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Increased coal demand buoying Thungela exports, but high costs a challenge

13th June 2022

By: Donna Slater

Features Deputy Editor and Chief Photographer

     

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In a pre-close statement on June 13, JSE- and LSE-listed coal miner Thungela CFO Deon Smith said a high average benchmark coal price contributed to strong earnings and cash generation for the miner in the six months to June 30.

The benchmark coal price averaged $266/t for the year to date, compared with $98/t in the first half of 2021.

Prices have, however, been “extremely volatile” with large daily fluctuations in physical prices, the miner reports.

“Cash flow generation has been robust on the back of strong realised export coal prices. The strong cash generation has resulted in a net cash position of [about] R15.3-billion [at period’s end],” Smith said.

Thungela expects its earnings a share for the period to be at least R58 apiece. “This represents an increase of R54.87 compared with [the first half of 2021’s earnings a share] of R3.13 apiece,” he noted.

Headline earnings a share for the period are expected to be at least R58 apiece, up R54.95 from the first half of 2021’s headline earnings a share of R3.05.

June 7 marks a full year since Thungela’s listing on the JSE and LSE in which it concluded the distribution of a maiden dividend of R2.5-billion to shareholders, while also distributing R273-million to the SACO Employee and Nkulo Community Partnership Trusts.

As such, Thungela expects to report improved earnings and cash generation for the period, reflecting its ability to mitigate the impact of the continued inconsistent and poor rail performance by Transnet Freight Rail (TFR), which has impacted on Thungela’s ability to deliver export thermal coal to the seaborne market.

The miner reports that demand for thermal coal remained firm at the start of the year as global economic activity continued to recover from the Covid-19 pandemic, being further buoyed by Russia’s invasion of Ukraine that sent demand for coal and its value higher.

Also, the discount to the benchmark coal price has been about 15% for the year to date, compared with 23% for the first half of 2021 and 13% in the second half. The discount for the year to date has widened slightly as a result of a more balanced sales mix compared with the second half of 2021.

As such, Thungela’s export saleable production for the first half of this year is expected to be about 6.1-million tonnes – 14% lower than the 7.1-million tonnes of the first half of 2021. This is a direct result of actions implemented to mitigate the impact of reduced and inconsistent TFR rail performance. Steps taken to address the situation include curtailing production where possible to reduce stranded costs.

Thungela’s free-on-board (FOB) export cost per tonne, excluding royalties, in the period under review is expected to be about R957/t, up from the R787/t of the first half of 2021. This unit cost is currently higher than this year’s full-year guidance of between R850/t and R870/t, excluding royalties.

“At this stage, we are not restating guidance as the increase in FOB cost per export tonne in [the first half of this year] is largely attributable to the denominator impact of the lower export saleable production expected to be achieved in [the period], and higher-than-planned energy input costs,” he said.

Smith added that this year’s full-year guidance assumes an improvement in export saleable production in the second half. “Should export saleable production improve as expected in [the second half], the full-year 2022 guidance will remain appropriate.”

Including royalties, the FOB cost per export tonne is expected to be R1 124/t, up from the R782/t of the first half of 2021.

Thungela’s export equity sales for the period under review are expected to be about 6.4-million tonnes, 3% less than the 6.6-million tonnes in the comparative 2021 period.

The miner’s capital expenditure, including sustaining and expansionary capital, in the period under review is expected to be about R500-million.

“Historically, Thungela’s [capital spend] has been higher in the second half of the year and this is expected to also be the case for 2022,” he said.

Going forward, Smith said the miner was closely monitoring the previously issued export saleable production guidance in light of the inconsistent TFR rail performance. “TFR’s performance for the year to date has been 55-million tonnes on an annualised basis for the industry.”

For Thungela to achieve the lower end of its previously-issued export saleable production guidance of between 14-million and 15-million tonnes, he said TFR needed to deliver a successful yearly maintenance shut in July. This is in addition to increasing yearly rail performance by about 9% for the second half, as compared to the first half. Overall, this requires TFR to ramp up capacity to 60-million tonnes a year.

Nonetheless, Smith said TFR’s performance was expected to improve following the yearly maintenance shut.

Notwithstanding the expected improvement in rail performance, Thungela also expects an inventory build-up of about 500 000 t in the second half of this year.

In addition to engaging TFR to collaborate in finding solutions to the issues affecting TFR’s rail performance, Thungela is also evaluating alternative transport options to mitigate the impact of poor TFR rail performance.

“The board continues to believe that, in the current economic environment, it is appropriate to maintain the liquidity buffer at the upper end of the range of R5-billion to R6-billion.

“[Thungela] expects to declare an interim dividend for the period [under review] at the release of its interim results on, or about, August 15,” Smith noted.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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