Thungela Resources Limited

Good morning, everyone, and welcome to Tungela's 2023 Interim Results presentation. I'm Ryan Afrika, Head of Investor Relations for Tungela, and I'd like to take a couple of minutes to introduce today's agenda and to explain how the day will run. But before that, please allow me to draw your attention to a couple of disclaimers ahead of today's presentation. While you take a moment to read through the cautionary statement, a reminder that the Interim Results documents are available on the Tungela website, www.tungela.com, and the Results tab of the Investor section. Today's session will be recorded, and the recording will be available on the Tungela website from later this afternoon. The presentation is also available on our website. Moving to today's agenda. Our CEO, Julijn Glovel, will provide an overview of Tungela's 2023 first-off highlights, including how we're tracking on the execution of our strategic priorities. He will also provide insights on safety and discuss how rail performance has impacted the business. Our CFO, Dion Smith, will then talk through the operational financial performance for H1, as well as provide an update and guidance for full year 2023, before July provides a brief update on Ensham and concludes the presentation. This will be followed by a Q&A session to give those on the call and webinar the opportunity to ask questions. Turning to Q&A. For those wishing to ask questions directly, we ask that you please join the session using the conference call facility provided, as we can only take direct questions through this facility. In order to ask a question during the Q&A session, please dial star one on your keypad, and this will register your intention to ask a question. Once the Q&A session starts, the operator will then open your line and ask you to go ahead with your question. For those joining via the webinar, you will have the opportunity to submit questions via text, which will then be read out during the Q&A section. Now, allow me to hand over to our CEO, Julijn Lovo, to take us through Tengele's interim results for 2023.

Thank you, Ryan, and good day to everyone on the call. It's a pleasure to speak to you, our investment community, again. Our purpose to responsibly create value together for a shared future is core to everything that we do as a business. I'm pleased that we continue to deliver on our purpose and to execute our strategic objectives. even in a tough market environment such as the one we have seen in the first half of this year. With that, let's take a closer look at how we've managed to demonstrate resilience in H1. Safety is our first value, and we remain focused on operating a fatality-free business. I am sad to report that Mr. Bruce McClung passed away in February of this year from complications following an accident at Zibolo in December last year. Our thoughts are with his family, his loved ones, and friends. This is a singular reminder that we must be unconditional about safety to ensure that everyone goes home safely every day. Moving to operating and financial performance, We delivered a resilient set of results against backdrop of continued TFR challenges and a sharp decline in thermal core prices. The group produced 6.1 million tons of export-sellable production in H1 this year, similar to our performance in H1 last year. We also shipped 6.3 million tons of export sales, only marginally lower than the 6.5 million tons in the same period last year. as we were impacted severely by poor rail performance in Q1 and 2D railments in May 2023. We showed unique agility to deliver this operational performance in the face of such poor rail performance. Weaker coal prices weighed heavily on our financial performance. These weaker prices are reflected in our earnings and our cash generation. The business generated a profit for the period of 3 billion rand and adjusted operating free cash flow of 4.3 billion rand, significantly lower than the comparative period in H1 last year. Through disciplined capital allocation, we maintained a solid net cash position of 13.6 billion rand at the end of June 2023. In addition to the cash on hand, We also have access to 3.2 billion rand in undrawn credit facilities, providing additional liquidity in what continues to be a volatile market environment. The group's solid liquidity position allowed the board to declare an interim dividend of 10 rand per share. In aggregate, that amounts to a total of 1.4 billion rand returned to shareholders or 33% of adjusted operating free cash flow. We are pleased to reaffirm our dividend policy and to reiterate that we remain focused on creating shareholder value. I want to pause briefly to provide an update on the execution of our strategic objectives. On the previous slide, I discussed the value created for shareholders. We'll contribute R156 million to our employee and community partnership trust as we continue to spike on social. Our ESG approach is holistic and encompasses all elements of ESG. As a result, in April we published our Made in Climate Change report aligned to the recommendations of the Task Force for Climate-Related Financial Disclosures. We have had the opportunity to engage many of our investors on the topic of ESG, and I am encouraged by the positive and constructive feedback we have received. In maximizing the full potential of our existing assets, The Board approved the development of the Zibulo North Shaft Project, which will sustain the Zibulo production profile for a further 10 to 12 years from 2025. We continue to make good progress on the Elders Project, which will replace production from Kurugu as the latter comes to the end of its life. The