a respectable result at 6.4 million for the year. Like Maules Creek there's lot going on there, the truck cylinder replacement project will occur during the change out in November and December, and we've allowed couple of weeks for that on top of the normal change out to ensure that, that gets executed well. The Stage 3 project, as I say, is a life extension. That will allow us to mine those long panels, and we're certainly expecting big improvements on the cost base in that shallow ground as a result of that project.

The Gunnedah operations delivered a consistent result year-on-year. But sadly, production at Rocglen has come to an end with the exhausting of its reserves. We are moving into rehabilitation project, which will run for another 18, 24 months with a small crew of our people there, very keen to make sure that we provide a very good example of contemporary rehabilitation at this site.

I'll move over now to Page 34 and talk about our ESG and community aspect of (inaudible). As you all know, we do treat ourselves as a local company, I think many companies in our industry do, but we do focus on the local community. And this page really does summarize that social contact that we have with the community in which we operate.

And very simply, this is the notion of our view on sustainability in terms of how we interact with our stakeholders. We develop long-lived mines, and we operate them well. We're creating permanent jobs and procuring services locally. We spent over $300 million in local services over the last 12 months between Tamworth and Narrabri, a large contribution.

And we contribute on a number of other social levels as well with targeted contributions that we make. We are building capacity in the region where we operate, skills, infrastructure, enabling capacity that will obviously benefit not just the projects that we're running, but the community more generally. And in doing this, we do foster and hope we engender transparency and support with local partnerships throughout the community. And this builds further strength in the community.

We have complemented this by a safe work track record and responsible environmental stewardship of the large lands that we own in the area. And it's through this that the community gains confidence about the legacy that we're leaving with more skills, more infrastructure and a good, responsible operator and steward of the land in which we manage.

Now that sounds great, and may sound like words, and then we may be just convincing ourselves. But if you flick over the page, and you look at Page 35, we actually do take the temperature of the community periodically, and we can see over time that the proposition that we represent as a company is resonating with the local community. And you can see over time, we've converted negative people into actually people who are actually accepting of our presence. And in fact, some are even more positive than they were in the past. That's been a really good effort, I think, from our team to ensure that the local people see the benefit of our presence there. And I think this was tangibly demonstrated with the submissions and the hearings that surrounded the Vickery project.

You all know that the indigenous community component is a key piece of our focus in the community because that is the area where the greatest disadvantage in the communities is exhibited. And I think we developed here what is really an industry-leading approach to indigenous engagement. I am very proud of the results that we've been able to attain from it.

I'll move over now to the outlook on coal, and we've always got a few slides on this, but I won't belabor this either too long, other than to remind you of some important references which underpin the comfort that we feel in growing our company the way we are. I'm over on Page 38. The new policy scenario we know is a central scenario of the IEA's World Energy Outlook. Certainly denotes that coal's going to continue to grow in absolute terms. Although proportionately lower, it's a bigger pie given the enormity of the energy demand that they're predicting over the outlook period to 2040.

Another corroborative piece of information is obviously the very good piece of work done by BP, which is their Statistical Review. And they've also noted that coal's had a bit of a surge in 2018. Growing at a rate, which is twice the average of growth over the last 10 years, which is a reflection of what we see as a company in terms of our customers and what they're engaging in with new investments in coal fired generation.

That also speaks to Page 40, where we see continuing growth and again, coal continuing by all estimates to play a very important role out to 2040. Clearly, the center of that growth is Asia. And whilst we are engaged in more uncertain times at the moment, Asia continues to be the growth center of the world. And as you can see as people are striving to attain the types of living standards that we enjoy, obviously, that's driving consumption of energy. And really, in the end, as these charts depict, all sources of energy will be required in order to meet this extraordinary demand, and you can see in Southeast Asia, in particular, coal demand during the outlook period is going to go through tremendous growth and is essentially doubling through the outlook period.

So that really brings us to the wrap-up of what's been a very good year for us, as I say, a very good financial year. Certainly, very good results, high watermark for the company financially and high watermark in terms of distribution of returns to our shareholders. We are in an inflationary environment in our industry, despite what I mentioned earlier about the broader economy not experiencing the same. We are. And in this year, we must focus on our cost base, and we have a number of different cost out and business productivity initiatives already in place to try and do better than the cost guidance we've given you for this year. There are a number of aspects of that, which are temporary, as I mentioned, and they will moderate over time. But we certainly need to be focused here and now on our costs.

We've got to advance the growth and optimization strategies, not just over our existing assets, but obviously, our 2 key development projects in our pipeline and make sure that we execute well there. Vickery, we are expecting an approval during this next year, and the formation of a joint venture during that period is certainly something that we're working on and considering all the options in terms of how we want to optimize the benefit of Vickery for our shareholders.

And Winchester South, of course, continues to gain momentum and is accelerating quite quickly because the government has definitely put the heat on us to accelerate this as quickly as we can, and we're completely aligned to that outcome. So we're working very closely with the Queensland government to ensure that we can deliver the best possible outcome for our shareholders as soon as possible.

So that really wraps up. 2019 has being a very good year. Thank you all for your support and for taking the time to dial in today. And I'll hand back to you, operator, for the commencement of the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Sam Webb from Crédit Suisse.

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Sam Webb, Crédit Suisse AG, Research Division - Associate [2]

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If we just start with Maules quickly, please. I'd like to understand how long you're going to be at this elevated strip ratio, not just in FY '20, a '20 elevated strip over 7:1. And then can we assume if you drop back to Maules, your normal long-term run rate rather costs then subside beyond that. And also to get to 16 million tonnes, what kind of capital should we be thinking, if much at all, to get to that number?

