Eskom, Transnet woes drag coal sector down

JOHANNESBURG - Exxaro’s results for the year to December 2023 tell the story of a coal sector battling what economists refer to as structural bottlenecks, mainly Eskom and Transnet. Fix these two state-owned companies and the results would without doubt have been a whole lot better. Exxaro’s coal exports are now at their lowest levels since 1992. SA had to watch the commodities boom of the past few years from afar, unable to fully participate because Transnet could not ship the required volumes, and Eskom’s declining coal demand mirrored the load shedding schedule (hitting an all-time high of more than 330 days in 2023).

The chart below shows what has happened to coal and iron ore prices since 2022, and the dwindling volumes processed through the Richards Bay Coal Terminal (RBCT), which last year handled about 47 million metric tonnes (Mt) against a design capacity of 91 Mt. That’s roughly half what the terminal is capable of handling.

Storms

Exxaro turned in a respectable performance given the multiple challenges it faced, and will have to rely even more on management agility to weather the inevitable storms that lie ahead. “Shareholders will be pleased with a special dividend of R5.72 on top of an ordinary dividend of R10.16 per share.”

These are the rewards for cautious cash management. The company is lightly geared with far more cash than debt, allowing for a bonus payout to shareholders.

The company clearly anticipated falling commodity prices and declining coal offtake by Eskom. It held capex of around R2.4 billion, mainly for the maintenance of existing operations.

Revenue for 2023 was R38.7 billion, which is 17 per cent less than the previous year, but that’s still 50% higher than 2019, just before COVID-19. That is when energy and coal prices spiked as developed nations stocked up on energy supplies in anticipation of a cold winter. They spiked again at the beginning of the Ukraine conflict but are now back down to the historic mean. The reason for the drop in revenue was reduced

Eskom demand and lower exports – they were down two per cent due to domestic logistics constraints.

Inflation

The need to find alternative transport channels to market contributed to mine inflation of about 16 per cent, which is almost double consumer inflation for the year. Mine inflation is a worry, not just for Exxaro but for the entire sector, as supplies are imported at weaker and weaker exchange rates.

Seleho Tsatsi, Investment Analyst at Anchor Capital, notes that Exxaro had net cash of R43 a share at the end of 2023, equivalent to about a quarter of its market cap.

“So, Exxaro has declared a R5.72 per share special dividend, bringing the total FY 2023 dividend to quite a sizable number. Coal net operating profit was down 40 per cent, mostly because of lower export coal prices. Coal sales to Eskom were also hit by offtake disruptions. This was partially softened by stronger iron ore profits. At the moment, lower iron ore prices, which are down about 20 per cent so far this year, and subdued export coal prices are headwinds in the short-term.”

Thungela’s 2023 year-end results will be out next week, but we already have a pretty good idea of what’s coming.

Adjustments

A February trading update said the market should brace for a drop of R88-R90 drop in earnings per share, which are likely to end the December 2023 year at R34-R39. These numbers include various once-off, non-cash adjustments related to the acquisition of the Ensham Business in Australia, part of the group’s plan to diversify its earnings base.

“Continued underperformance on the part of Transnet Freight Rail (TFR) has again hampered our ability to operate optimally,” said Thungela at the June interim stage in 2023.

“TFR achieved an annualised run rate of 48 Mtpa for the industry in the first half of 2023, a deterioration of 13 per cent compared to the 55 Mtpa run rate achieved in the first half of 2022.

“TFR suffered two derailments in May 2023 which cost Thungela at least 340 000 tonnes in rail capacity.”

The group reported a stabilisation in TFR freight services in the second quarter of last year following collaboration with the coal industry.