Thungela Resources Limited

Good day everyone and welcome to Tungela's 2024 interim results presentation for the six months ended 30 June 2024. I'm Hugo Nunes, Head of Investor Relations for Tungela and I would like to take a couple of minutes to introduce today's agenda and to explain how this event will run. Our CEO Julijn Glovel will share the highlights for the first half of 2024. Our CFO Dionne Smith will then talk through the financial and operational results for the period under review, as well as provide an update on guidance. This will be followed by July concluding the presentation. We will then open up the Q&A session, providing 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 facility conference call 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 1 on your keyboard, and this will register your intention to ask a question. Once a 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 session. Now, please allow me to hand over to our CEO, Julijn Glover.

Thanks, Hugo, and thank you to everyone on the call. I'm pleased to share with you Tungela's 2024 interim results that demonstrate our track record of executing on our strategic priorities as we build a long-life competitive business. We remain steadfast in our focus on controlling the controllables. On safety, we are unwavering in our commitment to operate a fatality-free business and are proud to report that have been operating for 18 months without a loss of life. In South Africa, we also achieved our lowest total recordable case frequency rate of 0.99, down from 1.4 in 2023. Operational performance for the first six months of the year is in line with 2024 guidance in South Africa and is ahead of full year guidance in Australia. And as a result, we are upgrading the production guidance at Ensham. Group export-sellable production is at 7.8 million tonnes, up from 6.1 million tonnes last year. We are particularly pleased with the strong operational performance at Ensham, producing 1.6 million tonnes of export-sellable production on an 85% basis, or 1.9 million tonnes on a 100% basis. Group capital expenditure ramped up to 1.5 billion rand, reflecting the disciplined execution of our two life extension projects in South Africa, Bing Elders and Zibulo North Shaft. These projects remain on track and on budget. These projects are key to improving our long-term competitiveness as some of our older mines come to the end of their lives over the next couple of years. The operating environment in the first half was challenging. External factors such as the softer core prices that have steadily declined from the record high seen in 2022, compounded by the underperformance of Transnet freight rail, negatively impacted our financial results in comparison to the same period last year. We are reporting a profit of 1.2 billion rand for the period. One of our highlights, as you will see, is our Australian operation Ensham, which has delivered solid performance, contributing nearly one-third to our profit, exceeding our expectations and justifying the group's geographic diversification strategy. We generated 936 million rand in adjusted operating free cash flow, which resulted in a net cash position of R6.7 billion at 30 June 2024. These results have allowed us to declare an interim ordinary cash dividend of R281 million, or two rand per share. In addition, the Board has approved a share buyback of up to R160 million. This amounts to shareholder returns of R141 million, representing 47% of adjusted operating free cash flow. The Sisonke Employee Scheme and the Nkulo Community Partnership Trust will also receive together a collective R31 million. Dion will walk you through the financial details in a moment. Our increased focus on accountability, safety culture, and third-party reviews to improve critical control effectiveness is delivering meaningful safety improvements. In Australia, the total recordable case frequency rate significantly improved to 11.64 from 22.63 ended December 2023, reflecting proactive efforts to align ancient safety systems with Tungela's work practices where it is appropriate. Coming to our life extension projects, our two life extension projects at Elders and the Zibulo North Shaft remain on track and on budget. At Elders we have spent R1.4 billion to date. we expect to spend approximately 350 million rand in the second half of this year, and a further 100 million rand in 2025. As a result, anticipated total cost has been revised down to 1.9 billion rand from 2 billion rand. At Zibula North Shaft, we have spent 1.1 billion rand to date, with approximately 740 million rand to be spent in the second half of this year. and 510 million run to be spent in 2025 and 2026. The Elders and Zimbolo North Shaft Extension Project will extend our life of mine for the South African operations from the initial eight years at listing in 2021 to approximately 15 years. Just to be clear, 2024 was always going to be our peak funding in terms of our projects. Let's just reflect on the one key constraint to our South African business. There's been little improvement in TFR performance at 47.3 million tons on an annualized basis for the industry in comparison to 47.9 million rand railed in 2023. The single biggest impact was the two derailments which accounted for approximately 600,000 tons of lost export equity sales for Tungela. The South African coal industry, including Tungela, continues to support TFR initiatives to improve performance, such as the deployment of security on the rail line, the acquisition of critical space for the locomotives, and the provision of assistance when derailments occur on the line. These costs continue to be recovered through the mutual cooperation agreement between Transnet and the industry. While we believe