Thungela Resources Limited (TGA) Earnings Call Transcript & Summary

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

Thank you very much. Good afternoon, everyone, and welcome to this afternoon's investor call following the release of the CFO pre-close statement earlier today. I'm Ryan Africa and Investor Relations for Thungela, and I'm joined on the call, of course, by our CFO, Deon Smith. Today's call will be run through both in 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 2:00 South African time. Turning to Q&A. [Operator Instructions] Finally, a reminder that this morning's announcement is now available in Thungela website and that today's session will be recorded, and a recording will be made available on the Thungela website from later this afternoon. 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 for everyone having taken time to join us for this pre-close call for full year ending 31 December, 2023 and expecting to report more detailed results to the market in March next year, but clearly keen to update our stakeholders on progress and where we expect to end in this year. Before we go into any of the detail of the announcement that you would have seen on RNS or SENS this morning, clearly, Thungela's leadership remains absolutely focused on safety as a business. We were devastated by some of the more pronounced incidents in the mining industry that you would have seen over the last couple of months. And our thoughts and prayers go to those families, colleagues and our friends in some of the mining companies that have seen absolutely devastating impact on the employees and the lives of their employees over the last couple of months. And clearly, as an industry, we have a lot to do to work towards a fatality-free industry. And at Thungela, that's one of our key priorities, our key values. And so therefore, we still mourn the loss of Breeze Mahlangu, who passed away early this year following an incident at our Zibulo operation late last year. We are [indiscernible] deeply thankful for all the hard work from our various operations in keeping our people safe and pleased to report that we've been fatality-free since that incident. Now clearly reflecting on the results of our business, we sought to update you in the short SENS we released this morning on some of the key metrics. But allow me a couple of minutes to just walk you through, and that might help us set up the discussion in such a way that there are the appropriate links for you to ask any questions you deem necessary to help you form a view on what to expect for our full year results. Our results are definitely marked by a different level of demand for coal this year compared to 2022. And it was introduced over the winter period where we experienced a much warmer winter than I think Europe anticipated. And as a result, gas stocks, coal stocks, it remained higher. Our key market focus has been in Asia Pacific, where clearly, the demand remained high, but prices softened quite considerably in 2023 compared to 2022. And you would see from the SENS that we've averaged -- Richards Bay API 4 averaged around $123 a tonne and compared to last year's $270 a tonne, and that clearly resulted in a very significant margin squeeze. In terms of the Ensham business in Australia, which price [Audio Gap] against the Newcastle Benchmark, you would see that, that price has also taken a similar [Audio Gap] and averaged this year around $175 a tonne compared to [ $360 ] the prior year. Interestingly, in terms of the [Technical Difficulty] that we achieved, and as a reminder, that is a combination of both a quality differential as well as a quality discount, and that gets us to a price realization below API 4 of about 85%. So therefore, our discounts have narrowed to around 15% in this year, which, if you recall correctly in the first half of the year, it was slightly higher at about 18%. It continues to narrow and the reason for it is, as API 4 actually contracts, given the lag between when orders are placed and when coal is priced, there's a natural contraction that's happening in that discount. But we're expecting those type of levels to prevail in the short term. Interestingly enough, in the Ensham business, when we report results, you will note that we will focus on the last 4 months of 2023. So that's from September through to 31 December, 2023 as that was the effective date of the transaction when we reached the full completion of that transaction that we announced on the 3rd of Feb. We'll consolidate 85% of that business, recognizing that the 15% is owned by LXI in the underlying Ensham business other than for revenue line items for sales where we'll recognize 100% because we acquire 100% of the coal from -- or sell 100% of coal from Ensham and then we'll recognize the balance 15% in the purchase of coal. So when you look at those numbers, you'll see that in Ensham, we've achieved or we're likely to achieve a slight premium to the Newcastle Benchmark price. And that premium of about 