TerraCom (ASX:TER) discusses the outlook for coal

TerraCom Limited (ASX:TER) Managing Director Danny McCarthy discusses highlights of the company’s June quarter results, the recent rains in Queensland, the mine life and run rate of the company’s key asset Blair Athol and the outlook for coal.

Tim McGowen: We’re talking coal with Danny McCarthy, who is the Managing Director of TerraCom (ASX:TER). Danny, thanks for your time. You’ve just announced a very strong quarter. Can you talk through the result?

Danny McCarthy: Yeah, I sure can. So, we achieved $224 million as a headline EBITDA number. Biggest contributor to that was BA despite the unseasonal rain that we had in Central Queensland and other logistics-related matters with getting coal to port due to rain. We had issues with slips and so on down rail paths, so it was quite challenging. BA contributed $174 million of that. So, 75 per cent of that EBITDA result was purely based on BA. And not to downplay it, South Africa in its own right did $50 million for the quarter, which is a great result for South Africa. And given that business when we took it on, it was a $10 a tonne business, and we are very satisfied with how South Africa is also contributing to our EBITDA performance.

Tim McGowen: And, Danny, where’s South Africa in the equation given there’s been lots of volatility and turmoil in the country at the moment?

Danny McCarthy: Yeah. Well, Tim, I spent six months over there last year. So, I went over in late March, and I think I had a webinar or something when I was over there with you guys. I was sitting in a hotel room in Pretoria when I was doing that. Six months was spent over there. I got a good look at the place. Very satisfied with what we’ve been able to achieve with the operational discipline, and really in the last six months taking advantage of the export coal market. South Africa is well placed for us this year as well. I’ve been back once since going over, and I’m due to go over in a couple of weeks’ time. So, very happy, amidst all the challenges of South Africa, to have a $20 a tonne margin business.

Tim McGowen: You reported the repayment of the Euroclear bond debt. I think that was just announced just recently. Does the company still have any outstanding debt?

Danny McCarthy: Yeah, so we were able to clear that debt in full in May, and to assist with that we had a $60 million prepay deal, which we’ve done and delivered one shipment under that prepay. Essentially, we ended the year with all of the parent company debt repaid as well as the Australian business unit with zero debt. And the only remaining debt for us is debt in South Africa, of which we’re a 49 per cent contributor to. It’s been a great opportunity to take advantage of the market and pay down debt well ahead of any of our expectations.

Tim McGowen: Danny, we’ve had some terrible weather up and down the coast here, the east coast up here. Has that affected Blair Athol in any major way?

Danny McCarthy: Yeah, it’s been quite unseasonal, and I guess we’ve had our fair share of inundation of rain. One of the benefits of us at Blair Athol is that we’ve focused extensively on water management, infrastructure, pumping, and we’ve been able to fare pretty well, all things being equal. And having multiple operational faces to source our coal when we need to has given us that ability to deliver our 2.3 million tonnes for the year on the back of a massive quarter. We had two days to go and got our last sale away, but nonetheless, the mine’s in great shape, we’ve got some inventory on the ground and we’re off to a great start for the new financial year.

Tim McGowen: Danny, the company is forecasting to pay an unfranked dividend of 10 cents based on the financial year results. Can you give us some more details?

Danny McCarthy: The Board are forecasting to pay the 10 cent dividend, as we’ve previously announced to market, and again in our quarterly release. We believe that post the completion of our end-of-year accounts, we will be able to confirm the amount, and we’ll update our dividend policy at the time and look to reissue that. But the focus right now is returning capital to shareholders, and that’s something that we’ve been given plenty of feedback on, and we are committed to.

Tim McGowen: Now, Danny, Blair Athol’s obviously been the jewel in the crown. Can you elaborate on the kind of mine life and whether you can capitalise on where coal prices are at the moment through increased production?

Danny McCarthy: BA, at its current run rate of 2.2 to 2.3, is at its optimal cost baseline. We can stretch BA. We can put some more tonnes out, and in the past we’ve gone up to 2.6, 2.7 million tonnes. That tends to stress every part of the BA supply chain, and it increases our cost base without the requisite return. Now, you can say in the current market costs are really secondary to the matter, but we are a cost-conscious organization. And, for us, every tonne of coal needs to go out at the right cost base to maximise the margins. The current mine life at BA is sitting around nine years based on a run rate of 2.2 million tonnes. We’re just about to update our JORC reserves following the depletions we’ve done this year, and we’ll issue that to market in due course.

Tim McGowen: Danny, obviously you’ve got a very strong coal price. What does demand look like in regards to your client base?

Danny McCarthy: Our client base is pretty solid. We’ve got our coal well sold into Japan, Korea and India. We’ve got three unsold cargos for the coming financial year. We’re okay with that. We do see the coal price staying at high levels on long run. We don’t see any indication of that softening. In fact, we’re quite buoyed about the FY23 forecast, and we’ll be taking advantage of those. All of our prices and coal sales are index-linked, so we are well placed to take advantage of the long-run coal prices that we’re currently seeing in the short term.