Thungela Resources Limited (TGA) Earnings Call Transcript & Summary

Good day, and welcome to Thungela's CFO Pre-Close statement June 2025. [Operator Instructions] Please note that this event is being recorded. I will now hand you over to Hugo Nunes, head of Investor Relations. Please go ahead, sir.

Thank you very much, Judith. Good afternoon to all, and welcome to this afternoon's investor call following the release of the CFO Pre-Close and trading statement -- CFO Pre-Close earlier today. I'm Hugo Nunes, Thungela's Head of Investor Relations. And I'm joined in the call by our Chief Financial Officer, Deon Smith. Today's call will be done through both in audio webinar as well as a 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 1:00 South African time. Turning to Q&A. [Operator Instructions] Finally, a reminder that today's announcement is now available on Thungela's website. And today's session will be recorded, and the 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 to Deon Smith. Thanks. Deon?

Yes. Good morning to all of you. Thank you, Hugo, for the introduction. So today, we've published a preclose statement. We expect to announce our half year results on the 18th of August 2025. And clearly, when you look at what we've sent out today, a couple of key features that we want to just highlight to you. In terms of safety, it remains one of our key strategic pillars for our business alongside driving our ESG aspirations, maximizing the potential from our asset base, diversifying in the appropriate manner and then obviously, our capital allocation strategy. We're very pleased that we've now had 27 months -- consecutive months without loss of life. And that remains a key enabler to our performance as a business and clearly proud of that track record. Our business requires more than just that to operate successfully. We also require good production outcome. And when you look at our statement, there's a number of very, very solid production performances across the business but also with a couple of headwinds and challenges. And we'll get on to that a bit later on. We've experienced softer coal prices year-on-year. In South Africa, we've seen prices reduced by around 12% period-on-period to low 90s. And in Australia, this was clearly more pronounced with the Newcastle around 24% down from last year. In terms of realized prices, however, down 15% in South Africa and around 11% year-on-year in Australia. So the Australian reduction in price was masked and shielded a bit by the premium that we earned in Australia, and I'll get back to that in a second. So in South Africa, when you look at the detailed numbers, you'll see that our discounts were mid-teens. And this was mainly driven by supply-demand dynamics, high stockpiles in the East and also a prospect of slightly lower burn rates. Good domestic production in some of the Far East countries have really driven the discounts a bit wider than what we've anticipated, but still within the numbers that we previously said we might see. In Australia, we've achieved a slight premium, and that was driven by the fixed price contracts that we set in place late last year. And those cover around [ 70% ] of our sales in the first half of the year. In terms of the forward curve, if I look a bit into the future, not necessarily our view, but clearly, the market's perspective on forward prices, we see South Africa recovering into 2026 to low 100s and that forward curve marks up Australia to about 120 into the next year with a slight sort of contango in both of those curves into 2026. Clearly, that's encouraging given that those type of recoveries in prices should see our margins repair and recover to the levels we've seen previously. In terms of currency, clearly, we also faced a fairly weak U.S. dollar or a strong rand, if you sit in our shoes. And that has been a bit of a threat to our business, given our revenue line is determined by a U.S. dollar price line. You would recall at the end of last year, we set out in the notes to our financial statements that we have sold currency forward. We've continued to do so. And when we report at the end of June, you'll see that we've maintained that around $700 million forward sold at early ZAR 19s, so ZAR 19 to $1 or just over ZAR 19 to $1 with around $0.5 billion of that maturing in the second half of 2025 and [ ZAR 200 million ] in 2026. So that is clearly a positive both in terms of earnings and cash that we're expecting to come through. And clearly, with the combination of coal prices, that should protect our revenue line into the second half and 2026. Clearly, we're also still fairly much dependent on a good performance from infrastructure, and we are pleased with Transnet's performance in the first half of the year. When you look at the numbers in our preclose statement today, you'll see that many of the initiatives that we've spoken about over the last 2 or 3 years have come to fruition, and that has enabled us in many respects to ramp up some of our productivities of the underground operations. And that could have been the case also in some of the open cost was it not for the fairly significant rain events that we experienced in the first half, which constrained our open cost performance. But you would see that our export saleable production is up by about 3% year-on-year, 6.2 million tonnes to 6.4 million tonnes in South Africa. In Australia, as we've previously flagged, that export salable was constrained in the first half. It's down from 2.1 million tonnes to about 1.6 million tonnes of export saleable production from Ensham. And the primary driver behind that was the geology or a couple of geological features that we knew that we had to get through. And we're looking to Australia to improve that run rate back to what we know it could be in the second half of 2025. If we then reflect on our FOB cost per tonne in South Africa, it was really impacted by lower domestic revenue offset. As we said before, our methodology to calculate that free onboard costs involves also reducing that cost with byproduct and domestic revenue. And in this instance, given the rain events, Isibonelo's production was materially below what we planned it to be. And therefore, we've had a bit of a cost headwind on a calculation basis, but we're expecting that to improve in the second half of the year. In Australia, clearly, that FOB was also impacted by the lower denominator and in line with what we said in our pre-close statement, we're looking to improve that production, and that would also mean that our FOB cost per tonne should pull back into that guidance range full year, that's both SA and Australia. So we spent around ZAR 1.2 billion in CapEx in the first half, which is about 1/3 of our spend for the full year, and that's consistent with past years where our CapEx is weighted to the second half of the year. Clearly, given price environment that we're facing currently and some of those headwinds, we are carefully reviewing that level of CapEx spend on SID. But we're not at a point where we believe we should make decisions that would harm the momentum of our production footprint. And so therefore, even on lifex CapEx, we continue to invest in Elders, which is now complete, but also in the Zibulo North Shaft project, where between those type of projects, those 2 lifex projects and the gas, we expect to have around ZAR 800 million still to be spent on those projects when we get to the end of June 2025. Our business continues to be subject to a number of enablers, as you picked up on the call. We have to produce well and use our equipment in our mines productively. We have to sell that and therefore, depending on infrastructure, clearly, we need to earn a decent price for our coal. If you look at this last 6 months, some of those features have challenged us. But at an operating cash flow level, we're expecting to be cash positive. And clearly, we've reserved historically the cash to complete those lifex projects. So we believe our business whilst challenged has performed well in the first half, notwithstanding some of those headwinds that I spoke about. Now I'll use the opportunity to pause and just check if there are any questions online before we start to wrap up the call. Hugo, can I ask you to just check for Q&A.