diversification of our business is well underway, and in February 2023, we announced the acquisition of a controlling shareholding in the Ansham Thermal Core business in Australia. I'm pleased to report that we have made excellent progress on completing the conditions precedent, and we are confident that the transaction will close on 31 August, 2023. Finally, in relation to our strategic priority of optimizing capital allocation, The board reaffirms its dividend policy by paying out 33% of adjusted operating free cash flow. We'll expand on the board's consideration of a share buyback program later in the presentation. Safe to say that our capital allocation has been guided by the funding requirements for Ansham, Zibolo, and Elders. and also the continued uncertainties around market conditions and rail performance. In short, we continue to make good progress on our strategic priorities, and I must emphasize that even though we are facing short-term headwinds, our long-term priorities remain unchanged. Turning to safety, While the total recordable case frequency rate is actually improved in H1 2023, we cannot say that we are pleased with the safety improvement when we have had someone pass away earlier this year. We continue to be unconditional about safety and this business must and will operate fatality free. Moving on to real performance, It has been widely reported that TFI has continued to struggle in the first half of 2023, delivering an annualized industry run rate of only 48 million tons. The first half was a tale of two halves, an exceptionally poor Q1, and an improved stable Q2, despite two derailments in May, which cost the industry 1.5 million tons, and in the case of Tungela, 340,000 tons. This stabilized performance of approximately 50 million tons per annum is given us sufficient confidence to narrow our export saleable production guidance, something Dion will pick up on later in the presentation. Of course, stability at 50 million tons per annum is not enough, and it is imperative that performance improves in the second half of the year towards at least the 60 million tons per annum run rate. The establishment of the National Logistics Crisis Committee is a positive step in the direction of Transnet meeting its contractual obligations. And the efforts to improve security and infrastructure performance continue relentlessly and should see TFR continue to improve towards the 60 million ton per annum tempo over time. Improving performance beyond 60 million tons per annum will require the return of the long-standing locomotives to the coal line. And this is dependent on resolution of the impasse between Transnet and its Chinese supplier, CRRC. We remain encouraged by the discussion between the parties to find a solution. The continued TFR underperformance coupled with lower benchmark core prices have weighed heavily on our performance so far. While we expect both of these factors to improve over time, we must ensure that we are resilient to these short-term conditions, but also that we are ready to take advantage of improved prices and rail performance when they arise. The work to make our portfolio resilient is informed by four factors. Firstly, our expectation of TFR rail performance We have responded to rail constraints by high grading our product to ensure that high-margin coal is railed. We've also curtailed production in response to lower rail performance. You may recall that previously we curtailed production at Kwesela, but we've now decided to ramp up Kwesela and to rather curtail production through the removal of three underground sections which are starting to face increasingly complex geology. Secondly, the extent to which we are able to realize productivity improvements. Improving the competitiveness of the portfolio will underpin the resilience and readiness of the business into the future. And we've embarked on several initiatives aimed at increasing productivity. while also instituting targeted measures to ensure the correct cost base for the revised portfolio. Third, we must consider the long-term fundamentals of the coal market. These fundamentals remain robust, And coal will continue to play an important part in the global energy mix, especially in our traditional export markets in Asia, where both China and India continue to add to their coal-fired power station fleet. This robust demand is set to continue against an ever tightening supply environment. with core emerging as a chronically under-invested industry. We expect the combination of these factors to be price supportive, though we continue to plan our business using the bottom-up analysis developed by Hoodmark, which arrives at a long-term price of approximately $90 per ton for API4. And lastly, we invest through the cycle in our projects, Elders, Zibulo, and Ensham. These key investments will improve the quality and competitiveness of our portfolio. Our ability to deliver on these priorities whilst protecting the business requires a strong balance sheet and liquidity position. Disciplined capital allocation will be key to navigating the conditions we are currently facing without having to take significant value destructive decisions. I must have a point that should prices weaken further for a protected period of time, and we don't see any material and sustained improvement in the real performance, we may have to consider changes to the size and shape of our portfolio. We are confident in our ability to weather the challenging market conditions we are currently facing while remaining focused on safety and executing on our strategy. Let me now hand over to Dion to take us through the numbers for the second half of the year.

