When Anglo American demerged its South African coal assets into Thungela Resources it agreed to continue marketing the fuel in return for a relatively modest 1% of revenue. As it was 2021 and coal was then public enemy No. 1, the marketing fee represented something of a corporate largesse. The coal assets were limited in life and Anglo expected its UK shareholders to flee Thungela. What the UK miner didn’t bet on though was a quadrupling in coal prices that year.
Thungela went on to pay bumper dividends, but it also allocated A$335m in cash to buy Ensham, a mine in Queensland, Australia. Coal prices have since retreated but July Ndlovu, CEO of Thungela, says valuations on coal reserves have increased because the world is jittery on energy security following Russia’s invasion of Ukraine in 2022. Small geopolitical events can have big outcomes, says Ndlovu. Existing coal mine owners are now more reluctant to sell, or have much higher value expectations. “We still see opportunities in mergers and acquisitions, but it’s becoming more difficult,” says Ndlovu.
The firm’s shareholders are also watchful of Thungela’s spending plans. They downed a company resolution to issue shares for cash at the firm’s annual general meeting in June. Ndlovu says the negative vote was no great surprise. He also downplays its consequences. “It wouldn’t affect our ability to do M&A but the message we receive all the time is that as a pure play the preference is that we give cash back to shareholders.”
M&A makes sense for Thungela because rail and port logjams in South Africa, which are unlikely to ease this year, are constricting export sales. Better still – as it’s cheaper – is the brownfields expansion of Ensham itself. The property contains about a billion tons in coal reserves of which current production, estimated to be 3.2mt to 3.5mt this year, is a fraction. Ndlovu has high hopes, however, that production could be pushed to four million tons this year by making substantial mining improvements. A yet greater increase in annual production is the company’s aspiration in the long term.
“It’s a massive resource. We just have to find out what is optimal in terms of production. Is it five million tons or 10mt a year? I can say we will know by the end of the year,” he says of a feasibility study on Ensham’s expansion.
Thungela is currently spending R2.6bn developing Elders and Zibulo South, new mines in South Africa that will replace depleted reserves elsewhere in the portfolio. The company also keeps a R5bn “cash buffer” in order to protect the balance sheet against market volatility, and because Thungela is a single commodity producer it would be risky for the firm not to have it. Improving the performance of Transnet, the state-owned utility, would result in a major uplift for the company.
Ndlovu doesn’t expect Transnet Freight Rail (TFR), Transnet’s largest division, to improve coal delivery rates this year. In fact, they may well deteriorate following two derailments in the first half involving Thungela trains, costing the company 650 000 tons in exports. “It was extremely disappointing,” Ndlovu says. In both cases, signalling was at fault. “That’s a problem I’ve been talking about for a while. Without proper signalling, TFR doesn’t really know where its trains are on the Mpumalanga to Richards Bay line, and that’s what happened this year. Both derailments were collisions.”
Ndlovu cracks a chuckle about the incident, but it’s a bitter one considering the economic consequences. Thungela is likely to see one million tons in on-mine stockpiles as a result, which translates into less flexibility in managing the coal sales mix. As a result, the discount to the benchmark price on Thungela’s average sales increased to 15% in the first six months of this year from 14% previously.
At the time of writing, there’s some selling pressure on Thungela shares but that can change quickly if the coal market changes pace. “It’s impossible to predict geopolitical events but then you don’t need a massive event to bring coal security back into play,” Ndlovu says.