Thungela Resources, the JSE- and London Stock Exchange-listed coal producer, plans to acquire coal operations outside SA and expand into other commodities in the next 10 years to diversify as pressure mounts on companies to reduce exposure to fossil fuels.
Thungela was formed less than a year ago after Anglo American unbundled its South African thermal coal assets in a bid to reduce its carbon footprint as world energy production moves away from coal to greener sources of power.
Presenting annual results for the year ended December 2021, CEO July Ndlovu said this week there was a compelling case for diversifying given the shift away from fossil fuels, and rail constraints on the coal export line last year.
“It goes without saying that geographic diversification of coal assets is an option for us provided we are able to secure quality thermal coal assets at reasonable valuations.
“We also think acquiring a producing coal asset provides a neutral contribution to the global carbon footprint, which supports our environmental, social and governance investment criteria,” he said.
Coal, chrome, iron ore and manganese companies have been hard hit by underperformance at Transnet Freight Rail (TFR), which has grappled with locomotive availability, vandalism and theft.
Thungela lost R2bn of export sales and production after being hampered by TFR constraints. Its export equity sales declined 16% to 13.9-million tonnes in 2021, down from 16.6-million tonnes in 2020, at a time when coal prices have skyrocketed and demand has soared.
As a result of the poor performance by TFR, operations were curtailed at Khwezela and Zibulo collieries.
Ndlovu said commodity diversification is desirable but more complex.
“The best way to describe this is that the customer gets what he wants. Society says we should diversify from the use of coal, the timelines may be uncertain but my view is we will see a decline in the use of coal over the next two to three decades and therefore if we want to build a long-life business over the next decade we should be looking at other sources of revenue,” he said.
Thungela unveiled plans for the Elders colliery and Zibulo North life extension projects, which are scheduled to start in late 2022 and 2023, respectively.
The group said the Elders production replacement project will cost an estimated R1.9bn and extend the production footprint in the Goedehoop region by about 10 years. Thungela also plans to sink a shaft at the Zibulo North project and add about 10 years of life to the mine at a cost of R2.2bn.
A lot of coal is still needed until the world makes the transition off coal to greener energy, but there is no new supply coming because there has been no new investment. As a result the coal price has gone through the roof
— FNB Wealth and Investments portfolio manager Wayne McCurrie
CFO Deon Smith said the single most important step by TFR since the rapid deterioration in 2021 was the introduction of 40 additional locomotives, which should theoretically result in 25% more capacity on the coal line.
“These locomotives were introduced in March 2022 and we are expecting to see a step up in performance from the second quarter of 2022.”
Among the financial highlights was net profit for the year of R6.9bn from a R362m loss in 2020, and a 45% jump in revenue to R26.4bn compared to R18.3bn a year earlier, mainly as a result of a 90% increase in benchmark coal prices and achieved prices of R1,535/ton compared to R798/ton.
The group declared R2.5bn in cash dividends at R18 a share.
FNB Wealth and Investments portfolio manager Wayne McCurrie said Thungela is benefiting from higher coal prices because there have been no new investments due to climate change risks.
“The reality is a lot of coal is still needed until the world makes the transition off coal to greener energy, but there is no new supply coming because there has been no new investment. As a result of that, the coal price has gone through the roof and Thungela has benefited from that.”
McCurrie said the outlook for Thungela for the next five years is strong because demand is still high, but diversifying from coal is the right decision.
“Ultimately in 10 to 15 years' time no-one is going to use coal. The world will take itself away from coal. They have got to diversify into something else; what it is I don’t know. If they don’t, the company will disappear.”
The group announced a target of net-zero emissions by 2050.
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