Thungela Resources Limited (TGA) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the Thungela CFO Pre-Close statement. [Operator Instructions] Please note that this call is being recorded. I'd now like to turn the conference over to Ryan Africa, Investor Relations Officer. 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. Today's call will be run through both an audio webinar as well as a conference call facility. Deon will present an overview of the key elements in today's release. Thereafter, there will be a Q&A session until we close the call shortly before 1:00. Turning to Q&A. [Operator Instructions] Finally, a reminder that this morning's announcement is now available on the Thungela website and that today's session will be recorded and recording will be made available on the Thungela website from later this afternoon. With the logistics out of the way, please allow me now to hand over to Thungela's Chief Financial Officer, Deon Smith.

Thank you, Ryan, and good afternoon to everybody that's made the time to dial into this pre-close and trading statement call, that's now for the year ending 31 December 2022. So we're clearly expecting to deliver strong cash generation for this year but that's [indiscernible] number of operating challenges. And in today's call, I'll sort of unpack what's in our trading statement a bit more, but leave sufficient time for Q&A, just to clarify any questions that you might have. We'll also clearly talk a bit about the threshold trading statement. So that's the earnings per share and HEPS that we'll get to a bit later on. Now before we get into the details on the performance and the financials, let me just pause to reflect on the fact that -- so we've now had a fatality-free business since June 2021. And whilst 18 months fatality free is certainly not cause for celebration, yet it is a testament to the work that our teams continue to do in respect of eliminating fatalities across our business. So turning to our performance for the year. And we have to start with the Transnet Freight Rail. So we've unfortunately seen a proliferation of a number of matters across our industry. And in addition to the illegal mining, we've also seen an increase in the number of power supply interruptions. And this is not something that South African households have only felt but the power curtailment across operations has clearly become more pronounced in recent times. But the biggest drag in our performance remains a very well documented and ventilated issues around Transnet Freight Rail. At the release of our interim results in August, we were hopeful that there would be an improvement in TFR performance following the annual maintenance shut. So whilst the shut happened and it was completed in time, and whilst TFR's performance initially improved post the shut, that momentum was interrupted by the strike at Transnet during October of this year. The strike was closely followed by severe derailment on the coal corridor in early November. And in aggregate, these 2 events cost us around 600,000 tonnes in export saleable production and -- I mean given the need on our end to constrain production when our stockpiles are full to the brim. So for clarity, following each of those events, it is typically necessary also for Transnet to rebalance the network as [indiscernible] at the bay rather than at the mines. And that results in a slower ramp-up and the impact of those events are, therefore, slightly longer than the times or the dates that we've set out in the SENS or RNS this morning. So clearly, it's incumbent on us to continue to mitigate the impact of TFR. And what we've done, and historically, we've continued to do, and whilst our strategy has been to continue railing higher-grade products to optimize our revenue growth and the price that we realize for coal. And we've had to start to rail some 48 -- so 4,800 CV material in Q4. And clearly, this placed some pressure on discounts, which I'll talk to a bit later on. We've also continued to create additional stockpile space and balancing stocks across operations by trucking stocks and that clearly has a bit of a cost headwind across the operations. We've also opened up 3 additional sidings and that's in our third-party sidings that we utilize. And that creates further loading capacity and also further stockpiling capacity. It derisks train cancellations and spreads [ to a ] broader distribution pattern of plans a bit better. We've trialed a transport of coal by road to the Richards Bay multipurpose terminal. And whilst operationally, that was a success, we remain quite cautious given the various reports of community challenges as well as the broader social and environmental impact of transporting coal by road. But notwithstanding all of these actions, we were -- we're still forced to curtail some of our operations. And as a management team, we clearly remain deeply concerned by the deterioration of performance. But we have seen encouraging signs. We've seen clearly government step in, in many respects, and most recently, the ban on the exports of scrap and copper, albeit only for 6 months, should reduce some of the theft that we've seen across infrastructure in South Africa. If I now talk a bit more around what I've set or what we've set out in the SENS and the RNS. In terms of processing demand for energy, we reiterate our view that the global demand for coal remains strong with various supply side challenges. And South African situation or export corridor is but a microcosm of some of the global challenges on the supply side. And whilst prices remain well above what we've seen in recent