Thungela: Underwhelming Winter Capture And Lurking Headwinds (Ratings Downgrade) (NGRF)

Thungela Resources Limited (OTCPK:TNGRF) is a South African coal mining company with an alternative listing in the United States. We’ve covered the stock extensively over the past few years, delivering opinions on its prospects throughout the economic cycle.

Today’s article provides an updated outlook on Thungela’s prospects. We last covered the stock in September, claiming it possessed tactical prospects. However, time has elapsed since then, and market variables have shifted. So, with that said, herewith are our latest findings on Thungela Resources Limited.

Salient Events

Realized Results

As visible in the diagram below, Thungela’s year-over-year revenue slumped amid a softer pricing environment and sluggish export environment. The company’s South African saleable export production slipped by 6.9% during the period (to 12.2 Mt) due to continued railway challenges and an underwhelming UK/European winter.

Although Thungela’s newly acquired Australia-based Ensham added 860,000 tonnes to production (to level it back to 2022’s level at 13.1 Mt), realized coal prices ended up dominating proceedings. In fact, Thungela’s South African prices more than halved to $103.69 in 2023. Ensham added volume on a pro-rata basis as its four-month prices (pro-rated after acquisition) settled at $155.85 per tonne; however, the broad-based impact could not be recovered.

On a lighter note, Thungela’s domestic operations blossomed lower-than-anticipated rainfall played a hand. Domestic sales increased by 8% to 7,271 tonnes, while domestic saleable production increased by 17% to 8,087 tonnes.

Outlook

Enough about the past. Let’s discuss Thungela’s outlook.

The company expects South African saleable production to settle between 11.5 and 12.5 million tonnes. Moreover, Thungela’s Ensham production is expected to reach 3.2 and 3.5 million tonnes. Additional consideration must be given to domestic supply assets such as Rietvlei as the South African winter is approaching.

Furthermore, as the diagram below shows, Thungela expects free-on-board rates to advance from their R1,134 (roughly $60) per tonne in 2023.

What’s our take on all this?

Firstly, we must consider that we’ve discussed annualized results up until now. Let’s stick to a half-year outlook for now, as the volatile economic environment and weather patterns add severe challenges to a long-term assessment.

Our half-year outlook bases itself on a slow export market. The Northern Hemisphere is about to exit its winter season, adding natural headwinds to Thungela’s export prospects. Moreover, we believe global economies are softening amid disinflation, interest rate pivots, and waning consumer confidence. As such, demand-side factors are wobbly.

Furthermore, supply-side factors are questionable. Although Thungela’s recent ramp-ups at Goedehoop underground and Khwezela open cast provide optimism, railways, and Eskom remain a significant problem. Additionally, South Africa’s general election is held on May 29th; we anticipate significant hostility leading up to the election (deemed the most uncertain election in 30 years), lending the argument that operational disruptions are unlikely.

To conclude this section, I added a diagram of the run rate to convey railway implications. A lot of private sector involvement has surfaced, with Thungela itself enhancing its security presence. However, this is a hard fix, which would likely require political stability before improvements are realized.

Ensham

I partitioned Ensham’s data into a separate section to better organize the flow of the article.

As mentioned before, Thungela acquired Ensham with four months of pro-rated data included in Thungela’s 2023 results. Take note that Thungela acquired 85% of the going concern via its Sungela subsidiary, which is 73.5% owned by Thungela. Therefore, although Thungela has majority ownership and uses full accounting consolidation, it does not own the entire project.

Ensham mines in the Bowen Basin with a connected railway 339 km from Port Gladstone. The asset delivers higher-priced coal but at a higher cost. However, Ensham is a strategic play from Thungela, providing it with geographic and material-based diversification.

We are not acquainted with Ensham’s Net Present Value forecast, as Thungela’s in-house expansion cost-benefit analysis is still underway. However, by keeping it simple, one billion tonnes in additional resources with synergies doesn’t hurt.

Valuation Metrics and Dividends

A comprehensive valuation of Thungela must be executed before making a rational investment decision. Nonetheless, a parsimonious overview of the firm’s price multiples provides a solid starting point.

Thungela’s price-to-book ratio is well placed at 0.66x. A pending interest rate pivot paired with higher coal forward prices could enhance the firm’s book value, consequently driving that P/B multiple into an even more alluring territory.

Furthermore, we like Thungela’s 1.17x EV/EBITDA ratio because the metric suggests relative value if compared to the sector median.

Another benefit of Thungela is its dividend profile. The stock has a 4-year average dividend yield of 25.68%. However, beware, as its retrospective dividend data was bolstered by special dividends during the firm’s cyclical heights. Moreover, I’ve heard of situations (in the SA comments section) where U.S. investors lacked clarity about their dividend receipts.

Final Word

Our updated analysis shows that Thungela’s valuation and dividend metrics are promising. Additionally, synergies from the Ensham deal are waiting in the wings. However, the firm faces seasonal and cyclical pressures, leading us to conclude that Thungela’s stock is not aligned to outperform the broader stock market in the intermediate term. Our previous analysis labeled it a tactical opportunity, but we hereby downgrade Thungela to a hold.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.