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Investors in Thungela spooked by continued Transnet rail woes, despite upbeat outlook

Thungela Resources's share price took an almost 10 percent nosedive yesterday after it posted that despite the coal price surge in the past year, its production would decrease due to rail problems at state-owned logistics company Transnet.

Thungela Resources's share price took an almost 10 percent nosedive yesterday after it posted that despite the coal price surge in the past year, its production would decrease due to rail problems at state-owned logistics company Transnet.

Published Jun 14, 2022

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Thungela Resources's share price took an almost 10 percent nosedive yesterday after it posted that despite the coal price surge in the past year, its production would decrease due to rail problems at state-owned logistics company, Transnet.

The coal producer released a pre-close and trading statement for the six months to end June, saying export saleable production of coal would decrease by 14 percent to 6.1 million tons due to Transnet’s poor performance.

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Despite this, the group said it had seen continued strong earnings and cash generation for the period January 1, 2022, to May 31, 2022.

This was driven primarily by the high coal price, which led earnings per share (eps) to R58, an increase of R54.87, or 1 814 percent, compared to R3.13 in the prior corresponding period.

Headline earnings per share for the first half of 2022 were expected to be at least R58, an increase of R54.95, or 1 801 percent.

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Export and sales numbers were likely to be lower than the first half of 2021 as a consequence of the cost per ton at 6.4 million tons, which is higher than Thungela’s production.

The group would also distribute its maiden dividend of R2.5 billion to shareholders and had paid out R273 million to the Saco Employee and Nkulo Community Partnership Trusts.

Thungela chief financial officer Deon Smith said: “The impact of TFR (Transnet Freight Rail) inconsistency and poor performance is at a height of our lower production and also our sales numbers.”

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Smith said TFR’s performance for the year-to-date was 55 tons, on an annualised basis for the industry.

“We are closely monitoring the previously issued export saleable production guidance in light of the inconsistent TFR rail performance,” he said.

Smith said for Thungela to achieve the lower end of the export saleable production guidance previously issued from 14 tons to 15 tons, TFR needed to deliver successful annual maintenance shut in July 2022 and a step-up in annualised rail performance of approximately 9 percent for the second half of 2022 compared to the first half of 2021.

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The export saleable production was expected to be down 13 percent in its underground and 18 percent in its opencast mines.

Smith said TFR introduced around 40 locomotives. Thungela had not seen the anticipated full step-up from the trains, but there was a high risk that Thungela would have seen further deterioration in TFR's performance.

Smith said TFR's train delivery to Thungela sites had been variable.

“A variable that means not high or too low. Clearly, that remains disappointing, we have not reduced the pressure that we are in in the industry. This has made our planning slightly more complex,” he said.

Smith said Thungela had been working closely with Transnet to resolve some of its issues.

This as demand for thermal coal remained firm at the start of the year as global economic activity continued to recover from the Covid-19 pandemic.

“The unfortunate onset of the conflict between Russia and Ukraine further contributed to tightness in supply and resulted in a refocus on energy security in Europe and beyond. This tightness, coupled with sanctions on Russia, saw the price of the energy complex, including thermal coal, escalate rapidly from late February,” the group said.

Anchor Capital investment analyst Seleho Tsatsi said the large increase in earnings was due to thermal coal prices, which had reached record levels.

“Export volumes disappointed due to continued challenges with Transnet Freight Rail performance. Net cash has built up to R15.3bn, or about R115 per share as of the end of May. We believe there is the potential for a sizeable interim dividend given the company’s intention to maintain a liquidity buffer of R6bn,” Tsatsi said.

He said the share traded at a low multiple relative to current earnings, in part reflecting the market’s caution around the long-term sustainability of current thermal coal prices.

“Tightness in thermal coal prices and the potential for above-normal cash returns need to be weighed against ongoing volume issues at Transnet,” he said.

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