10% in the last couple of months is mainly due to the fact that some of the Ensham coal sales are against fixed price contracts. So Japanese Reference Price being the most predominant fixed price contracts that are in place at Ensham. And that is around 50% of the sales book of Ensham in the last 4 months of 2023. And those fixed prices were obviously struck much earlier in this year, in 2023, when prices were higher than what they currently are, which has resulted in that premium for the last 4 months. And therefore, that average realized price is approximately $153 a tonne for the period since completion. In terms of export saleable production, so this is what our operations have produced in South Africa. We're expecting the full year 2023 number to come in at about 12.1 million tonnes, which is marginally above the midpoint of the range that we provided to you earlier this year. And clearly, it's slightly lower to the prior year's 13.1 million tonnes. And that's because we removed 3 underground sections earlier this year in response to the continued poor rail performance. You also note that when we talk at year-end about our coal volumes and inventory [Audio Gap] those numbers have reduced from just around 3 million tonnes to just below 2 million tonnes over the course of 2023. Clearly, producing less and selling the same, but also selling [ FOTs ] -- free-on-truck sales has contributed to the reduction in those coal stockpiles. In terms of export saleable production at Ensham, we're expecting the full year 100% number to come in at around 2.9 million tonnes. Really pleased with the performance of the Ensham mine since completion. You might recall that the run rate up to the end of August when we announced the completion was about 2.7 million tonnes. With the right focus on productivity, Ensham has continued to make strides on its run rate. And therefore, we're seeing a much higher run rate currently that will enable them to come in at that 2.9 million tonne for the full year. In terms of FOB cost per export tonne for the South African operations, both including and excluding royalties, we're expecting the actual final number to come in at the low end of the revised guidance range that we shared with the market in August. And that's sort of positive or at the low end due to a number of factors. Yes, the denominator is slightly above the midpoint, but also we achieved slightly higher domestic revenue prices to offset on that and also a slight positive movement on the rehabilitation provision compared to last year's slight increase in that provision. In terms of Ensham's FOB cost per export tonne, expected at approximately ZAR 1,950, so ZAR 1,947 is what [ we've given ] in the SENS. That number is, for the last couple of months of this year, a bit higher than what we would like to see it. And we'll work on that in the new year and provide appropriate guidance when we announce our results in Q1 next year, including royalties, which in Queensland, from the [ first dollar ] is around 7%. That number is about ZAR 2,300 a tonne. So whilst the cost per tonne at Ensham is higher than the SA business, clearly, the margins are still fairly attractive, given the sales book against NEWC and some of the fixed price contracts. In terms of the actual sales or export equity sales in South Africa, you would see that for the full year, we're expecting it to be broadly flat compared to last year, about 12.1 million tonnes. At Ensham, we're expecting it to be slightly higher than production of full year 100% at about 3 million tonnes. And therefore, if you look at the 100% number in relation to that, we're likely to recognize close to 1.2 million tonnes of sales as a result of Ensham or the 4 months that we had economic control of and operational control of Ensham. In terms of capital expenditure, we've previously guided a range that include sustaining CapEx as well as our 2 lifex projects: Elders and Zibulo, up to ZAR 3.3 billion. And we're expecting to report a lower end number at around ZAR 3 billion for the full year. Those projects, notwithstanding that spend run rate is on track and on schedule, and therefore, the coal delivery dates are unaffected by the slightly lower spend in total this year. And we expect to still spend around ZAR 2.8 billion across those two projects during next year and the year after to complete both Elders and the Zibulo North Shaft [Technical Difficulty] originally we announced those projects. In aggregate, the spend is about ZAR 4.4 billion and ZAR 2.8 billion of that is yet to be spent in 2024, 2025. In terms of Ensham, full year CapEx, it's about ZAR 1 billion on a 100% basis. And therefore, around ZAR 300 million of that will be consolidated into our accounts. Our cash position remains fairly strong. At the end of November, that net cash balance was about ZAR 10.5 billion. And given the fairly chunky tax and royalty bill in South Africa that's payable twice a year, next one is in December, about ZAR 2.1 billion, net of some of the other