YACAF - Yancoal Australia: Unlikely To Replicate Record 2022 Performance

2023-04-06 17:38:24 ET

Summary

• Yancoal Australia Ltd is Australia's premier coal miner, exporting predominantly to Asian power markets.
• The company experienced a bumper 2022, which saw record-breaking top line and bottom line numbers.
• Since then, coal prices have normalized, making a repeat performance somewhat unlikely.

Company Introduction

Yancoal Australia Ltd ( YACAF ) is a leading low-cost producer of metallurgical and thermal coal primarily used for power generation destined for Asian customers. The company markets global seaborne coal, producing a mix of thermal, semi-soft coking, and pulverized coal injection coals for major export markets.

The $7.3B market-cap Australian coal miner trades at 2.2x forward earnings, heavily discounted against a decarbonization drive likely to see the miner fight for survival in the very long term without some degree of corporate revamping.

The company was born out of the merger of Yanzhou Coal Mining and Austar Mine in 2004, creating an Australian coal mining giant. Subsequent strategic acquisitions have helped the dual-listed (Australia/Hong Kong) energy player build a portfolio of 11 coal mines across New South Wales, Queensland, and Western Australia operated by a workforce of 4,400.

Over the past 3 years, Yancoal's stock price has effectively tripled, delivering +57% compound annual growth rates.

With recent performance more the exception than the norm, we here at ZMK Capital remain skeptical of the firm's ability to continue generating similar print in the coming years, following a dampening of global economic sentiment, a virtual tripling of the stock price, and a halving of seaborne coal prices. Sell.

Yancoal has a diversified but Asia-centric customer base with 2022 shipments destined for Japan (20%), Taiwan (18%), and South Korea (17%). Notably, coal exports to Europe increased significantly from 2% of 2021 volume to 9% in 2022 on the back of Ukraine war-induced commodity price volatility.

In 2022, the company shipped 24.6M tons of thermal coal and 4.7M tons of metallurgical coal, significantly down from volumes in 2021 (31.7M tons of thermal coal and 5.8M tons of metallurgical coal). Challenging wet weather conditions in Australia have heavily impacted operations and coal transport logistics, providing some support to prices.

Notwithstanding, coal's energy induced spike (it outperformed all commodities in 2022) has taken a hit as natural gas prices normalize, and additional supply volumes attract renewed, sometimes substituted, demand.

Marketable proved and probable coal reserves have declined -22.8% off a vintage 2022 year marked by sky-high coal prices.

Coal Prices

Since hitting a recent 14-month low of $173/ ton, Newcastle Coal Futures rebounded following expectations of tightened supply. New legislation in Australia is expected to impact coal production output, affecting supply from a major global exporter.

Inclement weather has also compressed Australian coal output, with recent heavy rains in New South Wales and Queensland. Prices remain well off their 2022 peak, a product of warmer winters in the Northern Hemisphere and a sharp pullback in natural gas prices.

The vestiges of the war in Ukraine are likely to continue to weigh on energy prices, and indirectly coal. The world's largest producer, China managed to post bumper output, increasing by 9% to 5.9B tons in 2022. Changes in social attitudes towards coal and its enduring impact on the environment imply a heightened degree of risk-taking when targeting investments in the space.

Coal prices have significantly come down off their 2022 record numbers.

Financials

Total 2022 revenues ballooned (US $7.1B FY2022 v US $3.9B FY2021), illustrative of disruption in global energy markets following the onset of the Ukraine War. Recently, Yancoal posted astronomical numbers - $4.3B EBITDA FY2022 against $1.5B a year earlier.

Illustratively, the company posted more net income ($2.4B FY2022) than in the previous 9 years combined! During that period (2013 - 2022), the Sydney-based coal miner generated cumulative losses of -$352M, suggesting due caution should be taken with recent rockstar numbers.

An extraordinary 2022 has meant Yancoal has been able to fill its coffers, with the company now holding $1.8B in cash and marketable securities while distributing generous dividends to equity holders - the company currently posts a gargantuan 22% NTM dividend yield on a 45% payout ratio, showing room to move if additional distributions were required.

The firm paid $1.1B in common and preferred stock dividends in FY2022, a company record. It is worth highlighting a $1B tax bill currently held on the liabilities side of the balance sheet following a bumper 2022.

Yancoal's debt load is manageable, with the company using its exceptional period of earnings generation to pay off creditors. Long-term debt reduced from $2.3B in FY2021 to only $332M in FY2022, demonstrating the sheer size of cash inflows during the period. The company also holds $282M in additional equity method investments, highlighting perhaps the intention to diversify away from its coal-focused mining pedigree.

Yancoal posted record numbers in FY2022 - cash flow from operations was 3x greater than the previous year, boosted by strong volumes and changes in income tax considerations. Free cash flow per share shot through the stratosphere (from $0.90 FY2021 to $3.08 FY2022).

Nonetheless, it is worth keeping an eye on royalty regimes and public opinion in Australia, which may change given recent record profits and operating performance. Capex during the same period almost doubled, from $195M FY2021 to $374M FY2022, as the Australian coal miner looked to deploy capital to boost production during a period of high commodity prices.

As earnings have increased, Yancoal's price to earnings ratio has effectively halved - the company trades at a forward P/E ratio of 2.2, down from around 5.8x a few years earlier.

Naturally, that is reflective of the dynamics of the equity price, which has increased almost 57% over one year while earnings have almost quintupled! Amidst some downward pressure on seaborne coal prices, we believe such an amazing performance is not sustainable in the long run.

Risk Profile

The biggest risk to Yancoal Australia Ltd's stellar financial performance is the lasting decarbonization drive, growing social concern surrounding environmental sustainability, and political backlash from administrators looking to curry favors with voters. Asia continues to remain dependent on coal as a fuel source, but attitudes are slowly changing.

Steel-making coal only makes up a marginal amount of the coal venture's volumes, providing little in terms of alternative revenue-generating options. Yancoal's board of directors has been conservative when deploying capital and the balance sheet remains strong - little in terms of debt during a time of monetary tightening.

The single biggest issue surrounds whether Yancoal Australia Ltd can replicate a record-breaking performance during a period where coal prices have significantly come down from all-time highs. We expect the future 12 to 18 months will be a period of normalization and reversion to the mean.

Key Takeaways

Yancoal Australia Ltd is a leading Australian coal producer supplying to important Asian markets. The company's record performance has provided a backdrop to questions surrounding the authenticity of the decarbonization drive, particularly from Asian countries.

With $400/t seaborne coal prices last year, an almost 4x increase in prices, questions abound as to whether coal still can make up a lasting part of the energy mix. For the time being, the answer is likely yes, but whether Yancoal Australia Ltd can deliver the same astounding financial performance remains to be seen.

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