REG - Thungela Resources - Pre-Close Statement

Thungela ResourcesAnnouncement

13/12/2023 07:45

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RNS Number : 5302W  Thungela Resources Limited  13 December 2023

Thungela Resources Limited

(Incorporated in the Republic of South Africa)

(Registration number:  2021/303811/06)

JSE share code: TGA

LSE share code: TGA

ISIN: ZAE000296554

('Thungela' or the 'Company' and together with its affiliates, the 'Group')

 

Chief Financial Officer's Pre-Close Statement

for the financial year ending 31 December 2023

Operational agility sees Thungela confirm its full year 2023 guidance despite
continued rail challenges, while also achieving higher than expected
production at Ensham

 

Dear Stakeholder

 

As we approach the end of 2023, we are proud to report that we have
demonstrated resilience in the face of external challenges, made substantial
progress in executing our strategic objectives, and continued to live up to
our purpose - to responsibly create value together for a shared future.

 

Based on the Group's performance for the period 1 January 2023 to 30 November
2023 ("the year to date"(1)), we are set to achieve the full-year guidance
metrics as outlined in our 2023 interim results released in August 2023.

 

The following are the key insights into our performance for the year to date
and our expectations for the financial year ending 31 December 2023.

 

•      Energy demand reduced in Europe, China and much of Asia
following the milder 2023 Northern Hemisphere winter. This reduction in demand
was further exacerbated by already high coal and gas stock levels in key
import hubs. Inventory levels in the main coal supply hubs increased due to
the low demand in Europe, with more producers shifting their focus to the
Asian-Pacific market. Energy prices, including the price of coal, remain
volatile and susceptible to ongoing geopolitical tensions.

 

•     Benchmark coal prices softened markedly in 2023 following the
record levels observed in 2022. The Richards Bay Benchmark coal price(2) has
averaged USD122.88/tonne for the year to date, compared to USD270.87/tonne for
FY 2022. The Newcastle Benchmark coal price(3) has averaged USD175.15/tonne
for the year to date, compared to USD360.19/tonne for FY 2022.

•     Discount to the Richards Bay Benchmark coal price has been
approximately 15% for the year to date, compared to 15% for FY 2022 and 18%
for H1 2023. Discounts in the second half of the year narrowed as prices
retracted. The average realised export price for product sold ex-Richards Bay
Coal Terminal ("RBCT") for the year to date is USD104.85/tonne, compared to
USD229.21/tonne for FY 2022.

 

•     The premium achieved by Ensham to the Newcastle Benchmark coal
price has been approximately 10.4% from completion of the acquisition on 31
August 2023 through to 30 November 2023. This premium is due primarily to the
composition of the Ensham sales book which includes volumes sold at fixed
prices. The average realised price for product from Ensham is USD153.44/tonne
for the same period.

•

 

•     Export saleable production relating to our South African
operations is expected to be 12.1Mt for FY 2023, marginally higher than the
mid-point of the guidance range of 11.5Mt to 12.5Mt issued in August 2023. The
removal of three underground sections in response to poor rail performance
resulted in a decrease of 7.6% compared to the prior year (FY 2022: 13.1Mt).

 

•     Export saleable production at Ensham(4) for FY 2023 is expected to
be 2.9Mt (on a 100% basis), higher than the expectation of 2.7Mt that
prevailed upon completion of the acquisition - this increase is primarily due
to an enhanced focus on productivity. The attributable export saleable
production from Ensham for the Group in FY 2023 is expected to be 0.8Mt - this
represents 85% of the total production for the four months from completion of
the acquisition to the end of the year (refer to Annexure A).

 

•     FOB cost per export tonne excluding royalties for the South
African operations for FY 2023 is expected to be at the low end of the revised
guidance range of R1,120 to R1,200/tonne issued in August 2023 - this is due
to higher-than-expected domestic revenue offsets and a positive movement in
the non-cash rehabilitation provisions. Including royalties, the FOB cost per
export tonne is expected to be at the low end of the revised guidance range of
R1,170 to R1,250/tonne.

