Thungela Resources Limited (OTCPK:TNGRF) Q2 2022 Results Conference Call August 15, 2022 6:00 AM ET
Company Participants
July Ndlovu – CEO
Deon Smith – CFO
Conference Call Participants
Operator
Good morning, everyone and welcome to the Thungela’s 2022 Interim Results. Today, we’re at [Bastion] office and we’re joined by our CEO, July Ndlovu and CFO, Deon Smith. I’d like to welcome those who have joined us on the call today. What a year it has been for us. A year since we listed on the Johannesburg Stock Exchange as well as the London Stock Exchange. We have had a stellar performance, not without a few hiccups along the way.
And with that, I would like to hand over to our CEO, July, to take us through the overview of our results.
July Ndlovu
Thanks Elina, and good morning colleagues. And it’s quite a beautiful morning, exciting morning to share with you what we have shared with market earlier this morning. I know quite a few of you do track and monitor our share, and monitor everything that I say to the market. So what I’m going to say to you is probably a repetition of what you’ve already read this morning.
Firstly, what I want to talk about our results, I think it’s always important to talk about first and foremost, our face value, which is safety. It is pleasing that in the first half of the year, we ended without a fatality, even more pleasing is I’ve shared with most of you that we have now gone more than a year without a loss of life on our watch. This is testament that it is possible to run a fatal free business. We cannot however relax, we cannot rest on our laurels. We’re going to have to continue to work hard day in day out to ensure that everyone goes home safely every single day.
Now on the numbers, which is probably what today is all about. Our saleable production as you probably all know, is behind where we were last year. Some of that is conscious decisions we took to curtail some of the operations, but it’s primarily as a result of the constraints that we had with rail performance. But I’m pleased to say that where we have sought to maximize production, you, our teams on the mines, have worked tirelessly to ensure that we deliver the stellar results that we’ve delivered today.
In terms of our strategy, we are well on our way to executing our strategy. In this morning, we announced that the Board approved the Elders production replacement project. This project is an underground mine, 5 cm sections, is going to replace the production that is going to come to the end at Goedehoop, when Goedehoop gets to the end of its life.
I’ve deliberately skipped talking about the financial metrics, because that’s what my CFO is now going to tell you about, exciting results and well done to every single one of you. Deon?
Deon Smith
Thank you very much, July, and good morning to you on this, what is a chilly morning in Johannesburg and I assume at the operation similarly chilly. Our results are absolutely smoking hot though. We’ve earned earnings before interest tax depreciation and amort, so that’s EBITDA of R16.7 billion in the first six months of this year. That is an absolute record. If you boil that all the way down after taxes and so forth to a profit number, its ZAR9.6 billion, that is a fantastic result for a business of our shape and size. And clearly, we have strong market prices to thank for that performance. But also, the operational discipline across every single mine has in some way contributed to what we’ve been able to report this morning.
I will leave to July to announce what that means in terms of dividend and allocation of cash to the Nkulo Community Participation Trust as well as the Employee Participation trusts. However, having said that, what you have to think about in context is that in our first six months, we could have even done better. And what I mean by that is, if we had no constraints across any of our mines or Transnet Freight Rail, which has also been a constraint, those numbers could have been higher. And it’s a pity but we are doing everything we can to maximize our product mix to ensure what we railed down to RBCT is the highest possible margin and cash generation for us as a business.
And as a result in the period, we have earned adjusted operating free cash flow. So that is all the cash flow from operations less our sustaining capital of about ZAR540 million, and that net cash flow number or adjusted operating free cash flow is ZAR8.9 billion. And that has enabled us to return a lot of that cash to our stakeholders and shareholders and add it back to the Green Fund. And I’ll talk about the Green Fund for a second, before handing back to July to talk to you about returns to shareholders, communities and employees.
