Thungela mints money as Ukraine war sends coal prices into orbit

Thungela Resources was supposed to be a set of hand-me-down coal assets from Anglo American, which proudly announced to the world that it was exiting the coal business in 2021.

Coal was seen as a dirty, dying sector destined for the knackers yard, to be replaced by solar panels and wind turbines.

The Ukraine war was nowhere on the horizon when the company was hived off from the Anglo stable and listed separately on the JSE in June 2021.

The chart below shows the story of the last year, with a nearly three-fold increase in realised coal prices.

Coal prices were already climbing steadily as it became clear the global economic recovery would not be powered by renewables – then vaulted in February 2022 when the war in Ukraine began.

On Monday, Thungela reported that profit for the half-year to June 2022 was R9.6 billion (H1 2021: R351 million), gifting the coal miner a net cash pile of R14.8 billion (H1 2021: R3 billion).

The company has splurged a R60 interim dividend on shareholders, which is 21% of yesterday’s closing share price of about R285.

This represents a payout of 92% of adjusted operating free cash flow, which is substantially higher than the company’s target payout ratio of 30%.

Revenue for the period shot up 161% to R26.17 billion (H1 2021: R10 billion).

Earnings before interest, tax, depreciation and amortisation (Ebitda) shot up 783% to R16.7 billion (H1 2021: R1.89 billion).

The Ebitda margin is also one for the record books: up 45 percentage points to 64%.

“Demand for affordable energy sources such as thermal coal escalated amid the energy security crisis which was exacerbated by the escalation of the Russia-Ukraine conflict,” says Thungela in its mid-year financial results statement.

“Coupled with supply constraints in major coal producing regions, this resulted in the price of thermal coal increasing to unprecedented levels.”

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Transnet coal line woes

It’s clear the results would have been even better if Transnet Freight Rail (TFR) was able to ship more volume.

This is reflected in the chart below, which shows an annualised 53.3 million tons a year run rate being shipped to the Richards Bay Coal Terminal, down from 70 million in 2020. This is an area that will require serious attention in the coming year.

“A consistently well-run logistics corridor between Mpumalanga and Richards Bay is crucial not only for coal exporters such as Thungela, but also for the South African economy which generates billions of rands in foreign currency earnings, tax and royalty revenues through coal exports,” says Thungela CEO July Ndlovu.

“We remain committed to working with TFR, government and the industry, but we are also evaluating alternative logistics so as to mitigate the impact of TFR on our operations,” he adds.

Commenting on the coal miner’s financial performance, Terence Hove, senior market analyst at Exness, says Thungela has now returned shareholder value of 1 138% since listing a year ago.

“This has been achieved through an increase in share price, the 2021 final dividend and the 2022 interim dividends,” he adds.

“What is apparent is that these results could have been higher given the supply chain constraints underpinning performance of coal delivery between Mpumalanga and Richards Bay Coal Terminal.”

Trucking coal to the ports

Though management is looking at alternative solutions by trucking coal to the port, this poses a number of other challenges – including rising fuel costs, the ability to recruit sufficient drivers and vulnerability to drivers’ strikes that have gripped parts of the country over the last year few years.

“It will be a tough balancing act, but Thungela has committed to maximise the opportunity presented by the current energy crisis as a result of the Ukraine war,” says Hove.

“What is evident is that Thungela’s export saleable production performance will remain limited to the ability of TFR to scale up performance rapidly, hence the urgency of finding suitable alternative transport solutions while the current coal pricing opportunity is present,” he stresses.

There seems little sign of a softening in international coal prices at this stage. Energy-starved European countries are turning increasingly to coal as an energy source, a trend that may not be easily reversed.

Thungela says it is monitoring these trends and the implications for its strategy in the short to medium term, “with particular attention given to exploring opportunities for geographic diversification”.

This article first appeared on Moneyweb and was republished with permission. Read the original article here.