Thungela Stock: Let’s Have A Nudge? (OTCMKTS:TNGRF)

CUHRIG We wanted to revert to our stance on Thungela Resources Limited (OTCPK:TNGRF), a highly volatile coal miner that often has investors on the edge of their seats. Thungela has experienced numerous event-driven activities since our latest coverage in March, during which we downgraded the stock based on seasonality. Data by YCharts Without further ado, here is our latest take on Thungela. Operating Performance Update Mostly Ex-Enhsham Thungela released its first-half report on June 18th, revealing numerous expected results, including its first-half production and sales forecasts. We covered Thungela’s latest earnings in March, and therefore, we’ll focus on its H1 forecasts in this article. Firstly, Thungela’s H1 is nearly concluded, meaning its forecasts are close to being realized. We anticipate its realized results to settle in due course. The next diagram shows Thungela’s H1 production report; a discussion follows. First Half Production Results (Thungela) Broad-based production (ex-Ensham) is anticipated to increase compared to last year. Besides Goedehoop, the company’s underground assets will probably see increased production, likely due to lower load-curtailment via reduced load-shedding hours. Goedehoop’s production looks set to settle lower. Although the reason for this is debatable, it could be a planned decrease. According to our knowledge, the mine operated at a high capacity before H1. Remember, Thungela remains susceptible to infrastructure issues and faces a northern summer, meaning overproduction could lead to future inventory write-offs. Furthermore, Thungela’s opencast mines are set for contrasting results. Nevertheless, the segment’s amalgamated production seems to be unchanged. What do we expect going forward (ex-Ensham)? Let’s start with the risks involved (ex-Eskom). As mentioned on a few occasions, Thungela is faced with a northern summer, which could introduce a seasonal effect. Moreover, Thungela’s struggle with inefficient national railways has resumed as the firm has lost about 650 kilotonnes of export sales since the turn of the year (due to railway issues). We believe the abovementioned factors could lead to sustained production struggles, in which Thungela might intentionally operate below its capacity to avoid inventory write-offs. Now, let’s look at a few tailwinds. The sustained war in Ukraine and rising tensions between the East and the West might lead to trade disputes, providing South Africa and Australia with the necessary latitude to fill pockets of undersupply. Additionally, Southern Hemisphere winters are in full flow. Anecdotally, it is very cold and dry here in South Africa, making for a more conducive mining environment. H1 Sales (Thungela) As for sales, Thungela expects its South African sales to settle lower in H1 than a year before. However, the company’s H1 report stated that its production will remain within its full-year guidance. We think the firm’s sales and production will be very closely correlated leading forward, as the company’s systematic challenges will require a nimble mining execution plan to combat potential inventory write-offs. Alternatively, Thungela won’t want to surrender market share, meaning excess production-over-sales is possible. As for value-based sales, the Richard’s Bay coal futures curve is sloped upward, suggesting an improved pricing environment is possible. Thungela sold its coal at a 15% discount since the start of the year, slightly wider than the 14% last year. Thungela usually sells at a discount, meaning its discounted sales don’t worry us. In fact, we are optimistic about the systematic support it might receive from futures being elevated. Will futures prices be in contango (future spot price higher than quoted futures prices)? Only time will tell. Richards Bay Forward Futures Curve (Coal) (Trading View) A Bird’s Eye View of Ensham Turning to Ensham, Thungela owns 100% of Sungela, which owns 85% of the Ensham in Australia. However, Thungela uses full consolidation accounting practices. Enhsham is anticipated to deliver 2 million tonnes in H1. The project is capital intensive, with A$23 million (about $15.38 million) in capital expenditures expected for H1, which is nearly half of South Africa’s forecasted all-inclusive capital expenditures of R1.3 billion (about $71 million). Ensham will probably deliver solid production once its mine development plan has been realized. However, we remain worried about its interim results due to labor shortages in Australia and the possibility of high initial sunk costs. Key Profitability Metrics The following profitability metrics are based on Thungela’s latest financial results. We think the company has solid profitability, deriving from affordable labor and supply-chain costs. Moreover, Thungela has likely achieved economies of scale by mining at most of South Africa’s salient coal mines. Profitability (Seeking Alpha) Here are a few matters to add to Thungela’s ex-ante profits. Thungela expects its H1 FOB (free on board) in South Africa to hit the lower end of its guidance between R1,170 to R1,290 per tonne. This excludes royalties. However, it signals a lower transport cost environment, likely due to lower regional inflation and a softer labor market. Additionally, Thungela expects Ensham’s H1 FOB to settle at the lower end of its guidance range between AUD130 and AUD140 per tonne. Again, this excludes royalties and signals a lower overall cost base induced by systematic factors. We have a few concerns regarding the aforementioned claims. Firstly, South Africa’s national election concluded on May 29th. Load-shedding softened pre-election, allowing for a more conducive mining environment. We are hesitant about the sustainability of lower load-shedding hours post-election. As such, we flag the possibility of higher FOB and production costs later this year. Furthermore, labor strikes are salient to mining supply chains. We won’t be surprised if FOB rates increase due to unexpected labor strikes throughout the supply chain. Valuation Metrics and Dividends An absolute vantage point of Thungela’s price multiples suggests its stock is undervalued. For example, a price-to-book ratio of below one is usually considered good. Thungea’s price-to-book ratio of 0.62x is below one, and the sector median of 1.62x, suggesting it has absolute and relative value in store. The firm’s price-to-earnings and price-to-cash flow ratios follow a similar pattern. We deem both low on an absolute basis, and the data shows that they are low on a relative basis. Metric Value Sector Median Price-to-Book 0.62x 1.62x Price-to-Earnings (GAAP) 3.03x 12.01x Price-to-Cash Flow 1.77x 5.09x Click to enlarge Furthermore, Thungela’s three-year dividend yield on cost is 38.24%, which is humongous compared to the sector average of 5.45%. To our knowledge, special dividends and price fluctuations elevated various of the stock’s dividend yield metrics. Nevertheless, Thungela has a history of paying solid dividends, which we deem beneficial. Seeking Alpha Final Verdict Thungela faces numerous risks, such as inconsistent production, seasonality, and systematic risk. Nevertheless, we believe that many of those risks have been baked into its stock price, and various tailwinds have emerged. Among Thungela’s tailwinds are its relatively undervalued valuation multiples, an upward-sloping coal futures curve, and the inclusion of Ensham. Considering the above, we upgrade Thungela to a Buy from our previous Hold rating. 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.

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