And then just quickly on the special dividend, another really good return. To what extent, if at all, were buybacks entertained? And when you think about capital management, how do you think about a normalized through cycle or whatever metric you use for your balance sheet at the moment? Is it the 4% gearing ex the lease liabilities? Or is it the 8% when you include them? So just a bit of color around that, if you could please.

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

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Yes. Thanks, Sam. Let me try and answer that for you. So the transition that Maules makes at 7:1 strip ratio. That's about -- that's a full BCM more than what we experienced last year. So I think you can basically round that out, if you like, just at the mine level, and use 450, say for instance, as your BCM rate, and that will give you the impact of that.

This does start to moderate in '21. And about '22, we actually think we're back at the normal life of mine strip ratio at 6.4. So I think if you drew a straight line from now to then, it won't be 7 in next year at that full level. It will moderate, but in '20 will be at the 7 level. So that will give you a view of the cost reductions that come with that.

At the 16 million tonne CapEx rate, we're not expecting material CapEx to be required there. There's no doubt there's a little bit more. If we're going to get 3 more million tonnes of coal, there's going to be some coal moving capacity that we need to gain from that. Our view is that 16 million tonnes in terms of overburden work, we can do with the autonomous fleet, the existing fleet that we have. So it's really just coal moving capacity that's required. And there is also, given our infrastructure is set up for 13 million, there is a study that's going on at the moment, which is sizing the capital requirements for -- in addition to our bypass circuit, so that we've got more coal handling capacity to be able to accommodate the extra coal.

Jamie, you want to add to that?

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Jamie R. Frankcombe, Whitehaven Coal Limited - COO [4]

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No, I think you've covered it. I mean, it really is an opportunity to utilize the additional capacity that will be provided to the overburden fleet through the implementation of autonomous operations. So since the equipment, as Paul said, it's coal mining fleet and, I guess, we'll squeeze the infrastructure as much as we can to get the capacity to produce the -- or process the (inaudible), yes.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [5]

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And Sam, your third [limb], I think, was the buyback question. Yes, the returns are very good, very happy with that. The Board has taken a lot of time to consider the various channels through which we could return surplus capital to shareholders. And there's no doubt that's certainly one of the ones, which is on the table.

In the end, those deliberations concluded that this was a simpler route in order to just manage our needs in this current time. But I have to say, this is an ongoing discussion for us. And on a 6-monthly basis, obviously, given the timing we've talked about for capital outflows for Vickery, even though we put $40 million to $50 million in our projections, that is approvals related in terms of its timing, as I mentioned.

So we think there's probably another 12 months here of significant returns that we need to deal with. And so the Board is looking at it very closely. So I think it's one of those watch-this-space moments. And certainly, the Board will have more to say around this at the AGM in terms of what their deliberations are. And what -- and I'll set some expectations then for that interim and final over this next 12 months.

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Sam Webb, Crédit Suisse AG, Research Division - Associate [6]

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Did you guys actually have a gearing target or a net debt target anymore or not really?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [7]

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We certainly will -- gearing at 15% is what we've said previously. And -- but we've said repeatedly that we're -- during this phase, where we've obviously got some capital surplus to our needs, we're not going to do too much with this extra money, so we'll send it back. That was the statement that we made, that 15% is in terms of through-the-cycle-type level. We're going to give that a good nudge, as you would imagine, with Vickery and Winchester South. And so for a temporary period, there's going to be gearing in excess of that level.

What we're just working through is just the timing of all these things. We watch, unfortunately, Vickery with the New South Wales regime, perhaps not keeping to the government's time line there, whereas, we see Queensland accelerating. And so we're just trying to balance all those things out and in the interim, as I say, just returning to shareholders everything that's surplus to current needs.

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Operator [8]

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Your next question comes from James Redfern from Merrill Lynch.

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James Redfern, BofA Merrill Lynch, Research Division - VP [9]

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Just want to ask a question on unit cost, please. So unit cost for a while had been rising maybe the past 5 years. And this is -- for FY '19, you've outlined [6 or 10] of [structural and] strategic cost drivers. Given the investment in parts, should we assume a gradual increase in unit cost going forward, given the strategic and structural costs that you outlined? And also, obviously, Vickery is a higher-cost project that will come on in a couple of years, so that's going to increase the cost base even further. Is that a fair comment?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [10]

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James, thanks for that. Yes. Look, I think the industry's costs have been going up. There's no doubt about that, and we're no different to that in the operating environment that we are. I would say to you, though, that at this level, we think that this is probably -- as I say, Maules Creek in this current year will change. And it's reflective of Maules Creek, such a big driver of our business, obviously, being nearly 50% of the production. What goes on there, obviously, is very influential on the cost overall.

Narrabri, I don't see any reason for additional costs, I'll have to say. And I have to say also for Maules Creek, when you look at the costs at this level now, we don't see any reason for that to increase either. So hopefully, that answers your question, where is it going. Our view is it's coming down. So we need to get over this hump of no -- it was complete out-of-pit dumping. We need to get over that. And you can only do that by transitioning to in-pit dumping and shortening up hauls. And certainly, we will see that during the course of this year, but it is back ended in terms of we reach pit bottom and then really start to exploit material cost reductions in that sense.

We have said in previous announcements, that it will take 5 years to transition to 100% in-pit dumping, and that will generate significant savings for us. And of course, the rollout of the autonomous project will also bring costs down. So I did make the comparison of Maules Creek being sort of like a pimply faced teenager at the moment, it's not the full adult yet, but it's certainly on the path of being able to deliver that. This year, we just need to work our way through this year to get on the other side of it to see some of these material cost reductions coming to the full.

