All I want for Christmas is a lump of coal
Shares in coal producers have gone mad, precisely because of efforts to decarbonise. And no, you’re not too late to buy in
● If you have an interest in the environmental benefits of almond milk and paper straws, look away now: coal shares have gone bonkers.
Shares in Thungela Resources have gained sevenfold since listing on June 7 2021. This week, they hit a record high of just over R230 — a gain of 157% year to date. Exxaro Resources — which reflects the knock-on effect of international coal pricing in domestic markets — is 51% higher this year.
It’s largely thanks to Russia’s invasion of
Ukraine, which has further disturbed energy markets already struggling with high gas prices. At over $260 a ton, the thermal coal price is more than 50% higher year to date and 170% higher on a year-on-year basis.
One irony of coal pricing is how the search for energy security has brought the moral hot potato of “just transition” to Europe’s door. Critics of plans to decommission coal mines in developing economies argue it is unfair of developed economies to insist on it when it had taken Europe decades to achieve the same. To an extent, there’s a certain turning of the worm.
In any event, it’s all good news for Thungela CEO July Ndlovu. Shares in his company were tipped to crash ahead of its JSE debut. The view at the time was that UK shareholders in Anglo who had pressed the group to dump its SA coal
mines were very likely to liquidate their Thungela shares.
“We have picked up significantly far more shareholders from offshore than anyone assumed we would,” says Ndlovu. In fact, about 50% of the stock is held by non-South Africans.
Such is the international flavour of Thungela’s register that decisions are now being made in mind of it. Ndlovu and the board are considering a share buyback — its share price rally notwithstanding — owing to withholding tax on dividends in SA which UK shareholders, in particular, don’t like.
This possible share buyback programme aside, it’s worth asking whether local investors who missed the 600%-plus price gain in Thungela can still get any value from coal’s rise (from the ashes)?
Yes, they can.
Analysts at RMB
Morgan Stanley are overweight Thungela on a target price of R290 a share.
Another interesting investment angle on Thungela is that its recent unveiling of R4bn in new projects all replacement tons, incidentally means Thungela is not the short-term investment phenomenon it was
tipped to be. In the words of analysts at RMB Morgan Stanley: “This is no longer a short-term asset.”
The practicalities of the world sometimes override some of the environmental issues
Paul Dunne
Another option for energy junkies is Glencore. The company — much criticised in the past for retaining its thermal coal mines — estimated in February that a third of 2022 earnings before interest, tax, depreciation and amortisation
(ebitda) would be derived from thermal coal assuming a then spot price of $175/t. Given a spot price of nearly $100/t more so far this year, analysts are endorsing Glencore shares owing to the impact of energy price upside.
Goldman Sachs’s Jack O’Brien estimates that Glencore will generate $33bn in ebitda in 2022, more than 50% higher than in 2021 thanks to thermal coal price improvements. In fact, based on spot prices across its commodity deck, Glencore’s ebitda would be $56bn, driven by thermal coal.
But it’s not only thermal coal prices that are benefiting from the Ukraine crisis. The price of metallurgical coal — material used in the manufacture of carbon steel — has also rallied, given that Russia is responsible for
about 15% of seaborne supply. This helps Anglo American, which produces the mineral.
O’Brien estimates Anglo will generate $22bn in ebitda this year, 16% higher than the bank’s previous estimate. Included in the calculation is first production from Collahuasi, the group’s $5.3bn copper mine that commissions midyear. Perhaps — like Glencore — it’ sa safer bet for investors who worry about pure-play stocks like Thungela, given energy market volatility.
One final point of the hike in thermal coal pricing over this and last year is to highlight the risk of bumps in the road ahead of decarbonisation. The UK has a strategy to end the sale of new petrol and diesel cars by 2030, but Prime Minister Boris Johnson has recently reopened the pathway for fracking and the commissioning of nuclear energy.
According to Northam Platinum CEO Paul Dunne, the adoption of electric vehicles will not be as universal as forecast, which will benefit platinum group metals in the manufacture of internal combustion engine cars. “The practicalities of the world sometimes override some of the environmental issues. It’s the way of the world. The transition is never as quick as the forecasts say. It is always something in the middle,” says Dunne.
If you needed convincing, what’s happened to thermal coal markets in response to surprising geopolitical events highlights the folly of making bold forecasts.