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Thungela declares whopping R8.2bn half-year dividend on R8.9bn free cash

Thungela CEO July Ndlovu

Thungela CFO Deon Smith

15th August 2022

By: Martin Creamer

Creamer Media Editor

     

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JOHANNESBURG (miningweekly.com) –  JSE- and London-listed thermal coal-mining and marketing company Thungela has approved the declaration of an interim gross ordinary cash dividend totalling R8.2-billion from retained earnings accrued during the six months to June 30, on profit for the reporting period of R9.6-billion, which is more than 27 times higher than last year’s first-half profit.

Thungela was listed in Johannesburg and London in June 2021 following the demerging of Anglo American’s the South African thermal coal operations.

Although full-year guidance for export saleable production has been revised down reflecting expected ongoing Transnet Freight Rail (TFR) performance, Thungela has a far-reaching value-over-volume plan which could see value remaining sky high on highest-margin coal being railed.

Providing insight into the context in which Thungela presented such impressive results, Thungela CEO July Ndlovu outlined how the Russia/Ukraine conflict’s demand pull had been coupled with supply constraints across the major coal-producing regions, resulting in coal prices soaring to unprecedented record levels.

Despite TFR’s under-performance hindering Thungela’s ability to take full advantage of the strong demand environment, the company delivered operating free cash flow of R8.9-billion resulting in a net cash operating free cash flow position of R14.8-billion – R11.8-billion more than in the first half of 2021.

The board’s R60 a share represents 92% of operating free cash flow and is way above the stated policy of returning a minimum of 30% of free cash flow to shareholders.

In addition to the R273-million received by the trusts in 2021, the SACO Employee Trust and Nkulo Community Partnership Trust will receive R500-million in keeping with commitment to share the value with stakeholders.

Moreover, on the environmental front, a further R200-million half-year discretionary contribution has also been made to the company’s Green Fund.

Thungela is distributing all excess cash above the liquidity buffer of R6-billion.

The board has also approved the R2-billion Elders production replacement project, which maximises coal quality.

Elders will replace volumes from the Goedehoop colliery, which is coming to end of its life.

“This is quite an important project as it will allow us to preserve jobs and livelihoods of particularly small enterprise businesses within the region that we operate,” Ndlovu told a media conference in which Mining Weekly participated.

In June, Thungela launched the Thuthukani supplier and enterprise development programme to support local business and stimulate job creation. Thuthukani means to uplift in isiZulu and the programme aims to provide hands-on entrepreneurial business support in the form of non-funding technical enablement to small enterprises in Mpumalanga, around Thungela’s mines.

Thungela is seeking to geographically diversify its coal business.

RAIL CONSTRAINT EXPECTED TO REMAIN

Although improvement is expected from TFR given work done, Thungela has decided to be conservative in its expectation by continuing to implement its mitigating actions and lowering production guidance from 14-million tonnes to 15-million tonnes to 13-million tonnes to 13.6-million tonnes. The lower guidance does not rely on material improvement by TFR.

The expectation is that capital expenditure in 2022 will likely be on the lower end of the guided R1.7-billion to R2-billion.

HIGHEST MARGIN COAL TO BE RAILED

In response to Mining Weekly, Ndlovu pointed to the announced likelihood of only 60-million tonnes of coal being railed through the rail corridor to Richards Bay Coal Terminal in 2022, requiring Thungela to mitigate its business by setting out to rail the highest-margin coal.

The results just out also involved Thungela taking action to ensure that it sends the highest-margin coal down the corridor to maximise earnings.

The first mitigating action taken is to stockpile where necessary lower-margin, lower-grade coal, such as middlings coal.

The second action taken is to curtain operations where possible and where it makes business sense.

Instances of this include Thungela curtailing a plant at Greenside colliery and a minipit operation at Zinbulo and slowing the ramp-up of Navigation area in Khwezela North. Equipment there is then dedicated to rehabilitation activities, which is seen as making good business sense in that it addresses a long-term liability on the company’s balance sheet.

The third action taken is to look at alternative ways of getting to market and will be sending some coal parcels by road while still remaining of the view that rail remains the most efficient, cost-effective and reliable way of getting to port.

On collaborative action being taken by Thungela and TFR, Ndlovu said first and foremost, a massive maintenance backlog was being dealt with, and work done during the shutdown was very pleasing.

But not all work has been completed and a significant capital injection is required to catch up with the maintenance, with the shareholder able to play a role by recapitalising the rail enterprise.

“Clearly, the work being done to procure additional equipment is important, and we think that will take us down the road, but we all have to accept that given that these problems have been in the making for so long, catching up on the infrastructure backlog, and recapitalising Transnet is going to take time,” said Ndlovu.

In that context, there are things that Thungela can to do with TFR such as what has been done to improve security and planning.

GREEN FUND

On a further R200-million half-year discretionary contribution being made to the company’s Green Fund, Thungela CFO Deon Smith explained in response to Mining Weekly that when Thungela set out on the demerger from Anglo American, the single largest liability on its balance sheet was its environmental obligations that are required to be carried out once mining is discontinued.

From a regulatory perspective, that liability is just over R4-billion.

With the regulations enshrined in the new National Environmental Management Act, the estimate is that liability could be as much as R6.9-billion.

Cash collateral of about R3.3-billion has been put into an environmental rehabilitation trust.

But on top of that, Thungela has created the Green Fund, which enables the company to accelerate contributions to a trust that is essentially the cash collateral.

Prior to the latest R200-million allocation, the company had around R3.7-billion in those trusts, of which R3.3-billion is in the trust and around R400-million is in the Green Fund.

The latest addition of R200-million to the Green Fund aims to close any gap of cash collateral over time so that by the time the collieries reach an end of life, those liabilities are fully cash collateralised and those trusts can collectively responsibly manage the closure.

“We think that this additional contribution is therefore the appropriate step in the context of our ESG obligations to close that gap during the next number of years,” Smith explained.

Remediation work in response to the uncontrolled release of water into the Kromdraaispruit and Wilge river on 14 February 2022 is continuing amid a committed by Thungela to restore the river system.

Edited by Creamer Media Reporter

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