Yancoal withholds dividends to hoard cash for M&A spree

By Peter Ker, Resources reporter, AFR, Aug 20, 2024 – 8.51am.

Yancoal directors have signalled they are serious about buying Anglo American’s Queensland coal mines by deciding to hoard the company’s $420 million interim profit rather than pay dividends.

Yancoal’s solid first-half profit bolstered the company’s cash balance to $1.55 billion with no debt, but it will not be sharing any of those spoils with shareholders in the near future.

Yancoal chief executive David Moult is keen to buy more mines. Janie Barrett

“The board has not declared an interim dividend … with the retained cash providing flexibility for potential corporate initiatives and may be distributed in the future if not utilised,” the miner said on Tuesday.

“The group continues to look for high-quality acquisition opportunities.”

The decision to prioritise acquisitions over dividends drove Yancoal shares 14 per cent lower on Tuesday to $5.98.

Yancoal’s constitution states that 50 per cent of net profit must be returned to shareholders as dividends every year. But the constitution also gives directors the right to “rescind” a dividend if they feel the company’s financial position “no longer justifies” it.

Yancoal chief executive David Moult has made it clear that he wants to buy assets, particularly high-quality coking coal mines for steel making in Queensland.

Last year he publicly confirmed that Yancoal was a suitor for BHP’s Daunia and Blackwater mines. But the company was ultimately outbid by Whitehaven Coal.

Mr Moult reiterated on Tuesday that he was more likely to buy coking coal assets than thermal coal assets, as part of efforts to better “balance” Yancoal’s portfolio.

More than 80 per cent of Yancoal’s sales over the past six months were thermal coal for power generation.

Anglo American is selling its five Queensland coking coal mines as part of a break-up strategy designed to improve cashflow and shareholder returns, accelerated by BHP’s foiled advances.

Track record on acquisitions

The best two mines in Anglo’s portfolio are the Grosvenor and Moranbah North mines.

The sale process was dealt a severe blow in late June when an underground fire halted production at Grosvenor. The extent of the damage remains unclear, but Anglo believes it will not prevent a sale.

Mr Moult would not be drawn on specific targets on Tuesday but said the company preferred “low cost, tier one” mines.

“We are in a very strong position to finance whatever opportunities present themselves at the moment,” he said.

Yancoal’s track record of acquisitions over the past eight years has worked in its favour. The company spent close to $3 billion buying Rio Tinto’s best NSW coal mines and recouped that investment within six years.

Mr Moult pointed to the success of that Rio transaction trying to soothe investors’ nerves on Tuesday.

“Look back at 2017 and how that transformed Yancoal at the time and the value that has brought to shareholders over the last few years,” he said.

Mr Moult said Yancoal also had a good track record on dividends, paying a cumulative $4.3 billion since 2018.

Tuesday’s $420 million underlying and net profit was 57 per cent lower than last year, as coal prices declined from record highs to levels that are still high by historic standards.

Morgan Stanley analyst Sara Chan said Yancoal’s profit was weaker than expected because of higher than expected operating costs.

Ms Chan said the absence of a dividend was “a negative surprise to the market considering the track record” for interim dividends to be paid in previous years.

Prices for top-quality NSW thermal coal were $US150.05 ($223) a tonne on August 16, according to GlobalCoal. Top-quality NSW thermal coal prices averaged less than $US60 a tonne in 2015-16 and averaged less than $US120 a tonne in each of the seven years between July 2011 and June 2018.

Morgan Stanley assumes a long term average thermal coal price of $US127 a tonne.

China was Yancoal’s biggest customer over the past six months, buying 34 per cent of the company’s volumes and contributing to 33 per cent of Yancoal’s revenue.

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20-Aug-2024:

Was it Worth it, Yancoal? Money of Mine Podcast, 20-Aug-2024

Skip to the Yancoal bit here.

CHAPTERS

• 0:00:00 Introduction
• 0:02:43 YAL get smashed
• 0:22:39 T92 + ATHA tie the knot
• 0:34:13 The intriguing strategic investments we've seen

DISCLAIMER

All information in this podcast is for education and entertainment purposes only and is of general nature only.

The hosts of Money of Mine (MoM) are not financial professionals. MoM and our Contributors are not aware of your personal financial circumstances. Before making any investment decision, you should consult a licensed financial, legal or tax professional.

MoM doesn’t operate under an Australian financial services licence and relies on the exemption available under the Corporations Act 2001 (Cth) in respect of any information or advice given. MoM strive to ensure the accuracy of the information contained in this podcast but we don’t make any representation or warranty that it’s accurate or up to date. Any views expressed by the hosts of MoM are their opinion only and may contain forward looking statements that may not eventuate.

MoM will not accept any liability whatsoever for any direct or indirect loss arising from any use of information in this podcast.

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So not everybody that buys coal companies buys them for exposure to the coal price, eh?!?

Some people apparently want a share of the profits.

D'ohh!

Possibly that chart analysis at the end there (which I think is AI generated) is one day behind.

Fun Fact: According to JD, the only thing that's keeping Yancoal OUT of the S&P ASX200 - and by default the S&P ASX300 - indices is their free float, being the number of shares available to trade other than those held by substantial holders and insiders (founders, management, and their families). Yancoal's free float was 29.56% of their shares on issue according to JD and he says that one of the conditions of S&P index inclusion is a minimum 30% free float.