Thungela to exceed dividend expectations after strong coal prices in second half of year

THUNGELA Resources was set to cap a successful debut on the Johannesburg Stock Exchange this year with a better-than-anticipated final dividend. This follows strong thermal coal prices in the second half of its financial year ended December.

Thungela Resources was created following the demerger of Anglo American’s export-focused thermal coal assets. It listed on June 7 amid a degree of scepticism. After a period of sell-offs, the company’s share price stabilised and has since gained 274% year to date. Shares in the company were 16% higher by around midday in Johannesburg today.

According to RMB Morgan Stanley, at the market’s current clip the group could close the year with roughly R9bn in cash, implying a payout of 3.5bn – although contributions to the coal firm’s rehabilitation fund had to be taken into account, it said. Thungela has a payout policy of a minimum 30% of adjusted operating free cash flow.

Commenting in a pre-close and trading statement, Thungela’s CFO Deon Smith said the group would register profits in respect of share earnings and headline share earnings following strong coal pricing. An announcement on the possible capital payout – which could also be in a share buy-back – would be around March 22 when Thungela presented its year-end number for the 12 months to December.

Smith also disclosed additional details of Thungela’s balance sheet management approach in which it would maintain a R5bn and R6bn liquidity buffer during periods of strong coal pricing and a R2bn to R3bn buffer during periods of weak pricing.

The benchmark export coal price averaged $123 per ton for the year-to-date and peaked at R210/t end-October before moderating to $141/t by the end of November. The discount applied to its export coal grades this year narrowed to 17% on average from 26% last year, and 23% in the first half of the current financial year.

Putting all this together, Smith said it was prudent Thungela maintained “… the upper end of its liquidity buffer”. As matters currently stood, that would mean Thungela retaining cash of about R6bn after distributing R2bn in a final dividend.

Commenting on the export price, Smith said supply constraints in the seaborne thermal coal market ex-Australia and Indonesia to China had helped improve demand for South African coal, as well as South Africa’s own freight constraints related to Transnet, the state-owned firm.

Trouble on the rail line

As per a similar year-end statement from Exxaro Resources last week, Thungela said Transnet division, Transnet Freight Rail (TFR) was leading a troubled existence currently.  TFR problems had led to a stock build at its Khwezela complex where newly ramped up pit Navigation had been established to offset a loss of production from the mothballed (and high cost) Bokgoni pit.

Responding to analyst questions in a teleconference today, Smith estimated a capital build of about R1.2bn or the equivalent of some 2.5Mt across its mines.

Commenting more widely on the TFR-related sales bottlenecks, Smith said: “Production at other operations had been steady until October, but is only expected to return to optimal performance once on-mine stockpiles have been reduced”.

All in all, export saleable production for the year is expected to come in at 14.9 million tons (Mt) which is at the lower end of a 14.8 to 15.2Mt estimate given by Thungela in October. Export equity sales – excluding third party buy-ins – are expected to be 13.7Mt for the 12 months.

TFR has been scourged this year by acts of vandalism and theft on its rail network, including the Mpumalanga to Richards Bay coal line. TFR said earlier this year it was effectively ‘under attack’ of numerous armed gangs of up to 25 people stalking the line.

On the positive side, Thungela said that it would establish a beneficiation plant at its Goedehoop Colliery at a cost of R200m which would produce one million tons of coal a year for four years, starting March 2022.