Thungela’s half year dividend shrinks as lower coal prices burn off profits

THUNGELA Resources’s interim dividend plunged to R10 from R60 a share after lower coal prices and problems with the freight rail system resulted in much lower profits at South Africa’s biggest exporter of coal for power stations.

Profit of R3 billion was well down from R9.6bn at the same time a year before, following a significant decrease from record thermal coal prices a year before.

In that year, coal prices had been buoyed by an energy crisis in Europe with the start of Russia’s war with Ukraine, while seaborne coal prices fell sharply this year as European buying slowed on the back of record coal and gas stock levels coming out of a milder winter.

“This resulted in the redirection of coal volumes to Asian markets, which also showed signs of weaker demand, especially from Japan and China,” said Thungela’s CEO July Ndlovu.

Thungela’s share price closed 4.81% higher at R137.35 on the JSE yesterday. But this also reflected the decline in shareholder returns, as the price is about 60% lower than what it traded at a year ago.

Headline earnings fell to R22.46 a share from R67.23 a share. Adjusted operating free cash flow of R4.3bn was less than half the R8.9bn in 2022.

The net cash position, however, stood at R13.6bn versus R14.8bn at the end of the first half of 2022.

Ndlovu said there had been no improvement in the rail performance.

He said Transnet Freight Rail suffered two derailments in May, which cost Thungela at least 340 000 tons in rail capacity.

After a particularly poor first quarter, the rail performance stabilised in the second quarter – following the derailments,” he said.

On coal prices, he said the group believed that the current coal price headwinds marked only a pause in attractive prices rather than a sustained downturn.

“We expect demand for coal to remain robust in developing countries, especially Asia, which is reliant on thermal coal, as countries such as China and India continue to build coal-fired power plants,” he said.

He said global underinvestment into coal supply had continued, with the exception of China and India, both focusing on domestic supply, and Indonesia, which produces lower quality coal.

“At the same time, we have seen an increase in new coal-fired power generation coming online, especially in China, all of which should be supportive of coal prices in the medium to longer term,” he said.

The R4.1bn Ensham acquisition in Australia was expected to completed by August 31, 2023. Ndlovu said the acquisition marked “the first milestone of our geographic diversification strategy.”

Ensham was described as a large asset with long life potential that could provide Thungela with entry into the southern Bowen Basin in Queensland, a leading mining jurisdiction with mature and well-established infrastructure.

Thungela said the acquisition was set to be earnings and cash flow accretive, with strong potential for a short payback period.

The acquisition also brought increased scale and marketing capability, providing access to Japan and other Asian markets.

The group’s Sisonke Employee Empowerment Scheme and Nkulo Community Partnership Trust would receive a R156m contribution in keeping with commitment to create shared value.

“LNG prices are now starting to find support, which will make coal more competitive as a fuel source towards the end of the year as the European winter approaches. Coal production from Russia’s western regions is also slowly being curtailed at current pricing levels,” the group said.

The group said it would ensure that it was both resilient to weaker shortterm market conditions and ready to take advantage of improved conditions as they arise.

Two focuses were required to achieve this: the first being the decision to structurally resize the portfolio in response to rail constraints.

The second was to improve competitiveness by increasing productivity and ensuring the optimal cost base for the business.

“In the event that prices remain depressed for a protracted period and rail performance does not improve, we may be required to consider further revisions to our portfolio,” the group said.