By Charl Botha*
Thungela listed on the JSE on 7 June 2021 at R20,66. Since then, the proportion price has risen to its most up-to-date R87, in transient touching R102,46 alongside the intention. From R20,66 to R87 in decrease than six months is a fanciful consequence. Naturally, this fee of return is no longer sustainable, however is something more sensible mute on provide from these levels? I’m cautiously optimistic that it’s some distance.
The Thungela exchange model is no longer subtle. It targets to mine coal as cheaply as that it’s doubtless you’ll perhaps perhaps be imagine, after which sell it for vastly more. Naturally, the specifics of the absolute top design it does so is unparalleled more concerned, however in easy terms, it mines coal essentially for the export market; on the most as much as the moment drag-fee, about 16.5 million tons per annum. The coal is then railed 600-recurring kilometres by Transnet Rail Services and products to Richards Bay Coal Terminal. From there, it’s some distance despatched largely to shoppers in Asia; mediate vitality vegetation in India and China. The corporate additionally sells coal into the home market however the profits it generates on these gross sales are negligible, and therefore its contribution to the price of the exchange marginal.
5 factors force the majority of the Thungela’s price: a global benchmark coal price, the rand/dollar exchange fee, the quantity of coal it produces, the price at which it does so, and at remaining, the performance of Transnet Freight Rail Services and products. Particularly, the increased the benchmark coal price, the weaker the rand, the more coal it mines, the more affordable it does so, and the easier Transnet is at railing it, the increased Thungela’s profitability shall be.
Of the 5, the one I’m least skittish about is the exchange fee. The government is, unfortunately, taking continuously contaminated care of that. The two operational factors – the price and quantity of manufacturing – has to this point been in step with management’s steering. Furthermore, the operational team has mammoth skills on the relevant mines. The leisure two – the benchmark coal price and the performance of Transnet – are issues of prayer. Let’s accept as true with in thoughts every side in turn.
Expend the benchmark coal price: the export coal Thungela sells is priced in relation to something known as the Richards Bay Free on Board (FOB) benchmark price, most regularly identified as the API4 benchmark price. Benchmark prices are in US dollars per ton and, all around the remaining 10 years, common annual API4 benchmark prices accept as true with ranged from a low of $55 per ton in 2015, to a excessive of $220 in 2021, with $78,8 per ton the 10-twelve months common. It’s fundamental to bellow Thungela doesn’t sell its coal on the benchmark price however at a low cost. The particulars of how this low cost is calculated are unimportant. In essence, Thungela’s coal is when put next to the benchmark coal and alongside with other quality and provide and query factors, it’s some distance (most regularly) supplied a reduced price (per ton) for its product, historically round 25%.
Nonetheless, in contemporary months, the good deal has narrowed to 17% as Thungela management has answered to the abovementioned parastatal challenges by railing some of its increased quality product. Administration is assured a low cost stage of 20% may well additionally be sustained within the medium to long interval of time as it implements a whole lot of effectivity initiatives.
With respect to future benchmark prices – and therefore Thungela’s discounted prices – well-identified worldwide consultancy Wooden McKenzie estimates this may occasionally perhaps perhaps common about $80 per ton in staunch terms for the comfort of this decade. Because it’s doubtless you’ll perhaps learn about, the benchmark price didn’t exactly behave sloth-adore round the most as much as the moment historical 10-twelve months annual common, and I believe that the following 10 years won’t be unparalleled quite loads of.
This Jack-in-the-field price behaviour has fundamental implications for Thungela’s price and solvency. As an illustration, when benchmark coal prices averaged $102 in 2018, the corporate generated gain money flows from operations of R6bn; R4,1bn after capital spending to withhold the exchange. On the opposite hand, when common benchmark prices dipped to $66 in 2020, the corporate generated R17m and was money negative to the tune of R1.7bn after sustaining capital expenditures. This variability in profitability is the main motive why management has no longer too long ago indicated this may occasionally perhaps additionally be sustaining a liquidity buffer of R5bn to R6bn when occasions are right – for use when they aren’t – and R2bn to R3bn when conditions are reversed.
