Thungela Resources Limited (TGA) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Thungela-Pre-Close Statement Conference Call. [Operator Instructions] Please note that this call is being recorded. I'd now like to turn the conference over to Ryan Africa, the Head of Investor Relations. Please go ahead, sir.

Thank you very much. Good afternoon, everyone, and welcome to this afternoon's CFO call following the pre-close and trading statement released earlier today. I'm Ryan Africa, Head of Investor Relations for Thungela. I'm joined on the call today, of course, by our CFO, Deon Smith. I would like to take a couple of minutes to explain how the call and audio webinar will run. Today's call will be run through both an audio webinar as well as the conference call facility. Deon will present an overview of the key elements in today's release. And thereafter, there will be a Q&A session until we close the call shortly before 1 o'clock. Turning to Q&A, for those wishing to ask questions today, we ask that you please join the session using the conference call facility provided as we will only be taking questions through this facility. In order to ask a question during the Q&A session, please dial star 1 on your keypad, and this will register your intention to ask a question. Once the Q&A session starts, the operator will then open your line and ask you to go ahead with your question. To reiterate, we won't be taking typed questions submitted through the webinar platform today. It is possible, of course, to follow today's session across both platforms simultaneously, although you will have to mute one of the sessions to avoid interference. And please bear in mind that there is a 30-second delay on the webcast. It is also possible to dial into the conference call facility only shortly before the Q&A session and directly from your computer. If you are planning to do this, I do encourage you to please register for the conference call and advance the Q&A session as you will need the link sent to you upon registration. Finally, a reminder that this morning's announcement is now available on the Thungela website and that today's session will be recorded, and the recording will be made available on the website from later this afternoon. A transcript of the session will also be made available on the website in the coming days. With the logistics out of the way, please allow me to hand over now to Thungela's Chief Financial Officer, Deon Smith.

