Thungela reaps global coal demand rewards despite rail disruptions

22nd March 2022 By: Donna Slater - Features Deputy Editor and Chief Photographer

JSE- and LSE-listed thermal coal miner Thungela Resources recorded a 601% year-on-year increase in revenue to R26.28-billion in 2021, pushing it to a profit of R6.94-billion, from a loss of R362-million in the prior year.

The miner posted headline earnings a share of R66.57 for 2021, compared with a headline loss a share of R5.31 in 2020.

It has declared a maiden cash dividend of R18 a share, payable in May.

Adjusted earnings before interest, taxes, depreciation and amortisation increased by 3 389%, from R286-million in 2020 to R9.98-billion in 2021, while adjusted free operating cash flow increased to R3.92-billion in 2021, from a loss of R249-million in 2020.

As such, Thungela held R8.66-billion in net cash at the end of 2021, compared with debt of R388-million in 2020.

The improvement in its financial performance came on the back of Thungela being buoyed by the benchmark thermal coal price, which strengthened by 90% to $124/t, although the stronger rand offset some of the gains.

In addition, the discount to benchmark prices narrowed substantially from 26% in 2020, to 16% in 2021, resulting in higher realised coal prices of $104/t in 2021, up from the $48/t achieved in 2020.

Being primarily an exporter, Thungela’s revenue was positively impacted on by increased demand for high-quality South African coal.

Developing economies in India, Pakistan, Sri Lanka and Vietnam are on a path of recovery, post-Covid-19, and are experiencing an increased demand for energy, prompting those countries to source more coal.

Thungela did, however, record a 16% decrease in export sales to 15-million tonnes in 2021, as a result of disruptions on Transnet Freight Rail’s (TFR’s) operations.

CEO July Ndlovu says Thungela is, nevertheless, committed to working with TFR, the government and the industry to resolve the transport issues experienced in 2021 and at the start of this year.

“We believe the challenges are transient and have planned our operational performance on a gradual, rather than an immediate recovery in rail performance. This is of national concern given that coal exports constitute one of the primary sources of foreign currency generation for South Africa,” he adds.

In terms of health and safety, the miner improved its total recordable case frequency rate to 1.35 in 2021, down from the 1.51 of 2020.

However, Thungela recorded a fatality at its Goedehoop operation in June 2021.

Meanwhile, the miner’s Khwezela colliery suffered a spill of mine-contaminated water into a nearby river system on February 14 as a result of an overflow from a disused shaft, which led into the mouth of the Loskop dam, a distance of about 60 km.

“The impact on the ecology was significant; however there were no livelihoods at risk,” says Ndlovu.

“We took immediate actions . . . ma[king] water in the river system safe for use as we speak. We are now in the process of developing a longer-term plan to mitigate the impacts on the ecology and return the . . . river system to what it was before this incident,” he says.

Once Thungela was alerted to the spill, it immediately implemented an operation to stop the flow and started work with the parks board and Department of Water and Sanitation on rehabilitation procedures. This required Thungela, at its own cost, to release water from the Bronkhorstspruit dam into the Wilge river and the Witbank dam.

“We continued to monitor the quality of the water and, within 24 hours of us releasing the water, the quality had [returned] to being safe.

“There is aquatic life that is beginning to show itself in the river systems; however, we are conscious of the fact that once [acid water is spilled] aquatic life [is destroyed] in a significant way,” says Ndlovu.

Subsequently, Thungela has hired experts to help it develop a plan to bring the natural water system back to its natural form in the future.

OUTLOOK

For the remainder of this year, Thungela expects a gradual rather than immediate recovery in TFR’s performance. It, therefore, projects that its export saleable production for this year will be between 14-million and 15-million tonnes, before returning to 16-million tonnes in 2023.

However, Ndlovu notes that the current geopolitical unrest in Europe (as a result of Russia having invaded Ukraine) is resulting in an unprecedented escalation in energy and commodity prices (including thermal coal prices) and that the impact on input cost inflation and volatility will remain a risk to global growth.

Prior to it invading Ukraine, Russia was responsible for 88-million tonnes a year of coal exports, says Thungela director and CFO Deon Smith.

He explains that the majority of Russian coal exports historically found a market in Europe through the port of Rotterdam. “Clearly, the demand in Europe for much of that coal has now shifted to rest of world, including a considerable quantum of that to South Africa.”

However, Smith says South Africa’s export market was just shy of 60-million tonnes in 2021, and there is therefore “absolutely no way” South Africa could fulfil more than a fraction of what Europe now requires, given the sanctions against Russia. “So the Europeans are really shopping around the whole world to fill that void.”

Ndlovu adds that Thungela started getting inquiries for its coal long before the conflict in Ukraine. “This seems to have started at a time when energy prices spiked in Europe and there were shortages of gas.”

“We believe that thermal coal remains a key pillar of the global energy mix and . . . we have an important ongoing role as a responsible producer.

“We recognise and balance society’s needs, environmental expectations and the vital role we play in the economy and our communities. Our foundations are firmly in place and our journey to value creation has just begun,” he says.

Ndlovu says the company will continue its focus on what it can control – achieving its goal of becoming a fatality-free business, realising further operational improvements and cost efficiencies, and seamlessly executing its life extension and production replacement projects.