Anglo American, the mining behemoth took the decision on May 7th, 2021 to divest from its South African thermal coal and demerge its assets in this space into a separately listed entity that it chose to name Thungela Resources. The name “Thungela” comes from the Zulu word meaning to “ignite” or to “set alight” or to “set on fire”. This new mining outfit was formally demerged and listed on the Johannesburg and London Stock Exchanges on June 7th, 2021 and it presented its first set of interim financial results as a standalone entity in July. Its results exceeded expectations from the market which was quick to subscribe to its shares and doubled its share price over the course of the month. The company’s name seems very instructive given this background. It has literally set light to its shares by delivering a very impeccable set of numbers and it does not appear to be slowing down anytime soon.
Thungela Resources comprise Goedehoop, Greenside, Isibonelo, Khwezela, AAIC (operating the Zibulo colliery), Mafube Coal Mining (operating the Mafube colliery) and Butsanani Energy (operating the Rietvlei colliery). Prior to the demerger the SA Thermal Coal Operations were mainly held by South Africa Coal Operations Proprietary Limited (“SACO“), Anglo Operations Proprietary Limited, which has subsequently been renamed Thungela Operations Proprietary Limited (“TOPL“) and Anglo South Africa Capital Proprietary Limited.
Before the demerger and the resultant creation of Thungela, Anglo’s coal operations looked like this:
After the demerger this is what the company looks like:
The result of the demerger and divestiture is a pure-play, standalone company that it is focused on one commodity in a single geography. Thungela is domiciled in South Africa and listed on the Johannesburg Stock Exchange (JSE) with a secondary listing on the London Stock Exchange (LSE). As mentioned earlier the company posted stronger than expected earnings characterized by operating profits of R990 million (US$69 million) and adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) of R1.9 billion (US$132 million). The company achieved this impressive financial performance based on buoyant prices for thermal coal which were underpinned by the global recovery from the COVID-19 pandemic.
The company finished the first half of the year with R3 billion (US$209M) in cash which it attributed to a capital injection it received, strong cash generation from its operations and healthy stock piles of coal at its collieries and the Richard’s Bay Coal Terminal (RBCT). Thungela expects to produce between 15 to 16 million tonnes of coal in 2021 and for global thermal prices to be at around R830 (US$58) per tonne. The company in its pre-listing statement stated that it expected its capital expenditure budget for 2021 to be between R2.6 billion (US$179.8M) to R3 billion (US$207.4M). At the time of reporting its half year earnings the company had spent R1.3 billion (US$89.9M) in capital expenditure. This the company said augurs well with its expectations going forward and it further stated that the capex budget for 2021 will come in at the lower end of the stated range at R2.6 billion.
A caveat is in order here. Earnings are derived from the investments that a company makes in its operations. Put differently, a company’s earnings are sustained over the long term by the investments that company makes or the capital it deploys into its operations. The other way that a company sustains its earnings especially for a commodity producer like Thungela is through high prices for commodities on world markets. If commodity prices remain high as they have been for the last two years, it is reasonable for investors to expect stellar financial performance from companies in this space.
It should therefore raise flags for investors when a company announces reducing capex budgets because this can indicate that present earnings will most likely not be sustainable in the long term or that the market the company is operating in is in long-term decline. Thungela Resources being a pure-play coal producer can be classified as one producing a commodity that is in long-term decline. Renewable energy is now in vogue and the rest of the world is moving in this direction and leaving dirty fossil energy sources like coal.
An investor looking to invest their capital into a company like this one will do well in financial terms but must always keep in mind that the fossil energy space will be declining over the long term. Be that as it may, Thungela’s dividend policy is to return at least 30% of free cash flow every year. During the interim financial results presentation, the company’s CEO July Ndlovu, a Zimbabwean born South African-based mining executive, announced that the company would not declare a dividend in the interim but would declare a dividend at the end of the year. This was endearing to the market which has seen shares in the company surging even further. The occasion of the results presentation was symbolic in that it demonstrated that the company had successfully made the transition from being an operation within the Anglo-American group to a standalone business.
In terms of share price performance and compared with some of its peers in the listed coal mining space, this is how Thungela Resources fares:
From the time it was listed the company has delivered share price appreciation of just under 200% to shareholders when viewed over the last six months despite the fact that the company started trading on the JSE and LSE a little over two months ago. It is an outlier in the listed coal mining space. Thungela listed at R20.66 (US$1.42) and closed R59.36 (US$4.10) as of September 2nd, 2021. Sector heavyweight Exxaro Resources in the same period has delivered a respectable but lacklustre 7.29% whereas Wescoal delivered an impressive 37.60% to its shareholders and MC Mining shareholders saw 28.03% of their money disappear.
During the interim results presentation the company’s leadership affirmed its commitment to environmentally sustainable goals or ESGs and to this it has set up Employee and Community Partnership Plans each holding a 5% interest in the South African operations of the company. The shares in each of the partnership programs are fully funded by the company and are debt free.
Outlook
The consensus view around Thungela Resources is that it is a BUY. This is because Thungela supplies a critical resource that is still part of much of the developing world’s and to a certain extent the developed world’s, energy mix. Advanced economies are implementing stimulus packages and spending record amounts of money on public works and infrastructure projects. The largest of these is the recently passed bill by the US government to spend a record US$3.5 trillion on stimulating that economy. This means that countries like the US will be demanding more and more of basic resources to build and develop their infrastructure. Thungela will supply one of the critical of these basic resources.
Image courtesy of Moneyweb
The company expects coal export demand to remain buoyant characterized by firm demand from south Asian countries that are urbanizing and experiencing economic growth. These countries include but are not limited to India, Pakistan, Sri Lanka and Vietnam. Furthermore, supply constraints from South Africa and Australia are likely to support firmer prices for coal going forward. In South Africa coal is ferried from the colliery to the RBCT and stockpiled there while it awaits shipping to customer destinations all over the world.
There is only one major transporter of coal and that is the national railway operator Transnet which has in recent times experienced disruptions in service from vandalism. This has affected the state entity to such an extent that it is failing to deliver product timeously to the RBCT.
There are geopolitical tensions between Australia which is a large supplier of coal and China, another larger consumer of natural commodities, especially coal. These tensions are such that it is envisaged that China will be sourcing coal from South Africa instead.
Over the long-term success for Thungela Resources will come from the tonnage of coal it can produce and sell at the current strong prices. The company will be banking on prudent management of its finances as shown by the capital expenditure in the last six months and going forward.
If matters at Transnet are not meaningfully resolved Thungela stands to miss some of its sales targets should it fail to deliver product to the port terminal as it stockpiles product at its colliery. This is in the worst-case scenario. Even with this outlook the company expects to increase earnings in the second half of the year from strengthening coal prices and productivity improvements. Chief executive July Ndlovu expects to reward shareholders with a maiden dividend at the end of the year from the strong financial position he expects the company to finish in.
