Thungela buys Australian coal mine for R4.1bn as it diversifies, but remains committed to investing in SA
COAL miner and exporter Thungela, which has announced the acquisition of an Australian thermal coal asset, says it remains committed to investing in South Africa although it is now seeking geographical diversification to de-risk operational challenges occasioned by infrastructure constraints from Transnet and Eskom.
On Friday, Thungela announced the A$340 million (R4.1 billion) acquisition of a controlling interest in Australia’s Ensham coal mine from Japanese-owned Idemitsu.
The acquisition has largely been seen by market analysts as landmark in spreading risk for the company, but has been criticised by others as coming at a high price, which may affect dividend payments. The share price in Thungela on the JSE firmed 0.83% to close at R224.3 on Friday.
Thungela chief executive July Ndlovu told Business Report on Friday that acquisition of the Australian asset was aimed at bolstering the resilience of the company.
He said Australia was a well-established mining jurisdiction with support infrastructure industries such as rail and ports as opposed to its primary market of South Africa.
“This diversification opportunity decreases our exposure to a single geography and the acquisition of Ensham de-risks our underlying business and will further bolster our resilience.
“It provides us with an excellent entry point into Australia, a leading mining jurisdiction with a well-established port and rail network (and) gives us access to the Japanese and other Asian markets where demand for thermal coal remains strong,” he said.
Thungela, however, remains “invested and deeply committed to the South African mining landscape”, where it has just announced an investment into a significant “expansion project at Elders” operation.
The company is, nonetheless, suffering from infrastructure bottlenecks in moving its thermal coal using Transnet’s inefficient rail network.
The performance of Transnet, which rails Thungela’s coal to the Richards Bay Coal Terminal for export, “continues to impact” all local coal operators, Ndlovu said.
Consequently, the “ongoing operational challenges result in rail underperformance”, which negatively affects
Thungela’s “ability to move product to port” and export markets.
In terms of power supply, which has been erratic owing to load shedding by Eskom, Thungela is managing the situation as it is operating below capacity owing to the rail infrastructure bottlenecks.
This explains why Thungela is now focusing on “creating value for shareholders” to diversify into Australia.
“Because of the Transnet rail challenges, we are not currently at full capacity, which does provide some flexibility to deal with load curtailment,” Ndlovu said.
Thungela believes the new Australian asset is a highly cash-generative thermal
coal asset, with long-life potential, at an attractive valuation. It also gives Thungela the opportunity to capitalise on the current strong Newcastle coal price environment.
Moreover, about two thirds of the 2023 budgeted production from the Ensham coal mine has already been “forward sold at attractive prices”.
Based on the current market observed forward curve for Newcastle thermal coal, Thungela anticipates “the payback period of the transaction” to be “potentially within two to three” years.
Thungela had stronger revenue generation in its last trading year, driven by a strong price environment for thermal coal.