Thank you very much, Ryan, and thank you to all of those on the call Webex for making the time to join us for our pre-close and trading statement for the financial year ending December 31, 2021. So clearly, if you had the opportunity to review this statement, you'll see that we're very pleased with a robust cash generation in the last number of months in our business. We're pleased with the proactive steps we've been able to implement to mitigate the ongoing challenges that we've had on rail given TFR's performance. We've pulled all the levers that we've said before, and that has really resulted in some of what you would read in today's statement. We're also introducing today our views on balance sheet flexibility, and in particular, what we call a liquidity buffer, and I'll spend a bit of time with the logic on that and reiterating our dividend policy, which we think remains fit-for-purpose in that articulated minimum, dividend of 30% of operating free cash flow after funding sustaining CapEx. But before we go into all of that, the answer, we just recognize that we've given the market an update on October 18 on the ongoing challenges in relation to TFR, our production, our full-year sales outlook, and the next time other than today that we would be able to engage the market is really in March when we come out with our 2021 full-year results. So let me start where it's most important. I mean, our people in Thungela remain our greatest asset. We continue to do everything we can to ensure that our people return safely home and healthy after each day's work. Given the challenges we've all had in the global pandemic, this has been a larger challenge than on an average year. But we remain, as a management team, resolute on our drive to keep our staff healthy. Clearly, if you look at the results that we've been able to generate in the last number of months and looking forward to the full year, we are extremely pleased with what the markets have done. Clearly, the coal demand has remained robust off the back of challenges with European renewable availability and delivery gas shortages and the like. And we've seen that demand not inconsistent with what I think market commentators anticipated with industry exports out of RBCT hitting primarily India, but in the top 5 exporters, you also see destinations such as Pakistan, second; third, China, South Korea and Europe, so through the Netherlands as the fifth largest recipient of RBCT export coal. That robust demand has also been met by continued supply constraints. And these constraints has not necessarily been South African story, but a global story across a number of coal-producing jurisdictions. The net result of all of that has been stronger prices than most market commentators anticipated. And clearly, some of these features continue to be with us and remain sort of encouraging for what we're likely to see into the first part of 2022. These stronger prices have also played through to discounts. You might recall when we presented to you at the Capital Markets Day and at the interims, we sort of flagged our view on discounts, which really isn't a crystal ball, but rather just what we anticipated. And at the time, you might recall in 2020, we saw discounts of around 26% down to our realized price from the benchmark API 4, pleased clearly with us year-to-date around 17%. So that narrowing in the second half of the year to around 14% in that H2 or just shy of 14%. Some of it was conscious and intentional, and some of it anticipated as a result of changes in, for example, our agreement with Anglo American effective June 1. The intentional component was mainly the sales mix, given that we've said consistently that the highest margin coal will continue to find a seat on a train. And therefore, we have had to optimize our sales mix to maximize for cash and for value. And that has really played out well in our portfolio. The market has also been kind with premiums on certain 6,000 CV branded products and therefore, narrow discounts across our whole portfolio. But to be clear, we certainly sold materially less and railed materially less lower CV product in the second half of this year. If you look at our export saleable production, we forecast the full year at 14.9 million tonnes. Clearly, that's still subject to a month of delivery TFR continuing to keep our stockpiles at levels that we can keep our mines operational. But what that means when you look at the tables that we've supplied to the back end of the statement is that production at our higher-margin operations are either flat or up year-on-year. But at our lower-margin business, which is the Khwezela business, that production is materially down, again, reiterating our focus on our higher-margin operations. Now Khwezela, there's a number of factors playing into their production. You might recall, we've placed Bokgoni on care and maintenance previously, and we were busy ramping up navigation. But given all of the constraints in TFR and stockpile constraints, we have slowed that process down and focused our efforts and our trains on where we are able to maximize value and cash. That's likely to, therefore, be a feature, even into the early parts of 2022, and we'll monitor that situation quite closely when we talk about Khwezela or navigations ramp-up. So we've spoken a lot about TFR and the challenges that the industry faces in terms of rail capacity and performance. And whilst this year so far has been a very disappointing year for the industry, we have taken a number of steps in step with TFR to seek to address some of the challenges that TFR continues to face. Firstly, as you might have picked up on the media and as we've said before, the secured intervention that the industry has helped put in place, has made a very significant impact on availability of trains at our sites. And that initiative, mainly through sort of focused security teams and drones is currently on the back of that success being extended across that 600 kilometer rail corridor in order to make even a bigger impact. Now notwithstanding the success on the security side, that has also been met by a disappointing performance in some of the loco availability. And as you've also, again, no doubt heard and read before, the challenge has mainly been that of spares availability and maintenance. And there are 2 different layers of challenges. And we are -- we remain confident that if we can solve the spares availability on the [19 Es], so just to remind you, those are the Japanese sourced locos, and good progress has been made in setting up sourcing hub and then securing the necessary inputs and spares to get those up and running. That should have a double-digit percentage improvement on the total rail capacity. The more complex conundrum is the China-sourced locos, so the [21 Es] and so forth. And those are subject to a much more complex set of challenges. But clearly, between the 2 streams of work security intervention to avoid [indiscernible] theft and then other vandalism on the one side, and on the other side, spares availability and maintenance on these locos. We are confident that this remains a transient issue, but the timing of full resolution remains uncertain at this point in time. We, however, understand and know that TFR is putting in every single effort they can, and so we, the industry, RBCT. And we're, therefore, confident that during the course of 2022, we should see a step-up back to closer levels to what TFR has declared in their aspiration to get back to 70 million tonnes annualized capacity. So from a sales perspective, I look at our 2021 year, we have an outlook of 13.7 million tonnes of equity sales. So that's a coal that we produce, rail and sell. Clearly, that is below the levels of our production for this year. And as a result, we've built stocks around approximately ZAR 1.2 billion worth of stocks in this year-to-date. The timing of that unwind of stocks and working capital is mainly dependent on when spare rail capacity becomes available again. If you look at the end of November, we've shared with the market today that we had around ZAR 8 billion of cash at that date. And clearly, that is driven from the position of the strong sales number, strong prices and also FX up to the end of November. We've also today introduced the concept of a liquidity buffer. And we've set that out fairly clearly in our note that following periods of stronger prices or during course of stronger prices, which is what we are seeing currently, we believe that the right balance sheet flexibility to maintain is around ZAR 6 billion of liquidity. Now clearly, that provides us with room for returns to shareholders to fund life extension projects. And to ensure that our rehabilitation cash provisions are adequate for our future obligations and liabilities. These decisions on broader capital allocation is top of mind for our Board, and clearly, will receive attention early in 2022. And I said earlier that we'll reiterate our dividend policy, which is to return a minimum of 30% of operating free cash flow to shareholders. And beyond that, clearly, the form of return, whether through cash dividend or buybacks, otherwise, is also still a decision that the Thungela Board is able to opine on with much more confidence given the performance of the business so far. This cash generation and the potential to pay a robust dividend, therefore, also signals a promising outcome for employee participation program and the community participation program. And we would talk to you a bit more about that when we get to our full-year results. Something else that's on our agenda, clearly in the context of the strong cash generation is our Lifex projects. We've signaled that we continue to study these key projects, given the importance to the life of our business, so not only Elders and Zibulo, but also [indiscernible] and other projects. And we've also previously said that many of these projects are truly life extension in that they're only able to be mobilized at the end-of-life of a particular operation. But we have some level of flexibility to potentially accelerate some of these projects, and we'll only do so where it is absolutely sensible. And we continue to study and we'll provide the market with an update on those studies when we report our full-year results in March next year. We've also used this opportunity on a voluntary basis to provide the market with a bit of an update on a very good outcome for us. We were very pleased that we've concluded a strategic partnership transaction with Nasonti, GSM or Goedehoop South MRD. This project, as you'll notice from the announcement, there's a very low capital intensity in terms of cost per tonne. It is also a very low-cost operation once mobilized and therefore signals the opportunity to put higher-margin tonnage into our export equity profile. Having said all of that, that additional 1 million tonne of production is a very flexible tonnage profile in that it is not a typical open cast to underground mine with limited flexibility. And that flexibility remains very important, given the continued uncertainty around the exact level of rail performance into the next year. That transaction became unconditional in November, and we are making really good progress to establish that plant and that operation to be in ramp-up mode from early next year or Q1 next year. When we come to the market again in March, we plan to provide the market with a more update or detailed update on our capital plans for the next year or 2 as well as our cost per tonne and production outlook. And some of these are clearly dependent on what we believe is achievable for TFR in 2022 relative to the 70 million tonnes that they have conditionally declared for the year. With that, let me pause and hand back to Ryan to start us off on some of the questions that might have come in on the lines. Thank you very much, Ryan.

