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Thermal coal producer Thungela hardly lived up to its Zulu name — to ignite — when it listed in London and Johannesburg about two years ago. Global miner Anglo American spun it out because of its vulnerability to South African political risks. The lossmaking group accordingly did not set the investment world alight. Not much has changed since then.
Natural gas prices soared after Russia invaded Ukraine. So did Thungela’s profits from the dirtier substitute coal. South African coal prices roared up 400 per cent between the June 2021 listing and just after the invasion.
As Monday’s interim results revealed, that coal rally has since subsided. Earnings per share tumbled by two-thirds year on year. Thungela’s market value remains nearly four times higher than its listing price. But South Africa’s pitiful record of neglecting its infrastructure blights the share’s valuation.
Thungela might look cheap at just over three times forward earnings. Australia’s Whitehaven Coal trades at 4.5 times. And Thungela swims in net cash, nearly R14bn ($740mn), equivalent to three-quarters of its market value.
The problem is its export capacity and thus growth potential. Thungela’s coal revenues rely on South Africa’s state-owned rail network Transnet Freight Rail. This lacks serviceable rolling stock following a fight with a Chinese supplier. Annualised, over the past five years TFR has carried around 60mn-70mn tonnes. That compares with the 91mn capacity at the key export port of Richards Bay, according to Liberum.
Thungela does have good finances. It hands out a third of its free cash flow as dividends, producing an enormous 60 per cent plus yield. That leaves spillover for share buybacks and acquisitions. To diversify geographically, in January Thungela bought 85 per cent of Australia’s Ensham for R4.5bn.
More than most coal producers, South Africa’s rail infrastructure woes make Thungela look like a miner in run-off. That situation can only suit climate activists and income-focused emerging market investors.
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