No reason to think that Tarrawonga should be any expensive than what is. So no problem there outside of general inflation in the industry. You do highlight Vickery as being higher cost. There's no doubt about that. And all the work that we're doing is all about optimizing Vickery to ensure that we can bring that cost down. The success of an autonomous rollout at Maules Creek will be instrumental in lowering costs at Vickery, given the proportion of its total cost that's going to be spent in moving dirt. And we see the AHS opportunity there as being significant for Vickery to bring those costs down.

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James Redfern, BofA Merrill Lynch, Research Division - VP [11]

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Very good. Just one quick one, please, on the potential sale down of a potential stake in Vickery. Just wondering, are you still having discussions with various strategic joint venture partners? And just update on the timing of any potential sell down.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [12]

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Yes. Look, we have been discussing this with potential parties, and they remain very interested in it. In fact, they like the work that we've been doing and like the revised version of Vickery, if you like, the extension project. So that's very encouraging, but they're sort of not that encouraged, I have to say, about the time it's taking at -- nor are we, that the government is taking to consider this.

We essentially feel like we've lost 6 months, unfortunately, with this IPC process. Unfortunately, they haven't closed out any issues. There'll be no new issues raised of any import, I have to say. So there's -- I suppose that's the silver lining here. But as a result of that, those interested parties are happy to wait until such time that we've got further clarity on rounding out this process. They all want a piece of the 10 million tonne scenario, they're not interested as a general statement in the 4.5 million tonne currently approved project. So I think that will move out more in line with the approval time line.

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Operator [13]

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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 [14]

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First question from me, Paul, is just wondering if you could be a bit more specific on Maules Creek costs long term. So if we look at the move to autonomous haulage, lower strip ratios in a couple of years and the inclusion of in-pit dumping, could you maybe be a bit more specific on the dollar-a-tonne-type savings just to help us model the asset? Is that sort of $5 a ton, something like that? And the next question is on Narrabri Stage 3, just wondering what the total spend for that is looking like, just to try and spread that through the model.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [15]

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Yes. Thanks, Lyndon. Good questions. Thank you. I'll try and deal with Maules Creek. Look, we haven't given any guidance yet on this, but we're very cognizant of the thirst for some information on this. So we look at this in 2 ways: The autonomous opportunity at Maules Creek combined with in-pit dumping, in our minds, is a significant cost reduction and productivity drive. So if I said, if you looked -- if you think about the other autonomous operations that we can benchmark, admittedly, they are really just -- they're only a few years old in their own context, in iron ore in particular, those people are sort of deliberating between, call it, 15% and 20% type productivity improvements from their fleet. I think 15% is a good number. I think coal mines are a little bit more complex, as you know, compared to iron ore mining. I mean they won't like us saying that, but I think that's definitely the case. So I think if you focus your attention around the 15% level productivity-wise, that's where we think this will go. And I've given you a number for the BCM rates. And so if you think about that in the context of productivity, you can calculate an improvement off the back of that.

We will be giving you more color on this. I know we've got our inaugural Investor Day coming up soon. So we will start to figure out more information on this, so we can help people digest and compute what they think the opportunity is here. But the combination of the 2, in-pit dumping and shortening up those hauls, and also lifting productivity with an unmanned fleet is a big prize, it's a big prize. Maules Creek is going to benefit from it tremendously. And you can imagine at 10:1 strip ratio at Vickery, even more so in that regard. So I won't put a prediction on it right now, but I'll give you enough numbers there to lead you to an improvement.

Narrabri Stage 3 capital, yes, look, there is some good capital that's going to go into this plan. Most of it's really just about development meters. I have to say that there is, obviously, related infrastructure, the conveyers and things like that.

But again, we'll come -- we'll start to step people through this a little -- with more detail as we bottom out our plans for this. We had highlighted in this pack some capital for mains development because we will need to do some of that during the course of this 12 months. So again, with the Investor Day, we'll have a broader presentation on this, which will spell out more clearly for everybody what we think the capital requirements over the next few years will be for stage 3.

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Lyndon Fagan, JP Morgan Chase & Co, Research Division - Analyst [16]

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And if I may, just a final question. We're obviously in the middle of a bit of a downturn, what would be the conditions that would see you not proceed with Vickery, and therefore, Winchester South? I mean, have you sort of talked about or looked at breakeven type pricing? Or is there a belief within the company that these are profitable through the cycle and let you go ahead pretty much under any scenario?

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

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Well, I don't think -- there's a 5:1 strip ratio Winchester South. I don't think there's any scenario that we've examined that shows that has not been profitable through the cycle. I mean, that's very good. I mean, even the yields, which are different obviously from the yields we experienced. At a product level, you're talking about Maules Creek-type costs. If you're looking at a product level comparison of cost, so if you said 6.4:1 of our yield versus 5:1 of the yields in the Bowen Basin, that's not a bad benchmark for you in terms of how you think about that. But obviously, the revenue line is going to be vastly different than the Maules Creek scenario. So that's certainly not concerned in that way. Of course, we want the [high key] process to be as high as possible.

For the Vickery, Vickery as you know, 10:1 it is more sensitive. Tarrawonga being 10:1 sailed right through that difficult part, cash flow positive at all times. You would say at the bottom of that, that wasn't enjoyable, but if we look at this at a broad sense between the semisoft product and the thermal product with its premiums, the number we generally use for our -- internally is about $75 average revenue between those 2 products, U.S. dollars, obviously. That's the products -- sorry, the project is quite healthy on that basis. In fact, when we look at it at a $75 average revenue, the payback is at 4 years when we look at it. So that's quite robust. So given the split of products we have there, that's a decent place to be.