But the Green Fund is a responsibility fund for us. It’s an environmental provision fund for us, it’s a cash collateral that we put or set aside in order to pay for those future obligations when our mines get to the end of their lives. We’ve decided to add a further 200 million on top of 188 million that we added to that fund earlier this year, which now brings our total cash collateral we have available to around ZAR3.9 billion or close to ZAR4 billion. You might recall, when we demerged that number, it was just above ZAR3 billion with contributions and growth that has now reached almost ZAR4 billion. And that is an important number for us to continue to monitor, because when our business gets to or when mines get to the end of life in the next 10, 15, 20 years, we would want there to be sufficient provision to close those mines responsibly.
With that, let me hand back to July to talk to you about what the returns to shareholders, communities and employees look like.
July Ndlovu
Thanks Deon. So Deon has just said absolutely smoking financial results. We generated very good cash flows, we ended up with almost ZAR15 billion of cash in the bank. So what have we done with the cash? He told you one of the elements, which is a responsibility that we take very seriously. In other words, providing for the funds required to responsibly close these mines when we get to the end of them. That’s the additional 200 million. What have we done with the rest of the money? So we’ve returned we — this morning, we announced that the board approved a dividend of ZAR8.2 billion, that equates to ZAR60 a share.
This is quite an interesting number if you take into account that on a day one listing, we closed the day on ZAR21.90, 63 times much more. If you add the ZAR18 that we paid for 2021 and the share appreciation we’ve grown shareholder returns by an incredible number, 1,138. I never thought, I would ever hear such a number. But that is testament to the hard work of the men and women on our operations.
One of the things that we have said as part of our purpose, we always talk about responsibly creating value together, Thungela Together for a shared future. We can’t do that unless we share the value we create with the communities that are most impacted by our operations, and the most important stakeholder, which is our employees.
So this morning, again, we announced that between those 2 groupings, the Employee Trust and the Community Trust, NKulo Trust, we are contributing a further ZAR500 million to those two trusts. That brings the total contribution to those since listing just over a year ago to just under ZAR 800 million. I mean, it’s an incredible, incredible contribution that we are making, that gives real meaning to our purpose. And I want to urge each and every one of you to share this great news with your families, with your friends, that Thungela is indeed on its march to its future.
So let me pause and just talk a little bit about the future. With the announcement that we have made today, we also made an announcement that given the constraints that we have had in terms of rail and what we think will happen for the remainder of the year, we are revising our production guidance downwards to 13 to 13.6. But I want you guys on the mines to understand this. This is important. This is important. This is important. This does not mean you now have a license to miss your numbers. I want each and every one of you to deliver on your promise. The only way we will end trust with our stakeholders, and remember some of the stakeholders most important, and shareholders important are your families, your grandmothers, your grandfathers in the communities within which you operate is to deliver on our promises.
And I want us to make sure that we deliver those numbers for H2 so that again, we can get together this time next year in March, and say what a year it has been. Thank you very much, everyone.
Question-and-Answer Session
Operator
Thank you, July. Our call is now open for questions from people joining us today. The first one is actually not a question. Nadira would like to say just how proud she is that she’s watching our management and she feels lucky to be working under this top management team. All stars.
July Ndlovu
Thank you so much, Nadira. We only look as good as you guys make us look good. I’m proud to be your CEO.
Operator
With that being said, given the contributions to the EPP, which is a more longer-term retention plan, what is the strategy that management has to retain talented individuals given that there is a skill shortage currently in the country?
July Ndlovu
In fact, earlier on I warned [indiscernible] that I was going to ask him to answer questions, but let me try and be [Indiscernible], and because [Indiscernible] is sitting opposite me, if I get it wrong, I blame him.
We’re doing a number of things. The board recently approved some changes to our remuneration practices, again, to make sure that our remuneration practices are not only — are not only competitive compared to the rest of the industry, but ensure that we deepen the value share that I’ve just spoken about. We can’t just have an employee share partnership plan and leave another group out of making sure that we share value, that body has given us now the tools to be able to address that.
