Thungela to buy Australian coal mine Ensham for A$335m as SA risks mount

THUNGELA Resources today unveiled a major step out in strategy by announcing plans to buy for A$335m (R4bn) the 3.2 million ton (Mt) a year Ensham coal mine located in the coal-rich Bowen Basin of Australia’s Queensland.

Thungela said the proposed deal would derisk the business and bolster “our resilience recognising the ongoing infrastructure challenges in South Africa”. It would also provide “an entry point” to Australia suggesting the firm has plans for other acquisitions there.

Ensham is currently owned by Idemitsu, a Japanese petroleum company, and supplies the Japanese and as well as the Taiwan, Korea and India markets. In addition to a wider sales footprint, acquiring Ensham will also give Thungela exposure to the Newcastle export coal price which trades at a premium to Richards Bay export coal.

Ensham has potential for increased production in the future. It has a current 16-year life of mine and is permitted through to 2028 when an operating licence renewal is required.

Based on forecast prices for Newcastle coal, the payback period of the deal is about two to three years. The transaction would be “earnings and cash flow accretive”. About two-thirds of Ensham’s sales were sold-forward at “attractive prices”.

The deal structure is via a third party in which subsidiary Thungela Australia and its acquiring partners, Audley Energy and Mayfair Corporations Group, will acquire control of a newly created company called Sungela Group. Sungela will acquire 85% of Ensham.

Thungela will fund a A$267m investment giving it about 65% of the asset, and then co-fund Audley and Mayfair to the tune of A$67m via a mezzanine loan, repayable after four years, which takes Thugela’s stake to nearly 80% and leaving the partners with 6%. The balancing 15% of Ensham is owned by LX International, a commodity trading company headquartered in South Korea.

The acquisition represents a watershed moment for Thungela as it seeks to grow its portfolio beyond South Africa’s borders. The company said in November it faced a 600,000 ton ‘opportunity cost’ owing to failures of Transnet, the state-owned rail and ports company. It expected a 900,000 ton capital build for the year.

Export sales for 2022 were forecast to be 12.8Mt compared to guidance of between 13Mt to 13.6Mt, a 15% decline. Lower production has resulted in an increase in the FOB cost per export ton which would come in at $955/t compared to guidance of $885 to $915/t, Thungela said last year.

Australia’s Bowen Basin, however, is a well established coal centre in the country with extensive infrastructure. Ensham’s coal is loaded on to a 13km dedicated rail spur where it is transported 339km to Gladstone port for export. The coal is then loaded onto trains via a 13 km dedicated rail spur and is transported via the Blackwater rail system (339km total distance) to the port of Gladstone from where it is exported.

The acquisition may raise questions about the future trajectory of dividends from Thungela which has a 30% of adjusted operating free cash flow distribution policy. It paid a R60/share dividend at the interim stage.

Thungela paid R1.1bn to its empowerment partner Inyosi Coal in which it flipped up its asset level stake in Thungela to the listed shares. Other calls on Thungela’s cash is the R2bn development of Elders which will replace coal from the nearly depleted Goodehoop colliery, as well as the Zibulo North expansion.