[Operator Instructions] Operator, please open the line for first question.

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

A couple of questions from my side. First of all, the cash burn in the first half and ZAR 6 billion at the end of the half. That does not take into account whatever you might need to do on the contract with Newcastle, right?

Deon, was that clear to you, the question? You're on mute?

Brian, would you please repeat your question.

Okay. So Deon, does the ZAR 6 billion cash balance at the end of June, does that include any [ give up ] that you might need to make on the Newcastle on the contract bit?

No. So it excludes that restricted, Brian, but recognize it's not a big number this year. Of the -- all of the sales in Australia, around 25% was against that Japan reference price contract that you're referring to where we need to true up once those negotiations are complete. It's not a very big number, but the cash number of approximately ZAR 6 billion that we are expecting to see at the end of the first half excludes that cash which we've restricted or reserved out of that balance.

Can you just give us like a rough number or even a range?

From memory, I think the number in rand should be around ZAR 150 million to ZAR 200 million.

Okay. That's cool. Deon, how is the Board thinking about dividends now for the first half?

Yes, it's obviously an ongoing question and debate. We have a very firm dividend policy and historically have had whereby we fund a minimum of 30% of our adjusted operating free cash flow. So that's free cash flow or our operating free cash flow less just our sustaining CapEx. Clearly, we're expecting that to be positive and therefore, 30% of that. The second lens that we put over our cash balance as you might recall from past periods has always been to look at the total number that we have in our bank account, reserve, the unspent lifex cash at [ ZAR 800 million ] as well as a quick look at some of our environmental liabilities and the like to see if there's anything we need to top up. And once we've done that, whatever is left over goes back to shareholders. So our policy and our practice remain consistent. It's just applying it to the numbers when we get to the interim results. So continue to be motivated to reward shareholders through the cycle, and that's why we've always said that we would also maintain a cash buffer to enable us to do that also.