Ingredient 2: Transnet Freight Rail. As considerable, Thungela currently mines about 16.5 million many of export coal yearly. Sadly, currently, it cannot sell this unparalleled coal. Why? Because Transnet hasn’t been in a location to rail that quantity of coal from the mines to the ships. And the motive behind that is two-fold: theft on the line (and of the line doubtlessly?); and a shortage of locomotive spare substances. Having acknowledged that, with exchange help, Transnet is anticipated to up its sport within the advance interval of time, which may well even mute learn about it rail no decrease than 15 million many of Thungela product in 2022.
Ingredient 3: the rand/dollar exchange fee. There isn’t unparalleled to be acknowledged here besides that Thungela’s price is amazingly sensitive to any movements on this forex pair. As an illustration, in accordance with my calculations, for every 10% proceed up or down within the common exchange fee over the following 10 years, Thungela’s price will upward thrust or fall by 42%. Merely save: if you suspect the rand goes to weaken against the Dollar within the approaching decade, Thungela is no longer a contaminated save to be (all the pieces else being equal). And vice versa.
Ingredient 4: coal manufacturing and costs. As considerable a whole lot of occasions, Thungela is producing export coal at a most up-to-date drag-fee of about 16.5 million tons per annum. The notion is to elongate this to 17 million tons in 2022 and 2023. On the price facet, the corporate is currently mining and handing over coal at a free-on-board price price of about R833 per ton. The aim is to withhold operational prices at these levels over the following three years (in staunch terms).
Importantly, this free-on-board operational price of R833 per ton doesn’t encompass the capital prices major to exchange its most up-to-date mining resources. Particularly, if the corporate doesn’t exchange the tons it loses because most up-to-date manufacturing, there shall be no more Thungela coal manufacturing in about eight years. Essentially based on my very rough calculations, it would need to exercise about R152 per ton in staunch terms going forward to defend the coal coming.
The resultant valuation: to this point, I’ve highlighted and in transient talked about the 5 factors I accept as true with in thoughts the finest in determining Thungela’s price. But to estimate an intrinsic price – or more wisely, quite loads of sensible values – we need to save some specific numbers on these factors and their interactions. In other phrases, we need to drag a misfortune where we enter ranges of specific numbers into a model and learn about what comes out the opposite facet. Ideally, it shouldn’t be garbage-in-garbage-out, however this form of exercise is as unparalleled an artwork as a science. As the Yogi Berra announcing goes, ‘Prediction is laborious, especially about the long drag’.
A center-of-the-boulevard misfortune: let’s enlighten the following – or something shut adequate to it – happens. One, the API benchmark price tracks the Wooden McKenzie annual common estimate (in staunch terms) for the comfort of this decade. Two, enlighten that one US dollar will take hold of you no decrease than R16,5 on common all over this future interval, and three, Transnet can continuously rail 16 million many of Thungela coal from Mpumalanga to Richards Bay per annum. Then, in accordance with my calculations – and given a conservative staunch price of capital assumption of 14% – I bag to a cost of R36 per share; decrease than half of of the most up-to-date R87 per share. As a result of this truth, assuming my model is ball-park precise, you wouldn’t are looking out for to be purchasing for Thungela at these levels.
Something more optimistic: enlighten the common annual benchmark prices change into 10% increased than the Wooden McKenzie estimates. Further, elevate that the rand gradually weakens to round R23 against the dollar in 2030 (in step with inflation differentials between the US and South Africa). Furthermore, defend the price of capital assumption at 14%. Finally, let’s no longer tempt destiny; elevate that Transnet mute manages to rail 16 million many of Thungela coal per twelve months. Then my intrinsic price estimate would elevate to R104 per share, or 20% increased than the most up-to-date R87 per share.
Clearly, Thungela is no longer a take hold of-and-withhold, backside-of-the-drawer, no-brainer form of investment. It’s a lit firecracker, and most for scramble no longer a share you in deciding on to withhold within the imperfect conditions. On the opposite hand, if short- to medium-interval of time coal prices change into increased for longer than what most query them to, as I create, here’s a put collectively you in deciding on to be on … no decrease than for a while.
- Charl Botha CFA
- (Present: The author holds shares in Thungela)
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