Thungela shares fall 18%

Casual observers will have been surprised by the nearly 19% drop in the Thungela Resources share price, but they might not have known that Thungela has been trading on a dividend yield (DY) of nearly 50% for the last few weeks – or that the last day to trade to receive the big final dividend of R40 per share for the year to end December had arrived.

The last day to buy shares to get your name on the share register to receive that big dividend was Tuesday (18 April).

The share opened ex-dividend on Wednesday morning.

The market slashed the price by R38 from R204 to R166 per share as new owners will not receive the dividend.

The R38 drop in the share price was exactly equal to the dividend receivable by shareholders net of 20% withholding tax.

Thungela, founded in 2020 when Anglo American unbundled its coal mines into the new entity, has been trading on a high DY for almost a year. Firstly, it declared a high interim dividend of R60 per share, then the final of R40 per share.

Management noted in the final results for the year to end December 2022 that Thungela achieved “exceptional cash generation” during the financial year, despite ongoing load shedding challenges and problems with Transnet’s rail and coal terminal operations.

“This resulted in a net cash position of R14.7 billion at year end, R6 billion up from the prior year. The outstanding results and solid liquidity position allow us to declare a final ordinary cash dividend of R40 per share,” the company noted.

“This final dividend represents returns to Thungela shareholders of R5.6 billion, or 61% of adjusted operating free cash flow generated in the second half of 2022.

“Combined with the 2022 interim dividend of R60 per share, this amounts to a total dividend declared for 2022 of R100 per share, and brings the total returns to Thungela shareholders to R13.8 billion, representing 76% of adjusted operating free cash flow of R18.1 billion for the year.”

Sensitivity

The second reason for the high DY is that the low share price reflects the sensitivity around investing in companies seen to harm the environment. Investors – especially institutional investors – are increasingly forced to shun mining shares, with coal miners at the very top of the list.

In essence, fund managers can avoid a lot of backlash from clients and letters from environmentalists if they simply sell these shares.

However, Casparus Treurnicht, portfolio manager at Gryphon Asset Management, says the share has offered good returns since its unbundling from Anglo American.

“If you bought it when it was spun out of Anglo, you would have made an absolute fortune.

“It’s just these kind of unloved assets where opportunity is,” says Treurnicht.

“It is still trading on a price-earnings ratio of only 1.5 times, just because nobody wants to associate themselves with it. There are a lot of ESG [environmental, social and governance] concerns around it.”

The current share price of R166 compares to a price of less than R90 at the beginning of 2022, equal to a return of 84% in capital appreciation.

The R80 worth of dividends after withholding tax increases the return to 195%.

Change is coming

However, the future looks less promising as far as dividends go. Coal prices have decreased from 2022 levels, load shedding in SA is getting worse, and there is not much hope of any significant improvement with the ports and railways.

Management also mentioned in the last results that things are changing at Thungela due to the R4 billion acquisition of the Ensham coal mine in Australia.

“While the acquisition of the Ensham Business will be paid for from cash on hand at year end, it will materially change the overall structure of the group, including our liquidity needs,” it said.

Read: Thungela to buy controlling stake in Australian mine

“Accordingly, we have secured access to R3.2 billion in credit facilities with leading SA banks to reflect this change, as well as to bolster our resilience against continued poor rail performance by maintaining a sufficient level of liquidity.”

It looks like shareholders should temper their expectations.

Buy or sell?

“Based on where it is trading, this is a classic example of where nobody knows where it’s going,” says Treurnicht.

“But it is probably going to remain cheap.”

For the next few months, investors will have to remember that Thungela has paid its big dividend – because share statistics supplied by the JSE and redistributed by different data vendors will show that the share is on a very high (historic) DY.

That is because the formula to calculate the DY is simply the dividend of the preceding 12 months divided by the ruling share price.

The calculation is backward-looking without taking into account that the dividend has been paid, and without considering next year’s dividend.

In the case of Thungela, the yield will jump to an unrealistic 60%.

This time, a high DY is not an indication of a good buy as it is unlikely that Thungela will pay another big dividend again any time soon.