years, we have seen increased volatility in recent time. In discounts, which I've flagged a bit earlier, remain the only short-term leverage that buyers of coal have relative to benchmark. And we've seen pressure on these discounts, and some of them are widening, especially for lower-quality coals. In terms of export saleable production, you would have seen that we've guided now for the full year about 12.8 million tonnes, just slightly lower than our -- than the bottom end of our most recent guidance. And that's most exclusively due to the strike and derailment, but importantly, the short period of time between the strike and the derailment. Therefore, the lack of momentum and ramp up between those 2 incidents, as well as the slow ramp-up post the derailment as TFR sought to rebalance the rail network. Clearly, that lower production denominator has a compounding impact on our FOB cost per tonne. And you'll see that that's around 4% above our previous guidance. But also, we've taken a noncash charge around ZAR 85 a tonne, and that's for environmental provisions. Clearly, in those environmental provisions, what you'll see the increase relate to mainly is that with global mining inflation, equipment, diesel costs, energy cost into that rehabilitation provision, creating a slight headwind. And that process of an annual assessment of our environmental provisions, as you might recall, is an independent or third-party assessment as to what the shape and size of that liability is likely to be in future years. In terms of export equity sales, that clearly followed on from the production and the rail performance, and we, therefore, are expecting to end the year at about 11.9 million tonnes. So clearly, mathematically, that sort of gives you around about 900,000 tonnes of inventory build. And given all the rail challenges I've spoken about, that inventory build has been mostly at the mines as well as some of the rail sidings, ours and the third-party rail sidings. Our capital expenditure at around ZAR 1.9 billion is in line with our guidance previously. And we're very pleased, obviously, that the Elders production replacement project is now in execution. In terms of cash flow generation for the period, as of the end of November, and this is purely a snapshot and indicative. And we've had a net cash position of about ZAR 19.8 billion. And given the very low sales number in November, we are expecting to have a cash neutral position in December on an operating basis. And then face headwinds in relation to -- or cash headwinds to be clear in relation to tax and royalty charges and -- as well as the need to inject just north of ZAR 1 billion into a self-insurance structure, which I'll elaborate on a bit more later on. Simply today, providing a threshold trading statement as we expect full year earnings per share to be at least ZAR 125 per share with full year headline earnings per share of at least ZAR 131 per share. The difference between these 2 relates to potential impairments that we continue to assess. And those impairments are exclusively in some of our domestic operations and certainly not in relation to our export operations. As I start just to wrap up and you start to prepare some of the Q&A, it's important to note the recent SENS announcement, RNS announcement, where we reported that we've acquired the 27% minority interests in Anglo American Inyosi Coal. So that's the AAIC historic structure. And that structure holds our flagship operation in [indiscernible] Zibulo and -- as well as the Elders production replacement project. And that acquisition was essentially concluded at a earnings -- around 1x earnings or 1 year's worth of earnings. And we believe was a prudent step to enable us to optimize that Elders production project as well as the Zibulo operations and capital structures into the future. I said earlier that we have -- the Board has resolved to set up a self-insurance structure. And clearly, the insurance markets have been very challenging in recent times. Prior to the merger, we set up an 18-month placement of insurance. And that has now substantially come to an end of its life. Some of our policy -- or the increases in costs in some of the policies were eye watering and clear indications are that insurance is unlikely to be available to coal companies for many years to come. And it's, therefore, a prudent step for us to safeguard the longer-term sustainability of our business by putting aside roughly ZAR 1 billion into such a self-insured structure. We continue to place catastrophic risks in the market. But clearly, over time, as we capitalize that structure with an ordinary cost premiums, even that catastrophic cover might may no longer be required in future periods. In terms of capital allocation, clearly, that ZAR 1 billion also plays into the net cash we would be reporting at the end of the year. Meaning, to the extent that it reduces our net cash that we will report. But we remain committed as a Board to our dividend policy, which, if I can remind you is to pay a minimum of 30% of adjusted operating free cash flow to shareholders. And to the extent that this free cash above that to be considered also to be distributed to shareholders. And the Board will clearly in that whole discussion also reflect on the liquidity buffer, and we accordingly expect to declare the next dividend in relation to the 2022 year at the release of our full year results in March 2023. But let me pause there and just hand back to Ryan to test whether there are any questions that we might be able to answer to give you further clarity on the announcement today. Ryan?