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Operator [18]

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Your next question comes from Rahul Anand from Morgan Stanley.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [19]

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Look, first one is around the $100 million growth CapEx. Paul, I was just looking at this year's numbers as well and then on to next year. So you did mention in your presentation, $40 million to $50 million of the CapEx was likely for the Vickery commencement, and that's contingent on the government approvals. But just talking about the other $50 million, is that purely going into studies? Or is there any sort of early development works that are being undertaken this year and next? That's the first one. I'll come back with the second after you answer.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [20]

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Well, thanks for the question. Yes. Look, as I say, if you've acknowledged there is some variability in terms of the timing of that Vickery number. So we'll put that aside. You've got various elements of other CapEx going out the door. In terms of which numbers you are actually pointing -- are you pointing to the growth section? Firstly, just in terms of which ones, I can make sure we get our answers right.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [21]

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Right. That's the question.

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

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Yes. Okay. Well, you've got studies at Vickery and Winchester South certainly ongoing and drilling, but call that $10 million. So, for instance, in aggregate there. We have some lands that we purchased in this new year for the Vickery's Phase 3 project. So that's certainly -- there's 3 properties, Jamie, in aggregate? They we're sort of in the mid-teens. I think we've, in aggregate, those 3 that we spent there. Narrabri South mains, we do have that $20 million allocated to start developing mains for Narrabri South that comes in there. And then obviously, you've got -- not to be confused with Narrabri mains themselves. As I mentioned, there's another -- there's about $20-odd million, a little bit more than that in the final limb, if you like, of the Narrabri mains in our existing mining lease to be developed. Tarrawonga, thrown in there, there's some fleet money in Tarrawonga for the excavators. That is actually -- that will be refunded in this new year. We paid for the excavator in cash, but the leasing arrangement that's on actually takes a little while to process. So that $13 million will be refunded to us in this new year. So there's definitely a few things going on there. Does that help you?

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [23]

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And if I can follow up quickly. Yes. Yes, it does. I was just interested in that early development work at the South mains. So that's helpful. And in terms of the Stage 3 project itself, I mean, the previous presentations you did mention potential expansion of production as well. I mean, rough numbers, is there any early sort of indication around that? I did see a submission into the environmental approvals body as well that was sort of talking about 11 million tonnes to 13 million tonnes, but I was a bit confused just to how much production we're talking about in terms of the south side as well?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [24]

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Yes, that's a good question. We're currently approved for 11 million tonnes total run on a calendar basis. So we have highlighted the fact that we may need a little bit more, and that's what you were referring to I presume.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [25]

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Yes.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [26]

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Going through some analysis there, obviously, we've never bothered the 11 million tonnes already, as you well would understand. Certainly done 8 million tonnes in the shallower ground. And this will be better described in our Investor Day when we've got a few pictures and posters in front that you can point to. But when you just imagine, when you flip out to the southern side of the mains and you come back to the eastern flank where the shallow ground is, without a change out for 2 to 3 years in what we call the first of those long panels, panel 2 and 3, I think it's not unrealistic to expect 8 million tonnes plus in those periods in those. So there's essentially 3 years in every block at that rate. And we know, and we know those next 3 or 4 panels are actually in consistently good conditions. And so you would say 3 years in 1 panel and you say 3 more, so you're going 9 to 12 years at very good rates. And we also know relatedly when we're in that shallow ground, obviously, the secondary support and other costs associated with the current costs that we're experiencing in the deeper ground on the northwestern side of the mains, you wind all those costs back because that's just not necessary in that shallow stable ground condition. So when we're running at 8 million tonnes, your cost is below $50, which is obviously a price that we are speaking to get to as soon as we can.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [27]

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Great. Okay. And the second one, it has been talked about a bit in terms of the dividend policy. But I guess, given the growth options that currently exist, would you or the Board be considering something based more on a free cash flow basis rather than earnings going forward? Or us as analysts, I mean, how should we be thinking about it? I know the net gearing targets were asked before. But from a capital perspective perhaps?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [28]

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Look. Rahul, I wouldn't be encouraging that discussion, I have to say. Just given the fact that we know, that we -- the great position we're in with the significant pipeline that we have, it's going to require significant capital to get out the door. So I think we're doing pretty well to, in this year, 88% of the underlying impact, which is obviously a high percentage of the actual statutory impact after those adjustments, noncash as they were, is a pretty good position to be in. So as I say, the Board is considering this almost every meeting, just because it is obviously something that's front of mind for them, whilst we've got surplus capital, rightly so that they do spend time on it. But I think we've just got to be cautious given the size of the CapEx spend that we have. Any transition to, like you say, a cash flow derived payout ratio, look, I mean, that would only ever be a temporary phenomenon anyway given the size of the CapEx spend we've got over the next 5 years.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [29]

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Yes. So I'm just worried if -- because that cash outflow looks quite significant and the projects' opportunities are several. Just what the right way to think about the dividend then becomes, I guess?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [30]

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Yes, our view is, as we're going through the construction period, our view is that special dividends will become less likely, and you will revert back to our payout ratio between 20% to 50% of impact during the construction period.

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Operator [31]

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Your next question comes from Paul Young from Goldman Sachs.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [32]

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First question, Paul, on Maules Creek. You've already said that production for FY '20 will be mostly second half weighted. But I'm just curious about, if you look on a calendar year basis, you're permitted 13 million tonnes of random mine production, are you still targeting 13 million tonnes to calendar year, any calendar year and calendar '20 specifically? Or are you restricted due to the peak constraints, lack of order or the challenges of order at the moment, also the product strategy? That's the first question.

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

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Thanks, Paul. That's a good question and kind of an astute pickup we have to say. We have mentioned this a number of times, the difference between financial year and calendar year regulation. So Jamie might want to chip in here and have that one.

