Has Thungela passed peak earnings? A surge in coal prices soon after its unbundling from Anglo American in 2021 helped it return R60 to shareholders in interim dividends alone last year — three times the price of the share on its debut. It meant that investors who stuck with the stock on listing to its record high of just under R380, would have made a gain of over 1,600%. Even given the fact that the share is down 35% over one year, Thungela is still, at R141, up over 500% since its unbundling. For the first half ended June 2023 revenue fell 45% to R14.3bn, headline earnings per share have dropped 67% to R22.46 and the dividend is just R10. The FM spoke to CEO July Ndlovu.
Were you just a one-hit wonder? And shall we ever see the like of 2022 again?
I don’t think I could ever use the word never, because what drove that was geopolitics. But we mustn’t forget that fundamentals were already beginning to point towards a very supportive market. What the coal market is shaping out to be is a market where demand is holding, but there’s very little investment going into supply, so it’s a tightening market.
Demand has risen in the Far East, which continues to build coal-fired power stations — and that says to me that the obituary on coal was written way too early. What we have seen is that any event that has a bearing on energy security moves this market quite dramatically. Last week we saw the possibility of a gas strike in Australia — not even the strike but the mere discussion that there could be one got gas prices running, and with that, coal prices. We have entered a new zone of very volatile energy input prices.
For retail investors looking at Thungela and wondering how to value it, should they be tracking what happens to gas prices, as much as anything?
Look, the energy markets used to be quite simple — we just looked at supply and demand and you could almost predict the price perfectly. The thing that you can no longer predict is geopolitics, and what that can do to energy prices is probably the biggest unknown. So what you have to do as an investor is a fundamental, bottom-up analysis and pick the companies which remain competitive based on long-term fundamentals — you can then ride out the volatility. When prices collapse you don’t lose money, when they spike, you make lots of money.
I imagine you like to think that you are in that basket of companies?
We have been very prudent and intentional in how we think about our business. We always say that we look at our business and make decisions based on a long-term price of $90 per ton. And that’s part of the reason that today we were very clear to say that, despite what appears like a collapse in prices, we will continue to invest in key projects that improve the quality and competitiveness of our portfolios.
There was a lot of talk about a share buyback, from which you’ve now back-pedalled. Why is it right, now, to not do one?
We’ve said we consider the needs of our business and one of them is investing through the cycle. We’ve committed capital to three very important investments in Ensham, our Elders project and Zibulo — but we’ve also said we want to be able to see a clear and sustained trajectory for Transnet’s improvement, and we will need to monitor the direction of the coal price.
On a scale of one to very frustrated with Transnet, how frustrated are you?
I’d prefer to answer that by way of a metaphor: when you have a son or daughter on drugs, does being frustrated with them help in any way? Or is it about doing everything that you can to help that child? And that’s where we find ourselves with these infrastructure challenges. I’m beyond frustration — I’m energised about finding a solution.
That’s all very well, unless the problem child is resistant to an intervention. How receptive is Transnet to your help?
Perspective is everything on these kinds of things; when we started the year Transnet was on a one-way track downhill. We got together and intervened, started working on security, and the reason we are able to say that their tempo will be 48Mt this year is because [of] co-operation. I’m not saying it’s easy but I think it would be unfair to all the colleagues in Transnet who have worked very hard to try to find solutions.
Do you see its rail capacity getting up to 70Mt a year? And if it did, what would that mean for your business?
It would have a profound impact not just on our business but on other businesses in the coal sector. But I’m going to use another metaphor of a swimming lane: the first lane is to fix what we’ve got, which is to get us to 60Mt, and that’s the work I’ve just described. To get beyond 60Mt will absolutely need for Transnet and the government and the Chinese supplier CRRC to find each other so we can get the locos back online.
The third swim lane is related to deregulating infrastructure provision in South Africa so we can bring best-of-breed to provide the locomotive power, the capital and the skills to do this more effectively. On the last two we’ve seen the white paper [from the government], we are encouraged by what we see, we just need to get on with it.