Thank you very much, Deon. We will now turn to Q&A. A reminder for those wishing to ask questions, we ask that you please join the conference call facility, as we'll only take questions through this facility. [Operator Instructions] For those on the webcast, you will, of course, be able to hear the questions and the answers. Operator, please go to ask that you open the line for our first question.

Thank you, sir. The first question comes from Brian Morgan from RMB Morgan Stanley. Please go ahead, Brian.

Hi guys thanks very much and great update. The one thing you haven't chatted to us about is unit cost guidance. And I was wondering if you could just give us an update on that. I think you were guiding for ZAR 830, but there's also a portion of rehab provision swing in there, too. So could you just chat to us about how you're seeing that for the full year?

Hi, good afternoon, Brian. Yes, so our unit cost guidance has not been updated. You are correct. Your memory is correct. We've previously guided full year this year at ZAR 830, but also in real terms to keep that flat into the next year and beyond. We are in the process currently to refine our rehabilitation provisions. And as you might recall, a portion of that ZAR 830 related to those provisions, we have not yet concluded that work. And as a result, we've thought it prudent not to necessarily update that number as we stand today. Clearly, Brian, the ZAR 830 has come under risk as a result of the lower denominator from a sales or production perspective in the full year on the back of the TFR constraints. But notwithstanding that, the tonnage that we've been able to take out of our portfolio, we've also focused our efforts on taking tonnage out where we were confident that we would be able to take a large portion of the costs out also. So from a cash cost perspective, on the FOB per tonne, we continue to believe that we would come in below that ZAR 830 a tonne level on the full year.