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Jamie R. Frankcombe, Whitehaven Coal Limited - COO [34]

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Yes. No, Paul, we are definitely targeting only the 13 million tonnes on a calendar year, and indeed, in a financial year. And as you can see with what we've forecast for FY '20, we do get a little bit out of kilter in that it's back-ended, more tonnes in the second half. To line those 2 up, it's not an advantageous position that we want to be in. Probably the better way is that we would see when we go forward with the approval of the 16 million tonnes, we'll endeavor to make sure that, that discontinuity, if you like, between the 2 years is corrected, if we can. But just to reaffirm, the position is 13 million tonnes within both of those constraints, the financial year and the calendar year. (inaudible)

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [35]

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Yes. Go on.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [36]

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The challenge here is just, as you have obviously picked up on, there's a differential between how the financial year struck versus the calendar year. It might be easier just to actually change the year-end. But that is as simple as that sounds to say, it's not that easy to do, looked at in the past. But the other thing which is actually quite influential here is, and you've been to the site a few times so you'll have seen this in some of the presentations. Obviously, the materiality of the Braymont seam being such a big piece of our seams, of our total reserve being about 30%. When it turns up, it's quite influential in our mining sequence in terms of how much coal you get quickly. And so that is the other one which we're trying to normalize to make sure, as Jamie said, that we can deliver 13 million tonnes on a year round basis be that moves on the calendar or financial. But that one is a variable that does through a bit of a mine planning challenge to our team on the ground there.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [37]

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Okay. Just sort of are water shortages impacting FY '20 guidance at all?

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

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No, they're not. No, they're not. But water concerns, as you would imagine, for everybody during what we understand to be, in inverted commas, a "history of record" the government tells us it is. It's a very dry time and setting a new record. So we're very conscious of this. We're working very hard on a number of different water security initiatives, which are well entrained. And just to make sure that if this persists for any extended length of time, then we don't have to do anything to modify production in any fashion. But no, our underlying assumption is that we'll be able to operate continuously throughout the year in the mode that we would like to operate without any constraints on water perspective.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [39]

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Okay. A question for Kevin on CapEx and cash tax. Kevin, just maybe on cash tax, you paid $15 million in cash tax in FY '19. FY '20 is a big catch up year. Can you maybe provide us some guidance on the catch-up payment and also prepayments in tax for FY '20?

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Kevin Ball, Whitehaven Coal Limited - CFO & Executive General Manager of HR [40]

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It's an interesting question, Paul. I think when you have a look through the financials, you will see that we were a little bit more successful in finding some more tax losses. So there isn't a catch-up coming. In fact, I think we're going to get some money back of what we paid to the ATO. But you're right, that 2020 will be the year where we start to pay tax. So that's why that dividend is franked to 50% or the ordinary component of the dividend is franked 50% because we do and expect, we do have franking credits and expect to build that franking credit balance through the year. But now we're a little bit more successful in rounding out all those numbers as we turn the corner and become taxable.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [41]

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Yes. So how do I proceed from here, Kevin? So what sort of cash tax rate?

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Kevin Ball, Whitehaven Coal Limited - CFO & Executive General Manager of HR [42]

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About 30%, Paul. You should assume we are paying about 30% to 32% in cash taxes moving forward.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [43]

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Right. And while I got you, Kevin, another quick question on CapEx. You only spent $3 million in the open cut. Looking at segmentals in the June half. I know you've guided to sustaining CapEx of $50 million, $60 million, which is a step-up. But is that $50 million to $60 million still too low on a medium-term basis when you look at what's required at Maules Creek, Narrabri and the small open cuts. I know you've got some growth, which could be considered sustaining, et cetera, et cetera. But is that going to step up again?

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Kevin Ball, Whitehaven Coal Limited - CFO & Executive General Manager of HR [44]

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I wouldn't think so. I think we talked -- I think that $50 million to $60 million that you've got in guidance here on the sustained, you should be okay.

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

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That's the amount of the...

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Kevin Ball, Whitehaven Coal Limited - CFO & Executive General Manager of HR [46]

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Open cuts.

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

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[180] open cuts.

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Kevin Ball, Whitehaven Coal Limited - CFO & Executive General Manager of HR [48]

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And the underground.

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

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[450] at the underground.

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Kevin Ball, Whitehaven Coal Limited - CFO & Executive General Manager of HR [50]

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Yes.

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Operator [51]

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Unfortunately, we've run out of time for the question-and-answer session for investors and analysts. We're now moving on to the question-and-answer session from media. (Operator Instructions)

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [52]

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Operator, if there were other questions there in the queue from investors, then we're happy to take those, I think, first. Just I don't want people just disconnecting now because they didn't have the time to get in the queue.

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Operator [53]

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Sure. Not a problem. Then I can go ahead with the next questions that were from the -- your next question then comes from Hayden Bairstow from Macquarie.

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Hayden Bairstow, Macquarie Research - Analyst [54]

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Just a couple for me. Just firstly on -- is the provision changed on the balance sheet? I mean, is there actually a cash component to what you're assuming now on closure costs? Or is it more of just an accounting adjustment? And then just on the growth plans. I mean, there's obviously, BHP talking about exiting coal, I mean, there's some assets now, more assets, I guess, out there potentially much bigger, obviously, for sale. I mean, are you starting to assess those options versus the current organic growth projects you've got as a sort of alternatives for capital?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [55]

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Hayden, sorry about the clunkiness just in (inaudible) it wasn't the intent. Look, provisioning, there's definitely -- the government changed some rules in terms to how they want provisions calculated in this regard. So it is a little bit heavy-handed we think at times, because they do take -- most of this work that we're doing currently at Rocglen and Sunnyside and, obviously, you have some legacy assets. We're doing it ourselves broadly. So we're doing it at [treaker] at what these rates are that they think should be considered or the approach that they would like you to take in calculating that estimate. But they are increasing, and I think generally, closure costs will increase over time. I don't think that's directionally an unfair thing to say. But they obviously are at the end of the life of mine. And so when regulations change in this regard, you are allowed to just provide for that as part of a balance sheet adjustment rather than anything that occurs through the P&L. But that small charge, obviously, on the closed assets had to go through the P&L, there's no enduring asset to recognize it against. So that's the answer to that one.