Thank you very much, Deon. We will now turn to Q&A. [Operator Instructions] Operator, please could I ask you to open the lines for the first question.

The first question we have is from Brian Morgan from RMB Morgan Stanley.

A couple of questions from me. Could you just give us an idea of how your inventory is distributed between rail sidings, mine and the port, just in terms of quantity, if that's possible.

Do you want to quickly just run through all your questions and Ryan will just jot them down and then we will...

Sure. And then second question is how much more -- so you put ZAR 1 billion into your [ self ] capital, how much more do you expect to put into that over time? And then the third question is, you have increased the rehab liabilities by ZAR 1.1 billion. What are you doing with the rehab assets? Are you going to be increasing that by the same amount?

Those are your 3 questions, Brian?

Yes.

Okay. And the -- quickly to the easy one first. In terms of insurance, whilst we've capitalized that or about to capitalize it with -- approximately ZAR 1 billion, our intent is not to grow that materially other than what's our annual premiums, which for reference, is around 200 -- just over ZAR 200 million per annum. So that premium rather than being paid to [ export ] market will now be paid into the -- essentially the capitalization or continued capitalization of that -- of self-insurance structure. And absent that, that cost of ZAR 200 million in likelihood would have hit more than ZAR 300 million per annum. So it's a very efficient structure and clearly a very good saving mechanism for us to shield us from not only sort of the inflation pressures, but what's become a very, very difficult market to maneuver. In terms of the rehabilitation liability, the intent is not today to match that increased rehabilitation liability with increased assets or cash collateral. But clearly, that remains a discussion for the Board when we reflect on the full year dividend. And we're also quite keen to see how this rehabilitation liability evolves over time. And as you know, that the NEMA regulations postponed to the 19th of September 2023. And that's still a bit of work in progress to see where that lands. And then equally, with some of the increased pressures on inflation that might have played into the rehabilitation liability in the current period, you might see some of that subside again in future periods. So it's not a foregone conclusion that we believe we should increase the cash collateral or the assets in relation to that liability. So that's not a conclusion. In terms of the stock distribution, we -- end of the year, we're likely to land at about 3.4 million, 3.5 million tonnes of total stock broadly. Across the mines and the sidings, that's likely to be around 3.2 million or just over 3 million tonnes of stock and at port around 300,000-odd tonnes of stock. So that's order of magnitude, Brian, what we're currently seeing over the -- at the end of this year.

Can I follow up on that question, if I may? So just on the 300,000 tonnes, is that a sustainable number? Or will you need to build up those inventories again?

So prior to Transnet's challenges, we've reflected carefully on what we felt is the optimal stock levels at port, which are closer to between 600,000 and 700,000 tonnes at any given point in time. But clearly, given the current and continued rail challenges, we've settled down to such a level that we believe is an arguably a lower point of stock to be held at the port. And the lowest I can recall that was just prior to demerger when it was around 200,000 tonnes at the port. So this is certainly not a level that we are comfortable with, but we definitely require an improvement by Transnet to lift it to a more optimal level.

The next question we have is from Ben Davis from Liberum.

Just a quick question from me. Well actually, I'm just trying to -- how best to think about it in terms of Transnet's performance in the second half. Obviously, the strike and the derailment having quite an impact sort of 22 days out. How would you -- do you think -- how would you think it would have performed without those factors? It's about roughly 10%, 12% of the kind of the [ time ] in the second half that would kind of gross up to more like a 54 million tonne annualized performance in the second half? Or should it be more than that? Because as you mentioned, lots of momentum during -- between those 2 periods as well and those subsequent ramp-ups.