In addition to some of the things that [Lesetho] is doing in terms of just reviewing our packages and making sure that they’re competitive, that in itself is not what is going to retain people in Thungela. What will retain people in Thungela I hope, if you listen to what Nadira said is if we can make this the best place to work, we’ll make that the best place to work if we can deliver on our purpose, if we can deliver on our strategy.
And remember, I’ve been talking to you guys about our strategy, the four pillars, making sure that we absolutely laser-like focus on ESG. We get the best value out our high quality assets, and we begin to invest in the future. The investment we announced today on Elders is the best building block to ensure that we are beginning to build it Thungela of the future. And lastly, making sure that we are getting funding to making sure that these strategies are executed is important.
We also announced people practices from a talent management point of view, from a leadership point of view, in fact I have been participating in our leadership academies, and I’ve been blown away with the conversations that are happening in those. Again, this is to make sure that we create the Thungela that we all will be proud of. We’re not going to do it alone as leadership. We’re going to do it together. And the way we’ll do it together is through these practices. This morning, on my way to work just before I left home, I participated in living our values, again, is beginning to create the culture that we all want to create that environment that each and every one of us can just be the best that we can be. Don’t start me on this journey, because I won’t stop.
Operator
Thank you very much, July. And now going back to the dividend that was declared, our policy is 30%, minimum of 30% of adjusted operating cash flow, we have exceeded that twice in a row. Now, have we set a precedent that this is how we will continue in the future?
Deon Smith
It’s a very good question, and clearly one that’s quite topical, not only for whoever asked the question, but for our shareholders also. And the answer is no, we haven’t set a president. Our dividend policy is to return 30%, but in particular a minimum of 30% of our adjusted operating free cash flow to shareholders. But let me unpack that a bit more and give you a bit of context as to how we got to 92% and how we got to 63% in our first dividend, the ZAR18 that July spoke of, or the 2.8 billion in March.
The board resolved that we need a level off cash liquidity in our balance sheet after we’ve paid dividends. July said earlier, we had close to ZAR15 billion in cash on our balance sheet at the end of June. And similarly, we had around ZAR8.7 billion of cash on our balance sheet at the end of December last year. If you calculate those quantums of dividends we’ve paid, you would see that we paid down as well as allocated to the community and employee programs and then the Green Fund down to a level that we retained cash, that retention is about ZAR6 billion.
So in theory, if that dividend were to have been paid on the July 1, so immediately after the six month reporting period and we made all the payments on that same day, we would still be left with ZAR6 billion. We’ve also consistently said to our shareholders, we run at earn it first principle, which means that yes, by the time that we pay our dividend, we might have earned some more money and that balance might be above the ZAR6 billion or materially above the ZAR6 billion after funding the dividend. But we want to earn it first then assess all of our capital allocation opportunities and after that return excess cash, which is important, and therefore the 92% is excess cash and the 63% was excess cash. So is there a scenario that we might not return 90% or 60%? The answer is absolutely yes.
We continue to look at a number of M&A opportunities. We’ve looked at these across the globe in the last nine months, and we continue to scratch hard at those options. Clearly, if we find something that we think is value accretive and would grow Thungela in the appropriate way and sustain the business as well as show returns for the long run, we would absolutely consider acquiring such an asset. If that’s the case, we might want to use some of that cash as firepower to acquire a business or a mine, something that’s sought, in which case that percentage might be lower. But we’ve remained committed that it would not be lower than 30% of our free cash flow in the period.
Operator
We have a question from [Bungani]. Are there any new projects for expansion or acquisitions as Deon might have mentioned, planned for Thungela?
July Ndlovu
I think, [Bungani], Dion has just answered your question. The projects are — internally we do have project opportunities, and that’s why we’ve just done Elders. The team is hard studying the expansion to — on the life extension at Zibulo, again, when you read we announced that. And Deon has just said to us that in the last 10 months we have looked at a number of opportunities globally and we continue to evaluate those, at the right time we’ll then be able to advise the rest of the organization what we have been able to do.
Operator
There’s a question from [Fikile]. What was the outcome and final cause of the Khwezela incident from the investigation?