M&A, look, but we've got our hands full, I have to say, what I'm trying to do here, I suppose, is convey to people the fulsome nature of the body of work that's going on in the company. It's not just about producing our budget this year in terms of tonnes and sales, it's obviously, we've got a raft of projects going on around the company, which is occupying everybody. So we're very busy. M&A, look, I don't think M&A really is the first focus for us, to tell you the truth. I mean, we obviously look at all these assets as they come up. As you would imagine we do. But we've got pretty firm views on what's going to add value to the company and what doesn't. But I have to say, it would have to be something compelling for us to want to turn our attention or divide our attention rather than turn it away from, but divide our attention between the pipeline that we've got and executing on that to something that someone else wants to sell.

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Operator [56]

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Your next question comes from Paul McTaggart from Citi.

Paul, if you're speaking. We can't hear you at the moment, you might have your phone on mute.

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Paul Joseph McTaggart, Citigroup Inc, Research Division - Metal and Mining Analyst [57]

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You're right. I did. Sorry about that. I think I confused myself, I picked up the headset, and that made (inaudible) down. So, look, I just want to get a sense of your confidence about the met coal portion that will come out of Vickery, because you've still got, through time, a ramp-up to come at Maules Creek still. And that semisoft, especially our market, is not that big globally. So I'm just trying to get a sense of do you think the market is ready for another kind of big slab of production coming to the market in this market segment? And how should we think about -- I know you talked about 4 to 5 year ramp up to full production for Vickery if you get the 10 million tonne option. But how should we think about the sort of met coal portion?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [58]

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Yes. I think we -- for Maules Creek, because you're quite right, Paul. We're obviously -- we're doing about, on average, about 30% of production is going up into the met market. That's obviously slower than the ramp-up, we're just on our fourth year. So we would have hoped to have been around 50% at the end of year 5. So 1 more year. But look, I think it's been more modest, as you know, that the spreads between Braymont semisoft have been low, as is the case when the high coke market runs hard. Now, hard coke has come off quite a bit, and semisoft inquiries are picking up again. You're right. You're right, obviously, with Vickery coming on to ask that question. I suppose the way we look at it, we have a longer-term plan. But we look at it as essentially we have options to swing it into the thermal or the semisoft market given the quality, the premiums that we can attract for our coal. So whilst we absolutely would like to continue to drive into the met market, the number that I gave earlier around Vickery at $75 average revenue being still an attractive place to start this project up, if you look at that from a thermal perspective plus its premiums, it's well covered if we end up for several years being able to penetrate the semisoft market less than we'd otherwise plan to if there's some deferral in that penetration. But the market is growing, slowly though, I have to say, as you observed. It's not a huge market. That's absolutely right. But it is growing. And we see India being an increasingly significant part of this market, where it hasn't been in the past. But certainly, they've got a taste of Maules Creek now. So they're definitely -- have jumped up in the queue in terms of our priority mark as far as where we think that semisoft goes.

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Paul Joseph McTaggart, Citigroup Inc, Research Division - Metal and Mining Analyst [59]

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Okay. And I guess, to the extent you get a steel maker in as a partner, once you get all your approvals, that potentially ameliorates any of those concerns?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [60]

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Yes. Yes. That will be prize number one. I think in terms of -- we know -- we know the thermal will walk out the door. So that's less of an issue. The semisoft, we'd love to have a cornerstone player in there who validates that product quality. We know it's slightly better than Maules Creek coking properties in fact. Ash protocols are the same, but the coke properties look better. So that will be a nice place to be to do that.

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Operator [61]

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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 [62]

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Two quick ones. Just at the end of last year, for fiscal year, you've finished up with a lot of ROM stock at Maules Creek. [Does that effective] traded through your guidance. Just it seems like you've got your own guidance, you've got the yield and you've got the sales. Is that conversion of all that ROM stock sitting in there as well? Or is that in addition? And then just secondly, just at Narrabri, obviously, you painted the picture of you want to get into the South, you've got a lot of approvals you've got to seek to get the expanded South. If you fail, what does that look like? What does future of Narrabri look like without that access to the big longer link panels?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [63]

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Thanks, Glyn. So the ROM stocks, yes, we did bring a lot of those into the year, and they -- we're in the process of selling that now. So July has been a big sales month. We expect August to also be a big sales month. So they roll, they definitely roll through into that. I presume the math that you're doing is looking at that sales guidance, saying why isn't it a little bit higher? And that is that we do observe that, again, faction at Maules in particular, will be back ended. And so we expect to have good sized stocks at the end of this financial year also. Part of that transition is what Jamie was talking about earlier, and equalizing, if you like, the wrong production rate across not just the financial year, but also the calendar year. Yes. And one might argue there's a touch of conservatism in that number also.