Okay cool. And just to confirm, I assume that you pay income tax and royalties in December before the end of the financial year, right?

Yes. Certainly, in terms of our normal cycle, we would seek to fund our typical provisional payments and royalty payments within the financial year. That's correct.

Okay. Cool. Is there anything that we should be aware of that could come between the end of November and end of December, which could swing your cash balance apart from just normal course of business and tax payments and provisions et cetera?

No. I don't think there's anything that necessarily is material in that context. But to reiterate, the variability of TFR's performance clearly could have some level of impact on the shorter to medium term. But given that the revenue that we would receive in December is based off November sales, Brian, there's nothing material that I can think of that would play into the December end cash balance, no.

Thank you. [Operator Instructions] The next question comes from Patrick Mann from Bank of America. Please go ahead, Patrick.

Thanks very much for the update. I suppose related to TFR and the performance, let's say, if we resolve the issues with the [19Es] on the sort of Japanese sourced locos, how should we think about what the rail capacity is then? So you were saying it's much more complex with China [21Es]. So what's the kind of, I suppose, portion that can be solved and then what's the portion that's probably more difficult to fix? And then maybe just in terms of your own planning, when do you think we'll start to see improvement in the rail line? Thanks very much.

Hi, Good morning, Patrick. So the rail question is clearly a very complex one, given that it's not necessarily linear linked to one intervention, which gets you an uplift of direct proportions, given that there are a myriad of concurrent challenges. And as we've seen with the security, whilst the initial prognosis was extremely positive, it's still positive after some further headwinds. So difficult to give you a direct correlation, but from our view in glass Patrick, if we are able to solve the [19Es] between TFR and the industry, that, in my estimation provides for around double-digit percentage improvement. So if you look at the full year this year of around probably 58 million tonnes TFR performance. Just solving the [19Es] should get TFR closer to around 65 would be my guess, 1 million tonnes annualized. That still leaves them a couple of tonnes short from the 70, which means there are a number of other initiatives to add loco capacity beyond that and clearly also address some security headwinds. Given that, the security interventions, as you might recall, was only really implemented in the second half of this year, and we haven't seen the annualized benefit of that security in 2021. So I think that the [19Es] could give us double-digit percentage from the current base improvement just based on taking how many locos would become operational if we had secured all of those Japanese spares on day 1. And then clearly, there's more upside beyond that if we are able to make further progress in loco capacity and security. To answer your second part of -- sorry, go for it, Patrick.

No, I was going to say that's very clear, thank you. But maybe can you give us a bit of a time line then on when you'll know whether that you guys have found a solution for the [19Es], for example? I mean, what's the kind of time line on that then to, let's say, the 65 million is right, and I'm not saying -- I appreciate it's your best estimate. So I'm not holding you to do anything. But if that is correct, I mean, when would you think if everything goes well, you could get back to this?

So Patrick, yes, even more difficult to put a time line on what you've just asked. I think the solution has largely been found. So it's not as if there's a search for a solution, it is more the implementation of the solution. And other than some rate type and logistics, the solution is very well understood by all stakeholders. And the only possibly area that I don't have perfect data is on the lead times of each and every spare part and the criticality to that. So it's very difficult to answer your question on timeline. We remain hopeful clearly that it could be resolved, the [19Es] at least, during the first half of 2022 with some residual overhang to be solved in the second half. And clearly, there might be some spare parts where the lead times are longer than 2022. But clearly, they wouldn't impact every single loco or inoperable loco today. So very difficult to give you a definitive time line. Apologies, Patrick.

