Thungela Resources Limited (TGA) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Thungela Investor Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to hand the conference over to Ryan Africa, Head of Investor Relations.

Thank you, operator. Good afternoon, everyone, and welcome to this afternoon's investor call following the announcement released on SENS and RNS this morning. I'm Ryan Africa, Head of Investor Relations for Thungela, and I'm joined on the call today by our CEO, July Ndlovu; and CFO, Deon Smith. Today's call will be done through both an audio webinar as well as the conference call facility. July will provide a brief explanation of the rationale for the transaction, and Deon will then talk us through the detail of the transaction. Thereafter, there will be a Q&A session until we close the call shortly before 1. 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'll only be taking questions through this facility. [Operator Instructions]. To reiterate, we won't be taking typed questions submitted through the webinar platform today. It is possible to download the conference call facility only shortly before the Q&A session and directly from your computer. If you have planned to do this, I do encourage you to register for the conference call in advance of the Q&A session as you will need the link sent to you upon registration. Finally, a reminder that Thungela is currently in a closed period until the release of our results on the 27th of March. Accordingly, the focus of today's call will be limited to the details of this morning's announcement. With those logistics out of the way, please allow me to hand over now to Thungela's Chief Executive Officer, July Ndlovu.

Good day, everyone, and thank you, Ryan. Thank you, Deon, for joining us on this call. You'd have seen the announcement earlier this morning, and let me just quickly give you some highlights from what we said in the SENS announcement that we announced. The acquisition that we're talking to is in line with our strategy. At the outset, we said one of the things that we wanted to do, apart from getting and maximizing value from our current portfolio, was to consider and looking for opportunities to diversify our business geographically. And we said we'd do that in areas where we've got a right to win, and this transaction fits perfectly within that category being a coal mine in a mature geography. So together with our partners who acquired 85% in the Ensham business and the details of what we're calling the Ensham business are well described in the SENS announcement, and really no need for me to go through that again. So what's the rationale? This asset is a high-quality, long-life potential asset with scale, a mining method that is aligned to our operational expertise is something that we understand, our bread and butter, is similar to our underground mines in South Africa. So we think we bring expertise that can unlock value going forward. It's cash flow accretive, and it's got the potential for a very short payback. We did say 2 to 3 years. Again, we think that's a very compelling acquisition. We're acquiring this asset from a responsible operator, Idemitsu, who has offered very high standards in terms of governance, disclosure and environmental standards. And therefore, again, we as a responsible operator, who is committed to operating assets responsibly. We think that this transition from Idemitsu to us strategically is right for the asset, too. We shared with you our investment criteria, and one of them was ESG. And we look at this asset being an existing asset producing [ coal ] units. And again, it's moving into our portfolio does not increase carbon units globally, which is in line with what we said strategically. So overall, what I'm saying to you is we found an opportunity in a very compelling valuation in a mature geography, mature infrastructure, in a mining method that we understand and we think we can add value. And with those compelling economics, it made sense for us to acquire this asset because it will generate value through the cycle and therefore, enhance shareholder intents. So let me pause there and hand over to Deon to talk us through the transaction overview. Deon?

