Thungela Faces Asset Shake-Up Amid Transnet Rail Crisis: Coal Exports at Risk

Thungela Resources

South African coal mining company Thungela has issued a warning that it may need to reassess its asset portfolio if Transnet’s ongoing decline in rail performance does not improve. Thungela CEO July Ndlovu expressed concern during an interview with News24 after the company’s annual results were released on Monday.

  1. Thungela, South Africa’s largest coal exporter, warns it may need to reassess its asset portfolio due to Transnet’s ongoing decline in rail performance, which has significantly disrupted coal transportation to the Richards Bay Coal Terminal.
  2. Despite setbacks from poor rail performance, Thungela reports strong financial results, thanks to record coal prices, with adjusted EBITDA tripling to R29.5 billion and a total dividend of R100 per share for 2022.
  3. Thungela and Transnet are collaborating to find solutions to the rail infrastructure challenges, with some progress reported, but the outcome will be critical for the future of South African coal exports and the broader economy.

Thungela, the largest exporter of coal in South Africa, was separated from Anglo American in mid-2021 and has experienced significant disruption due to Transnet’s coal line dysfunction. The Richards Bay Coal Terminal has been particularly affected, with export levels in 2022 at a historical low of 50 million tons, down from a previous capacity of 81 million tons.

Transnet has plans to increase volume to 60 million tons over the next two years, as the shortage of locomotives begins to ease. However, efforts to source critical parts from a Chinese original equipment manufacturer (OEM) have failed, leading Transnet to seek alternative solutions from other manufacturers. Ndlovu estimates that it could take up to 12-18 months for a new OEM to reverse engineer the required parts and restore locomotives to service.

To prepare for the ongoing constraints, Thungela is cutting back on production and has warned that its export output could decrease by up to 20% in 2023, compared to the 13 million tons reported in December 2022. Thungela can sell products from its stockpiles if necessary, but the company is not planning to significantly reduce its stocks until there is visible improvement in Transnet’s performance.

In the first two months of 2023, the volumes transported on the coal line were equivalent to an annualized 45 million tons. However, Thungela has observed a slight improvement in the transportation rate since then. When questioned about potential alternatives to rail transport should Transnet’s performance continue to decline, Ndlovu pointed out that bulk commodities are typically transported by rail worldwide for a reason.

Rather than seeing Thungela as a victim of Transnet’s performance, Ndlovu views the company as a proactive leader in finding solutions to South Africa’s critical infrastructure problems. Ndlovu, who also chairs North Corridor steering committee meetings between Transnet and the private sector, believes that their collaborative efforts are starting to show progress.

Despite losing 3 million tons of export saleable production due to poor rail performance, Thungela reported impressive financial results on Monday, thanks to record coal prices. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) tripled to R29.5 billion for the year ending in December, with net profit rising to R18.2 billion. Thungela declared a final cash dividend of R40 per share for 2022, resulting in a total dividend of R100 per share, or R13.8 billion, equating to 76% of adjusted operating cash flow.

Moving forward, Thungela expects coal prices to remain strong, although they are unlikely to reach the historic levels seen in 2022. Thungela’s shares experienced some fluctuations in Monday’s trading, with an initial drop of 10% but ultimately closing just 2.4% lower at R191.60 per share.

The company’s ability to adapt and find solutions to the challenges posed by Transnet’s deteriorating rail performance will be crucial in maintaining its strong market position. As Thungela and Transnet continue their collaboration, it remains to be seen whether the rail performance will improve enough to prevent the need for Thungela to reassess its asset portfolio.

While Thungela is taking necessary precautions and adjusting its production strategy, the situation highlights the importance of a well-functioning rail infrastructure for the South African coal industry. The outcome of the ongoing efforts between Thungela, Transnet, and other stakeholders will have a significant impact on the future of coal exports and the broader South African economy.

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