July Ndlovu
The investigation is still underway. Some of the technical details around what would have caused it remains something that Leslie and team are modeling to understand better. But it’s not one single cause, it does appear like there is a confluence and contributor set of circumstances from the illegal miners who pump water into — on top of the south shaft to the sudden increase in volumes in the south shaft. It was an unprecedented rainfall season.
Then put on top of that, that the seal that was put on the south shaft was actually never meant to be — to stop large volumes of water, it was just meant to prevent inadvertent access to the shaft to what became a very sad story that the infrastructure we had to be able to pump water so that we could control the levels on the south shaft had been vandalized by criminals and we are able to go and reestablish it. So it’s not one single cause, it’s a number of causes that taken together. You guys on the operations know this about the switches, they just lined up. So it’s not one single one.
Operator
A question for you, Deon. How do you decide on the distribution of funds to the employee and community partnerships?
Deon Smith
Yeah, that’s a very good question. So the aim of these trusts were always to participate in the success of the underlying business. These trusts set at a SACO level, so a South African Coal Operations level, which is a subsidiary of Thungela. But SACO owns the lion’s share of what all of the operations and interests in companies where we might not have 100%, such as 50% of Mafube.
The dividends that these companies distribute into SACO and then the dividends that SACO distribute into Thungela is therefore part of the benefit of these trusts. These trusts collectively own 10%. So to the extent that SACO declares dividends, the trusts earn 10% of the dividends. So that’s how those trusts would continue to benefit into the future of any dividends declared by any of those companies. And when I say any of those companies, I don’t only mean Mafube, AIC, so there’s a blue legal entity, but also TOPl, Thungela Operations Propriety Limited and all the mines within those legal entities.
Operator
Thank you for the clarification. There is a question here from the Nazipo. What are the additional mitigations can we put into mitigate the TFR risk? This is the biggest business risk for Thungela?
July Ndlovu
I’ll be going around mines. I’d like to hear more ideas from you — from all of you guys, about if there’s anything more we can do as a business. But I wanted to commend the management teams in terms of our ability to mitigate and use the levers that are in our control. And I think that have allowed us to be where we are.
On the external front however we continue to work with Transnet and our lobby activities with government. The biggest issue for Transnet, in my mind today actually has become a capital issue, do they have the cash to be able to catch up the maintenance backlog, and that cash can only come from the shareholder, which is government. So that’s something that we’re going to continue to lobby very hard.
I’m pleased with some of the steps that they are beginning to take. The shutdown that we saw recently, we saw some significant work, but hardly enough to be able to resolve all the problems. They are hopefully imminently about to go out in the market and procure additional locomotives, but they need more. And the only way they’re going to be able to get that is to be recapitalized by their shareholder.
Operator
Thank you, July. On the environment front, given the Russia Ukraine conflict, the demand for coal has increased significantly. Is that your view that the view of thermal coal has softened, and is that to continue into the future? And would that change together strategy in marketing its commodity?
July Ndlovu
I prefer not to use words like the view of coal is soft and/or is hardened. I think there are some hard realities that have played out. The hard realities that have played out is that society needs, is we transition, which we should transition to a low carbon intensity future if we have to mitigate climate change. We’re going to need to be technology agnostic. We’re going to need energy sources that are secure, reliable and affordable. And it happens that coal is one of those. What we shouldn’t do, those of us in the coal industry is to go on a celebratory march just because Europe for instance is beginning to bring back coal, because in the same way they are actually beginning to approve significant capital to accelerate the deployment of renewables. All I’m hoping for is that when people begin to think about energy security, that it’s a lot more technology and energy source agnostic. And therefore, we make the right technology choices to ensure that we get to a lower carbon intensive future sooner rather later.
Operator
Thank you, July. Deon, I think we’ve partially answered this, but what is the reason for the additional payment made to the Green Fund? Have we made sufficient provision for environmental obligations going forward?