Thank you very much, July. And thank you for those who took the time to dial in. So this acquisition was, when you read the SENS, seems as if there are a number of moving parts. Let me boil it down to the basics. The purchase price in total is around AUD 340 million. So that's ZAR 4.1 billion in cash that we've committed to invest. Of that, AUD 267 million flows through directly as equity investment in return for our, essentially 63.75%, so around 64% of the underlying asset. And that's essentially a 75% share in the 85% that we're acquiring from Idemitsu. On top of the AUD 267 million, you would have picked up is the AUD 68 million mezz funding. And that's at the [ buyback ] rate in Australia, plus a floor of 10% or a cap of 15%. And that loan to our partners or that mezz loan is repayable period of approximately 4 years. That is around 70% of the cash flows attributable to our partners would be used to repay that loan. So therefore, if you overlay those -- that take on the economics, that's around 14.8%, so let's say, 15%, our direct interest in the underlying mine of 63 plus that via the loan until it's repaid, gives us essentially close to 80% or 78% of the underlying economics on a cash flow basis of this mine. And that's obviously in the short to near term until that loan is repaid. So who owns the economics on the other 21-odd percent, 22%? One, it's LXI that continues to own the 15%. And then two, it's clearly our partners, Audley and Mayfair, that would pick up around about 6% of the economics. This mine on a 100% basis does around 3 million tonnes per annum. That is lower than the historic numbers, mainly as a result of the closure -- historic closure of the open cost, and it's now purely an underground board and pillar line. It's deployed a couple of continuous miners, so 4 currently and hopefully in the future, 5. Those continuous miners operate the same methodology as what we do across our mines. And therefore, there's a lot of opportunity for mutual learning and productivity improvements. The 3 million tonnes roughly of sales is the same as the ROM tonnes, so run of mine tonnes, as there's no beneficiation and no washing. The cost that have been achieved on a per tonne basis, so a Free On Board per tonne basis, it's just shy of $100 a tonne. And that's for, let's call it, a [ 58 50 ] product. So a fairly high CV product, but importantly, low sulfur. So ash 12% to 14%, 2 different products, but importantly, sulfur sort of 0.7%, 0.6%, so well below the 1% threshold, which is an important measure if you look at price realization in the Japanese market. The CapEx is fairly low at this asset. It's fully capitalized. So even in terms of extending the life of the license beyond 2028 up to 2039, there isn't any material development or life extension or production replacement capital required. So the type of SIB capital ranges between ZAR 300 million and in some years of ZAR 600 million, but it's not an intimidating capital [ bill ]. And that's ZAR 300 million to ZAR 600 million, South African rand rather than dollars. In terms of port and rail capacity, this asset has got all of the ingredients to give it a free run into the export market. The below rail, above rail and port arrangements have life -- or those contracts of life until '24, '27 and then a longer dated. And they're renewable, with a range of about 4 million, 4.1 million tonnes is the tightest bottleneck on any of those contracts up to closer to 5 million tonnes. So no port or rail capacity constraints in the asset. In terms of the numbers we've shared, just to put some of it in context in the SENS, we quoted from a compliance perspective net profit after tax for 2022, that's around AUD 670 million, and that's on a 100% basis. So if one had to overlay just the 85% attributable to this broader transaction, that's AUD 450 million roughly. And then clearly, if you also take into consideration the underlying royalty structure that Idemitsu has put into the asset, that is around AUD 350 million that would essentially have been generated from this asset for our benefit, had we owned it for the full '22. So that's AUD 350 million, which is about a 1x earnings, if you look at it on that basis rather than just a top line base or a consolidation basis. So as July said, the asset therefore has very attractive returns. And clearly, to believe those returns, we need to look at the price line inherent. We certainly didn't make this investment off the back of the forward curve necessarily. As we've said before, we typically look at other sources, such as Wood Mac and make our investment decisions off that. But given that some of the coal in this mine gets sold against CPU, so that's the -- sorry, JP apologies, that's the Japan reference price, which typically gets negotiated April every year. We're very pleased that this asset has around 2 million tonnes out of the 3 million tonnes sold in terms of those contracts. And that gives us -- and whilst each of those contracts have the typical confidentiality, if you look at the range of them, around USD 290 to USD 300 a tonne sold at. That's for the 2023 period. Now if you look at Newcastle over the last year, that benchmark has been around $356 a tonne. And on average, this business realized around USD 340 tonne. So that's around 5% realization, but recognize only about 1 million out of the 3 million tonnes sold against [indiscernible] in terms of those Japanese contracts. Let me, with that, pause and just test whether we have any particular questions that some of the listeners would like to dive into. And with that, let me hand back to Ryan.

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

The first question comes from Brian Morgan of RMB Morgan Stanley.

Very exciting. Can you just -- a couple of questions on [indiscernible]. It is quite far away. Operationally, how are you planning to manage [indiscernible]?

Maybe, Deon, let me take that one. Our plan, Brian, is that -- as part of our integration is to make sure that we have got the right management, first and foremost, at the mine. You would have noticed that we said we've got operational control. So that makes sure that we can appoint, as we disclosed, the CEO and the CFO. So making sure that we've got the right competent people is important. But part of the integrating this business is integrating it into our systems, our practices, our routines and making sure that we can provide adequate support to the business. So we think we have concluded the right agreements to do that. Suffice to say that in the interim, part of the benefit of having the partners that we've got, allows us to have partners who understand the low-cost jurisdiction, understand coal mining, understand the basin, and therefore, they give us a soft landing as we go in there. And quite frankly, they remain part of the business, and therefore, that provides some continuity.

Okay. Good. And so in South Africa, Anglo American does your marketing of your coal products. Is there a marketing agreement for those assets? Or will you be doing it yourself?

So our marketing agreement with Anglo American runs until 2024. That agreement provides that when we have got new coal, we can exercise our discretion whether we want to include it into the existing agreement or we will market it ourselves. Again, as part of the forward arrangements, we look at what makes most financial sense for us. But the important thing is that we have got the marketing right, as we said, for a proportional part of the coal.

Okay. So what's your plan in that regard? Are you planning to do it yourself? Or are you planning to let somebody else do it?

I mean as you can imagine, Brian, I mean, we have an agreement that terminates in 2024. So part of our internal planning is to begin to do some of the marketing activities ourselves. Our best line given that there are some contracts in place, as Deon actually alluded, is that in the first instance what we prefer to do is to market ourselves, unless we can find a higher value option.

Okay. And can I just ask another one. When I look back at the quarterly production numbers out of Idemitsu, it's been very choppy. Production seems to have been volatile. That would suggest it's been -- operationally things haven't been going so well. Could you just talk to that and how you plan to turn that around? And then do you think there's any upside to the 3.2 million tonnes?

Brian, let me be clear...

