Yancoal Australia Ltd(YAL)

Team Veye | 07 Apr 2020 ASX - YAL
Yancoal Australia Ltd(YAL)
Call Buy
Investment Duration Long Term
Asx YAL

Yancoal Australia Ltd (ASX: YAL) is an Australia-based pure-play coal producer. The Company is engaged in the production of thermal and metallurgical coal for use in the power generation and steel industries in Asian markets. It holds ownership interests in, and operates, five coal mine complexes across New South Wales and Queensland, and manages five others across New South Wales, Queensland and Western Australia. Its interests in New South Wales include the Hunter Valley Operations (HVO), Mount Thorley and Warkworth open-cut mines (MTW), Moolarben coal complex (Moolarben) and the Stratford and Duralie mines (Stratford Duralie). Its mining interests in Queensland are located in the Bowen basin and include the Yarrabee mine (Yarrabee) and Middlemount mine (Middlemount). Its mining interests also include the Ashton, Austar, and Donaldson mines (Watagan Mines) in New South Wales. (Profile source: Reuters)

From the Company Reports

Acquiring an additional 10% stake in Moolarben

Transaction overview

Yancoal Australia Ltd (Yancoal)’s wholly-owned subsidiary, Yancoal Moolarben Pty Ltd, on 27 March 2020 announced that it had entered into a binding agreement to purchase 10% stake in the Moolarben Coal Joint Venture (Moolarben JV) - currently owned by Sojitz Corporation for $300 million in completion and deferred cash payments.

    

(Graphic Source – Company Reports)

Yancoal views the proposed acquisition as an attractive opportunity to increase its participating interest in the Moolarben JV from 85% to 95%. The immediate benefit will be the increase in attributable revenue, which Yancoal will consolidate into its financial results from this low cost, tier-1 asset; and with potential for the Moolarben JV to increase its production profile in the future, subject to ongoing work with external stakeholders.

The $300 million cash consideration is payable in four instalments, with the first instalment of $50 million to be paid on the completion date (being on or before 31 March 2020), the second instalment of $50 million, to be paid on 30 June 2020, the third instalment of $100 million, to be paid on 31 December 2020 and the final instalment of $100 million, to be paid on the date 12 months after the completion date. Part of the net proceeds which the Company received from the global offering and listing of the Company’s shares on the Stock Exchange which were allocated for potential acquisitions will be used in the acquisition. Cash holdings and future operating cash flow will fund the balance of the purchase.

Subject to completion, the effective time for the beneficial transfer of ownership will be 1 January 2020. The conditions to the transaction, being Australian Foreign Investment Review Board approvals and the waiver or expiry of the parties’ pre-emptive rights under the Moolarben Coal Joint Venture Agreement, have been satisfied.

(Graphic Source – Company Reports)

Full Year Financial Result 2019

Yancoal Australia Ltd (the “Company”) on 28 February 2020 presented its Full Year Financial Result 2019 for the year ended 31 December 2019

Financial Highlights:

  • Revenue from continuing operations of $4.46 billion, down 8% from $4.85 billion in the year ended 31 December 2018 (“FY18”). The decrease reflects the change in coal price during 2019. 
  • Total Operating EBITDA of $1.64 billion, down 25% from $2.18 billion in FY18. The Operating EBITDA Margin for the period was 36%.
  • Profit After Tax (PAT) of $719 million, a 16% decrease from $852 million in FY18. 
  • A final dividend of $280 million or $0.2121/share (unfranked); a total dividend of $0.3156/share is a payout ratio of 58% relative to full-year profit after tax. Earnings per share (EPS) were $0.545/share on a reported basis.

 

Operational Highlights:

  • Unit cost guidance exceeded – Cash costs (excluding government royalties) were reduced to $61/tonne in spite of industry cost pressures; the unit cost was $63/tonne in FY18. 
  • Increased production achieves guidance - YoY increases in both Saleable Coal Production of 52.1Mt on a 100% basis, with Attributable Coal Production of 35.6Mt; 50.0 Mt and 32.9Mt respectively in FY18.
  • Capital expenditure guidance achieved – Capital expenditure was $285 million (attributable) as Yancoal remained focused on controllable factors throughout the Period. 
  • Lower Total Recordable Injury Frequency Rate (TRIFR) - At the end of FY19 TRIFR was 7.27 (12 month rolling average), compared to 7.40 at the end of FY18.

