18th Apr '22 by CAPH

42 comments 1910 reads

I have recently looked into and been adding this South African Thermal coal miner, ticker TGA.

Thermal coal is used in generating electricity in coal power stations . It has high carbon and sulphur content so not one to consider if your ESG sensitive, but Thungela has done very well and I think in the current energy situation has more upside.

World demand for Thermal Coal

Despite efforts to reduce carbon emission and switch to more environmentally friendly options, coal is, and will continue to be essential to the worlds energy needs .

The 2020 BP Review of World Energy supply broke down the world energy supply as follows;

More than 35% produced from coal
Roughly 25% sourced from natural gas
16% from hydro
10% from nuclear
Only 12% from renewables

Wood Mackenzie 2021 report indicates that Asia’s thermal coal demand is set to grow from 79% to 86% in 2030 and that more than 90% of 195 new coal plants being built are in Asia.

Power generation in China alone is responsible for almost one-third of global coal consumption. Coal still represents 50% of China’s primary energy supply.

Thermal coal prices and market

World trade is approx. 1026 Million tons

Top Thermal coal exporters in 2020;

Indonesia 399 Mt-

Australia 200

Russia 177

S Africa 74

Columbia 55

USA 21

Top Thermal coal Importers 2020

Asia 797 Mt

China 208

India 157 - a major export destination for Thungela.

Japan 133

S Korea 84

Taiwan 53

Thermal Coal prices have more than doubled in the last year and prices increased further following the Ukraine crisis.

S Africa prices stood at $89/ ton January 2021 and rose to $410 / ton in March 2022 but these have now moderated.

Current drivers in thermal coal price

The Worlds largest thermal coal exporter Indonesia placed a coal export ban in Jan 2022- with an aim to prioritise domestic consumption.
Australia -has experienced la Nina flooding - reducing its coal production.
German Thermal coal imports increased to 25Mt up by 67% in 2021 due to gas import constraints and insufficient renewables supply. As a result Germany is now considering delaying nuclear phase out and decommissioning of its coal plants.
Alternatives to coal like LNG and gas are in deficit this year - for Europe Coal provides the best immediate alternative.
Reduced Russia supply due to Ukraine
- sanctions and the proposed ban on coal imports into…

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CAPH

21st Apr '22

India to Face more Power cuts due to soaring demand -

https://www.reuters.com/world/...

Roodini

22nd Apr '22

hi Epsilon,

Salt dome reservoirs are a nightmare, When you drill rock, its more or less solid. However salt flows under pressure. It flows like a thick plastic, You drill a hole and it closes up behind you, making drilling very tough.

You can drill a hole and when you go back into the well you find its closed up again and you have to Re drill it!

The total depth isn’t the major issue, but it is vastly more costly compared to Saudi land wells.

unwise2

The next time you read a broker note/article by a so called investment professional keep this in mind:

"Boatman claimed in a report published on Sunday that due to proposed regulations the clean-up cost for Thungela’s seven mines could be as much as $1.36 billion, more than its book value and almost three times the amount it has set aside in provisions.

Attributing zero value to Thungela, the report said: ‘Given that Thungela’s mines have remaining lifespans of 5-11 years (assuming no extensions), this is now a pressing issue for Thungela and its shareholders.’ "

https://www.sharesmagazine.co....

That was the 7th June, the first day of trading. TGA bottomed that day at 110 and then gained 1160% in 10 months.

Alphaflight

9th May '22

Coal still looks cheap:

"The rise in prices will enforce maximum fuel-switching among power generators from gas to coal to conserve fuel stocks this summer, with spot gas now uncompetitive against coal except for peak generation."

https://www.zerohedge.com/comm...

11th May '22

"The coal crisis deepens while Thungela scores"

https://www.moneyweb.co.za/mon...

12th May '22

saw that on capex insider yesterday......

mojomogoz

Any of you coal guys worried that the recession being signalled by market action (always debatable but simplistic interpretation for argument from me) will have knock on impact into commodity space and particularly coal?

It’s def a factor, however any reduction in demand is probably matched by a shut down in supply from Russia Ukraine & from other countries who restrict supply to meet their own demands. See the article just posted by “CAPH” below.

