Thungela Resources, South Africa's biggest coal exporter, is expected to sit with a million more tonnes in inventory after Transnet Freight Rail's (TFR's) performance faltered in the first half of 2024.
Thungela CFO Deon Smith told shareholders this week that TFR's performance had been a “key constraint” on the business, and said the state rail entity needs to improve rail volumes by 20% in the second half of 2024 if Thungela is to meet its targets.
The company expects TFR to now rail 46Mt on an annualised industry basis, based on the performance of the first half of the year, which is below Thungela's needs.
“It is clearly not sufficient to meet our full-year guidance, and therefore for us to still hit the midpoint of our production guidance without building any stock we will require Transnet to step up by approximately 20% and hit 57Mt run rate in the second half of this year,” Smith said.
Thungela's on-mine inventory will increase by 1.1Mt by the end of the year if TFR's performance remains at the current run rates, he added.
“If the current rate is to continue, we are likely to build 1Mt of stock at our mines, absent any other decision around production into the full year. This is something the management team will closely monitor or consider.”
Smith said Thungela had lost 650,000 tonnes of export equity sales during the period, which was also due to derailments.
If the current rate is to continue, we are likely to build 1Mt of stock at our mines, absent any other decision around production into the full year. This is something the management team will closely monitor or consider
TFR was rocked by a major derailment after a collision between two coal freighters outside Richards Bay in January. This resulted in the partial closure of the coal corridor, which is already under pressure.
Smith's comments were a change of tune from the optimistic view in March when the company downplayed the impact of the January derailment.
Speaking at a results presentation in March, Thungela CEO July Ndlovu said rail performance in the first quarter of this year had improved, despite the derailment.
“The demonstrated performance for the most recent six weeks is up to 50.3Mt per annum run rate. And that is an improvement to levels last seen in 2022,” Ndlovu said.
Still, TFR's lower rail performance will result in Thungela's South African operations likely posting a 4.8% decline in export equity sales for the first half of 2024 to 6Mt, down from 6.3Mt a year earlier. The group's 2024 production guidance is between 11.5Mt and 12.5Mt.
Smith said that while TFR continues to make progress in installing various components in its locomotives, including compressors and batteries the industry has helped to source, he does not expect to see meaningful change until 2025.
“We are not necessarily expecting a step up in the train performance during 2024 as trains are typically removed from service in order to install these parts. We are likely only to see an improvement from these initiatives in 2025.”
Thungela was formed in 2021 when Anglo American unbundled its South African thermal coal assets. It is focused on mining coal from open and underground collieries in Mpumalanga and recently Ensham in Australia.
Smith said the company's financial performance was also badly affected by lower thermal coal prices and reduced demand from Europe and Asia.
“The underlying operating environment remains uncertain as macroeconomic and geopolitical headwinds persist, alongside continued rail performance challenges in South Africa. European and Asian winter energy demand did not meet expectations and thus coal and gas stock levels remained elevated at key import hubs. This resulted in reduced demand and softer benchmark coal prices for most of the first half of the year.”
He said benchmark coal prices had weakened. The Richards Bay benchmark coal price fell by 18% to an average of $99.71 per tonne for the year to date, compared to $121.00 per tonne for 2023. The Newcastle benchmark coal price was 25% lower than in 2023 at $129.99 per tonne for the year to date.
Lower prices would result in a fall in earnings per share of between 55% and 69%.
“The decrease in our earnings is mainly attributable to the decrease in the benchmark coal prices compared to the prior period, compounded by a drawdown on stockpiles from December 2023 as well as an increase in lower quality export coal in the export sales mix. Group headline earnings per share are expected to be between R7 and R10, thus between R12.46 and R15.46 lower than the previous year.”
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