Thank you very much, July. We are pleased to present a set of interim results for the period ended 30 June 2023 that demonstrates Tungela's ability to navigate the current challenging marketing conditions resulting from softer coal prices and continued underperformance by TFR. Net profit for the period was R3 billion compared to R9.6 billion in the first half of 2022, and we recorded an adjusted EBITDA of R4.4 billion compared to R16.7 billion in the first half of 2022. These earnings numbers are mainly due to lower realised export coal prices, and I'll get onto that a bit later. Export saleable production of 6.1 million tonnes is in line with the previous year, while the FOB cost per export tonne, excluding royalties, has increased to 1,139 compared to 927 per tonne in the first half of 2022. Again, we will unpack this later in the presentation. Our earnings per share for the reporting period came in at 22.45 compared to 67.23 in the first half of 2022. This financial performance has, as July mentioned, enabled us to declare an interim dividend of 10 Rand per share, which equates to approximately 1.4 billion Rand, or 33% of adjusted operating free cash flow for the first six months. Reflecting on benchmark coal price, after seeing record prices last year, we have seen a significant drop in the coal price since then. the average coal price has dropped to 129.50 per tonne in the first half of 2023, compared to 276.54 per tonne in the comparative period. Global economic pressures and high gas and coal stocks in key demand regions put downward pressure on coal prices in the first half. This is especially prevalent in Europe, where we are seeing higher pre-winter stock levels across gas and coal. South African exports have also faced increased competition from Russian coal into India, China, and surprisingly, even South Korea. We are now starting to see some green shoots for price support as China is securing increased LNG volumes, which should improve gas prices and reaffirm coal's competitive position in the energy mix. As anticipated, the discount to the benchmark coal price has widened slightly to 18% in the first half of 2023 compared to 15% in 2022. So the widening of the discount was primarily due to the time lag between when discounts are concluded in absolute dollar terms and the time of delivery when cargoes are referenced to the monthly benchmark coal price. which in this period of declining prices resulted in higher percentage discounts. For clarity, this could have been higher in a different product mix environment. But in terms of the off-take agreement with Anglo-American, the grade discounts are agreed in absolute US dollar terms at the time that the order is placed. Meanwhile, the price we receive for coal... depends on the average coal price during the month of delivery. So this means that if coal prices drop quickly, the fixed US dollar discount can end up as a significantly higher portion of the coal price at date of delivery. So should prices remain at the current levels, we therefore expect the discount to narrow marginally in the second half of this year. Turning to operational performance, at the start of 2023 we had approximately 3.2 million tonnes of stock at operations and approximately half a million at the port. As mentioned earlier, we produced 6.1 million tonnes of export sale or production and recorded 6.3 million tonnes of export sales in the reporting period. The export sales were enabled by the TFR rail performance of 6.2 million tonnes in the first six months of 2023 compared to 6.5 in the comparative period. The 300,000 tonne reduction in rail performance compared to the first half of 2022 is coincidentally the same as the rail volumes we lost as a result of the derailment in 2023, which implies a like-for-like rail run rate compared to the prior period. As we manage high stockpile levels across our mines, we continue to truck coal between operations and to third-party sidings. In addition, during the first half of this year, we executed approximately 400,000 tons of what we call free-on-truck domestic cells of lower quality stock to further alleviate stockpile pressure. This resulted in the lowering of our stockpiles across the operations to 2.7 million tonnes as at the end of June 2023, while stock at the port is reduced to approximately 400,000 tonnes. If we now look at our unit cost, our FOB cost per export tonne was 1,166, and excluding royalties, 1,139 per tonne, compared to 927 in the first half of 2022, which is within the guidance we previously communicated. You'll recall that in 2022, we saw a significant increase in inflation, particularly in the second half of the year, which was driven by the Russia-Ukraine conflict. Therefore, comparing the period-on-period cost, we have seen significant increases in explosives, electricity, and coincidentally also rail costs. At the same time, we saw the benefit of higher energy-related costs