that the correct building blocks are being implemented by TFR, we only expect to see improved rail performance from 2025. I must, however, acknowledge the new Transnet leadership's effort and commitment to improving performance. I would like to pause a little bit on the market. A number of factors continue to impact short-term demand and pricing. A key factor which followed the surge in coal prices at the onset of the Russia-Ukraine conflict remains the energy security for countries. Geopolitics will continue to impact the energy complex and result in volatility in supply and pricing of these commodities, as well as country and company ESG commitments. As we enter the winter season in the northern hemisphere, We expect gas and coal restocking to commence, even though a number of countries at fairly high coal and gas stocks coming the end of the current summer. It is widely expected that the southern hemisphere will experience La Nina conditions during the summer months in late 2024 and early 2025. The higher rainfall will potentially impact coal supply regions such as South Africa, Australia and Colombia, which is expected to support short-term pricing. The global economic impact, such as the weakening or strengthening of currencies, also influences coal pricing and demand. However, we believe that the long-term fundamentals of coal remain robust, supporting our strategic framework. So with that, let's turn to the long-term fundamentals. First, our marketing business, Tungela Marketing International, is fully operational in Dubai and is responsible for the marketing of our South African and Australian coal. The establishment of our own marketing function and business positions us closer to the key demand markets while capturing the full margin on our products. Global demand for coal reached a record high of 8.7 billion tonnes in 2023. Despite the decline in coal use in the United States and Europe, coal remains a crucial energy source for electricity, steel and cement production worldwide. The increasing demand from emerging markets therefore continues to outweigh the efforts to phase out coal globally. In addition, we continue to see the energy transition further delayed, as energy security considerations become a priority amidst geopolitical tensions and potential supply disruptions. Supply will be impacted by restrictive ESG policies and limited access to capital and insurance, which will discourage new production coming online. These factors provide an opportunity for Tungela is we have access to existing high quality core reserves and resources. With that, let me hand over to Dion Smith to take us through the detailed financial and operational performance.

Dion. Thank you, July, and to those online for making the time to dial into our interim results presentation. So we are pleased to present a set of financial results that demonstrates Tungela's ability to navigate challenging marketing conditions resulting from softer coal prices and continued underperformance by TFR in South Africa. As a reminder, the 2023 first half results do not include Australia as the effective date of the acquisition was 31 August 2023. Adjusted EBITDA for the period was 2.1 billion Rand compared to 4.4 in the first half of 2023, with Ensham contributing approximately 1 billion Rand for the first six months of this year. Net profit is reported at 1.2 billion Rand compared to 3 billion Rand in the comparative period. Year-on-year decrease was mainly due to lower coal prices, but we'll unpack this a little later today. The group generated cash flows from operating activities of 1.7 billion rand in the first half of 2024. And after investment in sustaining capital of just over 700 million, this resulted in adjusted operating free cash flow of just under a billion rand for the reporting period. While I'll unpack net cash in more detail later in the presentation, our net cash at the end of the period was reported at 6.7 billion rand. During the reporting period, we distributed $1.8 billion to shareholders through cash dividends and the share buyback. Our share buyback resulted in around 2.35% of our issued share capital being acquired in the market and being held as Treasury shares. Given the timing of the share buyback, the impact on earnings per share will be more pronounced in the second half of 2024 and obviously from 2025 onwards. Our earnings per share for the period was around $9.52. So that is at the upper end of the range we provided in the pre-close in June, mainly due to the favourable mark-to-market movements on forward exchange contracts at the end of June. So we remain committed to our stated dividend policy, which is, as July just mentioned, to distribute a minimum of 30% of adjusted operating fee cash flow to shareholders. The Board has declared an ordinary cash dividend of $2 per share and also approved a share buyback of up to 160 million rand, and that's obviously subject to favourable market conditions. In aggregate, this amounts to a total return of 441 million rand to shareholders, and that represents just shy of 50% of our adjusted operating free cash flow for the first half of 2024. The share buyback is expected to be completed during the second half, and that's pursuant to the authority that we obtained at the Group's most recent AGM in early June. 2024 the financial outcomes are based on the following operational results as july said earlier we continue to control the controllables best we can and our operational performance is not only in line with guidance but in some instances likely to exceed guidance Export saleable production was recorded at 7.8 million tonnes for the group. We achieved 6.2 in South Africa, which is marginally higher than the 6.1 million tonnes in June 2023. The