Deon Smith
It is something that touches the minds of the board from time to time, as you can imagine. If I can use one minute to unpack numbers for people, that’s the easiest way for me to answer a question. If you remember correctly that when we demerged, our total environmental regulatory obligation was around 4.1 billion, that number is not materially moved, it’s still around 4.1 billion. However, when you look at our balance sheet, we’ve provided around 6.9 billion, which is closer to what the new environmental management act requires from us. So that 6.9 billion is what we’re really solving for in becoming fully funded over time.
Now, if you look at where we are today, we have cash collateral in the old environmental rehabilitation trusts which are under the — essentially managed by ourselves, but for the benefit of the DMRE’s protection, so that cash is available to close those funds or those trusts have around ZAR3.3 billion in cash.
We’ve built on top of it, what we call the Green Fund, which is slightly more discretionary, it’s beyond a regulatory compliance matter. And that — those Green Funds are before this 200 million allocation we are making today around 400 million already. So by the end of the year, after we’ve made this incremental additional 200 million, which is the same as the 200 million we made in H1 that would be — rather than the 3.7 in total, so the 3.4 — 400 million roughly, that could be close to ZAR 4 billion in cash collateral available to close the mines.
Now you’ll see that that’s very close to our regulatory obligation of ZaR4.1 billion, which means from a regulation as it stands today, we are very close to being fully funded, but in terms of the NEMA and what might come down the track for us, we still have a gap, and therefore we will continue to contribute responsibly over time to close that GAAP.
Operator
Thank you very much, Deon. In terms of the mergers and acquisitions, is there a preference from geographical point of view to remain on continent or will we expand our nets further?
July Ndlovu
We were very careful to say geographic diversification rather than specific jurisdiction diversification. There’s some logic to our thinking. You want to diversify into commodities and regions where you have a right to win, where you’re leveraging your capabilities. We know how to operate in Sub-Saharan Africa, in Africa, in South Africa. So logic says, in the first instance we should look there. But equally we know how to run coal mines in bulk systems. We understand coal markets, and therefore any coal opportunity irrespective where it is on the continent – no, on the globe, warrants us looking at it.
And therefore, although we talk about geographic diversification, what we’re not doing is limiting ourselves to South Africa only or to Sub-Saharan Africa only, but we look both at a geographic lens, but we also look at a core commodity lens. And clearly, we take all those two together as we evaluate the opportunity .
Operator
In terms of the opportunities, Deon, for you are we looking purely to acquire or would we also consider things such as a joint venture?
Deon Smith
I think we’re agnostic to the nature of any investment in terms of joint venturing or acquiring, so long as we feel comfortable that we have sufficient control over such an investment to optimize the asset and to reach its full potential. You have to remember that when we set in a position we are today where we have cash, we have shareholders looking at us to say that we can also make some of those investments and they can also take the money and diversify outside of Thungela.
So when July speaks about the right to win, what he means is that when we apply the cash to an acquisition or investment, do we have the right to make such an investment or is it superior to give the cash out to our shareholder and let them make the investment? And I’ll quickly tell you a secret to that.
Can you make a difference beyond what your shareholder can? How do you do that? Prove to your shareholders today that we are operating our assets that we’ve already been entrusted with responsibly and productively. If we are able to operate our business cost effective, and what I mean by cost effective is where our cost increases year on year is lower than anybody else in the industry, where our production and our productivity is higher on demonstrable, so factors or metrics that the market understands. If our productivity is superior, they will trust us to invest the money and acquire new assets and grow our business.
Clearly at the moment, there are question marks, question marks around our ability to do that because we still are young business. Yeah, and we still need to prove that we can credibly operate, deploy technology, approve projects, deliver Elders. Yes, we think we have done that because we’ve operated in Anglo, but the market views it as Anglo successes rather than Thungela successes.
So unfortunately, we’ve started with a clean slate and for us to be able to invest in joint ventures or acquire anything, we need to demonstrate to the market that we are credible operators and operational credibility means back to July’s point of earlier. Yes, we have downgraded our production outlook for the year, but when Johan speaks with the operations you understand and realize that his or our expectation is to outperform that in order to build operational credibility. And that gives us the ability to decide whether we invest in JVs or acquire a full asset.