in our coal price. Despite the subsequent decline in coal prices, we have not seen a decrease in these energy-related costs. As July mentioned, we have reduced three underground mining sections, one each at Zebulu, Greenside and Godewa. And as a result, we have reduced the associated variable costs for each of these sections, but continued to carry the fixed costs as we've opted to redeploy staff. You may recall that revenue from our domestic product sales, which is normally margin neutral, is deducted from our operating costs in calculating FOB unit costs. The lower coal prices and resulted lower revenue applied to some of these domestic sales resulted in a headwind to our unit costs in the first half of the year compared to last year's first half. In addition, we have had lower than planned sales from Easy Vanilla resulting in a further lower domestic revenue offset to operating costs. I'll reflect on our full year cost outlook shortly, safe to say that we have initiated a number of cost curtailment projects to offset the headwinds we have faced during this period. In reconciling adjusted EBITDA of 16.7 billion in H1 2022 to the 4.4 billion recorded in the first six months of 2023, the largest impact is the result of lower realized export prices marginally offset by weakening of the RAND. We have already covered the impact of inflation and costs over the period on period. Export sales have further impacted earnings by 600 million RAND. Contributions to trusts as a result of the group's performance in 2022 and pay to beneficiaries in the first half of 2023 led to expenses totaling 400 million in the first half of this year, compared to 145 million in the prior period, driving the 250-odd million rand variance you see on the slide. In the first half of 2023, we have spent almost 900 million rand in capital expenditure, which represents approximately one-third of the full-year CAPEX bill. Of the CAPEX spent in the first half, 444 million rand has been spent on sustaining capital, while 449 million was spent on expansionary capital, mainly relating to the Elders project. We have also provided guidance on the expected cash flow for the Zebulu North Shaft project, which was approved by the Board in Q2 of this year. The Zebulu North Shaft project is expected to cost approximately 2.4 billion rand and will be completed by 2026. This project will extend the life of the Zebulu underground operation by approximately 10 years, producing up to 8 million tonnes per annum of run of mine coal. As in the previous years, our sustaining capital expenditure is typically skewed towards the second half of the year. In 2023, this is even more pronounced. This elders spend will ramp up in the second half of the year in line with our project plans. Looking at our cash position, you will recall the net cash balance of 14.7 billion as at 31 December 2022. During the first six months of 2023, we paid our dividends of 5.5 billion rand. We generated cash from operations of 4.8 billion for the first six months of 2023, compared to 15.2 billion for the same period last year. Further movements in the reporting period include the unwind of working capital of R747 million, which is driven by a reduction in the trade receivables. Then, as we've discussed, we also spent R893 million on capital in the first half, which brings our net cash position to R13.6 billion at the end of June 2023. The Board reaffirms Tungela's dividend policy by declaring a dividend of R10 per share, or R1.4 billion in aggregate. So that represents, as I said earlier, 33% of adjusted operating free cash flow, slightly higher than the stated policy, which is to target a minimum payout of at least 30% of adjusted operating free cash flow. This commitment is underpinned by the group's flexible balance sheet position and is in line with our capital allocation framework. Let's look now at the uses of net cash balance. As July pointed out earlier, our long-term priorities remain unchanged. And for this reason, it is imperative that we continue to fund our strategic capital projects, so that's elders, and Zebulun North Shaft through the cycle. A total of 3.8 billion remains to be spent on these projects, and we have thus reserved the sum as to avoid any value-destructive interruptions to the execution of these large capital projects. Completion of the Ensham transaction is also imminent, and we have therefore reserved that cash for this acquisition. The acquisition cost will be offset by the lockbox mechanism in place since 1 Jan 2023, although the exact figure will only be determined about three months after completion. We therefore have a total of $7.2 billion in cash already committed towards Elders, Zebulunorschaft and Ensham, so projects that will not only enhance the quality of our portfolio but also extend the life of our business. If we then deduct the $1.4 billion dividend to be paid to shareholders and the resultant $156 million