 

(Graphic Source – Company Reports)

Corporate Highlights: 

  • The corporate gearing ratio improved to 29% at the end of FY19 from 35% at the end of FY18. The Company continued to repay debt, with US$500 million repaid ahead of schedule in FY19

Safety 

The Group’s Total Recordable Injury Frequency Rates (“TRIFR”) improved through the period and at the end of FY19 the 12-month moving average was 7.27. Implementation of core hazards continues with critical control verification a key focus.

Production and Sales:

Total ROM produced during the period was 69.0Mt 100% basis, an increase of 4% from FY18. Total Attributable production to Yancoal was 46.5Mt; an 8% uplift over FY18. Watagan and Middlemount provided a 3.7Mt and 1.7Mt equity-accounted contribution, respectively.

Attributable Saleable Production was 35.6Mt; an 8% uplift over FY18. The Sales Volume of attributable production was also 35.6Mt, with Yancoal’s sales split (equity share) being 30.1Mt thermal coal (28.4Mt in FY18) and 5.5Mt metallurgical coal (5.1Mt in FY18).

Consistently strong extraction and delivery rates at the tier-one Moolarben, Hunter Valley Operations and Mount Thorley Warkworth operations are the foundation of Yancoal’s production profile.

Yancoal realised an average price of $100/tonne for thermal coal products ($123/tonne in FY18) and $167/tonne for metallurgical coal products ($182/tonne in FY18), representing an overall average-sales price of $111/tonne ($132/tonne in FY18).6 Yancoal’s mix of contract types with differing durations and reference prices help to mitigate against changing spot prices in the international coal markets.

(Chart source: TradingView)

Operating Guidance: 

Yancoal’s stated performance targets for 2020 are: 

  • Saleable coal production of around 36 million tonnes (attributable). 
  • Operating Cash Costs (excluding government royalties) to remain around $61/tonne. 
  • Capital expenditure is expected to be around $380 million (attributable).

 

  YANCOAL AUSTRALIA LIMITED (YAL)
Stock Overview
Sector Energy
Risk Medium 
Market Cap $2.77 billion 
Daily average Volume 26,026
EPS (FY) $0.545
PE RATIO 3.9
Yearly Dividend Yield  15.03%
Target Price (s) T1 and T2 T1 $2.70    T2 $3.30
Stop Loss $1.90
Recommendation Buy
52 weeks High $3.70
52 weeks Low $1.91
Directors Mr Baocai Zhang
Non-executive Directors Mr Gregory Fletcher
Mr Fucun Wang

 

Veye’s Take

Yancoal’s acquisition of an additional 10% stake in Moolarben is an attractive opportunity for the company to increase its participating interest in the Moolarben JV from 85% to 95%. The immediate benefit will be the increase in attributable revenue, which Yancoal will consolidate into its financial results from this low cost, tier-1 asset; and with potential for the Moolarben JV to increase its production profile in the future, subject to ongoing work with external stakeholders. Consistently strong extraction and delivery rates at the tier-one Moolarben, Hunter Valley Operations and Mount Thorley Warkworth operations are the foundation of Yancoal’s production profile. Yancoal remains resolutely focused on efficient operations optimising output from its low-cost operations to generate shareholder value. The reduction in operating costs, increased production and improved financial position achieved were significant outcomes. Over the past two years, Yancoal has made early debt repayments totalling US$1.4 billion. Yancoal ended FY19 with a further improved gearing ratio of 29% and a healthy closing cash position. The stock has formed a base around current price zone. The substantial increase in volumes at the same time is another positive indicator. The crossing of $2.35 convincingly could clear its potential for another leg up. Veye recommends a “Buy” on “Yancoal Australia Ltd” at the current price of $2.135


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