- Thungela Resources Limited has been busy with mergers and acquisitions to grow its geographic footprint and diversify from its pure play coal business.
- The JSE listed miner recently made the news when it agreed to purchase an Australian coal miner called Ensham.
- The acquisition of Ensham is an all cash transaction wherein Thungela is taking a 65% interest.
The Johannesburg Stock Exchange (JSE) listed pure play coal mining company which was created from the demerger of Anglo American’s coal assets has been on a mergers and acquisitions spree. Thungela announced earlier this month that it had acquired an Australian coal mine. This move has been read by market analysts as a risk mitigation move by diversifying away from South Africa. It also bought out its Black Empowerment partners in a US$ 60 million transaction.
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On the M&A front, Thungela bought out its BEE partner Inyosi Coal from its South African mines Zibulo and Elders in a share swap transaction where Inyosi swapped its minority interest in both mines in return for shares in Thungela which are more liquid.
Thungela Resources Limited is one of those companies that offered investors at its inception a rare opportunity to create substantial value. The company that has been in existence in its present form for no more than 2 years has been one of the Johannesburg Stock Exchange’s (JSE) best performing stocks.
This is notwithstanding the fact that it produces and exports a commodity that is now universally frowned upon and yet the world relies heavily on. The company produces coal and makes a substantial amount of money in the process. South Africa based mining publication Mining MX described the financial results that the company produced in August 2022 in superlatives.
The publication said that Thungela Resources did not just “shoot the lights out” with its financial results, “it nuked them”. During that period the company increased earnings per share by 2,000% and declared a dividend that amounted to 21.7% of the previous week’s closing share price. From the time of its creation as a result of the demerger of Anglo’s export coal mines, the company at that time delivered a total return of 1,138%.
The trend has not stopped. Thungela Resources is still making money hand over fist. The steam in Thungela’s financial sails has been the elevated prices of coal. These elevated prices have been attributed to the war in Ukraine which has set the prices of energy products soaring.
The price of oil reached its highest levels since 2008. Oil prices have however, since retreated. Coal has been especially lucrative and not just for Thungela. Diversified miner and trader Glencore Limited has creamed it from the high coal prices.
Glencore announced this week that it made US$ 7.1 billion from coal. Demand for affordable energy has underscored the elevated coal price which has been escalated by the continuing conflict in Ukraine. Prices for coal ranged between US$ 236 to US$ 300 per ton in 2022. The high price of coal not only made money for Thungela but also mitigated the financial and operation impact of the failure of Transnet Freight Rail to make deliveries to the Richards Bay Coal Terminal in South Africa.
In South Africa, coal that is mined from collieries is transported to the Richards Bay Coal Terminal RBCT which is a specially built facility used to ship export coal to overseas markets. The main parastatal that ferries coal to the RBCT is Transnet through its subsidiary Transnet Freight Rail of TFR. TFR has been inefficient in collecting stockpiles of coal and delivering it to the RBCT. This resulted in billions of Rand in lost sales. Even with lost sales Thungela had a stellar financial performance.
Venturing beyond South Africa
The coal miner is flush with cash and it is confident of its future prospects to the extent that it announced this month that will be purchasing a coal mining operation in Australia called Ensham for ZAR 4 billion or US$ 219 million. The terms of the transaction make for very interesting reading and they demonstrate the very strong financial position that Thungela is in.
However, before an investor can delve into the coal miner’s internationalization strategy its important to understand the origins of its growth strategy. It is crucial to begin with Thungela’s buy-out of its Black Economic Empowerment partner.
The buy-out of its BEE partner was announced in November 2022 in a transaction valued at ZAR 1.1 billion or US$ 60 million. Thungela issued 4.3 million of its own shares to an entity called Inyosi Coal which held 27% in two operating mines called Zibulo and Elders. After the transaction Thungela will own outright interests in Zibulo and Elders mines whereas Inyosi Coal will hold roughly 3% of Thungela. The transaction was announced and consummated ahead of Thungela’s planned upgrade of both mines to replace its aging Goedehoop Colliery which is reaching the end of its life.
Thungela through this buy-out gains from improved cash flow from owning these assets outright and the BEE partners gain from having improved liquidity in their investment by holding shares in a publicly traded company should they desire to cash out.
The enactment of the Minerals & Petroleum Development Act also known as the MPRDA made it mandatory for companies to have a portion of their equity held by previously disadvantaged black people. This Black Economic Empowerment parameter has since been increased to make it much more broad-based. Through this equity swap transaction, Thungela gets to control its mines it owns outright and also retain its BEE credentials. The transaction gives the company and its BEE shareholders the best of both worlds.
Acquisition of Ensham
Thungela’s latest acquisition Ensham is located in Australia’s coal rich Bowen Basin in Queensland. The rationale for the transaction appears to be driven by both financial and risk management reasons. On the financial front Thungela stands to gain from increasing its production of coal by adding this 3.2-million-ton asset to its portfolio. This coupled with the fact that coal prices are envisaged to remain elevated throughout 2023 to 2024 and levelling out from 2025 onward means that the good times are set to continue rolling for shareholders in the company.
Thungela also announced that this acquisition would de-risk its business and make it more resilient against the infrastructure challenges in South Africa. The southern African country is losing its investment pull especially in the mining sector. South Africa has scored consistently low on exploration spending in recent times compared to mature markets like Australia which has well developed infrastructure.
The Ensham acquisition is entirely in cash. Thungela through its Australia subsidiary bearing the same name paid cash for its 65% interest and extended a mezzanine loan to finance the interest of its partners in the transaction.
Thungela’s partners in the acquisition are Audley Energy and Mayfair Corporations. The partners have come together to form an entity called Sungela which will purchase 85% of Ensham and the remaining 15% will be held by a South Korea firm called LX International. Ensham is currently owned by Idemitsu, a Japanese petroleum company, and supplies the Japan and as well as the Taiwan, Korea and India markets. Ensham will also give Thungela access to the Newcastle export price which is higher than the RBCT coal price. The company said that its acquisition of Ensham gave it a toehold in the Australian market which was a strong signal to investors that there will be more acquisitions to come in the coal space and others.
Thungela Resources share price performance relative to the JSE listed coal sector
The company delivered a very strong share price performance among its peers in the listed JSE coal sector.
The company booked a 69.94% share price increase for shareholders which was second only to MC Mining Limited whose shares appreciated by 274.14% in 2022.