No, no, that's fine. That's very helpful. Thank you. And then maybe if I can keep going because it would sound like it was just Brian and me. So hopefully, I'm not taking up somebody else's time. But are you kind of running to standstill here? So let's say we fixed [19Es], but we still have issues around China's [21Es] et cetera. Is that -- would you expect to see that the performance from there continues to deteriorate. So we're kind of okay, we can push Japan sourced locos, and we can kind of get capacity up there, but we are going to continue to lose capacity on the other side. Is that the right way to think about it? Or -- yes, I suppose it's just -- I mean, this is obviously critical for your guys' volumes and prices are really good et cetera. So this is kind of the variable that matters the most, right, which is why I'm banging on about it. So apologies for that, but we need to get it right.

Yes. So I fully appreciate the importance of this assumption, Patrick. The answer to your question is that we don't only have one horse in the race in terms of resolving between TFR and the industry, the loco challenges beyond the 19Es. The exam question is very simple, is introduce additional local capacity to TFR, whether through maintenance spares or additional locos. And clearly, TFR continues its program of work to understand whether there are alternative locos that could be introduced on other parts of the line with redirection of locos to improve the coal line. We remain confident that TFR is sufficiently focused on the exam question, given that the coal line is like for us, a very important revenue driver for TFR. And they are resolute to -- in their efforts to also increase loco capacity. Unfortunately, it's just not a 1-day game. So it's not about only one option to improve capacity beyond the 19Es. But I would be hesitant to be drawn into the detail as to what those other options are at this stage, given the ongoing commercial discussions to achieve that. But clearly, we're not blind to the fact that absent resolution on the Chinese situation or additional loco capacity, there is definitely a risk that the total capacity on the line wouldn't necessarily only see a double-digit increase but would also possibly or could also face thereafter headwinds if none of those other initiatives are successful.

The next question comes from Tim Clark from SBG Securities. Tim, you may proceed with your question. [Operator Instructions] Unfortunately, we cannot hear anything from Tim's line. We will come back to you, sir. The next question comes from Thibault Levacher from S14 Capital. Please go ahead.

Yes. My question would be really around how you came up with 6 billion of minimum capital and what the thinking between the ZAR 6 billion minimum capital that you want in an upcycle and the level -- the [indiscernible] level you want at the bottom of the cycle, just if you could frame the reasoning there.

Sorry, I didn't catch your name, but I think it's Zandre or is it…

Sorry, it's Thibault, yes, sorry.

Tibo, apologies for that. Okay. Yes, it's a very good question, Tibo. So the Board's logic is simply the following. So when we looked at our balance sheet, we've recognized, as we said in our statement, that we remain a single commodity, single geography business with a number of potential risks to our balance sheet. And clearly, if you look back at 2019 and 2020, when we saw really depressed thermal coal prices. We saw 2 years where from necessity, we had to continue to invest in our capital program. And over those 2 years, if you look at the pre-listing statement and our historic financial information that we published on the 8th of April, you will see that we were cash negative during 2019 and 2020. Notwithstanding that, total cash negative position in those years, we continue to invest in capital. If you take the capital out of those 2 years that you will see that at operating free cash flow level, we were neutral in those 2 years. So the Board's logic was borne out by a number of sensitivities, both price, FX and transfer performance and therefore, came up with a range of liquidity that we require, given that as a coal company, we don't necessarily have access to the typical banking lines and long-term debt facilities, which most mining companies have access to. And as a result, we feel that a level of ZAR 5 billion to ZAR 6 billion after a period of stronger prices remains appropriate, given that there is clearly a risk that following periods of strong prices, supply could enter the market more robustly, leading to a shorter-term softer pricing. And having that type of liquidity then gives us the ability to continue to invest in whatever projects we might have approved, potentially provides the Board the opportunity to continue to return cash to shareholders. And therefore, at the end of -- or during a weaker price line environment, we might get down to a liquidity buffer of ZAR 2 billion to ZAR 3 billion after having continued to invest capital through that cycle. Hopefully, that answers to your question.