Yes. So Ben, very good question, and we've opined on that ourselves to understand the underlying performance of Transnet absent these 2 very major events. Now there's lots of noise in our analysis, as you can imagine. We typically experience derailments from time to time, and that's part of our planning assumption. However, those derailments typically don't take too much time to resolve. This particular derailment was quite an extreme derailment with, I think, around 93 wagons, which is a full Transnet train set derailed. Adding that, plus the strike back, H2 performance was broadly in line with H1. In the first half, the industry achieved around 53.3 million tonnes. So therefore, order of magnitude, the second half, excluding the derailment in the strike, Transnet performed at similar run rates.

Got you. And are you -- I mean, is there anything to suggest from what you've seen, it could be slightly improved in the next couple of quarters?

I think it's a good question, which is the one that we typically opine on as a management team more often than we'd opine on our own performance, as you can imagine. And the reality is, if you look at what's in place and what's about to put in place, we remain but now more cautious than ever before, optimistic, given that we've now seen these 2 external events that is not entirely Transnet's doing, but certainly impacted them and therefore impacted us. But the security measures that we've put in place before remain in place, and they continue to be successful. The government ban, I spoke about earlier on copper and scrap metal exports to reduce infrastructure theft is likely to have a positive impact. And Transnet has indicated to us that it's reached an agreement. And now whether those are definitive agreements or principle, this is not entirely clear. But they've reached agreements with the Chinese to deploy a lot of the spare parts that's -- within country to some of the loco graveyard, the Chinese loco graveyard. And we therefore expect in the short to medium term once that's in place that 50 to 80 locos could come back across the heavy [ ore ] lines. And that's sort of in the next couple of weeks to months. The only thing that we understand, it's still a work in progress. There's a couple of visas for some of the Chinese to enter the country and to help Transnet implement these maintenance initiatives. So if you add all of those areas up, silver linings, so to speak, green shoots Ben, we sort of believe that a slight improvement in the short to medium term could be possible, ceteris paribus no further derailments, strikes or other acts of God, that is. And therefore, as we look to plan our own business, clearly, we cannot continue to operate at the level of constraint that we are today. And therefore, we are looking to ease some of those constraints come January onwards.

Got you. That's very -- so -- I'd just -- one last thing, and it might be nothing. It was just a press article suggesting using diesel locos instead of electrical ones to get around the copper theft issue. Do you have -- I mean, is that a realistic proposition? Or is that -- would that just take too much time again?

See there are a couple of reasons why -- I mean, that's a good suggestion on paper. But you have to appreciate the hurdles to that. So typically, the diesel locos has [ pulled ] the smaller wagons and train sets. And two, the cost and the distribution of diesel post the [ uMhlathuze ] point -- so sorry, I just realized geographically, when I speak to someone in the U.K., I might need to be more specific. But along the rail corridor or the coal corridor, a good couple of hundred kilometers is the point between uMhlathuze, the handover point and the Richards Bay port. And the longer stretch, obviously, from uMhlathuze through -- to Mpumalanga where the mines are. And what we've seen is that the use of electricity and diesel is at different levels of intensity pre and post that point. And that's mainly as a result of the distribution pattern, diesel availability and infrastructure by Transnet themselves. So whilst the solution is not inconceivable, it will take time to implement such a solution. And clearly, depending on what oil price does, it will certainly potentially be a very expensive exercise for Transnet compared to some of the initiatives that they have already embarked on, such as just maintaining the electricity locos that they have.

[Operator Instructions] The next question we have is from David Fraser from Peregrine Capital.

I mean, unfortunately, I think this call is going to be dominated by Transnet and not your own operations. And it seems like sort of death from a thousand cuts from Transnet. I mean, obviously, they've got capital issues and don't have the ability to deploy enough capital onto these lines to keep them properly maintained. Have you detected any change in the political landscape recently? I mean clearly, the criticism of Transnet is in every third newspaper on every third day. And that doesn't seem to really be resonating in any improvement in performances. I mean is there any change that you're seeing in the political landscape to actually get Transnet to understand that they are -- as they're structured right now, almost incapable of returning this line to the sort of 60 million to 65 million tonnes. I mean, it seems like -- I don't know where the bottom is or what needs to happen for the -- for that to be a real change in political will, but the question really relates to whether you've seen any change in political will in order to let the industry get more involved in these operations and potentially even take them over in their entirety.

