Money& investing
Analysis and coverage of SA's top companies and investments - the guide to where your money should be Black gold or barren pickings? Dinosaur fuel or green deal? It’s a buyer’s call now as Anglo American shakes loose its old-world coal assets
ý “We have ended the war on American energy. And we have ended the war on beautiful, clean coal,” declared former president Donald Trump back in 2018.
Sadly for the world’s coal bulls, Trump is now long gone and in spinning off its remaining SA coal assets, Anglo American has the unenviable task of convincing the market that its trash is another man’s treasure.
While Anglo is greening itself by removing its thermal coal business, it argues that the assets still have a lot to offer investors, as well as SA.
For one, Anglo is pumping money into what will be known as Thungela Resources when it lists on the Joburg and London stock exchanges next month.
Anglo will provide a cash injection of R2.5bn and has also agreed that, if thermal coal prices fall below a threshold of R1,175 or $80 a ton (adjusted to quality of coal sold), it will provide capital support to Thungela until the end of 2022. Anglo’s marketing busi
ness, meanwhile, will continue to support the coal business in the sale and marketing of its products for 3½ years.
“Anglo is paying to spin them off,” says Daniel Sacks, portfolio manager at Ninety One’s Commodity Fund. “That’s the state of coal assets — you can’t give them away.”
That’s because Trump’s “beautiful, clean coal” is anything but for the world’s biggest investors. “Nowadays holding coal mines, especially steam coal, is like holding a cigarette company — it’s affecting its rating,” says Peter Major, director of mining at Mergence Corporate Solutions. “Anglo has averaged a 25%-27% discount to its price to earnings ratio relative to the S&P 500 for 100 years. Currently it is at a 60%-65% discount on a p:e basis — and there is little sign it’s going to improve on its own, so it is working hard to do something about it.”
Crucially, the demerger means funds that are not allowed to invest in fossil fuels will have Anglo as an investment option again. Last year, Anglo’s exposure to coal made it one of 15 companies to be blacklisted for investment by Norway’s $1.3-trillion sovereign wealth fund.
But what about investors in Thungela itself? After all, they are getting something pretty rare now — a major, publicly listed, pure coal play, along with its own risks: volatile coal prices, SA’s carbon tax regime and environmental liabilities.
But, says Xavier Prévost, senior coal analyst at XMP Consulting, Anglo’s export mines — the second-largest exporters of SA coal — are the best the industry has in terms of quality and reserves.
And with no material capital decisions due, Thungela is likely to be a generous dividend payer.
It’s targeting a minimum dividend payout of 30% of cash flows from operating activities after funding sustaining capital expenditure.
The demerger is still subject to shareholder approval on May 5, after which 100% of the issued share capital of Thungela will be held by Anglo shareholders who will each receive one Thungela share for every 10 Anglo shares they hold.
“It will be very interesting to see the kind of flowback of the new stock of Thungela,” says Sacks, who describes the company, relative to other mining majors, as “incredibly tiny”.
“Never mind the ESG [environmental, social and governance] concerns, you will have this little fraction of a new share and, as a London fund manager, you will probably just dump it. Anglo itself owns 9% of its own stock, so when it gets unbundled, it will probably also sell it. So there’s going to be a lot of stock coming into the market.”
That means the stock is likely to trade “very cheaply”, particularly if there are a lot of forced sellers.
Notwithstanding the quality of its coal, Sacks says Thungela deserves to trade cheaply considering that there is about eight years of life left in its mines before the company needs to be recapitalised.
Ever the optimist, Major says: “I think it’ll be OK. The share will trade at a 10% dividend yield.
You can bet on it. [But] it’ll be on a single-digit p:e too, I’m sure.”
Pure coal miners, like Thungela, are nonexistent in SA while global peers are few. Worse, they haven’t done especially well in recent years.
For example, the share price of Peabody Energy in the US has plummeted 93% from $47 in June 2018 to just over $3. Australia’s Whitehaven Coal’s shares dropped 70% from A$5.78 to A$1.76 over the same period.
Anglo’s coal operations have also lost money in the past two years, thanks to slumping coal prices — though in 2018 the division made a R5.18bn profit when the benchmark export coal price was above $100 a ton.
Coal prices are now back at those levels, trading at $95 a ton in March this year, which means Anglo’s coal assets “must be spitting cash”, says Sacks.
Prévost, meanwhile, says the outlook for coal prices is good.
“Our new markets, India and now China, are in need of coal. We will be exporting SA coal for a long time to come.”
Given recent developments in Asia, Prévost says coal prices are more likely to rise than fall in future.
“The problem we have in SA is that we have a limited source of coal exports, but Anglo’s mines are the exception.”
Sacks agrees it’s plausible that prices will remain strong.
“It’s pretty obvious that if the world still needs the stuff and more mines are being decommissioned, you will have a bit of a supply squeeze,” he says. “It’s just that it could be the
last hurrah.”
Anglo Coal CEO July Ndlovu says he wants to focus on stabilising Thungela as a standalone business for the next two years, but there are growth options.
“We have about 750Mt of resources in the ground. Not all of them will see the light of day, but when appropriate, we will make the right targeted investment to extend the lives of these high-quality thermal coal assets.”
This wealth of untapped coal, says Prévost, is key.
“In my view, as Glencore gradually loses production, Thungela will become the largest SA coal exporter. With an export allocation of almost 22% at Richards Bay Coal Terminal, and if Transnet rail works as it should, it could export 20Mt a year.”
But if the picture’s that rosy, was a demerger the best way to go? As Sacks points out, if the Thungela share trades too cheaply for too long, it could still be bought by a private bidder.
Anglo CEO Mark Cutifani says there were some bids to buy the assets, but in the end they felt the demerger was the best option to ensure the business was established with no debt.
“Setting up Thungela for enduring success is at the heart of our responsible transition approach,” he says.
Cutifani is keen to talk up Thungela’s environmental credentials, and says: “I think it’s well set up to be the gold standard in thermal coal operations in the short to medium [term].”
Not everyone agrees.
Tracey Davies, executive director of shareholder activist organisation Just Share, says it’s misleading for Anglo to suggest shifting problematic assets out of the company is responsible, or supports a transition to a lowcarbon economy.
The demerger, she says, will reduce Anglo’s reportable carbon emissions, but it won’t result in any real-world emission reductions.
“This new company will list on the JSE facing a host of complex ESG issues. So this may solve some problems for Anglo, but it will simply shift those problems to the new company and its investors.”
One of those problems is its environmental liabilities, set at R6.45bn.
Jesse Burton, senior associate at think-tank E3G and researcher at the University of Cape Town, says that while this coal divestment deal may come with sweeteners, “what will happen when growth does not materialise from new coal assets? Will the financial resources be there to deliver good practice in environmental
I am not sure it is a ‘just transition’ for developed country shareholders ... to be let off the hook to leave social closure and liability risks to fall on SA
Jesse Burton