Yes, now it makes sense as to maximum, I suppose, cash burn. And then if I may, a second one. So I mean, it seems that China, for example, is now pushing for longer-term contracts to avoid the kind of energy price crunch that we had earlier this year. Is there any temptation on your end to strike deals that are longer-term at a high price, like in China, is that like 110 for the utilities, do you have any intention with your clients of signing longer-term contract at very attractive prices for you that would give you visibility as to cash generation for more than a year?

So Toba, we have signed an offtake agreement on our export coal with Anglo American, which was effective on the 1st of June 2021 or just prior to admissions. And that agreement runs for approximately 3 years. So we are not necessarily able to dedicate any physical equity coal production to a particular customer in the short term.

Thank you. The next question comes from Andre [indiscernible] from [Resco] Asset Management. Please go ahead, Andre.

Congrats on the results. Just 3 questions from my side. I'll start with the first 2 as they're fairly related, and then we can get back to the third one. So you mentioned you've reduced some production predominantly at Khwezela. Just I'd like to understand how close are you to potentially reducing production at any of the other mines should rail issues persist? And then also just some comments on domestic sales, did you divert more sales into the domestic market due to lower TFR capacity? And how did domestic sales go otherwise? Thanks.

Thanks, Andre. Good afternoon too. So in terms of your first question on Khwezela production, you might have noticed that we've curtailed Khwezela's production, but that it still has a level of continued run rate from the navigation, but being our lowest margin production tonnage. Clearly, there's, therefore, more headroom potentially to redirect some of that open cast kit into rehabilitation or other activities that might be earnings accretive and put us in a no worse off position from a cash perspective other than not building further stockpiles. So we've got a bit more headroom at Khwezela, if rail deteriorates further ore stockpiles becomes a larger challenge in 2022. Clearly, we continue to rank all of our operations from a margin perspective. And if there is a need to further curtail, yet again, that would be at our lowest margin operation across the portfolio. In terms of domestic sales, year-on-year, revenue is likely to be fairly flat, but let's not sort of get drawn on the detailed numbers, not too long from now, you will see those numbers. But we have not necessarily been able to redirect material volumes into the domestic market. And this is not necessarily unique to any particular coal producer with the TFR constraints, as you can imagine, there's been an oversupply, and you would also have picked up in the market, no doubt that [indiscernible] is sitting on fairly healthy stockpiles, given its inability to burn coal, not only from an economic activity, but also a power station availability perspective. So therefore, the domestic market has got limited depth to take some of the export coal. So hopefully, that answers that question for you, [indiscernible].

That's helpful. Thanks Deon. I'm not sure if I missed the number earlier. Have you got any idea in terms of stock build of export coal, where those docks are sitting?

Yes. So our stocks are largely at mine site rather than necessarily at the port. And at the end of the year, we are likely to sit on around 400,000 tonnes at the port. And at current production rates, approximately 2.5 million tonnes of coal across our mines up to the end of October, that stock build equated to about ZAR 1.2 billion of working capital build. And you might recall in H1, we built around 500,000 tonnes of stock with a balance built in the second half of the year.

Okay. That's very helpful. Thanks Deon. Just a last question from my side, slightly less related to your operations. I've noticed that the API 4 price discount to say FOB Australia has grown quite wide over the last bit despite freight rates coming down, do you think that is due to lower TFR availability and lower coal sitting at the ports? Or any ideas of what's driving that?

No, sorry, [indiscernible], I don't have any sort of idea of what drives those type of dynamics currently. Needless to say that we've seen the inverse of that a year or 2 ago. So no doubt, there's a number of nuanced supply demand, which is once we understand what it is in hindsight, we'll sound like we knew exactly what it was. But as I sit here today, I'm unable to tell you exactly what it is.

Thank you. The next question is a follow-up question from Thibault Levacher from S14 Capital. Please go ahead.

Just wanted to make sure on the capital distribution. So is it the way we should think about it that if you continue to generate strong cash flows, given the current strong environment, if it continues into the first part of 2022, should we expect that any cash generated over and above the ZAR 6 billion sort of threshold would be returned? Or do you have any other uses that you can think of for the kind of windfall cash?