movements in our cash such as the economic benefit from Ensham, that is the -- our [ proportional ] participation in Ensham's cash flows from 1 January 2023 until end of August of about ZAR 811 million, brings us to a net or anticipated net cash balance at the end of 2023 of approximately ZAR 9.6 billion. Now clearly, our results continue to be impacted by the fact that our operations run on a constrained basis in South Africa. That constraint is mainly as a result of Transnet. You'll see in the SENS, we set out some of the calendar year annualized numbers, which are slightly different to the numbers TFR would report, given their financial year are different dates compared to our [ cutoffs ]. But you'll see that the annualized industry run rate in H1 this year was about 48 million tonnes and in H2 so far, it's around 46 million and slightly lower. But notwithstanding that, you might also recall that we said, for us to hit the lower end of our production numbers, we needed to get to around 47 million tonnes in the second half. Now clearly, we're not there, yet we are hitting the midpoint of our exports saleable production range. And you might ask how is this possible. We set out a couple of sentences to help the market understand the dynamics around that. The key reason for our performance and not taking any of the hard work away from the teams on our end and Transnet's end to achieve this outcome, but our run rate on trains were higher than what we anticipated as a result of a number of things. But most notably, the use of our rapid load-out terminals as well as the wider distribution network. So essentially, Thungela is -- or continues to operate a set of sidings that enable Transnet to perform well through our sidings. And as a result, we have achieved a very good rail outcome in the second half of 2023. Clearly, our objectives and Transnet's objectives are very much aligned in continuing that type of performance, but it does require a lot of hard work and engagement between Thungela and Transnet for us to achieve that type of outcome. In terms of the Ensham acquisition, I've spoken to some of the numbers, which so far have yielded very pleasing outcomes for us. If you look at the original announcement where we were anticipating to pay around ZAR 4.1 billion for that -- for our interest in the Ensham business, after reducing that with the ZAR 811 million economic benefits in [indiscernible] as well as a bit of working capital adjustment, you'll see that the net outflow -- cash outflow for that interest is around ZAR 3.2 billion, which is a -- we still believe an attractive entry point into that business. And we expect that business to be accretive both in terms of cash generation and earnings into the future. Clearly, in South Africa, we need to complete our key life extension projects: Elders and Zibulo North shaft. These are absolute and top priority for the business. And we're expecting, as I said earlier, to complete the spend program over the next -- within the next 2 years with about ZAR 2.8 billion, still expected to be spent. In terms of capital allocation, we've said previously [Audio Gap], we set out our perspectives on the cash that we have on our balance sheet. We remain absolutely focused on the appropriate level of returns to shareholders, and the Board will clearly reflect on the balance to be achieved before we come to the market with our results in March. We've previously said we believe that it's prudent and necessary to continue to maintain around ZAR 5 billion cash buffer, which represents about 2, 2.5 months worth of spend for our business. We also believe that reserving or preserving some cash to complete those 2 projects: Elders and Zibulo, represents the right answer. So that's on top of the ZAR 5 billion, so about ZAR 2.8 billion at the end of the year. But clearly, what is [indiscernible] to us is to continue to fund our dividend and our minimum payout target is clearly 30% of our adjusted operating free cash flow, and that remains a cornerstone of our capital allocation framework. Now clearly, where we are in the market today, our focus is very much on controlling what we are able to control beyond safety, our production run rate, our [ cost-out CapEx ] and all the elements that feature very highly in terms of our management agenda. We believe that controlling those and doing our best on those and then enabling the improved performance on Transnet through various initiatives that we run through RBCT but also directly in engagements with Transnet and government are absolute paramount for us to enable us to continue to deliver superior results and returns to our shareholders. With that, I want to conclude that we take that role very seriously, and the responsibility of that is not lost on us as a management team. And we thank you for the trust that you've placed in us and continue to place in us to manage the business in that manner. With that, I would like to hand back to Ryan and open to any questions that you might have for us.

