It is a period of economic ineptitude where large companies attempting to greenwash their accounts sold off high value assets for cents on the dollar. A small band of Rebels are able to strike deep into the pockets of the groupthink and at Cerrejon Glencore is able to get possibly the deal of the decade. Not only having Anglo and BHP massively write down the value of their holdings but then getting them to pay for most of the deal.
Meanwhile across the Atlantic divide a separate bunch of Rebels get Thungela spun out of Anglo. Whilst the greenwashers of Anglo see a problem being removed, those left adrift quickly show that they can run a business and if people’s only hope is to mine then mine they will. In a masterstroke the leadership of the Rebel Alliance not only take control of the mines but whilst the Anglo Empire had them on a 5 year wind down the Rebels extend the mine life to 7 years. Adding almost 30% to the DCF valuation.
Striking deep into the world Thungela (TGA) finds that the precious resource (coal) is required as never before. Both China (who is building coal plans like they are going out of fashion) and India with its massive population want coal. As does much of the rest of the world as the Imperial classes realise that coal power works and renewables continue to have reliability issues. As Doomberg says “physics always eventually beats platitudes”.
Seeking to supply the needs of the many, despite disapproval of the global elite TGA finds that largely demand outstrips its ability to supply.
Supply is constrained by 4 factors;
Transnet the local rail carrier cannot properly manage the rail network. Various strike and supplier issues, particularly with the Chinese supplier of its rolling stock, makes Transnet an unreliable supplier. But as a rail monopoly pretty much unavoidable.
Eskom the national power supplier is perhaps not as inept as Transnet. But it is not much more reliable. Ongoing failure to provide reliable power supplies help no miner.
Theft. A significant level of what TGA provides to ship to clients is stolen. The SA police seem unable or unwilling to stop this.
Politics. SA has its own political system and no company in SA is immune to it.
So frowned on by the Imperial elite and constrained by local forces TGA has struck out and bought into an operation in Australia.
They are looking at a three year pay back. Though for these three years they have largely given away a significant portion of the upside that made Cerrejon such an incredible deal. In today’s business world a payback of three years is to be commended.
It is to my mind a particularly good deal for the following reasons.
1 – It removes a lot of the problems that plague doing business in SA. Australia is not a perfect country for business but it has a rule of law and at least at some levels of government an ability to understand mining.
2- It is incredibly well timed. India has just this month openly committed to coal reminding the Imperial Elite that it is more interested in keeping its own citizens, warm ,lit and fed than making western greens happy. After all India is a close neighbour to Sri Lanka and well aware of what happened there when it embraced green policies.
3-It is well timed as China has played something of a blinder. China has committed to reducing coal usage from 2028. I have no doubt it will manage that as it has perhaps the largest coal power building programme in the world. It also has the biggest renewables and the biggest nuclear, but for TGA it is the increase in Chinese coal demand that matters. So whilst some will be switched off from 2028 it is going to be switching off from a larger base.
Currently Chinese coal provides about 90% of their requirement. But with reopening the amount required will increase and China has just begun to bring in Australian coal after years of political boycott. To my mind the fact that it does so reflects its need. The CCP moves when it sees the benefit.
4-TGA’s management have always made it clear that they were not looking to close down when the current mines ran out. So they were going to spend money somewhere on an asset. I cannot think of a better country for a coal asset and I am happy that TGA did not try to expand their offering into non coal. The fact that they did (IMHO) a good transaction is both kudos to them and a point toward a higher valuation.
5-Inter related with point 1 above having an out of South Africa supply may make TGA a more reliable source of supply for its international customers. Accepting all coal is not the same I do think this adds to customer confidence that what it orders will get delivered.
6-It is a three year payback. And after this period any upside accrues to TGA.
7-The current TGA portfolio is currently listed as having a 6 year mine life. Based on past history that may be extended. But the Australian mine has a current 16 year life. Extended mine life is a good, possibly very good addition.
In the previous 6 months accounts (period ending June 2022) TGA had an adjusted FCF (their adjustments) of about £420m. Since then there have been a number of notifications about issues with delivery performance (mainly relating to Transnet and Eskom) and the Coal price has significantly decreased.
With the current Market Capitalisation of TGA at a bit over £1.4bn we have TGA itself valued at between 2 and 7 times forward FCF, picking up an asset for 3 times. Which seems to me to be a decent relative transaction price.
So all things considered I think the transaction makes TGA more valuable.
And may the force be with you.
“the definition of a mine is ‘a hole in the ground with a liar standing next to it.” Mark Twain