Yes. Thank you much for that question. So firstly, your observation is correct that clearly, we've signaled a liquidity buffer of around ZAR 6 billion. And we've also -- end of November, had ZAR 8 billion. And therefore, there's a good probability or possibility that cash generation would, therefore, add to the ZAR 8 billion between now and the point of declaring our maiden dividend. If we look at that cash headroom or surplus cash, clearly, the Board would face a trade-off between 3 uses for that cash. In no particular order, firstly, recognize that we have a number of environmental liability obligations into the future. We've previously said that we would closely monitor our so-called Green fund and contributions to it. Now our Green fund contribution for 2021 was about ZAR 188 million, and that was made in the first half of this year. But clearly, the Board would have to opine on whether they continue to be comfortable with that level of Green fund and the rehabilitation cash provision. So that's one, that is a consideration for us as we think through the returns to shareholders. The second one, and that hinges mainly on ongoing work we're doing to study the life extension projects. And as I flagged earlier, many of those life extension projects are unable to be invested or initiated prior to the end-of-life or close to the end-of-life of existing operations. But there are, at the margin, possibly 1, maybe 2 that one could accelerate in order to capture a particular market value. And therefore, understanding that capital spend profile over the next year or 2 will be important for the Board. The third one, clearly, is dividend and other returns to shareholders. To the extent the Board believes that it's appropriate to return more than the minimum 30%, whether through dividends or potentially buybacks, which, as you can imagine, is all of the above, sounds very attractive given current valuation levels and the like. So there are really 3 balancing features that will dominate our deliberations and discussions as we head into our maiden dividend declaration.

You're right. Yes. Thank you. And just maybe to follow-up on this. Yes, in terms of choosing between the dividend and the buyback, what would be the reasoning? And yes, I think you just mentioned in terms of the valuation of the company today. How do you think about the arbitrage between the returns on the CapEx versus return on a buyback at the current -- I'm going to say ridiculous valuation kind of return you can get from a buyback today?

Yes. So absolutely, a very good question. We don't necessarily favor either or recognizing that we have a broad set of shareholders with differing objectives. We are conscious of preferences across different parts of our shareholder base. Equally, we're conscious of the -- withholding tax leakage on a cash dividend. We're conscious of our market valuation of our stock. We're conscious of the supportive environment that price has continued to provide us. And therefore, as we move into that discussion, it is not an either/or in my mind, certainly, but I would not want to speak on behalf of the Board, clearly, they would opine on all of the considerations as the decision of the most appropriate manner to return cash to shareholders is made.

Thank you. The next question comes from Brian Morgan from RMB Morgan Stanley. Please go ahead, Morgan.

Thanks very much for the follow-ups. If I can just carry on where Thibault's left off just on the dividends. Let's just play a scenario where prices fall to trough levels by say the end of next year. Would the Board then look at drawing down that cash to pay a dividend or do a buyback, let's assume that the share price was materially lower than it is today, would that be a realistic scenario?

Brian, again, I'm not sure about the word realistic, but it's absolutely a scenario. Certainly, in my mind, the reason why we've signaled a cash buffer or liquidity buffer apologies, is to ensure that we maintain the level of balance sheet flexibility in order to provide the Board with all of the options that you've described rather than necessarily painting us into a single option. So absolutely, it is definitely a scenario and a possibility. But I'm just not sure about the word realistic at this point in time.

Okay -- if I can just come in. If you can just give -- I see there are no further questions in the queue, but I think we have wanted -- to want to understand a bit of technical difficulty. So if anyone does have a further question, please do dial star 1 on your key pad, and we'll give just another minute in case there's any other questions. Otherwise, we'll move to close the call.

Thank you. We will just pause momentarily to see if there are any questions. The next question comes from David Baker from Baker's Steel. Please go ahead, David.

Deon, can you hear me?

David, loud and clear.

Great result, fantastic. What I'm confused about is say you come to March and you build your cash it to ZAR 10 billion. Would that impact basically how much you would pay out in a dividend? Or would it just be on the dividend for the year-end to the end of December?

