Anglo American officially stepped out of the coal business on Monday when it spun off its remaining thermal coal assets into Thungela Resources, which debuted on the JSE at R25 a share.
Anglo investors received one Thungela share for every 10 Anglo shares held. Thungela holds 90% of Anglo’s thermal coal operations in SA, with the remaining 10% held collectively by employees and a community partnership.
Thungela listed with a net cash balance of R2.5 billion, with Anglo providing contingent capital support until the end of 2022 to offset any drop in coal prices, up to a maximum of $100 million in 2021 and $170 million in 2022.
The SA coal business produced 16.5 million tonnes (mt) of export coal and 12.4mt of domestic coal from seven coal mines with life spans of between three and 11 years. Cash costs were $38/t FOB (free on board) per saleable tonne and $51/t per export saleable tonne, placing the mines in the second quartile of the global energy adjusted seaborne cost curve, according to an analysis by Deutsche Bank. Exports account for about 80% of revenue.
Liberium estimates a valuation range of £2.30-£4.90 (R43-R93) a share, with value being driven by handsome dividend yields of 10-22%.
SBG Securities valued the shares at R33.
Deutsche values the group’s equity at $600-$900 million (R8-R12 billion).
Short-seller Boatman Capital released a report prior to the listing, arguing that there will be immediate pressure on Thungela’s share price once it lists. It expects the volume of sellers to exceed demand because of under-funded environmental liabilities that will increase once new environmental laws are introduced in SA.
Other factors weighing on the share price are investor migration, as Anglo shareholders received Thungela whether they wanted them or not.
Many may choose to exit the shares due to the associated risks, while investors remain wary of assets exposed to greenhouse gases. Boatman Capital also suggests Thungela may have overstated demand from Asia for its coal.
Boatman argues that National Environment Management Authority (Nema) regulations could bump up environmental costs for Thungela nearly three times to R18.8 billion as opposed to the R6.45 billion provisioned by the company. On this basis it comes to a valuation of “less than zero” for the company.
“Putting it all together, we find the valuation of Thungela to be below zero,” says the Boatman report.
“We appreciate that any one adjustment is subject to debate but we prefer to be ‘roughly right rather than precisely wrong’ so cannot reach a valuation other than zero.”
Analysis contains ‘basic errors’ says Anglo
Anglo American replies that the Boatman analysis contains some basic errors, such as confusing metallurgical and thermal coal forecasts, and misreading the impact of new Nema regulations on environmental liabilities going forward.
“The provision of R6.45 billion on Thungela’s balance sheet is over and above the regulatory guidance for miners in South Africa, is in accordance with IFRS (International Financial Reporting Standards) and audited, and consistent with the provisioning norms within the industry,” says Anglo in response to the Boatman report.
“The basis for provisioning under SA’s draft Nema regulations simply does not accurately reflect the actual or likely sums needed to discharge such liabilities.
“It is precisely because these sums are considered to be artificial, and arbitrarily inflated, that the draft has remained under review since 2015.
“This is an industry-wide matter in SA, so the regulations on which the Boatman report apparently draws its conclusion are far from being finalised.”
Listen to Nompu Siziba’s interview with Thungela Resources CEO July Ndlovu (or read the transcript here):