The exchange … with Thungela’s July Ndlovu

Down, but not out: why the commodity company is still bullish on dirty coal.
3 mins read

The one-time wonder of the commodity market, Thungela, is grinding its way through an unspectacular market after an extraordinary couple of years. Weaker coal prices mean its half-year profits are less than half the year before, and the dividend has been cut 80%. Should investors who saw its stock hit R377 in September 2022 before sliding to R106 this year stick it out? Currency spoke to CEO July Ndlovu.

Thungela CEO July Ndlovu. Image supplied

In your results you talk about how geopolitical issues could help lift coal prices, but you don’t say whether there’s a chance coal prices could tumble. Are there no strongly negative factors that worry you?

JN: What we’re sharing with you is what we’re seeing, so to make up factors on the downside we’ve not seen would be speculative and probably irresponsible. 

The inference for investors then is that present coal prices are the base-case scenario?

JN: The long-term fundamentals revolve around electricity demand and the make-up of that electricity, and the growth of economies in the markets that we serve. We look at supply dynamics in access to capital and licensing, particularly in key supply regions such as Australia and South Africa. We also look at new builds of coal mines [and] demand in cement and, when we take all of them, the long-term fundamentals are strong. Last year was a record demand for coal, this year is shaping up to be more or less the same – maybe marginally better – and that tells you that the way we’re reading the market is pretty accurate.

It doesn’t help if you can’t get your coal out of the country. Transnet is still a mess and things are only likely to improve from next year. Doesn’t that hurt Thungela?

JN: First, we’ve changed our business model: when we demerged [from Anglo American], we were a single-country, single-commodity coal producer, [but now] we’re not entirely dependent on South Africa. Second, our business model is to focus on controlling the controllables: safety, costs and productivity. As for Transnet, sometimes we have unrealistic expectations of how long it takes to turn around a complex logistics system. We all now applaud Eskom, but we forget how far back load-shedding started. These things just take time. I can tell you that the willingness and commitment of the new Transnet leadership to improve performance has been exemplary. 

But how complicated can it be really? All you’re doing is railing bulk commodities from one place to another …

JN: Until I started collaborating with Transnet, I also used to say to the guys: “You have one piece of equipment called a locomotive running up and down the country – how difficult can that be?” That was until I started understanding the interplay between the different loading terminals, different customer requirements, the different times it takes and the signalling. It’s more complex than that, and keeping a R45m piece of kit reliable is not as simple as I used to make it out to be. I’ve been disabused of my understanding. 

You mentioned your diversification: the coal mine Ensham in Australia, which you bought into, and which contributed R419m to your net profit of R1.2bn. Are there other countries or companies you’re looking at?

JN: We’ve been very clear that we want to continue growing our business by diversifying geographically. We keep looking. I’m not going to say what we’re studying. When we have something interesting, you guys will be the first to know.

Yet the ESG pressure among lenders is intensifying, so would you have to self-fund everything if it were to be an acquisition? 

JN: The reason we have a robust business model with a strong balance sheet and are able to fund our business actually tells you how creative we’ve been in funding ourselves. So we’re quite confident that if we find something that will enhance shareholder returns, we will find a funding strategy that is suitable.

Are you likely to diversify into different commodities?

JN: If you gave me a commodity for free, I probably would take it, but I can see enormous value in coal at the moment. 

Is that borne out by Glencore hanging onto its coal assets rather than unbundling them? That must say something …

JN: It vindicates our view. When you begin to see other people who are bigger than you doubling down, it is a positive statement, isn’t it?

Giulietta Talevi

A prominent voice in print and broadcast financial journalism with a sharp edge in market and company news. Former Financial Mail Money editor and BusinessDayTV anchor, Giulietta boasts an influential digital footprint that commands industry respect.

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