So David, apologies to sort of pick on words, but it could play out, but I'm not commented that it would play out into that dividend. I think what we did say is that our dividend policy remains sort of front and center in our minds, which is a minimum of 30% of the operating free cash flow after sustaining capital. But that doesn't mean the minimum 30% is necessarily a cap, but it does mean that it's a minimum. And therefore, the way that I think it could play into the Board's deliberation is in the level of confidence in the balance sheet's flexibility and the level of confidence of continued cash generation. And clearly, it could play into coming up with a more material percentage payout in relation to the period that the dividend is meant to cover. So our dividend policy is quite simple. It's an earned first policy. And clearly, the cash we would earn in H1 next year would become available for an interim potential dividend declaration at the interim results in 2022. Will it have an impact on the Board's deliberations or not? Absolutely. But I'm not convinced that it is the only factor that would play into their minds at that point in time, David.

Excellent. And just one other question. Given that the Chinese, I think one of the other participants that mentioned the $110 that the Chinese are saying that they're going to look out next year. Does that -- do you look at that at kind of putting a floor under the steaming coal price? Or and how do you see that? Or you don't really think it's material?

No, absolutely, David. I think the Chinese, as we would have seen in the last number of months, have a very profound impact on sentiment and news flow out of China in terms of what is acceptable to the Chinese government certainly has played into some of the sentiment around the Chinese price. And whereas -- sorry, coal prices more globally. And whereas if you recall correctly when I flagged sort of the markets, China was only the third largest recipient of South African coals, given that, that is such a vast market, burning sort of almost half of the global coal per annum, just a 5% or a 10%, let's call it, a 10% shortage in China, literally drives a 20% to 30% shortage in the seaborne world, which is clearly very price supportive. So China, whilst not a key recipient of South African coals, is very much a key determiner of what that coal price ranges at. So I think the $110 a tonne that the Chinese seeks to target in next year is definitely a reference point for us to keep in the back of our mind. But the way that we operate our business is slightly agnostic to that number, but rather how good we could get in terms of optimizing the cash in the bank relative to all the qualities that we produce and the rail that we have available. And clearly, if that number is true for next year, we again set for a very, very robust 2022.

Excellent, phenomenal result. And just one other question. I listened to a Whitehaven Coal, which is an Australian coal producer last week, and they were saying that the effective cost of coal is around 20% of the effective cost of natural gas, given the surge in the natural gas price and the tightness in that market. So clearly, coal is exceptionally competitive at the moment, one would have thought.

I can't comment on that percentage. The last time we looked at it, it was around 50% of the cost of natural gas. And I suspect that's the different markets that we're talking about. But yes, coal remains a very competitive and a very compelling baseline fuel load, especially for markets in the East. We said pre demerger, and we continue to believe that given those features and how attractive coal remains to our buyers of coal and our ultimate customers. We think that there's a supportive pricing environment into the medium-term for coal. So absolutely in alignment with Whitehaven's comment, but just not sure about the percentage.

Thank you. The next question comes from Mark Zand from Wexford. Please go ahead, Mark.

Good afternoon. Could you just tell us what the timing would be on when there would be an announcement on a return of capital, whatever the form it is?

Yes, Mark, and good afternoon in SA time. The data of that announcement clearly is still subject to a decision by the Board. I believe that it's likely to be somewhere around the March 22, 2022 on or about, which is any -- we are likely to announce our full-year 2021 financial results.

Thank you. We have no further questions in the queue. Ryan, can I hand back to you for closing remarks.

Thank you very much. Thank you, everyone, for your participation on the call this morning. We do appreciate it immensely. And I'm going to hand over to Deon for a last comment to close the call.

Thank you much, Ryan. Thank you to everybody, again, made the time. If we have the opportunity to speak to you again, really looking forward to that and wish you and your loved ones a healthy and restful break for those in South Africa heading into the holiday season. And for rest of you, please keep the economy in the north up and running. All the best.

Thank you very much. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.