At The Armchair Trader we have covered the Transition to Net Zero story in great detail. We believe it captures the zeitgeist of the decade. We have also covered the global energy crisis – a situation exasperated by the War in Ukraine – at length. These two themes, however, seem to be on a collision course, as the world needs new sources of energy, but the renewables industry isn’t at capacity to cover global needs yet.
Since oil, and especially natural gas prices started to spike following Russia’s invasion of its neighbour a year ago, governments, especially in Europe have been scrambling to find new sources of energy to keep their populations warm in winter, keep the lights on and keep their economies moving.
Despite the platitudes, the developed world (and even more so the developing world) is still heavily reliant on hydrocarbons, and when news stories of pensioners freezing to death in their apartments started to shift Western public opinion, governments quickly defenestrated their green agendas and started to cast around any and everywhere to find new supply lines.
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Combined with that other – thankfully receding – theme of the Coronavirus pandemic, where China, was first in, last out, has meant that the world’s second largest economy sparked up its smelters and power stations once again adding to global energy demands.
With no sight to the end of the conflict in Eastern Europe, the energy crisis is far from over, and the supply side story will rumble on throughout 2023. To deal with domestic demands, many governments have once again been considering that most polluting of materials, coal, as a cheap and readily available source of energy.
Renewal of old love
The winter has seen some countries are reopening mothballed coal plants to secure enough energy, while others, including Colombia, Tanzania, Australia and Indonesia, are boosting production as they seek considerable profits from exports.
The situation is leading to a coal rush. And with coal exports from Russia also sanctioned, the biggest consumers are the leaders of the global Green Revolution, Europe. According to the International Energy Agency, when the figures are tallied-up, world coal consumption is set to reach a new high in 2022 as the energy crisis shakes markets and will surpass eight billion tonnes, more than any time in the last decade.
Although the IEA predicts European consumption will be temporary, and dependent on the progress of the Ukrainian conflict, coal consumption in emerging Asia is set to rise over the coming decades – despite the need for the world to decarbonise immediately, if it is to stave off the worst effects of global warming.
Price per tonne hit record highs in March 2023, offering little incentive for coal producers to apply the brakes to their mining machines. So that’s why a company like standard-listed Thungela Resources [LON:TGA], is an interesting, if contrarian stock to follow.
Spin-out
Thungela is dual-listed on the London and Johannesburg Stock Exchanges and was formed as a spin-out from global mining company and FTSE100 stalwart Anglo-American LON:AAL in 2021. Thungela is an export-focused, South African thermal coal beneficiation and exporting company, which prior to 2022 exported the majority of its thermal coal to India.
As an aside – there are two forms of coal: thermal coal which is burned directly to generate heat and electricity, and metallurgical coal, also called coking coal, which is used to make steel.
Thungela holds a 50% interest in Phola Coal Processing plant, a 16 million tonne per annum (mTpa) coal washing plant, which is a joint venture between Anglo-American and BHP [LON:BHP]. Thungela also holds a 23.22% indirect interest in Richards Bay Coal Terminal (RBCT). RBCT is the largest coal export facility in Africa, with an advanced 24-hour operation and a design capacity of 91mTpa.
The company, as well as being a wholesaler and buying in coal from smaller mining operations, also owns seven of the largest thermal coal mines in South Africa.
Record highs
The company has had a strong year – something that only grew as the Chinese economy coughed back into activity, and Europeans started running out of woolly jumpers to layer up in. In its last update published in December 2022, Thungela reported strong earnings and cash generation up to the end of November, despite dealing with the challenges of transportation due to the country’s declining rail infrastructure and industrial action, illegal mining and delays caused by South Africa’s own unreliable national power network.
Buoyed by an average coal price of USD236.11/tonne, compared to the average price of USD124.11/T in 2021 the company was still making money, despite an aggregate 15% fall-off in production from its mining operations and a fa;ll in sales. The company said: “The on-going conflict in Ukraine resulted in Europe seeking to mitigate the impact of tighter gas stocks through increased imports of coal. Demand in the region is expected to remain firm into 2023 as stocks will have to be replenished following the winter season.”
Restocking
In its last results, published for the six months to end of June 2022, the company reported a 161% year-on-year increase in revenue. This was matched by an astonishing 4,427% increase in profits, a 2,048% increase in EPS and 387% increase in net cash to ZAR14.8bn (GBP 703.2m).
Thungela opened trading at 1,092p today (2nd February), and has offered a year-to-date return of -20.2%, a one-year return of 137% with its shares ranging between 457.2p and 1,932p over a 52-week period.
The company has a market cap of GBP1.5bn.
The coal rush is set to continue as energy remains a theme in 2023. Although the longer-term prospects for the black mineral look bleak, in the short- to medium-term in both its forms, it will remain a core part of the global energy mix. The boat may have already sailed on Thungela in terms of capital appreciation, but if you can get a tug on the water and catch up, there may still be some upward momentum for this stock.