On Narrabri, look, it's an interesting question that you posed. Actually, with the Narrabri, the Narrabri mine itself is a fabulous asset, obviously. So the current approved plan goes until 2032, I believe. And so there are some small modifications to that, that we would like to make in any event. So we'll do that in the ordinary course of things. But obviously, the prize is those long panels. I actually don't think the regulatory risk around the open cut mine and existing -- I'm sorry, the underground mine are high, in fact they're less than an existing open cut mine. And so it's a good question, but in terms of how we feel about the risks associated with that, it's pretty low. There's not many people around the area. The properties we now own that we will not completely cover, the exploration license, it's a pretty benign operation. You don't hear any fanfare about Narrabri mine. Generally, it doesn't raise any significant attention from a community perspective. So our perception -- our view of this risk is actually they are of lower order concerns. You just got to do the homework. I mean, the problem is here is that the volumes of work that has to get done for an EIS in this day and age are extraordinary. I don't think they are necessarily leading to better environmental outcomes. But you've got so many agencies across governments that just keep expanding, asking for our own separate view of the world and the things that they want to consider. And we've got -- so for the Vickery EIS, which is an approved project, but for changing extraction rate and a rail loop and an on-site prep plant extends to 4 lever arch binders. It's quite extraordinary what needs to be done there. So it's just really just a passage of time rather than any inherent risk for an existing underground mine. I think, as a general statement, it's lower than an open cut expansion.

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Operator [64]

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Your next question comes from Peter O'Connor from Shaw and Partners.

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Peter O'Connor, Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining [65]

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First off, congratulations on a record year. Three questions. Firstly, any read-throughs from the [dart] books IPC comments that came out in the last couple of days in terms of either what your comments were [to sell on] Narrabri or Vickery?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [66]

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No. And the other 2 limbs?

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Peter O'Connor, Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining [67]

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That was, secondly, Narrabri, and just taking Glyn's question, flipping it other way. If you do get the approval and you do go ahead, how do you address the risk of those loan books to the board? And how do the director, independent directors say, hey,

Paul, what if you get a [main deck] failure? What if you get a target failure? What if you hit a fault? Those loan books suddenly don't look so attractive? That's the second one. And third one, you've seen moves in semisoft coking coal price and PCI price lately with semisoft obviously taking it, ticked down a little bit and PCI catching up. Just thoughts on those moves over the last sort of month or so?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [68]

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Yes. Yes. That now got 3 limbs. Okay, read-throughs on [dart] book, I wouldn't say joint venture on any [darts] today. Nothing to do with that. Final reopen a closed underground mine, (inaudible), et cetera, et cetera. There are no parallels there for us with Narrabri. Your next question, flipping that around the early approval. I think those risks are understood and form part of the (inaudible) that the board has set already. I mean, geologically, I don't think there's any change in terms of risk support regimes that we anticipate necessarily. You've got capital, obviously, that goes in there with [base] and things. But I don't think that -- I think the Board has got (inaudible) and it's management's job obviously to make sure that we present the right assessment of those risks to them for them in order to make a decision.

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Unidentified Company Representative, [69]

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And as other operations are already in that rail. So if you look at -- and you would know, historically, Vickery longwall, for instance now 150 (inaudible) there's plenty of longwalls around 400 (inaudible) and the length of the longwall blocks, there's plenty of operations in Australia already and worldwide will get the sorts of lengths of 1 or more blocks that we're considering. So those risks are well understood.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [70]

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And semisoft, PCI, it's grades, look, it moves around a little bit semisoft as a phase the spreads almost widened out quite a bit so hence the inquiries we're now getting for semisoft. Our cut's moderated quite a bit. So I think the question here is that -- there's (inaudible) the backdrop of someone certainly here, trade-wise, around the place and let's (inaudible) that (inaudible). Someone needs to be on mute here, I think. Definitely one of the people.

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Operator [71]

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Your next question is a media question from Peter Ker from the Australian Financial Review.

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Peter Ker, [72]

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You mentioned at the start of the call that you're seeing inflation that's higher than the national average. And obviously, diesel is part of that. To what extent are wages part of that? And can you give us a kind of indication if wages are part of that inflation, how that's actually feeding through? For example, is most of your workforce unionized, and therefore, you've had renewals of multiyear ABAs? Or is most of your workforce not unionized, and therefore, they're in strong demand, and you're simply having to pay more to keep them?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [73]

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Yes. There's a combination of both of those answers. So generally, our workforce is largely unionized, and you're right, Peter, we do, we have rolled over enterprise agreements more recently, both the Narrabri and Maules Creek in the last 18 months to 2 years at reasonable levels, I have to say, which is great to be, obviously, (inaudible) accept the broader body of our workforce. But we do procure a lot of services. And whether that be roof support at Narrabri or drilling or any service that contains a significant labor component, we are seeing service providers turn up. And also, I want to get a return on whatever piece of equipment they're bringing to the site. No doubt about that. But they are actually exhibiting the signs of being able -- experiencing difficulty to find the skilled labor that comes with those services. And it's that component that we are seeing the inflation in. And so when you try and pick it apart, when you -- let's just say you renew a contract for a drilling service provider. We know what the drill rig costs and we know what the consumables are that go with that contract. And then, but when you look at the rates they want to charge you, there's definitely a big labor inflationary component built into these things where they are actually providing you the service as opposed to a dry hire basis.

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Peter Ker, [74]

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And we keep hearing about a lack of wage growth in Australia for some of these most in-demand jobs that you employ or that you come into contact with through contractors. Can you give us an idea of what sort of inflation, like, is it 5%, 10% that you're seeing in these sorts of jobs?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [75]

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Yes. Yes. No, look, we see that it is a national phenomenon. Obviously, there's a discussion about the lack of inflation. And years ago, everyone was scared of inflation, now we want some, well, we're getting it. And we now, (inaudible) I mean, when see the underlying labor rate inflation in bidding these services that we're procuring, not in our own people, but embedded in these services. That's anywhere between 5% and 10%.