to be paid to the Trust, this leaves us with a cash balance of approximately $4.8 billion assuming end of June. When considered together with the undrawn credit facilities of $3.2 billion, we believe that this to be an appropriate level of balance sheet flexibility in light of continued market and rail volatility. The difference between the approach we've communicated before and where we are now is that previously we said that we would fund Elders and Zabulu North from continuing cash generation from operations. However, the volatility in prices and uncertainty about the timing of the rail recovery means that it's now prudent to reserve cash to fund these near-term capital commitments. This required level of balance sheet flexibility is also an important factor when we consider a potential share buyback. We remain cautious as we evaluate a potential buyback given the continued uncertainty and dependency on various factors, most notably our exposure to TFR's performance. For clarity, we must ensure that the group has sufficient balance sheet flexibility to weather short-term headwinds whilst continuing to invest through the cycle. Then, we also need a degree of comfort on both the speed and magnitude of a recovery in both prices and rail performance. Given the continued uncertainty relating to these factors currently, the Board is of the opinion that a more cautious approach would be to wait for further clarity in order to execute a share buyback program that delivers long-term value for shareholders. If we unpack what I referred to in the previous slide just for a minute, we've consistently said that given limited pools of capital available to coal-focused miners, we believe that it's appropriate to maintain a degree of balance sheet flexibility sufficient to manage the business and invest in our strategic projects through periods of volatility. Remain of the opinion that it is appropriate to retain cash of approximately $5 billion in addition to the undrawn facilities. I want to focus on the $5.2 billion surplus cash on the left-hand side of the graph. We can ignore the interim amount here as it would be reserved under both scenarios given the imminent funding requirement. The difference between the graphs on the left and the right hand side respectively demonstrate the subtle change in approach necessitated by softer although volatile prices and variable rail performance on the part of TFR. The confluence of these factors has necessitated a more cautious approach, and we have accordingly resolved to fund approved projects where the spend is ongoing and highly certain from cash on hand rather than from future cash generation. The Board has not taken this decision lightly, but experience has taught us the importance of avoiding any interruptions or risk material value erosion to large capital projects that are critical to the future of the business. It is for this reason that we have opted to galvanise the funding required to execute Elders and Zabuda Northsoft as planned. As I commented earlier, the Board has not ruled out the option of a buyback, and should we see market conditions, in particular TFR's performance improve on a sustainable basis, at the same time that we're comfortable with our balance sheet position, we may opt to execute a buyback in the future. If we now turn our focus to the guidance for 2023, as July mentioned, we have updated our operational outlook for the 2023 year based on operations of the first six months of the year, and the range for export saleable production is accordingly narrowed to between 11.5 and 12.5 million tonnes. So achieving the lower end of that guidance range requires an annualised TFR industry run rate of only 47 million tonnes in the second half of the year, while the upper end requires a run rate of approximately 54 million tonnes per annum. Our guidance for FOB cost for 2023 has been revised to between R1,120 and R1,200 excluding royalties. Including royalties, the guidance range is revised to between $1,170 and $1,250 per tonne, using a forecast benchmark coal price just about $100 per tonne. This increase is primarily due to a lower domestic by-product revenue, offset from both Isibanela and Mafubeh. The 2023 cost guidance provided also reflects the impact of the reduction in underground sections, which we've already taken out during this year, as well as the yield loss on export coal washed sweeter. Our sustaining capital expenditure guidance for 2023 is maintained at between R1.3 billion and R1.5 billion. Expansionary capex is expected to be between 1.6 and 1.8 billion rand, relating primarily to the 1.2 billion for elders and 600 million for the Zibulu North Shaft project. The guidance for 2023 still excludes the NSHIM business, and we will accordingly only provide guidance after completion of the transaction. But with that, let me hand back to July for an update on that transaction and some closing remarks. Thanks, July.