Since listing in June 2021, Thungella Resources (LSE:TGA) shares have risen by over 500%. They peaked at 1,823p in September last year. Since then, they’ve lost close to 50% of their value. But they’re up 20% compared to March 2022.
However, the company is growing rapidly, and pays generous dividends. This makes me want to investigate further.
What does it do?
Thungella has interests in seven coal mines in South Africa and has no intention of transitioning to clean energy. In September, the directors said unequivocally that they were “not focused on diversification into the renewable energy sector“.
Its future prospects are therefore entirely dependent upon the demand for coal.
The future of coal
More coal was produced in the world last year than ever before. Russia’s invasion of Ukraine led Europe to revert back to dirtier methods of electricity generation.
But the International Energy Agency isn’t expecting a rapid decline in coal production any time soon.
| World coal production | Tonnes (bn) |
| 2022 | 8.318 |
| 2023 (forecast) | 8.365 |
| 2024 (forecast) | 8.267 |
| 2025 (forecast) | 8.223 |
Strong demand has kept coal prices high. In 2021, the average price was $124 per tonne. For the first 11 months of 2022, this more than doubled to $277. For comparison, the current spot price is close to $150.
Results
Unsurprisingly, the financial performance of Thungella mirrors the rising coal price.
| Measure / half-year | 30.6.20 (Rm) | 31.12.20 (Rm) | 30.6.21 (Rm) | 31.12.21 (Rm) | 30.6.22 (Rm) |
| Revenue | 1,657 | 2,093 | 10,046 | 16,236 | 26,176 |
| Profit / (loss) | (122) | (240) | 351 | 6,587 | 9,630 |
| Adjusted operating free cash flow | (248) | (1) | (1,682) | 5,605 | 8,934 |
So it has been able to reward its owners handsomely.
The directors have a policy of returning “at least 30%” of operating free cash flow to shareholders. In its short existence, the company’s paid two dividends. Both of which have significantly exceeded the directors’ target.
| Date paid | Financial year | R (£) per share | % of adjusted operating free cash flow |
| 23 May 2022 | 2021 | 18 (0.91) | 63 |
| 10 October 2022 | 2022 | 60 (3.00) | 92 |
Investors will know before the end of the month what the final dividend will be for 2022. Even if Thungella ‘only’ pays 50% of what it did for the first half, its shares are currently yielding an astonishing 45%. If the dividend is matched, the yield would be a mind-blowing 60%.
It’s important to remember that because the company is based in South Africa, withholding tax (up to 20%) will be deducted from any dividends paid. Also, the dividend is declared in rand, so the exchange rate will have an impact on the amount received in sterling.
What do I think?
Despite the amazing dividend, I’d be nervous about investing in the company. For a start, its product is a pollutant.
Also, Thungella has warned about the poor infrastructure in South Africa. Last year, the country’s railways experienced a 12-day strike. There was also a derailment which took 10 days to clear. This affects the company’s ability to get coal to the port, from where it’s exported.
The country also suffers frequent power cuts.
Both of these factors have adversely impacted production during the second half of 2022. In December, the firm released a trading statement indicating that coal output for 2022 was likely to have been 20% lower than in 2021. Even so, the historically high coal price will compensate for some of the lost production.
Looking forward, the coal price is likely to be closer to 2021 levels. The company’s performance in 2023 is therefore going to be more in line with two years ago, when the dividend was far less generous.
For these reasons, I’m not going to invest at the moment.