July Ndlovu
This is a point I’ve made to the mines evenly when I visit, guys, delivering on your controllables is a non-negotiable because that’s the right we have to be able to grow this business unless we can demonstrate that we operate a fatal free business, that we are better minds in terms of productivity and cost. We don’t have the right to invest shareholder funds into something else. And that is if there’s one ticket I need each one of you every single day to write on your white board or whatever it is where you keep your journal is to say those three controllables, and of course, as I said to some of you, I always thought there were three controllables now there are four. Killing fish is really bad. We are not going to have another environmental incident because if we do, we cannot be considered a responsible operator. So those four, we have the right it.
Operator
Speaking about the environment, trucking has a very negative impact on the environment. How do you reconcile this with our ESG commitments?
July Ndlovu
So it’s not a coincidentthat we have taken such a long time to decide whether this is something that we want to do or not. I mean it pains to say that we still think that rail is the most cost effective, the most efficient and the most responsible thing to get to the market. And we continue to dedicate lots and lots of energy to ensure that we get that right. But what we can’t do colleagues, and with a solemn responsibility to our employees and communities within which we operate, is that in the event that performance by TFR lessen significantly, we would not be acting responsibly if we don’t develop other alternatives. This is really beginning to mitigate what we think is the most significant as [Nazipo] said, the most significant risk to our business. We can’t afford to look the other way.
Operator
A question from [John Drew], what is the future role of the water bag project in Thungela’s building block to support our business strategy?
July Ndlovu
So the water bag is two projects. Sometimes we’ve talked about one project and because we always think about coal. We also have an exciting opportunity called gas in the water bag. Of course, my CFO is always thinking about his biological assets. The day he can monetize those are also called that an opportunity. We continue to evaluate those. But we must also realize the significant infrastructure challenges associated with being able to execute a project in the water bag. But this is something that we’re also studying as we speak.
Operator
Deon, can you give us a breakdown of where you’re seeing cost pressures coming through and what are your plans to manage those going forward?
Deon Smith
I think it’s fairly well reported on across most media platforms that global inflation is currently at one of the highest points we’ve seen in a number of decades, much of that pressures come through from the energy complex. The energy complex I’m referring to is typically diesel prices and explosive, so any consumable that is linked to the oil price or some energy content out there.
Now, fortunately, as you have seen in our results, I would argue we slightly shielded as a business from that impact, because our revenue line ourselves is also energy. So we both have the income and expenditure.
Having said that, that does not mean for one second that we should be complacent because the higher cost, the higher revenue on energy, we will be going back to the point I spoke about earlier around operational credibility. We will be held to account on our ability to manage cost effectively. We are a volume player. And what I mean by that is determining your cost per ton is more important than the absolute cost.
If we are able to produce productively, and that is my single biggest anxiety for next year and the year after, if you look at the early view on the budgets keeping our production fairly low across all of our operations sites and otherwise, but keeping our costs high means that our per ton, our unit cost, our Free On Board unit cost per ton is likely to increase very dramatically into the next year or two, both as a result of the inflation but also our denominator challenge. So the lower production than what our full potential is. So for us, our biggest single lever is therefore productivity is operating our assets and our equipment, our CMs and every single kit that we have out there as productively as what we can. So that’s on the productivity side.
What we have also done is we have pre-purchased and acquired some of the consumables that we knew was going to induce a higher rate of inflations up upfront, so that we can draw from stores at last year’s prices rather than at future prices. So we’ve done a bit of that. But the most important thing is for each of us at the operations when we have expenditure boards to take those engagement seriously and to consider and reflect on how we can be optimizing our own cost position at every single turn at every operation, because that will build this credibility of operating productively and in a cost efficient manner.
Operator
Thank you very much, Deon. And on that note, I’d like to close the call for questions and thank our CFO and CEO for their insights into the company.
Thank you, everyone.
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