Cool. And then last one, maybe the -- what -- some tailwind would you have booked for the first half as a result of the currency hedges?

The number I will need to get back to you on the exact number. And the reason for this is because it very much hinges on where the FX lands at the end of June. The calculation really depends on that number. And Brian, the reason for it is because with the positions we have in place, we expect to have around $700 million in place. We will need to value those positions, as you probably know, and the actual spot FX could have a very material impact on the earnings in both directions. But given that those positions are early [ 19s ], clearly, there is a tailwind. And when we speak later today, I'll give you the number. But as you probably know, that's clearly an earnings number, not a cash number necessarily.

Our next question comes from Ntuthuko Sithole of SBG Securities.

I've just got a quick question around Transnet. I was just hoping you could maybe elaborate on the improvement that you expect around the second half. These improvements are like structural improvements? Or do you feel that this recovery is still a bit fragile and vulnerable to setbacks?

Yes, very good question and good afternoon to you. I'm hesitant to say that all of the improvements that you will typically see in an infrastructure world and the Transnet operates are baked in and sustainable because the nature of the challenges that Transnet has faced in the past. You might recall security challenges, which post that also sometimes lead through to derailments or other events on the rail are binary in nature in that you have one unfortunate security incident that could lead to derailment. So whilst we remain hopeful that all of the right ingredients have been put in place by the Transnet management team, remain confident that their spend and prioritization of spend is now much more robust than what we've seen it before. The disciplined execution of all of the ingredients they require is certainly getting the right level of attention. It's difficult to tell you that there will not be any headwinds or derailments or otherwise. I think I heard this morning that there was an incident. We don't have any details yet, but that's a fairly regular feature, albeit quite often, it doesn't have any impact, but there could be ones that have an impact. So to answer your question as to what we're expecting in the second half, we're expecting a consistent performance to the first half with slight improvements post the shut -- the annual maintenance shut, which you might recall is a 10-day-old shut that typically Transnet undertakes special maintenance across the rail line as well as some of its rolling stock and locos. And that improvement back to what they have said to the market that they want to achieve, we believe, will be steady but the key next step change post some of the signaling work that they have started or starting soon, will probably only be felt from 2026, somewhere in '26 onwards.

And just to follow up on that, once rail does improve, do you think there could be any other constraints like potentially port capacity if rail continues to ramp up?

The nameplate capacity of the port is around 90-odd million tonnes, 91 million tonnes to be exact. That's very much a historic figure when it was designed and implemented to reach those type of levels. Compare that to the 55 to 60 million tonne range in the short to medium term, I don't think that other rail constraints would be the next bottleneck. Clearly, our business, what we're focusing on at the moment is developing Elders and Zibulo to replace production tonnages from mines that have come to the end of its life or coming to the end of its life like Goedehoop at the end of this. And to me, if I look at our production profile, it's more our own total output that would become the next constraint, if I can put it that way, beyond sort of 60 million tonne from Transnet.

we have no further questions in the question queue. I will now hand over to Deon Smith for closing remarks.

Yes. Thank you for that. I mean like in the past years, you would have observed that our business typically runs at a much higher order pace in the second half of the year compared to the first half of the year. We expect to see that same feature. And clearly, that seasonality coupled with the right pricing environment could see our business performed really well in H2 2025. If I reflect back on the first half, we've certainly had softer prices in a couple of challenging operating environment issues. And we're working through those and to ensure that we stay on top of everything we should control. Clearly, safety being one of those, very pleased in that performance as well as executing on a number of our strategic priorities. And one of those that I want to just highlight again is our lifex project. We remain on track both in terms of schedule and budget to complete those projects and to ensure that our business medium to longer-term stays competitive. I thank you for your time and dialing into the call and look forward to engaging where there is merit on a one-on-one basis. And thank you to everybody on the call for dialing in. Good afternoon.

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