Thank you very much, Deon. [Operator Instructions] Operator, please open the lines for the first question.

[Operator Instructions] Our first question comes from Tim Clark of SBG.

Thanks very much for the update, really appreciate it. A couple of questions from me, please. Just the first one on Ensham. We've been waiting with bated breath to hear what you're seeing once you get your feet under the mat as such and get operating. Just what opportunities you see, how you sort of see productivity and anything that you can give us, any further color you can give us on Ensham. And secondly, within that Ensham question, just on hedging, just to help us with whatever hedging we should put into our models for next year and how long that hedge book lasts, et cetera, that would be appreciated. I've got 1 or 2 other questions, but I'll pause there.

So Tim, we -- our first focus at Ensham was really a continuation of the business and the transition of it. And as a result -- I just returned actually this morning from Australia. We're very pleased to report that the transition of -- and separation from Idemitsu into a stand-alone business in Australia went seamless over the December -- the 1st of December period. We're able to pay our first payroll, accounts payable runs and so forth and run in our own IT systems. So our initial focus was very much a sustainable, responsible transition and separation from Idemitsu, which we're pleased has gone well so far. In terms of our initial view of the operation, we are -- we remain to be excited about the prospects for Ensham unlike our South African business, where clearly, the key constraint so far has been access to rail. There are fewer constraints in the Ensham environment or certainly, the constraints that exists are constraints we can work hard on solving ourselves rather than being dependent on another party exclusively to solve those. So we're excited about the prospect. The resource body is very, very significant, about 1 billion tonnes. The opportunity to introduce an additional production unit at Ensham is still there. We're working through the detail, the permitting and the like to achieve that. And once everything is in place, we could increase that run rate that you're seeing at the moment at around 2.9 for this year. Hopefully, we could shift that up proportionately, there are 4 production units. Hopefully, we can get a fifth in there and get productivities up. And that would help on the denominator. It will help on the cost per tonne, but certainly, the cash generation of that business also. The CapEx, you would note, Tim, from the SENS, at ZAR 1 billion for a single mine is higher than what our South African operations run at. We think there might be opportunities to optimize that a bit in some ways, doing some of the capital at our work in South Africa rather than relying on the [ trading ] CapEx. So there are opportunities to run [Audio Gap]. Nothing that we've seen so far at Ensham scares us, very similar mining methodologies. Very excited about the morale of the people and the skill sets of the people at Ensham, very excited about the opportunities that, that operation holds for us. So actually, a very, very good feedback in a nutshell. In terms of your question on hedging, we do not have hedges per se or swaps in place. What we do, however, have at Ensham is that, on an annual basis, a proportion of the coal sales are struck against the Japan Reference Price. Some of the sales are against fixed price contracts with utilities, so with power utilities [Audio Gap]. And for the last 4 months of this year, as I said earlier, it's around 50% of the book are against those type of fixed price contracts and 50% of the sales are floating against NEWC. We have not yet entered into any of those contracts for next year. We need substantial contracts for next year. And once we have, we will certainly communicate that detail. So for next year, I have to assume that it will all be Newcastle and that price realization should be just shy of Newcastle. So a couple of percentage points is what we've seen in the long-term average run for Ensham has been. But if we find favorable fixed price contracts for Ensham, we will certainly enter into those and flag those to the market, Tim. But for now, there isn't anything to report in terms of hedging at Ensham.

Can I just ask beyond that, just into the broader group in South Africa, and you've had some hedges in place at some points in time. Was the current result impacted at all or bolstered by hedging at previously higher prices, firstly? And then secondly, are there any -- should we be thinking about any hedge book impacts for this year -- for the coming year?

So Tim, in our results in the first half, you would see a slight tailwind as a result of those final hedges as prices came down, a very, very small tailwind this year. Therefore, nothing significant and no hedges in place in the South African business either as we sit here.

Okay. Super. And maybe just my last question, just on TFR. If we look at those run rates that you gave us, which were very helpful, 48 million tonnes in the first half, 46 million tonnes in the second half. Should we be thinking about a little bit of a loss into kind of productive capacity or sales next year? You've done very well to use your trucking and your sidings. So congratulations on that very positive outcome. But just should we think about a lower run rate just because that's where TFR have been for the second half? Or is that too punitive?

So it would be difficult for us to predict TFRs run rates into the next 6 months or a year right now. And the reason for it is we are sitting at the edge of our seat to understand the [ timing ] of various spare parts that we've, through RBCT, supported TFR to acquire. These spare parts [Audio Gap] in all of the loco ingredients [ are expected ] to arrive in a staggered fashion. We've also helped TFR over the last couple of months, reintroduce a full-time security outfit relative to the partial outfit that was put in place earlier this year or midyear [Audio Gap] TFR. And therefore, some of the low run rates we've seen as a result of, dare I say, a slip in security relative to what it was in the first half of the year. If those initiatives, both security and the spare parts, deliver the results that some of our TFR colleagues with [ a more realistic ] view predict could happen, then I think a further deterioration in the run rate would be [Audio Gap], but rather a slight improvement. But Tim, when that improvement arise, I think, remains slightly opaque because it is linked on when the new security initiative as well as the spare parts take traction.

[Operator Instructions] At this stage, I don't seem to have anybody else in the question queue. I do have Tim Clark still.