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Peter Ker, [76]

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Okay. And I appreciate that debt has been part of your growth plans for Vickery and Winchester for a while. But we seem to be moving into a very low interest rate period. Is that making you more likely to use debt or changing your thoughts about what type of debt you use for that growth?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [77]

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Well, Peter. We don't have any particular change in mind there. And we're well banked as a company. So we're very pleased with that. We've got a very supportive syndicate, which services our needs well. Don't see any need for equity in this environment in order to execute on our growth pipeline. So no change in our scenario at all.

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Peter Ker, [78]

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And I guess, the implicit in the big shareholder returns you've done today, this idea that you have great confidence that debt will be available in a few years' time if you need it, want it for something like Winchester. Can you give us some color on where you expect the future of lending to coal miners will come from? Because, obviously, the juxtaposition is the constant cavalcade of financial institutions who come out saying, we're no longer lending to coal. So is it U.S. debt markets? Or is it specialists? Or is it corporate bonds? Where do you see the future of debt for coal miners?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [79]

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Yes. Peter, we can only speak for ourselves. And as I say, we're very well banked. I think that is a product of good performance over time. We've obviously required significant debt in order to build Maules Creek, and we spent that money well and repaid that money quickly. And I think that track record is what has stood us in good stead with financial markets. We have no lack of interest in people wanting to participate in our development future. And that's very encouraging for us. So we acknowledge the discourse that you're referring to, but when we look at our experiences as a company and how we feel about the prospects for capital to support our growth, we feel very comfortable.

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Peter Ker, [80]

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Okay. No probs. And one that we're asking a few CEOs, perhaps it doesn't affect you guys too much because you're not a retail counter-facing company. But do you have any view on whether the RBI should be cutting down below 1% to kind of, I guess, stimulate the Australian economy?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [81]

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Yes. Look, we don't have a view on this, Peter. It's just really not our focus. We're obviously 100% exporter. And that alpha is actually on the destinations where we sell our product.

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Peter Ker, [82]

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Fair enough. And just finally, the ACCC were out talking last week about a proposed merger between 2 longwall equipment providers, Cougar and Bis Industries. And the ACCC put up a preliminary red flag on that merger because apparently it would be the biggest provider and the second biggest provider coming together. ACCC said that they did that red flag because they heard concerns from coal miners. I was wondering if you guys were an example of the coal miner who were concerned about this merger. And do you have any color you'd like to add to that?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [83]

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Peter, we've got nothing to add there. We're not engaged in that discussion anyway, sorry.

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Operator [84]

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Your next question comes from Melanie Burton from Reuters.

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Melanie Burton, [85]

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I have got 2 questions. Both of them are a bit related to Pete's question. The first one about jobs and jobs inflation. We are hearing in the mining industry that there are certain jobs, obviously, where you are seeing a skill shortage. So I wanted to ask you, do you think that there's enough education pathways in Australia that are providing sufficient skilled labor in the different areas? Do you think that, yes, do you think that we're teaching the younger generation the skills that they need to be employed by the likes of you guys?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [86]

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Thanks, Melanie. Look, that's a really important question. I think, I suppose you've got to look at the context of the point in time we're in. And what we think is causing this tightness in labor that we need is not just an industry which has been running pretty well across resources, generally. Not just coal, iron ore, obviously, running very hard, which has been even positive to see for the country's sake. But you've got a massive spend going on from various governments across the country, in infrastructure and the like, which is soaking up very, very similar skills to what we need to be able to run our industry at a point in time. And so there is a point of compression with various demands on this. The labor demand for states with infrastructure build, you would have said for many years has been quite subdued. Whereas now, you've got states of all stripes spending billions and soaking up that skilled labor content. The broader question, I think, as to whether or not we've overemphasized the secondary education versus skills training. I think that's a good question. And if you ask my personal team, I think we've probably overemphasized that. We're a regional employer. We've got both. We want people off the street, and we will train them to take on new skills in our industry. But we also want people who want to go on to secondary education and assume other roles within our business as well. But the pathway to a good career isn't necessarily only through a university. Of course, that's a great building block for anybody's career. But that's not the only way to do it. So perhaps we have overemphasized that to the detriment of skill development in the country.

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Melanie Burton, [87]

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And my second question is that you mentioned that you are quite comfortable with your position in the coming years if you need to raise debt. Are you saying -- I mean, we are seeing more climate change concerns coming whether or not you can have already [reached] that. [Haven't we] (inaudible). But are you seeing any, for example, change in ability to get insurance or, in general, risk to your business because of that in a quantifiable sense?

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [88]

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As we mentioned there with Peter before, our company is very well banked. And I think that our track record speaks for itself in that regard. And that's why we've got good support. I acknowledge the public discourse around these things, which you can't ignore. But in our circumstance, we're well banked and we're well insured. We've never really been captive domestically to the insurance companies here. We've always done that offshore. And that support has been very strong. The composition of those -- of our insurance book, if you like, does change from time to time. But our banking support has been very strong. And all indications are when we come to execute on Vickery and then Winchester South and after, we'll have a very supportive banking syndicate who will support us through that.

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Operator [89]

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We have no further questions at this stage. I'll now hand back to Paul for any closing remarks.

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Paul J. Flynn, Whitehaven Coal Limited - MD, CEO & Director [90]

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Thanks, operator, and thanks, everybody, for taking the time to dial in today for -- sorry about the dysfunction. We didn't mean to cut calls off mid-stream there. But if there are any further questions to explore other aspects of what's been a great year for Whitehaven in 2019, please, you know where to find us. So we look forward to catching up with you all. Thank you.

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Operator [91]

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That concludes today's Whitehaven Coal's full year 2019 results. Thank you, once again, for joining us today. You may all disconnect. Have a great afternoon.