 

•     FOB cost per export tonne excluding royalties at Ensham(5) is
expected to be approximately R1,947/tonne for the period from completion
through to the end of the year (refer to Annexure A). Including royalties, the
FOB cost per export tonne is expected to be R2,342/tonne.

 

•     Export equity sales for the South African operations are expected
to be relatively stable year-on-year with 12.1Mt for FY 2023, compared to
12.2Mt in FY 2022.

 

•     Export equity sales for Ensham(4) are expected to be 3.0Mt for FY
2023. The Group expects to recognise 1.2Mt of sales, representing 100% of the
sales in the four months following completion of the transaction (refer to
Annexure A).

 

•     Capital expenditure for the South African operations for FY 2023
is expected to be R3.0 billion, at the lower end of the guidance range. This
consists of R1.4 billion relating to sustaining capital and R1.6 billion
relating to expansionary capital for the Elders and Zibulo North Shaft
projects.

 

•     Capital expenditure at Ensham for FY 2023 is expected to be R1.0
billion (on a 100% basis) - this relates to sustaining capex only. The Group
is expected to recognise R0.3 billion which represents the attributable
capital expenditure incurred in the period from completion through to the end
of the year on an 85% basis (refer to Annexure A).

 

•     The Group had a net cash position of R10.5 billion on 30 November
2023. In December 2023 we received the Ensham economic benefit deed payment of
R0.8 billion. We also expect to pay R2.1 billion in taxes and royalties in
South Africa in December 2023. Taking into account these movements, as well as
expected cash generation from operations and capital spend for December, net
cash is expected to be approximately R9.6 billion at the end of 2023.

 

Managing the impact of continued poor rail performance

 

The inconsistent and poor Transnet rail performance continued to weigh heavily
on the South African coal mining industry and indeed on the Group's results in
the second half of the year. The annualised industry run rate dropped from
48.0Mtpa in H1 2023 to 45.9Mtpa in the second half of the year through to the
end of November 2023. This results in an annualised run rate of 47.0Mtpa for
the year to date, below the 50.3Mt railed in 2022.

 

The deterioration in the second half of the year has been primarily
attributable to an increase in security related issues as well as locomotive
failures. The coal industry, including Thungela, continues to work closely
with Transnet to remedy the security situation and has been supporting
Transnet through additional security coverage since November 2023. A
sustainable solution is dependent on the procurement of spares for the
locomotives supplied by the Chinese locomotive supplier CRRC, either directly
from CRRC, or from alternative suppliers. Thungela and the coal industry
recognises the need for urgent intervention and RBCT (on behalf of the
industry) has placed orders with alternative suppliers for critical locomotive
spares. Transnet is also in the process of procuring locomotive spares from
alternative equipment manufacturers.

 

In response to the continued rail underperformance, we curtailed production at
three underground sections earlier this year and instituted free-on-truck
sales in order to better manage stockpile capacity at our operations. We
continued to truck coal from our operations to nearby sidings, allowing for
further rail loading options and reducing the risk of train cancellations. The
wider distribution pattern and our rapid load-out terminals are physical
infrastructure advantages which allow us to benefit from additional trains
when TFR experiences problems on certain sections elsewhere on the line. As a
result, the Group expects to rail 12.0Mt in 2023.

 

 

 

 

Update on the Ensham acquisition

 

Earlier this year, we announced the acquisition of the Ensham thermal coal
mine in Queensland Australia, marking a significant milestone on our journey
to geographic diversification, and we successfully completed the transaction
on 31 August 2023.

 

It was imperative that the acquisition be value accretive for shareholders and
the transaction was structured to enable Thungela to benefit from the
economics of the Ensham Business from the lock-box date of 1 January 2023
through to completion. We are pleased to report that the Group has received
R0.8 billion in cash through this mechanism, higher than initial estimates.
Together with the final closing adjustments, this results in a reduction in
the purchase price of the Ensham Business from the initial R4.1 billion, to
approximately R3.2 billion.

 

The acquisition substantially increases Thungela's coal resource base and
provides access to new markets, notably Japan, as well as exposure to the
Newcastle Benchmark coal price. The Ensham sales book consists of volumes sold
against the Newcastle Benchmark coal price, the Japanese Reference Price as
well as fixed price contracts with large utilities.