increase was mainly due to improvements in production and output from operations that you might recall previously were constrained due to stockpile challenges. Ensham had particularly strong performance and recorded production on an 85% basis of 1.6 million tonnes. On a 100% basis that's 1.9 million tonnes for the first half of the year. Export equity sales from South Africa was 6 million tonnes and export sales from Ensham 2.1 million. That's obviously on a 100% basis. South Africa recorded a FOB cost per export tonne, excluding royalties, of R1,189, and Incheon recorded an FOB cost per export tonne of R1,360, excluding royalties. Sustaining capital expenditure was just over R700 million, of which two-thirds were spent in South Africa and one-third in Australia. Expansionary capex ramped up to approximately 800 million rand as we make progress on our two ongoing life extension projects that July mentioned earlier. Production in South Africa is at the upper end of a guidance range of between 11.5 and 12.5 for the full year And unit cost is the low end of the guidance, and that's mainly due to this higher production run rate, but also continued cost control across operations. Engine production is above the upper end of the guidance range of between 3.2 million tonnes and 3.5 for the full year. And the unit cost is also below guidance, also due to higher production and number of cash cost improvements. So if we now reflect on the markets that we operate in, energy prices continue to soften over the first half of 2024, driven by a milder winter in the northern hemisphere and also coupled with high coal and gas stocks. Support in the Asian region was driven by restocking activity ahead of the summer season. Reflecting on our coal price graph, The Richards Bay benchmark coal prices averaged $101 per tonne in the first half of 2024 compared to $129 per tonne in last year's first half. We achieved an average discount on the Richards Bay coal price of 15% in the first half of 2024. This compares to 14% for the full year 2023, notwithstanding the sale of lower quality coal in our export sales mix in the current period. Our export sales mix is likely to have a higher quality coal in the second half of the year, as we've now sold most of the historically lower quality stocks that we accumulated in periods we were unable to rail all of our production. The average Newcastle coal price for the first half of 2024 was $131 per tonne compared to the $204 per tonne in the first half of 2023. The average achieved coal price for Incheon was approximately $119 a ton, representing a discount of 9% to the benchmark. This discount is wider than previously observed and expected, given buyers' and customers' views that there's a disconnect between new benchmark and the actual demand and supply of coal during the period, and I'll unpack that a bit later on again. We either expect discounts to narrow slightly in the second half of the year, Approximately 20% of the sales from Enshim in the period are price-based, the Japanese reference price, which has yet to be settled in the market for 2024. Our South African stock levels decreased by approximately 200,000 tonnes, mainly due to free-on-truck sales as rail performance continued to constrain our export sales. These free-on-truck sales were concluded at prices well below export prices at RBCT and therefore represent a margin enhancement opportunity for the South African business in the future. That's clearly once TFR constraints are resolved. The derailments coupled with strong June sales months resulted in fairly low port stocks at the end of June 2024. The Incheon mine produced 1.6 million tonnes of export saleable production on an 85% basis following the introduction of a fifth mining unit on approval of licenses which allowed us to expand the operational footprint of that mine. We also purchased approximately 300,000 tons of equity coal from our JV participant representing 15% of Ensham's production. The annualized production run rate for the first half of the year at around 3.8 million tons on a 100% basis demonstrates an annualized run rate improvement of 40% compared to the run rate of 2.7 million tonnes when we took operational control of Incheon in September 2023. As a result of the strong production momentum and our continued focus on productivity improvement, this has resulted in an upward revision of our full year production guidance. Turning our focus to operating costs for the first half of 2024, increased by R5.2 billion compared to the first half of 2023, with inclusion of Ensham's operating costs of R4.2 billion for the period. Operating costs in South Africa increased by R917 million, or 9%, driven by inflation, approximately 6.4%, and higher inventory drawdown compared to the first half of 2023, around R600 million. million rand. Production costs reduced due to the curtailment of production in 2023 and the transitioning of the Ritvlei mine to Keran maintenance during the early parts of 2024. The purchase of third party coal to fulfil contractual sales obligations was necessitated following the timing of two derailments by TFR. On a unit cost basis, the FOB cost per export tonne for South Africa, whilst at the lower end of our guidance, increased to R1,189 excluding royalties. This increase was mainly due to inflation of approximately 6.5% compared with the impact of the lower domestic sales revenue offset. We also recorded above inflation cost increases on a per unit selling expense across both rail and port. We earlier mentioned the R4.2 billion operating cost at Incheon for the first half of the year. The on-mine cash costs were R2.1 billion, of which 29% is spent on employee-related costs. Royalties on a per-tonne basis, around AU$22 per tonne, were slightly