Thungela expected to return to profitability in 2021, following loss in 2020
Looking back on the first months since the demerger and Thungela’s listing on 7 June, the company says it is proud that in a short period of time it has been able to achieve solid results notwithstanding a number of challenges, most notably rail infrastructure constraints. Here are key insights for the year to date and its expectations for the financial year ending 31 December 2021 (FY2021):
- Demand for energy, including thermal coal, has continued to improve as global economic activity recovers from the COVID-19 pandemic. International coal supply from the major supply basins was disrupted by logistical constraints in China, Russia and Indonesia, community unrest in Colombia, and on-going geopolitical tensions between China and Australia. Demand for high-quality South African coal has remained firm.
- The Benchmark(2) export coal price averaged $123/t for the year to date, with the month of October seeing the official settlement price at $210/t. By the end of November the price had moderated to $141/t.
- Discount to the Benchmark price has narrowed substantially to ~17% for the year to date, compared to 26% for FY2020 and 23% for H1 2021. The improvement in realised prices was driven primarily by an optimisation of the Group’s export equity sales mix in order to prioritise the railing of higher margin products in the face of on-going rail challenges. The improved realised price was also supported by market conditions which resulted in premiums on benchmark coal products (6 000 kcal/kg) as well as the new marketing agreement with Anglo American, effective from 1 June.
- Export saleable production for FY2021 is expected to be 14.9 Mt, subject to no further deterioration in Transnet Freight Rail (TFR) performance or more stringent COVID-19 restrictions in December. At Khwezela, higher cost production at the Bokgoni pit was placed on care and maintenance in Q1 of 2021, but these volumes were partially offset by the ramp-up of the Navigation pit also within the Khwezela complex. Production at Navigation has however been slowed down in recent weeks due to full stockpiles caused by on-going poor rail performance. Production at other operations had been steady until October but is only expected to return to optimal performance once on-mine stockpiles have been reduced.
- Export equity sales for FY2021 are expected to be 13.7 Mt. Export equity sales have been significantly impacted by TFR’s persistent underperformance which stems from a combination of security-related issues and locomotive unavailability. As communicated in the market announcement released on 18 October 2021, while Thungela continues to engage TFR at all levels in order to seek a sustainable solution, we have also implemented a number of actions to mitigate the operational and financial impacts on our business, including the prioritisation of export equity volumes, as well as optimisation of the sales mix.
- At the release of our interim results earlier this year we referred to the need to reconsider capital spend through a “Thungela lens”. We are pleased to confirm that we have been able to achieve early improvements with regard to reducing capital intensity. Accordingly, we confirm that FY2021 capex will come in slightly below R2.6bn.
- Cash flow generation has been robust on the back of strong Benchmark export coal prices and narrower discounts, albeit in a context of lower export sales volumes. Thungela had a cash position of approximately R8bn on 30 November 2021.
Given that Thungela is a single commodity and single geography thermal coal business, coupled with limited access to debt markets, an appropriate level of balance sheet flexibility is important in order to manage the business through periods of coal price volatility.
Thungela’s board of directors (Board) believes it is appropriate to maintain a liquidity buffer of between R5bn and R6bn during and following periods of stronger market conditions, and all else being equal, between R2bn and R3bn following weaker market conditions.
Given the strong price environment and performance, Thungela is likely to return to profitability in respect of Earnings per share and Headline earnings per share for the 2021 financial year, following a loss in the 2020 financial year.