INTERESTING arithmatic by RMB Morgan Stanley has highlighted the opportunity cost to the South African fiscus as a result of Transnet’s difficulties operating its coal export network.
Were Transnet able to return South African coal export deliveries to 80 million tons (Mt) – a tonnage last achieved in 2017 – it would net R15bn additional in the 2023 tax-take, according to the bank’s report on June 3. That’s assuming current spot prices for thermal coal which are running at $415/t.
As matters currently stand, delivering some 60Mt of coal to Richards Bay, which the bank understands is the likelihood for this year, will still earn the national purse R58bn in taxes and royalties in 2023 – more than a third of the R140bn in tax due to be collected from all South African mining companies, again assuming current spot prices.
What this achieves in spending power is considerable. It would enable a nine month payback on adding 120 locomotives that Transnet requires to address the major bottleneck remaining on the export line, given that the private sector has largely installed its own security measures to stem copper theft.
These back-of-the-matchbox calculations have potential to mislead, however – as RMB Morgan Stanley duly acknowledges.
It said: “Of course, it’s never this simple. South Africa runs a narrow gauge railway line which is non-standard and procuring equipment isn’t simple. In the current environment, getting equipment in general isn’t easy. The coal producer themselves have scaled back operations for want of rail capacity and it wouldn’t be quick or easy to return these operations to full production”.
In March, Deon Smith, CFO of Thungela, said Transnet’s problems amounted to an opportunity cost of at least R2bn for the 12 months of the firm’s base case assumptions. Set against the way the thermal coal price had increased, the potential loss on future earnings was “sky’s the limit”, he added. Sky’s the limit, but not in a good way.
The potential benefit of a fully functioning Transnet would therefore have a major impact on South Africa’s coal producers.
Assuming Transnet could manage deliveries of 80Mt this year, Thungela’s free cash flow yield would rise to 83% compared to the current expectation of a 71% yield, according to RMB Morgan Stanley. That’s if Thungela bought in an additional four million tons in coal production given that its share of Transnet’s capacity – 20Mt – is higher than its mines can actually produce.