Thungela Resources Stock: Pure Play Coal Cash Machine (TNGRF)

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Brief Overview

Coal is useless. With world Wokeism and widespread cancel tradition laying siege to most Western societies, legitimate arguments about higher environmental stewardship and company accountability have recurrently gotten misplaced in over politicized agendas to push sure nationwide pursuits.

Only a couple of 12 months in the past, we had the IEA call time on the fossil gas business with pleas for a cease to new oil, fuel & coal exploration. How issues can change over a 12 months!

Since then, eye-watering inflation has plagued world economies. Super majors have binned capital funding in favor of returning investor money and despatched vitality costs hovering. Most sovereign banks are forcing restrictive financial insurance policies to fight sky-high costs, pushing the worldwide economic system right into a violent nose-dive.

Coal, an oft prized useful resource for rising markets to gas their economies, has outperformed actually each single commodity 12 months so far. Extensive financial volatility, an absence of under-investment, and the persistent demonization of world vitality have rocketed coal costs skyward, returning +105% year-to-date.

These figures are much more extraordinary given noteworthy Covid associated shutdowns in China and a US greenback whose unrelenting power has considerably stored a cap on commodity costs.

Price Action Coal

Koyfin

Newcastle Coal Futures (orange line) have outperformed all commodities mixed 12 months so far, posting beneficial properties of +105.54%

For contrarian buyers wishing to capitalize on hovering vitality costs, Thungela Resources, South Africa’s premier coal miner may match the invoice. The agency engages in mining and manufacturing of coal in South Africa, proudly owning pursuits in thermal coal from a number of mine websites within the Mpumalanga area.

Its prime prospects, positioned in rising markets in India and Asia, use the lion’s share for energy technology. Strong upside stays forecast for the agency with demand severely outstripping provide.

Export markets for seaborne thermal coal stay wholesome with rising markets slowly coming again on-line. Prolonged geopolitical stress has provided pure assist to document costs that are prone to proceed to be mirrored in Thungela’s accelerating revenues.

To put that into perspective, realized costs for H1 2022 hit $240/t. One 12 months earlier, the identical ton would have solely fetched $130.

Investor Presentation

Source: Thungela Resources Investor Presentation – Interim Results H1, 2022

Geopolitical elements and mayhem in vitality markets proceed to supply assist to Thungela’s income streams.

Unlike a big swathe of world vitality gamers, the corporate has tried to increase lifetime of mine with some measured growth and funding in belongings.

This contains the Elders undertaking, a traditional 5 part underground growth seeking to change volumes on the agency’s Goedehoop operation.

These investments additionally maintain native jobs, construct neighborhood provide networks and strengthens Thungela’s social license to function.

Simplified Income Statement

Thungela’s revenues have surged on the again on colossal commodity costs, posting USD $255M gross sales in FY 2020, USD $1.6B in FY 2021 and USD $2.6B LTM. Such income progress is extra commonplace with excessive flying tech-plays, not soiled outdated South African coal miners buying and selling at 2.2x ahead earnings.

The firm has taken prudent measures to hedge out potential draw back commodity danger via derivatives markets.

Sales are extra spectacular given the appreciable challenges going through the coal miner, together with lacklustre port infrastructure, a decrepit rail system and curtailed manufacturing at Zibulo (opencast), Greenside (5 seam plant) and Khwezela (Navigation Pit) One can solely marvel the optimistic internet results on gross sales, earnings and valuations if the corporate manages to resolve these points.

Energy prices have impacted Thungela Resources too with ~10.2% inflation hitting the underside line via an arrive of oblique prices similar to consumables, metal, petroleum, and explosives.

Net revenue numbers have nearly been as spectacular as coal’s unrelenting rise, with Thungela Resources posting a loss in 2020 (USD-$22.5M) adopted by mammoth beneficial properties in FY 2021 (USD $403M) and final twelve months (USD~$931M)

Investor Presentation

Source: Thungela Resources Investor Presentation – Interim Results H1, 2022

Thungela Resources has made prudent use of derivatives markets to hedge out draw back danger on coal costs.

Simplified Balance Sheet

The firm has crafted a struggle chest of money and marketable securities to assist its beneficiant distribution program. Currently paying a dividend yield of 23.5%, Thungela Resources posts an equally spectacular payout ratio of solely 16.15%.

Since floating on the London Stock Exchange, money available has ballooned, from USD $13M FY2020 to USD $933M LTD.

This cash-rich coal participant has benefited subsequently with long run debt non-existent and funding necessities simply manageable. The Elders Project would require some financing to increase lifetime of mine, however this could not pose large liquidity worries.

Simplified Cash Flow Statement

Thungela Resource’s is a money machine, posting USD $985M in money movement from operations during the last 12 months. To put that into perspective, in FY 2021 the corporate posted USD $383M, laying testomony to the sheer power that lofty coal costs have had on the underside line.

Cash Flows

Source: Koyfin

Free money movement per share has ballooned at Thungela Resources over the previous couple of years

Cash flows from investing present prudence within the enterprise’s strategy to capital expenditure, with a modest USD $98M spent during the last 12 months. Thungela issued $161M of long-term debt a 12 months in the past however that has since been repaid.

Cash movement from financing during the last twelve months has been non-descript, save the USD $150M distributed to shareholders. All-in, free money movement per share has nearly tripled since final 12 months – an incredible feat for a corporation buying and selling at a measly ahead worth earnings ratio.

Valuation

Relative valuations for Thungela Resources, regardless of being rock-bottom, think about a level of sizable danger. Beyond publicity to coal which the funding world has wholly fallen out of affection with, this ticker additionally embraces significant nation danger and massive publicity to the South African Rand.

Consequently, relative valuations are among the many lowest for giant coal operations. Forward worth earnings are pitching at 2.2x with worth to gross sales at lower than 1. Book values are round 1.7x through the previous 12 months, rising very marginally.

That makes for a compelling funding, given mammoth margins (EBITDA LTM – 56.8%), enormous return on belongings (44.53%), and gargantuan return on equity (86.27%).

Risks

Despite blockbuster numbers, margins, and ratios – the corporate will not be risk-free. Archaic port and railway infrastructure has hampered efforts to ramp up volumes, hampering gross sales. Domestic infrastructure, nationwide corruption issues, unlawful mining, and spiraling worth pressures all determine on the danger radar.

Coal as a commodity is prone to nonetheless have some legs and worth danger has been hedged via a basket of derivatives masking manufacturing.

If Thungela Resources can get the rail and port infrastructure proper, further upside might quickly be mirrored in volumes and the stock worth.

Key Takeaways

  • Social change, higher environmental stewardship, and packaged investments underneath the guise of ESG, have all contributed to thermal coal’s demise.
  • Yet geopolitical tensions, useful resource shortage, and a commodities increase have seen seaborne coal costs speed up upwards.
  • Emerging markets proceed to make use of thermal coal as an inexpensive, dependable (but closely polluting) supply for energy technology.
  • Thungela Resources has been completely positioned to capitalize on vitality markets in disarray.
  • The firm has posted document gross sales progress, eye-watering money flows, significant earnings and a laudable dividend coverage.
  • Port and rail infrastructure has plagued the corporate and put a synthetic lid on full financial potential.
  • However, at 2.2x ahead earnings, with a beneficiant dividend coverage, and little indicators of vitality prices abating, this ticker is value additional scrutiny.



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