 

Thungela assumed control of the operations on 1 September 2023, resulting in
an enhanced focus on productivity. We are confident that the mine should
produce 2.9Mt (on a 100% basis) in 2023, higher than our initial expectation
of 2.7Mt at the time of completion of the transaction. The integration of
Ensham into the Group has progressed well and we completed the transition of
all services from the previous owner on 30 November 2023. Key areas of
judgement in relation to the acquisition of the Ensham Business, and the
impact thereof on the financial results for the year, are in the process of
being finalised.

 

Commitment to capital allocation framework and shareholder returns

 

In South Africa we also continue to make good progress on the Elders and
Zibulo North Shaft projects which are on track with regard to both the
expected completion schedule and total expected spend. By the end of 2023 we
expect to have spent a total of R1.6 billion on the two projects, with a
further R2.8 billion expected to be spent in future to complete the projects.

 

While agile operational performance has allowed the Group to navigate
challenging rail and price headwinds this year, a degree of caution pertaining
to balance sheet flexibility remains appropriate as softening coal prices have
put the Group on a lower cash generation trajectory.

 

Disciplined capital allocation remains a cornerstone of Thungela's strategy,
and our capital allocation strategy continues to be informed by the funding
requirements for our projects as well as the continued uncertainty relating to
rail performance. Accordingly, the board considers it appropriate to maintain
a cash buffer of R5 billion as well as to continue to reserve the cash
required for the ongoing execution of the Elders and Zibulo North Shaft
projects.

 

The board also reaffirms that it is committed to shareholder returns in
accordance with Thungela's stated dividend policy, which is to target a
minimum payout of 30% of adjusted operating free cash flow(6), and the Group's
capital allocation framework which prioritises the return of capital to
shareholders while maintaining balance sheet flexibility.

 

Our disciplined capital allocation approach, agility and enhanced resilience
have served us well in 2023, enabling us to execute on our strategic
priorities, adapt to changing market conditions and ensure that we are able to
continue to create superior returns for our shareholders in the long-term.

 

 

Deon Smith

Chief Financial Officer

 

 

 

 

 

Annexure A: Ensham accounting treatment

 

As a result of the acquisition, Thungela, through its subsidiary Sungela
Holdings, obtained an 85% interest in the Ensham Business, with the remaining
15% owned by LX International, through its subsidiary Bowen Investment
(Australia).

 

Thungela holds a 75% interest in Sungela Holdings, with the remaining 25% held
by Audley Energy and Mayfair Corporations Group (the co-investors). The
co-investors purchase of equity in Sungela Holdings was funded through a
mezzanine loan provided by Thungela, which is repayable in February 2025. The
co-investors are required to apply 90% of any distributions from Sungela
Holdings towards repayment of the loan.

 

The results of the Ensham Business have been included in the Thungela Group
results from the date the Group obtained operational control, being 1
September 2023. The contractual agreements governing the Ensham Business
result in Thungela recognising 85% of the results of the mine on a
line-by-line basis, including saleable production. Thungela is responsible for
marketing all coal produced by the Ensham Business, and thus sales volumes are
recognised at 100%. Attributable metrics from Ensham represent the Group's 85%
interest therein, other than sales metrics which are at 100%. The incremental
costs relating to the 15% of sales volumes are recognised as coal purchased
from our joint venture partner within operating costs. The results of the
Thungela Group for the year ended 31 December 2022 will not be updated to
reflect the results of the Ensham Business before the date we obtained control
thereof.