higher than anticipated due to a portion of the coal sales invoiced at the 2023 Japanese reference price of $199 per tonne. We accordingly expect a realty credit in the second half of the year. Logistics costs are approximately AU$28 per tonne and we expect it to reduce in the second half of the year following the successful price renegotiations with the rail operator. Looking at costs at Ensham, we have made good progress in identifying a number of contracts where we have been able to negotiate better rates. These benefits will come through in the second half of the year. The group generated adjusted EBITDA of R2.1 billion for the first half of 2024, with NSHIM contributing approximately 48% in the period under review. The adjusted EBITDA margin for South Africa was approximately 10%, whilst NSHIM margin was 21% for the reporting period. The decline in earnings in South Africa was mainly driven by lower realised prices, which partially offset the weaker exchange rate and lower royalty expenses. The earnings headwinds previously discussed include the impact of inflation, as well as increases in selling expenses, notwithstanding lower sales volumes. The lower production costs offset some of the headwinds we experienced during this period. So let us now turn to working capital. So the release of approximately 300 million during the first half of the year was mainly due to the inventory drawdown offset by higher receivables due to comparatively higher Ensham sales in June 2024. Payables are higher mainly due to a portion of the Ensham coal sales recorded at the 2023 Japanese reference price of $199 per tonne, which is higher than expected prices in 2024. While we have invoiced these sales and received cash from our customers at the 2023 settled price of $199 per tonne, revenue has been recognised at the spot price on 30 June 2024 of $133 per tonne. So once the 2024 prices settled, revenue will be adjusted to reflect the settled price, while the cash received above will be settled and repaid. The slide on the screen aims to unpack net cash and the movement since December 2023. You will recall that at 31 December 2023, the net cash balance was 10.2 billion rand. You also recall that when we announced our 23 full year results, we declared a final dividend of about 1.4 billion rand, as well as a share buyback of up to 500 million rand. So we've therefore collectively distributed approximately 1.8 billion rand to shareholders in the first six months of the year. For the first six months of 2024, we then generated the 1.7 billion rand in net cash from operating activities. Of this, at the end of the period, we reserved 815 million rand to refund potentially ancient customers who were charged at the higher Japanese reference price, pending conclusion of the 2024 prices. We also continue to invest in the business. We've spent approximately 700 million on sustaining CAPEX and a further 800 million on the life extension projects in the reporting period. In addition, we made a significant contribution of 855 million rand as cash collateral into an escrow account to secure the environmental guarantees in Australia, which has enabled the transfer of the mining tenements to Tungela during the period. The amount of cash collateral is higher than we had anticipated and it's linked to the current licenses at Ensham. This cash collateral will however be revisited as soon as we secure the third and final mining license expected during 2025, which will extend the life of Ensham to approximately 2038, allowing for a longer period to build up the cash collateral. As a result of these cash movements, the net cash balance at 30 June was R6.7 billion. Tungela has a clear capital allocation framework which seeks to prioritise returns to shareholders while collateralising our environmental liabilities over time. Our dividend policy, which is to maintain a dividend power of at least 30% of adjusted operating free cash flow as a base dividend, is the core principle of this framework. As mentioned earlier, total SHELDA returns are R441 million. So a combination of the interim dividend of R2 a share and the share buyback of up to R160 million represents close to 50% of our adjusted operating free cash flow. Given the ongoing funding requirements for Elders and Zabulu North Shaft life extension projects, we continue to reserve R1.7 billion to complete these projects. This amount reflects the revised cost to complete of this project which July mentioned earlier. We will also reserve a further R120 million for environmental liability cash contributions in the second half. As a result of the dividend declaration the cash buffer will reduce to approximately R4.4 billion which is within the range we remain comfortable with to operate given the current point in the price cycle. 2024 guidance remains unchanged other than the production upgrade at Ensham following the strong production in the first half of the year, where we are increasing the production guidance to between 3.5 million tonnes and 3.8 million tonnes on a 100% basis. Although we are expecting to traverse two geological faults in the second half of the year, we are currently planning the optimal deployment of production sections with the inclusion of a fault crew to maintain the current production momentum. While we expect higher production at Ensham and a result in lower unit costs, we maintain a slightly conservative stance on the guidance as we anticipate non-cash costs relating to rehabilitation liabilities to potentially impact the cost per tonne as we reported. These rehabilitation costs will be more clearly defined in the second half of 2024. We are therefore keeping the Ensham FOB cost per tonne unchanged. So with that, let me hand back to July to wrap up for us.