Whitehaven Coal (WHC) 2015 AGM Voting Intentions

Company/ASX Code : Whitehaven Coal Limited (WHC)
Registry : Computershare Services
Poll/Show of Hands : Poll on all items
Webcast : No
Venue :
10am The Mint
10 Macquarie St
Sydney, New South Wales
Monitor : Mr Geoffrey Orrock
AGM Details / NoM : Friday 30th October, 2015
ASA Position
Not Applicable
Consideration of accounts and reports

FY15 was another challenging year for the Australian coal industry. Coal prices continued at low levels and although the AUD’s fall to around US$0.70 provided some relief low prices are expected to prevail for some time. For many operations, the unit cost of sales still exceeded the per tonne price of saleable product and there were mine closures across SA, NSW and Qld. However the Minerals Council of Australia says the generation of electricity from coal is the fastest growing method as the global industry turns away from nuclear power generation to the newer technology supercritical coal fired plants which are more efficient and generate lower emissions. Coal is expected to remain a key source of energy in the Asia Pacific region and Whitehaven Coal, with its increasing availability of high quality coal is well placed to supply these new technology plants.

For Whitehaven, FY15 was again a better year than the last with another list of impressive achievements. Safety performance is substantially better than the average across the NSW coal industry. In FY15, the Total Reported Injury Frequency Rate was 9.2 down from 34.6 in FY12. Mine production of 15.8Mt was up 37%, resulting from record production at Narrabri, first railings from Maules Creek 3 months ahead of schedule, and other mines producing at target production levels. FOB costs were driven substantially lower than the previous year with an outcome of $61/t, a 12% reduction on FY14 and eclipsing the FY15 cost target of $64/t FOB. All up, the company is well on its way to its target production rate of 22Mtpa. The 100% owned Vickery Mine which has approval of its project application to produce 4.5Mtpa utilising existing infrastructure is a further growth option.

During the year revenue increased by 1% to $763 million (FY14: $755 million) due to higher sales volumes, offset by lower prices and operating EBITDA before significant items increased to $130.3 million up 44% (FY14: $90.4 million).

Margin on coal sales expanded as the year progressed and averaged $15/t in H2.

Whitehaven reported a full year statutory loss after tax of $342.7 million (FY14: $(38.4) million), including significant items totalling $332 million. Significant items included a $355 million pre-tax impairment charge on several early stage exploration assets, devalued as a result of lower coal prices, and a $90 million pre-tax MRRT derecognition. Underlying profit before significant items was $(10.7) million (FY14: $(28.4) million).

Operating cash flow increased to $213 million, up 96% after last year’s result of $108 million. Capital expenditure was $436 million spent largely on Maules Creek and growth projects at Narrabri and other mines. 

Net debt was $936 million, and gearing equated to 25%. The company established a new A$1.4 billion Bank Facility with more favourable terms than the facility it replaced.

The company’s share price fell from $1.43 to $1.32 at years end. No dividend was paid in FY15 (57c paid since beginning of 2012). 

Whitehaven is a company in the middle of its planned growth phase and the interests of shareholders over the next few years will continue to be very much focussed on the successful development and optimisation of these new mines. 

The company says the outlook is for coal prices to remain subdued although Whitehaven’s high quality coal will be in demand as the new technology energy production in Asia expands. The continued focus will be on improving safety performance and efficiency, driving down costs, and to ramp up Maules Creek to full production in the next 3 to 4 years, with Vickery as a future growth option. 

ASA Position
Item 1: Adoption of Remuneration Report

Board fees were again unchanged in FY15. The Chairman’s fee is $350,000 pa and he receives no committee fees. Board members receive $140,000 pa, and an additional $20,000 for chairing a committee or $12,500 as a committee member. Director’s fees include participation in Board meetings and also in training days and site visits.

The MD’s fixed remuneration for FY15 was $1.3 million pa unchanged from the previous year. Other senior executive fixed remuneration in FY15 ranged from $500,000 to $875,000 pa. These levels of remuneration, as we noted last year, together with equity incentive, in comparison to the ASX 100 average, are modest.

All executives and the MD participated in the STI Plan in FY15. Senior executive target STI was 50% of fixed remuneration. The performance measures included production targets, FOB cost per saleable tonne and EBITDA targets as well as non-financial objectives including safety performance, achievement of specific objectives in relation to Maules Creek and Narrabri and leadership measures. The stretch opportunity was capped at 75% of fixed remuneration. 30% of STI is paid in “deferred” shares which vest in two tranches, the first after 12 months, and the second tranche after 2 years.

The stretch production target of 14.8 million ROM tonnes was surpassed and the EBITDA stretch target (excluding significant items) of $115 million was also exceeded. Similarly cost objectives and safety target reductions were exceeded.  Narrabri achieved record production and Maules Creek first railings were 3 months ahead of schedule. In FY14, the Board felt that the executive team performed well and granted STI for all executives 50%-55% of fixed remuneration. The FY15 STI outcomes were around 65% of fixed remuneration, less than the cap despite performance, the MD receiving $839,000 and other KMP received amounts between $325,000 and $590,000. 