A good % of global base load power generation is Coal - and will be for the rest of our lives,

Coal is required for a million things from power to steel, chemicals but most importantly is we have the granddaddy of all oil & Gas shortages on the horizon. Decades of under investment in exploration drilling has left the world with very limited supplies.

The obsession with the greenwash program thinking society can continue without oil and gas has created a whole generation of people who think their electric cars are powered by unicorn farts.

Closing down Drax coal and converting them to burn 20,000 tons per DAY of trees cut down in Louisiana is apparently “renewable” but in reality is the poster child of eco vandalism.

The world will wakeup and realizes batteries are not power, just a storage system.

I agree with a lot of what you say...I'm cautious of the extrapolations from here though.

Note that the fuse to coal renaissance was lit by China screwing up internal coal policy (and then heavy rain compounding) leading to their 2020 crisis. Since then China has solved the problem and its wont reoccur.

The bull case for commodities is impossible with a global investment lead credit cycle IMO...do you see one? Without it high commodity prices are merely a rapid tax or rate increase on economies compounded by currency weakness. Demand will be killed at pace with some countries and areas taken out and shot. See Sri Lanka now? And isn't this what has been happening to significant part of Chinese economy (real estate and infrastructure both highly unproductive and capital destructive...so China can't really afford to goose them back up!?). My theme for 2022 is de-emerging markets.

A great dissonance IMO is the narrative that we have massive undersupply and under investment in commodities. Okay...so why do we produce and consume way more than ever. I haven't heard a good answer to this. Beware narrative peddlers. Its irrelevant what we have committed to do in future if we can't arrive there (looking at you net zero etc).

Commodity markets are on the cusp of a great discontinuity and resolution...down. Unless the general market and economic bleeding can be stopped...

But what do I know...I'm just sceptical of straight lines.

to your comment about under supply in commodities. I partially agree. There has definitely been an under supply in oil and gas exploration. They chart has been a downward slope for decades.

This chart is conventional oil,

The US fracking saved the US by producing so much fracked O&G that if forced down prices. The fracking was only successful Due to cheap capital looking for returns. Most fracked wells were expensive and unsuccessful.

Commodities ( meaning copper, rare earth etc), I agree, their future book depends on the drive to “net zero” if the gif keep printing money to pay for votes then demand will continue

But Even if they scrap it, in the minds of most people electric cars are the saviour of the planet. we do produce more than ever but demand is out stripping supply.

I liked this article about how £1 billion of batteries would hold 11 minutes of UK electricity demand.

https://blog.argonautcapital.c...

Capex on commodities is at generational lows.

As a wise man recently said:

"...the supply of commodities and energy today essentially a function of capex spend 7+ years ago.
So if little is being spent on capex now, what then?"

13th May '22

In the short term yes, weak hands will invariably sell but I believe commodities will blow up in price especially now that the world's biggest resource producer (11% of the world) is being ostracized.

Note that 70% of Europe’s thermal coal comes from Russia. Coal accounts for about 20% of continental Europe’s electricity production (as of 2019; perhaps it is 25% now).

16th May '22

For clarity...I'm not arguing for or against Thungela Resources (LON:TGA) specifically other than general caution. I'm being sceptical of common arguments of commodities 'unstoppable' up and to the right progress. I do not believe 'de-carbonification' or 'net zero' are anything other than memes...hey, here's an article that wrote for a minor 'progressive' economics rag and reposted to Medium (boy did I get a head kicking for non aligned views!):

https://mojomogoz.medium.com/e...

