THUNGELA Resources is to pay an interim dividend owing to vastly improved thermal coal prices which offset the chronic under-performance of Transnet, the South African government owned freight and logistics company.
However, shares in the company slumped nearly 11% in early Johannesburg trade. RMB Morgan Stanley said in a note that Thungela’s coal export and pricing update came in softer than expected. Nonetheless, the company could distribute its market capitalisation of some R30bn over its next three dividend payments, despite today’s disappointing news.
Commenting in a trading statement today, Thungela CFO, Deon Smith said export sales would be 6.1 million tons (Mt) for the six months ended June, a 14% year-on-year decline. This was the resut of continued failures at Transnet which, at an industry-wide annualised railed rate of 55Mt, could unseat Thungela’s full-year export guidance of 14Mt to 15Mt.
There was also cost per export ton pressure on Thungela which averaged R957 per ton for the year to date, a significant increase on the R787/t registered for the corresponding six month period last year. Smith said the company was not adjusting guidance at this stage as it hoped to lift export tonnages in the second half of the year.
Thungela had also retained production guidance for the year, but Smith said Transnet would have to improve volumes in the second half to an annualised rate of 60Mt for an guidance downgrade to be avoided. In order to meet that TFR (Transnet Freight Rail) had to deliver a successful annual maintenance shut in July, and a step up in annualised rail performance of approximately 9%” for the second half, said Smith.
Even if Transnet achieves this performance, railed volumes would still be some way off the 80Mt capacity in nameplate capacity. “Locomotive unavailability and cable theft” were among the problems faced by Transnet, Smith said. Transnet railed 58.72Mt last year – its worst performance since 1996.
The Minerals Council South Africa’s chief economist, Henk Langenhoven said recently that Transnet could in 2022 surpass the enormous R50bn opportunity cost of last year were it to fall short of its nameplate rail capacity for the mining industry as a whole.
“This worrying trend, which shows no signs of slowing or reversing, underscores the urgency for high-level intervention on the rail network and our ports to stabilise them, return them to productivity and meet design capacity,” said Langenhoven.
Said Smith: “Thungela and the industry continue to engage TFR in order to collaborate in finding solutions to the issue affecting TFR rail performance”.
The company also continued with discussions regarding Transnet’s April announcement in which it declared a force majeure on take-or-pay contracts with coal exporters using Richards Bay Coal Terminal. Thungela was also evaluating “alternative transport options to mitigate the impact of poor TFR rail performance”.
Despite local problems Thungela will benefit from sky-high international prices, a function partly of the conflict in Ukraine which has interrupted coal exports and resulted in economic sanctions on Ukraine’s aggressor, Russia. The benchmark coal price averaged $266/t year-to-date compared to $98/t for the corresponding period last year.
The market had been volatile with large daily fluctuations in physical prices, said Smith. The discount to the benchmark coal price narrowed to 15% compared to 23% for the first half of last year, he added. RMB Morgan Stanley said it was anticipating a narrower discount of about 10% to the benchmark.
Nonetheless, the outcome for Thungela shareholders will be another stand out dividend payment, especially as proposals for a share buy-back were nixed at the firm’s annual general meeting in May.
Smith said Thungela was committed to distribute cash above its minimum capital return policy of 30% of adjusted operating free cash flow. It unveiled a maiden R18/share final dividend for 2021, equal to a payout of R2.5bn.
