Dealing with rail constraints remains a priority as Thungela achieves good results

Thungela CEO July Ndlovu

Thungela CEO July Ndlovu

27th March 2023

By: Schalk Burger

Creamer Media Senior Deputy Editor


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Despite the impact of ongoing rail constraints, thermal coal producer and exporter Thungela Resources managed to deliver good results for the 2022 financial year, with earnings before interest, taxes, depreciation and amortisation having increased three-fold year-on-year to R29.5-billion and net profit 162% higher year-on-year at R18.2-billion.

Revenue increased by 93% to R50.7-billion and the company declared a final dividend of R40 a share, bringing the full-year dividend to R100 a share.

This meant it returned R13.8-billion to shareholders, equating to about 76% of adjusted free operating cash flow for the year, which was well ahead of its policy to distribute a minimum of 30% of adjusted free cash flow to shareholders, Thungela CEO July Ndlovu noted on March 27.

"We generated adjusted operating free cash flow of R18.1-billion during the year, compared with R3.9-billion in the prior year. This outcome is in large part owing to strong coal prices, but is also testament to the agility of our people in operating in a severely constrained rail environment.

"A more than four-fold increase in cash generation is a remarkable achievement given the loss of close to three-million tonnes of export saleable production volumes as a direct result of the poor [State-owned] Transnet Freight Rail (TFR) rail performance," he said.

The company is collaborating with Transnet to address the constraints and shares a weekly performance dashboard with the rail operator.

"This is the single most important issue, and mitigating the constraint of logistics is a priority. We continue to manage the Transnet constraints in a smart way to maximise earnings. We also continue to prioritise sending everyone home safely and controlling [what we can]," he said, describing the company's outlook for the current year in a call with investors.

Given TFR’s deteriorating performance since 2021, and the especially poor performance in 2022, Thungela had to reset its production outlook for 2023.

Its export saleable production guidance for 2023 had been set at between 10.5-million and 12.5-million tonnes, as it planned to draw down on the high on-mine stockpiles, to the extent that the rail performance exceeded production levels, Ndlovu noted.

This compares with saleable production of 13.1-million tonnes in 2022.

"We have seen some improvements in the performance of rail over the past few weeks. The upper end of the export saleable production guidance is aligned with the expected performance of what TFR was able to achieve last year," Ndlovu said.

The production guidance is also in line with what the company has seen from TFR during the first quarter of the current financial year, which was at the upper end of TFR's performance during 2022.

Thungela planned to draw down on its 3.2-million tonnes of stockpiles to the extent that the rail performance exceeded the upper end of the guidance, he noted.

The company's share price on the JSE fell by nearly 10% by 11:50 on March 27.

Meanwhile, the exceptional cash generation resulted in a net cash position of R14.7-billion at year-end, R6-billion higher than in the prior year.

Further, while the acquisition of the Ensham coal mine, in Australia, will be paid for from cash on hand at year-end, it will materially change the overall structure of the group, including its liquidity needs.

"Accordingly, we have secured access to R3.2-billion in credit facilities with leading South African banks to reflect this change, as well as to bolster our resilience against continued poor rail performance by maintaining a sufficient level of liquidity," Ndlovu noted.

The Thungela board, in line with its strategic priority to maximise the full potential of its existing assets, approved the development of the Elders production replacement project, in South Africa.

"We also continue to progress the feasibility study for the Zibulo North Shaft life extension project and expect to submit this for board consideration in 2023. We are also evaluating potential development options for our significant gas resource in Limpopo," he added.

Further, in November, the company acquired the remaining 27% shareholding in Anglo American Inyosi Coal, which holds Zibulo and Elders.

"This transaction will allow us to benefit from the full economics of the most cash-generative assets in our portfolio, resulting in an increase in earnings attributable to the equity shareholders of Thungela," Ndlovu said.

Meanwhile, the creation of diversification options remains an important focus for the business' plans for the future.

Thungela said its guidance for free-on-board (FOB) costs for 2023 had been set at between R1 131/t and R1 264/t, or R1 047/t to R1 180/t excluding royalties, against a forecast benchmark coal price of $130/t.

"Our sustaining capital expenditure for 2023 is expected to be between R1.3-billion and R1.5-billion. Expansionary capital expenditure is expected to be between R1.6-billion and R1.8-billion, relating primarily to R1.2-billion for Elders and R500-million for Zibulo North Shaft, should the latter be approved by the board," Ndlovu pointed out.

Further, Thungela's operating costs increased by 29% during its 2022 financial year to R22-billion, up from R17-billion in the 2021 year.

"While we will ensure the business remains capable of continuing to deliver safe production and that we maintain operational flexibility to ramp volumes up should rail performance improve, we have instituted a programme to reduce costs across our operations in an effort to manage the unit cost impact of the reduced production guidance.

"The expected impact of this programme has been taken into account in the 2023 FOB cost per export ton guidance," he noted.

"Given the degree of uncertainty regarding TFR performance currently, we are not providing guidance for 2024. We continue to evaluate the potential for near-term improvements.

"Further, we are actively involved in the collaborative effort between the Transnet board and the Minerals Council South Africa, which is focused on stabilising and improving rail performance, and we remain hopeful that this matter of national importance will be resolved," Ndlovu stated.

Meanwhile, Thungela noted that the fundamentals supporting thermal coal remained firmly in place, although prices had softened early this year.

"While we are unlikely to see the historic price levels observed in 2022, we expect prices to remain robust. In the longer term, we anticipate continued strong coal demand from emerging markets, especially those in Asia where coal is likely to remain part of the energy mix for at least the next two decades," said Ndlovu.

"However, in the short-term, fixing the rail network is of critical importance to South Africa as the mining industry delivers far-reaching benefits, sustains jobs and livelihoods in our communities, and contributes significantly to the fiscus and the economy.

"We remain focused on working with Transnet to resolve the issues plaguing rail performance and call on government to support these efforts in order to ensure that the mining industry can continue to create value for South Africa and its people," he emphasised.

Further, the results from 2022 further bolster the company’s confidence in its resilience and potential.

"We look ahead with a sense of caution in the short term, yet confidence in the longer term."

In 2022, Thungela contributed R8.5-billion in income taxes and royalties to the South African fiscus and made a significant positive impact in its host communities.

"Had we not been constrained by poor TFR rail performance, this contribution and positive impact would have been much higher," he added.

Given its unique context in South Africa, and Mpumalanga in particular, Thungela has committed to focusing on the social component of environmental, social and governance, with a special focus on its employees and the communities in which it operates, Ndlovu noted.

"Employees and communities share in the value we create through their participation in the Sisonke Employee Empowerment Scheme and the Nkulo Community Partnership Trust, and we contributed R896-million to these trusts in 2022, bringing the total contribution since our listing to R1.2-billion.

"This will make a meaningful and lasting impact on the lives of those most important to enabling value creation, namely our employees and host communities," he said.

Further, in line with the commitment Thungela made last year, it has completed a full review of its intermediate emissions-reduction targets and has announced that Thungela aims to reduce its Scope 1 and 2 greenhouse-gas emissions by 30% by 2030 and to reach net zero by 2050.

"Further details on our pathway to net zero, including the intermediate emissions reduction targets, will be published in April in our maiden Climate Change Report, aligned to the requirements of the [financial markets climate action initiative] Task Force on Climate-Related Financial Disclosures," said Ndlovu.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online



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