And now some responses to few comments here:

Commodity- equity ratio: Why is this terribly important? Undoubtedly it depicts relationship trend to some degree (and a probable local extreme) but shouldn't the trend be down significantly down over time IF we have productivity gaining economies and services and intangible assets become a bigger part of the overall economic value pie. This in turn gets to whether stock or flow count in total economic sense. For functioning proletarian democracy I'd suggest that flow (activity) is primary and stock (the tangible value of things and whether that value should be objective eg is there a really an anchor value for USD?) is very much secondary.
Peaks in commodity to equity value are very much a function of extreme market corrections. This just tells you that the world of accounting reported earnings is very volatile. If we shift our accounting to something approximating national accounts and earnings then income is much smoother and if equities priced off of that then so would equity valuations (but they are leveraged and manipulated through the cycle, to an extreme extent since the early 80s and the cult of shareholder)
A rapid rise in commodity prices is equivalent to a rapid increase in interest rates or, even better proxy, taxes....if we do not have the powerful cycle engine of investment driven credit cycle. Current high prices are just ensuring demand destruction. We see this marginally in rich Western economies (and US is protected by USD rise too) but dramatically in some other places - Sri Lanka, Peru...and probably China (...yeah zero covid insanity but behind that is a hugely resource intensive but unproductive real estate and infrastructure segment that has gone pop and isn't coming back - large debt and expensive inputs?). Cutting Russian supplies adds to the severity of this problem. As there wont be the capacity to support high prices (no credit motor linked to activity), the demand will just be shot...and prices of commodities will correct as market moves into oversupply relative to new demand
Capital investment in commodities has happened away from western public markets as western public markets have not rewarded this. There has been very large ongoing global investments
The productivity of mining processes has improved greatly...so more output for less capital
China is elephant in the room. The extent to which it has created a massive demand for commodities since the GFC is staggering. A great deal of this has been very wasteful and its now just going to stop with China sitting on massive stockpiles too -> its not inconceivable we see no demand from China or even supply back out in some areas. This is particularly aggravated rapid RMB falls and general USD strength
Re coal, its not that scarce...just some places are fussy about digging it up (...or India and its current energy crisis is a problem of scale and geography as well as capital -> its one of largest global producers and users of coal but its gigantic and coal is 3/4 of power generation)
Re oil, at current prices there isn't a shortage of oil that can be produced, much of it unconventional but abundant -> shale and sands. I believe that many of the sands have very good long term production profiles once the decision to produce them is in play (ie the price is high enough)

Clearly there is an energy problem at the moment. I suspect this will be solved longer term by more production and alternatives (nuke). Shorter term the solution is shooting the weak...welcome to de-emerging markets of which China and maybe even India could be the big surprise.

Without a strong credit and growth cycle taking off from here it is inevitable that we will have an epic correction in commodity prices some point later this year. Its possible that govt subsidy/fiscal could fill that gap...but it would take a massive shift in policy globally and a willingness to create fiscal deficits as rates go up ...its not going to happen in Europe, UK and US...it is happening covertly in China but that is fill in the holes being caused by ongoing economic collapse in areas...and any EMs trying it will be slaughtered by markets -> so demand destruction will be huge...and given the short run deficit in commodity markets that demand destruction may be epic (...ie China and India going back years in GDP etc)

Steel Monkey

14th Jun '22

Very infomative and well articulated article @CAPH. I am bullish on Thermal Coal in the near future, what with UK planning to open their first coal pit in nearly 40 years in Cumbria. Thungela Resources (LON:TGA) has a good business model and generates positive cash flows.

I would try answering the following questions:

1. Will the global demand for electricity reduce?
2. How long will it take renewables and nuclear to replace the 35%+ contribution thermal coal makes towards generating electricity?
3. Will the top coal mining countries shut down their coal mines in the next 10, 20, 30 years? India has officially said not earlier than 2070.

The answers should form the basis of your investment thesis, irrespective of the macro noise around wars, political activism, climate change protests, recession, inflation etc.

1) Yes. De-emerging markets are our future. Many fringe/weaker EMs but also China without making the transition through middle income trap to developed status a la Japan or (very officially belatedly in 2021) Korea. I'm not saying China collapse into basket case but the majority of its economy is unproductive (real estate and infrastructure) as so cannot keep sucking in high priced inputs. India too at risk due its structural weakness (perhaps decay) beyond its super services sector (...a post growth developed capability in a country that needs to develop...that makes capital available for development impossible when input prices so high). All this knocks on to energy demand.

