ON June 7, investors will have a new proposition before them: Thungela Resources, the name given to Anglo American’s soon-to-be demerged thermal coal assets, currently held in its Anglo Coal unit along with a one-third stake in Cerrejon, a coal business in Colombia.
Given that conditions precedent have mostly been met on the demerger, all that’s required before Thungela makes its debut is Anglo shareholder approval which is to be sought at its annual general meeting on May 5.
Anglo American CEO, Mark Cutifani, said in an interview today that shareholders had expressed a preference for a demerger of the South African mines over a trade sale, so it’s likely getting the shareholder nod is merely one of procedure.
So what will investors be getting in Thungela Resources?
High liquidity for one, partly owing to the fact that Anglo isn’t keeping a residual stake in the coal business. Its demerger scheme is for one Thungela share for each 10 Anglo shares held.
Stephen Pearce, Anglo American’s CFO acknowledged in a press call earlier on Thursday that many of Anglo’s UK shareholders will be active sellers of Thungela since it was they that lobbied most strongly for Anglo to get rid of its thermal coal assets. There will also be potential limitations on UK institutional ownership of a South African share.
Secondly, investors will be getting a share predicated on yield. Thungela CFO, Deon Smith, says the company will pay 30% of free cash flow after sustaining capital in dividends, with a view to increasing this payout ratio in time. A question, though, is to what extent will Thungela be able to generate cash through the cycle, and whether earnings fragility could lead to more trading volatility.
In essence, Thungela may be a proxy to the coal price and its third major characteristic for investors will be significant risk.
There are also future liabilities, mostly relating to rehabilitation, totalling $430m. Of this amount, $193m is already provided for in trusts or in cash collateral, but some 5.5% of free cash generated – about $12.5m a year – would be funnelled into liabilities.
Anglo has sought to derisk the business by promising to inject $170m (about R2.5bn), making it net cash from the outset, as well as providing additional financial support that could total as much as $170m in 2022 should the South African traded coal price fall below a certain threshold.
According to Brian Morgan, an analyst at RMB Morgan Stanley, the South African coal mines struggle to generate cash at a South African spot coal price of $80/t. Anglo Coal’s South African mines reported a $15m underlying EBITDA loss last year, taking losses over the last two years to $20m. For 2020, the average coal price traded at $57/t, although Anglo said in its year-end results presentation that a 10% positive movement in price or exchange rate would see an $88m positive contribution to EBITDA.
There’s also the question of mine life. One of the reasons Anglo is exiting its thermal coal assets – other than the main reason of reducing its carbon footprint – is that the mines held in the company have an average life of 13 years against the Anglo mine life average of 25 years.
As a result, analysts wanted to know the extent to which Thungela would be able to finance new projects, and when they would be set into motion.
Smith said a number of projects – all of them extensions of existing mines – are on the cards, but added: “We don’t foresee major capital intensity for our brownfields projects.” And no major expansions are planned for the first two to three years paving the way for shareholder rewards provided the coal market plays ball.
Over and above capital expenditure and sustaining capital costs, there are some R800m in central costs of which about “a third could be whittled down in a year or two”, said Smith.