All pending LTI vested on the date of the merger due to change of control provisions in the LTI scheme. As a consequence there was no LTI available to vest at the end of FY13. To avoid the same outcome at the end of FY14, the company put in place a transitional vesting schedule for the 2012 LTI grant which was awarded on 24 September 2012. Senior executives received a grant of performance rights equal to 80% of fixed remuneration, where the number of rights granted was determined by reference to the market value of WHC shares. The 2012 LTI grant was divided into 3 equal tranches capable of vesting after a 2, 3, and 4 year performance period. The performance condition is a TSR hurdle relative to the ASX 100 Resources Index considered by the company to be an appropriate benchmark in the light of the company’s stage of growth and the focus on long term mine development and expenditure of capital. 

None of the 2012 LTI grant will vest if the relative TSR is below the 50th percentile, at the 50th percentile 50% will vest, increasing linearly until at the 75th percentile all rights granted vest. There is no retesting and the rights do not carry voting or dividend rights. 

The first tranche of 2012 LTI conditionally vested on the 24 September 2014. As the hurdle was not met, all of the tranche was forfeited. 

From 2013, the LTI grant will be divided into 2 equal tranches capable of vesting after a 3 and 4 year performance period respectively.

The vesting has also been altered so that none of the 2014 LTI grant will vest if the relative TSR is below the 50th percentile, at the 50th percentile 35% will vest, increasing linearly until at the 75th percentile all rights granted vest.

For the FY15 grant a second hurdle for LTI was also introduced. Senior executives 2015 LTI award will be subject to two performance hurdles, 60% of the award will be subject to a total shareholder return (TSR) performance hurdle as above, and 40% of the award will be subject to the Company achieving a gateway minimum defined cost per tonne target. ASA noted that cost control was a hurdle in both STI and LTI and the Board commented that they wanted to emphasise the critical importance of both a current and long term focus on cost control. 

The TSR rights will be divided into two equal tranches, which will be tested based on performance over periods of three and four years (respectively), with each performance period commencing on 1 July 2015.

Given the modest levels of fixed remuneration and incentive opportunity for the executive group and the impressive level of management performance the ASA intends to vote for this resolution.

ASA Position
Item 2: Approval of LTI grant to Mr Paul Flynn

The company seeks shareholder approval to grant Mr Flynn 1,027,907 rights as his long term incentive in 2015. The number of LTI rights to be granted to Mr Flynn was calculated by dividing $1,326,000 (the value of Mr Flynn’s LTI opportunity for the 2015 LTI award, being 100% of his annual fixed remuneration) by the volume weighted average price of ordinary shares in the company over the 20 trading day period commencing 10 days prior to 1 July 2015, being $1.29. The terms and conditions attaching to the LTI rights are noted in Item 1. 

The ASA intends to vote for this resolution. 

ASA Position
Item 3: Election of Dr Julie Beeby as a Director

Ms Beeby was appointed by the Board on 17 July 2015 and is a member of the Health, Safety, Environment and Community Committees. Her appointment increases Board gender diversity.

She has more than 25 years’ experience in the minerals and petroleum industries in Australia including major Australian and US resources companies and as Chief Executive Officer of WestSide Corporation, an ASX listed, Queensland-based coal seam gas company. Julie has technical, operations and strategy expertise and has held senior and executive positions in coal mining, mining services and coal seam gas after commencing her career in coal and mineral processing research. Julie is currently the Chairman of the Board of the Queensland Electricity Transmission Corporation Limited, Powerlink Queensland, and has previously held non-executive director positions on the Boards of Gloucester Coal Limited, Forge Group Limited, CRC Mining, Queensland Resources Council and Australian Coal Research.

The Board has considered Julie’s independence and has determined that she is an independent director.

Shareholders look forward to Dr Beeby speaking to her election.

ASA Position
Item 4: Re-election of Mr John Conde AO as a Director

Mr Conde was appointed a director on 3 May 2007 and has over 30 years of broad based commercial experience across a number of industries, including the energy sector, and was chairman of the company prior to the merger with Aston Resources. He is the Chairman of the Audit and Risk Management Committee, a member of Governance and Nomination Committee and Remuneration Committee.

Mr Conde is chairman of Bupa Australia and New Zealand, Cooper Energy Limited and The McGrath Foundation. He is also president of the Commonwealth Remuneration Tribunal and a non-executive director of the Dexus Property Group. 

He retired as chairman of the Sydney Symphony Orchestra in May 2015. He was previously chairman of Ausgrid (formerly Energy Australia) and Destination NSW. He was formerly chairman and managing director of Broadcast Investment Holdings, as well as a non-executive director of BHP Billiton Limited and Excel Coal Limited.

The Board has considered John’s independence and has determined that he is an independent director.

He holds 378,000 shares in the company.

ASA Position
Item 5: Re-election of Mr Tony Haggarty as a Director

Mr Haggarty has over 30 years’ experience in the development, management and financing of mining companies, and was co-founder and Managing Director of Excel Coal Limited from 1993 to 2006. He is a member of the Health, Safety, Environment and Community (Chairman) and Audit & Risk Management Committees

Prior to this, Mr Haggarty worked for BP Coal and BP Finance in Sydney and London, and for Agipcoal as the Managing Director of its Australian subsidiary. He was appointed to the Board of Whitehaven on 3 May 2007, was appointed Managing Director on 17 October 2008 and retired as Managing Director on 25 March 2013.

The Board considers that Mr Haggarty has consistently exercised independent and objective judgement on all Company matters since becoming a non-executive director on 25 March 2013. However, at this point in time, the Board has determined to treat Mr Haggarty as not being an independent director given his previous executive role with the company and the fact that less than three years have elapsed since he ceased his executive duties.

He holds more than 20 million shares in the company.

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