 

 

 

Annexure B: Operational performance
 

 

Table 1: Export saleable production by operation

 Export saleable production  2022     2023          % change

 Mt                          Actual   Forecast(7)

                             (a)      (b)           (b-a)/a
 South Africa
 Underground                 9.7      9.0           -7%
 Zibulo                      4.3      4.2           -2%
 Greenside                   2.6      1.9           -27%
 Goedehoop(8)                2.8      2.9           4%

 Opencast                    3.4      3.1           -9%
 Khwezela                    1.6      1.6           -
 Mafube                      1.8      1.5           -17%

 Australia
 Ensham (85%)                0.0      0.8           -

 TOTAL                       13.1     12.9          -2%

 

 

Table 2: Export sales by segment

 Export sales    2022     2023          % change

 Mt              Actual   Forecast(7)

 South Africa    12.2     12.1          1%
 Underground     8.8      9.3           6%
 Opencast        3.4      2.8           -18%

 Australia
 Ensham (100%)   0.0      1.2           -
 Export sales    0.0      1.0           -
 Domestic sales  0.0      0.2           -

 TOTAL           12.2     13.3          9%

 

 

 

 

 

 

 

 

Footnotes

 

1.   All references to "year to date" refer to the period from 1 January
2023 to 30 November 2023 (FY 2023). FY 2022 refers to the period from 1
January 2022 to 31 December 2022.

2.   Richards Bay Benchmark price reference for 6,000kcal/kg thermal coal
exported from the Richards Bay Coal Terminal.

3.   Newcastle Benchmark price reference for 6,000kcal/kg coal exported from
Newcastle, Australia. The NEWC Index is the main price reference for physical
coal contracts in Asia and is the settlement price for a significant volume of
index-linked contracts.

4.   Production at Ensham is crushed and screened before being sold into
either the export or Australian domestic market. Sales into the Australian
domestic market are at export parity prices and, as a result, all production
at Ensham is considered to be export saleable production.

5.   Based on an average ZAR/AUD exchange rate of R12.05:AUD1.00 for the
four months from the completion of the acquisition.

6.   Adjusted operating free cash flow is net cash flows from operating
activities less sustaining capex.

7.   Based on the latest available management forecasts. Final figures may
differ by ± 5%.

8.   Export saleable production for Goedehoop includes approximately 715kt
(2022: 372kt) attributable to the Nasonti operation.

 

 

Review of Pre-Close Statement

The information in this Pre-Close Statement is the responsibility of the
directors of Thungela and has not been reviewed or reported on by the Group's
independent external auditor.

 

A trading statement will be released once the Company has reasonable certainty
on the expected ranges for EPS and HEPS and to the extent required by the JSE
Listing Requirements.

 

Investor Call Details

A conference call and audio webinar relating to the details of this
announcement will be held at 13:00 SAST on Wednesday, 13 December 2023. A
recording of the audio webinar will be made available on the Thungela website
from 17:00 SAST on the same date - www.thungela.com/investors.

 

Conference Call registration:

https://services.choruscall.za.com/DiamondPassRegistration/register?confirmationNumber=2089702&linkSecurityString=57bdebc4a

 

Audio webinar registration:

https://themediaframe.com/mediaframe/webcast.html?webcastid=g3bZvNrt

 

 

Disclaimer

 

This announcement includes forward-looking statements. All statements other
than statements of historical facts contained in this announcement, including,
without limitation, those regarding Thungela's financial position, business,
acquisition and divestment strategy, dividend policy, plans and objectives of
management for future operations (including development plans and objectives
relating to Thungela's products, production forecasts and Reserve and Resource
positions), are, or may be deemed to be, forward-looking statements. By their
nature, such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of Thungela or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. The Group assumes no
responsibility to update forward-looking statements in this announcement
except as may be required by law.

 

The information contained in this announcement is deemed by the Company to
constitute inside information as stipulated under the market abuse regulation
(EU) no. 596/2014 as amended by the market abuse (amendment) (UK mar)
regulations 2019. Upon the publication of this announcement via the regulatory
information service, this inside information is now considered to be in the
public domain.

 

Investor Relations

Ryan Africa

Email: ryan.africa@thungela.com

 

Shreshini Singh

Email: shreshini.singh@thungela.com

 

Media Contacts

Hulisani Rasivhaga

Email: hulisani.rasivhaga@thungela.com

 

UK Financial adviser and corporate broker

Liberum Capital Limited

Tel: +44 20 3100 2000

 

Sponsor

Rand Merchant Bank

(a division of FirstRand Bank Limited)

 

Rosebank

13 December 2023

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