Let me make some comments, and then I'll ask Deon to comment as well. Brian, typically, when you put businesses on -- and I suspect you did see some of that with us when we were almost in our bands, that uncertainty creates all sorts of problems from an operational point of view, whether it's production or safety, that's one. Secondly, there's been a license issue that is made sure that they went to park a continuous miner, but we think that, that can also be resolved. We made the statement that this is a mining method that we understand. If we just look at our own productivity numbers, on a mine, which is very similar like Zibulo, we actually can see a pathway to improve the performance by anything between 5% and 10%. Deon, I don't know if you want to comment.

Yes. Thank you for that, July. Apologies for speaking a bit quick earlier. So Brian, your observations are absolutely spot on. And July is right that any mine on sale, and this mine has been known to be in the market for around 9 months, typically undergoes those type of morale and other challenges. And clearly, this news and clarity should support some of that in the coming months. The reality of this asset is that it used to be an open cost, and that open cost over the last 4, 5 years have gradually come to the end of life. So you would have seen the production decline in Idemitsu's numbers. In the last year, actually in November to be specific, one of the sections suffered a fall of ground. And as a result, the mine was put on stop, and that continuous miner was inactive for a period of time. That's now been rectified, and the mine is busy stepping up again into -- and that's the choppiness in the recent quarter that you're, no doubt, referring to. The productivity step ups that July is talking about is not something that we've baked on or banked on in making this acquisition work. And therefore, we foresee that we would like to stabilize the mine in the first instance. And we're not speaking as if all the CPs have been fulfilled. So we are talking about roughly 3 months from now. And in that period, as you can imagine, the usual orderly business conduct provisions and the like would apply to Idemitsu and their management of the mine.

The next question comes from Ben Davis from Liberum.

Could you hear me?

Absolutely, loud and clear, Ben.

Certainly, exciting news on this potential purchase. Just in terms of just general time line. So this is a lot box from the first of the year, but when do we actually expect it to clear? And when would your cash be going out the door at this point?

Deon, you can take that one.

Yes. So Ben, 2 things. The first is whilst we signed agreements overnight, you're correct that it's a soft lock box from the 1st of Jan. And what I mean by that is, whilst we do share in some of the economics from the 1st of Jan, it's capped at AUD 102 million. And clearly, that is to incentivize the buyers to execute on their CPs as quickly as possible. Typically, for a transaction of this nature in Australia, the completion time line is around 3 to 4 months to clear foreign investment approvals and our reserve bank approvals and so forth. And therefore, we're anticipating the transaction to complete somewhere mid of the year. We're not looking for a massive windfall out of the soft lock box from 1 Jan. But clearly, you'll be extremely helpful to lower the day 1 purchase price of this asset given that it's partially vendor funded from the 1st of January.

Got you. Got you. Okay. Perfect. Also just to confirm on the royalty that Idemitsu owns, that is just for the 2 years. That's just for 2023 and 2024. It doesn't go beyond that.

That's correct. It's -- and the threshold is slightly different. So the Ensham mine continues to enjoy 100% of the economics up to $170 per tonne in 2023, and up 100% up to $150 a tonne in 2024. Above that, we share the economics 50-50 on this 85% stake. And that 50-50 share is clearly net of Queensland state royalties.

Got you. And costs, one-off costs, sorry.

So the $170 is intended to discharge all of our costs and CapEx during the period as well as the base margin, and then above the $170 is where the sharing starts. So we pick up all the cost, other than obviously, they pick up half of the Queensland royalty to the extent it's attributable to the achieved price above $170 a tonne.

Okay. Great. Great. Just one last one for me. So the mine extension is up for 2028. I assume that there's nothing tricky in there in terms of the license renewal, which could be fairly straightforward?

I think in terms of answering that question from an Australian perspective is different from answering it in every other jurisdiction, South Africa included, in that there are always nuances in each country in relation to those. Fortunately, the licenses we are speaking of are operating licenses to continue to mine, in the existing geology, in the existing underground, using existing infrastructure, without any incremental impact environmentally or otherwise. So from a mining perspective and from an environmental perspective, this is a neutral license, and therefore, should not be contentious. But as you've seen recently in Australia, clearly, we have footwork to be done and we need to ensure that we put our best foot forward to avoid an outcome where we get caught up in debates on climate change and other factors that isn't currently necessarily a feature of that license approval, but could become.

Got you. And sorry, just one quick further one. Just on the -- so the open pits coming to an end. Does that mean rehabs already started or is it still within the sort of operational area, and that will come later?

Yes, very good question, Ben. So the rehab continues. And every year, there is a quantum of rehab that is discharged. That discharging of the rehab gives Ensham the edge or the opportunity to continue to participate in the Queensland financial provisioning pool. And historically, Ensham, as a result of that track record of continuous and concurrent rehabilitation, has been ranked as a low-risk operator. And therefore, the fees payable to that pool as a percentage of their liability is really, really low. Outside the rehabilitation that's ongoing, the main pit is unlikely to be rehabilitated or filled up for many years to come, because the current underground uses a portal in the second bench of the open cut, which simplistically means that you can't close that open cut mine, until such time that you've completed your underground mining.

The next question comes from Jandre Pieterse of Visio Fund Management.

A few questions from my side. The first one, you mentioned short payback period given the forward curve, would you consider hedging a significant portion for 2024 or 2025? Is there sufficient liquidity to do that?