Thanks, David. I mean as -- and part of my answer is, therefore, also aimed at listeners that might not be as close to the newspaper that appear on one of my desk every third day. There's certainly a lot of political noise in South Africa currently around the President of the country and also more broadly the ruling party politics heating up to its conference as well as the next election in 2024. So clearly, there's a lot of noise and a lot of distraction currently. What we have however seen in the last couple of months is increased involvement by a broader set of political players than what has been involved before. So previously, engagements were not exclusively but predominantly with the Transnet leadership and as well as the ministry that takes ultimate accountability for Transnet. And the level of interest has grown rapidly and now as we sit here today, we have at least 3 ministries that are also indirectly impacted by Transnet's performance. The recognition by a broader set of political commentators and role players are of such a nature that the pressure on The Department of Public Enterprises and Transnet has dramatically increased. We've also now seen that the Transnet Board in addition to the Transnet management has opened up channels of communication directly with industry and that there's been a special committee created with a combination of Transnet Board members and the CEOs representing each of the main corridors, coal line and the like, having formed, I think it's called [indiscernible] engagement in order to identify and more rapidly and quickly respond to the challenges that Transnet faces. Whether there is a realization of the effort required to improve it, I cannot comment. The realization about the impact on the country has now been clearly articulated at every single level. And those numbers are staggering and is the difference between economic growth and job creation or stagnation of the South African economy. And therefore, there is a political will at the highest levels to resolve the current challenges. The methodology and the execution of doing so and whether that would be exclusively government-led or a combination has not yet been resolved. And that, I think, is un -- or likely to become the key ingredient in a step change in Transnet, is the point of realization of that industry will and have to play a role in Transnet in order to improve its performance. We are not yet at that point, David.

The next question we have is from Zachary [indiscernible].

Quick question on expansion of sort of supply chain or the route to market. We've seen, as you mentioned, RBCT tracking sort of 50 million tonnes, 48 million tonnes. But we've seen sort of smaller ports, [ DCT ], MPT, Maydon Wharf stuff out of Maputo tracking sort of close to 12 million tonnes, which is obviously a significant increase over the last few years. Just interested to understand at what point do you plan on utilizing this excess capacity. Obviously, it involves a level of road freight, which has its level of complexity and risk. Ultimately, as risk managers and as mining operators, at what point do you decide to manage some of the risk on the road and start utilizing some of this capacity that's available to get to market.

Zachary, thanks for that. So we have, as I mentioned earlier, trialed road as an option. The operation was successful, and we indeed got coal to market. And it was not a meaningful quantum of coal. And as you said, the risks and the complications, which I think the media has reported on well from road accidents through to environmental concerns and community unrest not only in Richards Bay but beyond that, is certainly a very big consideration. It also requires a level of confidence in not only the operational side of what we're talking about Zachary but also in the stability of prices and therefore, potentially mechanism to underpin a margin, so as to avoid an outcome where you invest a lot of effort and time to set up that alternative distribution network [indiscernible] volatility in prices. So there are a couple of complications. But we remain focused on refining that route and having that as an alternative. But we reiterate, it's unlikely to become a very material element of our armory, so to speak, given the size of that and the cost of it relative to the primary route to market.

[Operator Instructions] The next question we have is from Shashi Shekhar from Citi.

Am I audible?

Yes, Shashi, you are. Hi.

Yes. Actually, sorry if I missed that, but I want to know what is the reason for the self-insurance? I mean, is it common in mining industry?