2) Too long. Renewables are a joke too. But why assume that with deficient global energy inputs and other resources it means that all countries push on their developing path

3) You are arguing against yourself...shutting mines will be better for those that stay open. But through necessity born of our stupidity we are opening coal mines (Germany!).

2022 is not going to be remembered for H1 but H2 -> spectacular commodity collapse and de-emerging markets (energy is safer than most due to necessity...but oil most safe and coal is very much a swing demand input by comparison)

There is a strange belief with commodity bulls right now that despite all the woes we see in markets and economically the demand for stuff will keep on going up. The 1970s are a bad frame of reference. They came on decades of growth and development and there was an ongoing strong pull from investment needs and push from credit provision (often marshalled by govt, particularly in Europe...which had sort of had an emerging journey). UK was special case for variety of reasons. The 70s are the exceptional inflationary period when we kept pushing the inflation higher due to credit/growth/wages. All other inflation periods outside of war in industrial nations cause demand destruction and are followed by disinflation or before central banks actual deflation.

Note also, commodities are just volatile. Even if there is structural undersupply, moments of demand fall relative to current supply cause dramatic drops...particularly when everyone bulled up

Look at this for a potentially leading edge indicator

https://twitter.com/gamesblaze...

And no, its not due to china lockdowns, see China balance of trade $bn:

They are still net export at super high level despite internal lockdowns. So they can supply what we want (obvs some supply chain stresses globally aside)...

lightningtiger

17th Aug '22

Interesting thread, I too am holding TGA. Yesterday it announced another dividend paid on 10th Oct 2022 @ just over £3.00 / share (300.0183p to be exact) Take off 20% for withholding tax, still leaves £2.20 a share. That is about 3X the earlier dividend this year. XD is on 22nd Sept. From dividenddata.co.uk yesterday, TGA was showing a dividend impact of 20.92%! That is over twice the rate of inflation @ 10.1%

This is one of my highest dividend paying share so far this year. Not that often you get a dividend payment worth a few grand!

StockRank 96, Momentum 98, Mkt Cap £2.01b. Share price today 1553p @ 16:14.

bryaz

21st Aug '22

sorry to pull you up on maths but i think it equates to 2/40 a share i hold

24th Aug '22

Thanks bryaz for correcting my maths. It is not like me to make such a mistake.

It should be £2.40 a share or 240p which I think you meant & not 2/40 a share, which you thought it should be. I hope this clarifies the situation. Thanks again for pointing it out. A bigger pay out than I thought. We need to be aware of exchange rates too when it is paid out too.

I have topped up with a few more shares today.

Interesting to see the director deals.

Update StockRank 99, Momentum 97, Mkt Cap £2.32b. Share price now 1778p

27th Aug '22

Thank you for the well written answers. They are very insightful.

I am not convinced though about the demand for electricity going down. The growth rate may be stunted, but will the supply exceed demand imminently to cause a steep crash in commodity prices?

IEA in its July 22 report states demand growth to stabilise in the range of 2.4% per year, less than the 6% in 2021. It’s still positive growth, not negative. In the same report, they make a short term bull case for coal - ”Due to high gas prices and supply constraints, coal is replacing natural gas for power generation in markets with spare coal plant capacity, particularly in European countries seeking to end their reliance on Russian gas imports. To secure energy supplies following Russia’s invasion of Ukraine, some European countries have delayed coal phase-out plans and lifted previously imposed restrictions on coal.” Their informative report on Coal (July 22) also stresses that the world’s consumption of coal is set to rise slightly in 2022, taking it back to the record level it reached nearly a decade ago.

However, this doesn’t mean a continuous growth in coal prices for the next 3- 5 years. The outlook for coal is definitely uncertain given the current economic growth. I expect. 2022 to be a record year and a gradual reduction in per MT prices in 2023 reaching stable prices back by 2025. This bodes well for the microeconomics of well run coal businesses. Expect them to generate significant free cash flow that can be returned to shareholders in the short term. Case in point, is the £3.02 per share dividend by Thungela Resources (LON:TGA), which even at yesterday’s (26.08.2022) closing price is a highly respectable 17% yield.

Thungela Resources and thermal coal

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CAPH

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"The coal crisis deepens while Thungela scores"

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