The key thing that I wanted to try and assess is just when we look at the Anglo guidance that we got last week, Friday, [indiscernible] gave us guidance effectively of completely flat production going out over the next few years. I just wondered if you could give us some kind of indication of whether you're a bit more optimistic than that. I know that I sort of half asked that question earlier. But just whether you think that there is very low hanging fruit that the iron ore line didn't fall down as much as the coal line. I think coal line is down almost 40% or thereabouts whereas iron ore was down 15%. So that's the first one I wanted to ask. And then the second one is just we've had a lot of reports out of some of your peers of redundancy programs and cutting costs and removing employees. I just wondered what you guys have been doing, are you just using attrition? I would -- I mean, you've had a very good cost result. So I'm sure that you are using various levers without necessarily putting them into front and center. But just what levers are you pulling on costs, given this lower production rate that we're desperately hoping will reverse, but are living with?

Yes. So if I -- maybe if I can start with the easier of it to -- believe it or not, on the second part of the question. So Tim, we -- when we took the 3 sections of production out earlier this year, you would recall that we did not launch a restructuring process of some sort. And the reason for it is because we indeed flagged that our intent is to use and rely on attrition to achieve most of that outcome for us, given we have a fairly good understanding of the age of our workforce and the -- at various operations. The second reason why we've not accelerated down that path is because if you look at the life of our operations, clearly, Goedehoop is coming to an end fairly soon. And yes, whilst Elders is ramping up, it does give us the opportunity in that handover to put the most optimal mine in place if that makes sense. So there's no point in restructuring now and restructuring again in a year's time when we have an operation closing. We have pulled every single lever we can think of so far to keep our costs intact. And we'll continue to do so. It's squeezing the lemon. It's ensuring that we spend on what we need to spend and continue to apply a level of austerity, given we are constrained through this denominator. But we are not yet at the point where we need to necessarily restructure our business. We have, in the prior year, you might recall, stopped a number of open car sections and sections of mines. But there, Tim, we have -- we've chose to stop sections in areas where we use contractors and therefore, also, at that point, avoided a broad restructuring. So we have used other levers than the big knife, so to speak, so far. And it continues to be the right answer for us because we also know how critical some of the board and pillar and skills are to our business and retaining those for the ramp-up at Elders and retaining that for the continuation of Zibulo is also very critical versus needing to train up and recruit people at that point in time. So could we operate even more thrifty if we took harder decisions? Possibly. But I think those would not have been the most optimal decisions for us in having to ramp up a new operation in the shape and size of Elders within the next couple of months. On the more difficult question you're asking on production into the future, the -- our impact on the line has been felt, in our view, earlier than the impact on the iron ore line from a timing perspective. Yes, it's been more pronounced, but it was over the last 3 odd years rather than over the last 1.5 years. And therefore, I think iron ore and other lines have had a more Damascus Moment compared to what we've had to do to our business about 2 years ago, really. You might recall in 2018-odd, we were running 17-odd million tonnes and now we are reporting a 12 million run rate. So we have already put in a lot of the hard work historically rather than having to make announcements today.

[Operator Instructions]

I can see that we have no further questions in the queue. 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 will get back to you. With that, please allow me to hand back to Deon to close out the call.

Thank you. Thanks very much, Ryan. And thank you again for everyone that has made time to dial in to today's call. I mean, clearly, in listening to the discussion, the challenge for us as a business continues to be resolving some of the key medium- and long-term bottlenecks. We are encouraged by some of the smoke signals out of the government over the last couple of weeks in resolving the Transnet challenges that have been building now for a number of years. We're encouraged by the boldness at which the government seems to now look at the issue and the potential reforms required around rail. And we remain hopeful that, that would not only provide reprieve for us as a company, as an industry, but also as a tax base in South Africa. We're very excited clearly about the prospects around Ensham and the results of that acquisition. We believe that thermal coal has a good place in the energy [Audio Gap] for a number of years to come and improving our portfolio through the geographic diversification and delivering on some of the strategic priorities we set ourselves as a team has really gone a long way to improve the resilience of our business into the medium and longer term alongside the 2 lifex projects in Elders and Zibulo. For us, we need to [Audio Gap] on some of the improvement areas for our business, including our competitiveness from a cost perspective across Ensham and [ our South African ] business and ensuring that whatever capital we spend, we get absolute value and payback for it. And those priorities alongside our continued focus on safety remains top of mind as we move into 2024. I continue to thank you for your interest in following our developing story and observing us as we seek to create value for a broad range of our stakeholders. And thank you for your [ attention ]. Have a lovely afternoon. And if we don't speak, have a good festive season. We'll [ talk ] again in the new year. Thank you very much all.

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