So Shashi, the reasons are actually quite unique. It's not uncommon. So let me just take you back perhaps a couple of years whilst it housed in our previous parent company, that parent company was also self-insured and that was mainly for efficiency reasons. In our world, when we demerged this entity, we placed 18 months of insurance into the market, recognizing that a 12-month period is typically what is required for an insurance program to be evaluated and placed in the open market. And that period has come to an end. As part of that assessment, we needed to assess what the most efficient insurance structure for Thungela would be, some of the mine insurance policies and business interruption and asset damage policies and so potential increases of up to 300% in the cost of insurance. Now that is not only a reflection of the actual price of coal and therefore, the risk that insurers are expected to take on business interruption but also a reflection of a declining pool of capital readily prepared and willing to be put to work in coal companies. So the coal market is one, the insurance market is drying up for coal companies; and two, it's becoming eye wateringly expensive. So putting the structure in place, therefore, shields us from those 300% type increases in some areas. And then secondly, sets us on a path that should insurance become absolutely unavailable that we would have a level of insurance and -- self-insurance that is. And insurance is critical to maintain in the context also of our environmental liability guarantees, as you can imagine.

Okay. Got it. So that funding, that ZAR 1 billion you are funding for this insurance, so that will be reflecting in your balance sheet, right, under net cash?

No, it will not be under net cash. That would reflect more likely than not under long-term investment in our balance sheet rather than short-term liquidity or cash.

The last question is from Mark Zand from Wexford.

The cash on the balance sheet, is it all held in South African rand? And when do you convert? Do you ever recognize any foreign exchange gains or losses?

Yes. So Mark, the cash at the end of November was mainly held in South African rand, whereas you might recall, at the end of last year, we had sort of a 50-50 split, when the rand was materially stronger than what it is now. So at the moment, we're largely rand based. I didn't follow the second part of your question, Mark. You just asked the currency. Was there another part of the question that I might have missed?

Well, just simply, do you recognize any foreign exchange gains or losses historically? Do you expect to?

Yes, we do. There are ForEx gains and losses in our accounts. Some of it report through to costs. And then that's a positive and that reduces our costs. And some of it reports through in financing activities in our income statement.

And then the ZAR 4 billion between taxes and royalty, what's the breakdown? And what are the rates?

So we're expecting our tax rate for the full year to get much closer to the corporate tax rate. But then I will need to give you the breakdown. Just give me a second, if I can just determine the breakdown of tax versus royalty. So it's approximately ZAR 3 billion in taxes and corporate taxes. And then approximately ZAR 1 billion in royalties. You might recall in H1, royalty was a bit higher and the taxes also slightly a bit higher. So it's about ZAR 3 billion currently in corporate taxes and approximately ZAR 1 billion in royalties.

And just -- can you just give me the rates?

It's -- the rate on royalty is a more complex calculation, Mark. It's -- it differs per entity. And it's essentially a percentage of net revenue, based on the sliding scale between 0.5% at the bottom and 7% at the top or at the upper end of net revenue. And the reason it's different for each legal entity is because sales in the -- is determined differently in each entity. So our tax rates are -- on a corporate level, the South African tax rates are 28%. And for the full year, we're expecting our tax rate to be approximately 24%.

Ladies and gentlemen, that ends our question-and-answer session. I will now hand back over to Ryan Africa for closing remarks. Please go ahead, sir.

Thank you very much. And thank you to everyone that's joined the call and also for the Q&A on the call. If you do have any further questions, please do feel free to get in touch with me via e-mail. My e-mail is [email protected], and I'll get back to you. With that, please let me hand back to Deon to close out the call for today.

Thank you, Ryan, and to everybody that's dialed in and for the questions that you posed to us. From a management perspective, we remain focused on what we are responsible to control. And clearly, for us, it's important to operate our business safely, and it's really important for us to operate it as efficiently as possible, and that's about getting product to the market at the lowest possible cost. And for us, it's also important to manage our balance sheet. Those are the key factors that we will continue to focus on. But given the challenges we've had in Transnet, we believe that it's going to be -- become more important than rather than just influencing the direction of travel that we continue to work hard at and with government, with Transnet to achieve the step change that the industry and the country and us as a company requires to get the full potential from our assets. And that's sort of the heart of our focus areas and our objectives for the next couple of months. And hope to report back on positive movements in that regard as we get to our year-end results, which we're planning to publish in March next year. With that, I wish all of you a good festive season and hope to speak soon. As Ryan said, we remain open to any questions until the start of our closed period, which is later in December. And please do zap us an e-mail if you need to get a hold of us, whilst we might not be in the office over the holidays in South Africa. Thank you very much and all the best. Bye-bye.

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