TNGRF - Thungela Resources Limited (TNGRF) Q2 2023 Earnings Call Transcript
2023-08-21 21:30:10 ET
Thungela Resources Limited (TNGRF)
Q2 2023 Earnings Conference Call
August 21, 2023 6:00 AM ET
Company Participants
Ryan Africa - Head of Investor Relations
July Ndlovu - Chief Executive Officer
Deon Smith - Chief Financial Officer
Conference Call Participants
Brian Morgan - RMB Morgan Stanley
Tim Clark - SBG Securities
Ben Davis - Liberum
Tebello Lebesa - Nedbank
Presentation
Ryan Africa
Good morning, everyone, and welcome to Thungela's 2023 Interim Results presentation. I'm Ryan Africa, Head of Investor Relations for Thungela, and I'd like to take a couple of minutes to introduce today's agenda and to explain our today order.
But before that, please allow me to draw your attention to a couple of disclaimers at 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 Thungela website, www.thungela.com, and the results tab of the Investors section. Today's session will be recorded, and the recording will be available on the Thungela website from later this afternoon. The presentation is also available on our website.
Moving to today's agenda. Our CEO, July Ndlovu, will provide an overview of Thungela's 2023 1st half highlights, including how we're tracking and the execution of our strategic priorities. He will also provide insights on safety and discuss how rail performance has impacted the business. Our CFO, Deon Smith, will then talk through the operational financial performance for H1 as well as provide an update on guidance for full-year 2023, before July provides a brief update on interim 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. [Operator Instructions] 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, July Ndlovu, to take us through Thungela's interim results for 2023.
July Ndlovu
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 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. Breeze Mahlangu passed away in February of this year from complications following an accident at Zibulo 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 the backdrop of continued TFR challenges and a sharp decline in thermal coal prices. The group produced 6.1 million tonnes of export saleable production in H1 this year, similar to our performance in H1 last year. We also shipped 6.3 million tonnes of export sales, only marginally lower than the 6.5 million tonnes in the same period last year. As we're impacted severely by poor rail performance in Q1 and two derailments 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 ZAR3 billion and adjusted operating free cash flow of ZAR4.3 billion, significantly lower than the comparative period in H1 last year.
Through disciplined capital allocation, we maintained a solid net cash position of ZAR13.6 billion at the end of June 2023. In addition to the cash on hand, we also have access to ZAR3.2 billion 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 ZAR10 per share. In aggregate, that amounts to a total of ZAR1.4 billion 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, who will contribute ZAR156 million to our employee and community partnership trust as we continue to spike on social. Our ESG approach is holistic. It 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 Goedehoop as the latter comes to the end of his life. The diversification of our business is well underway. And in February 2023, we announced the acquisition of a controlling shareholding in the Ensham 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 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 Ensham, Zibulo 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 passed away earlier this year. We continue to be unconditional about safety, and this business must and will operate fatality-free.
Moving on to rail performance. It has been widely reported that TFR has continued to struggle in the first-half of 2023, delivering an annualized industry run rate of only 48 million tonnes. 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 tonnes and, in the case of Thungela, 340,000 tonnes. This stabilized performance of approximately 50 million tonnes per annum has given us sufficient confidence to narrow our export saleable production guidance, something Deon will pick up on later in the presentation. Of course, the ability of 50 million tonnes 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 tonnes 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 therefore, to improve security and infrastructure performance continue relentlessly. And should see TFR continue to improve towards the 60 million tonne per annum tempo over time. Improving performance beyond 60 million tonnes per annum will require the return of the long-standing locomotives to the core 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 coal 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 Khwezela, but we've now decided to ramp up Khwezela 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 continue -- 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 coal imaging as a chronically underinvested 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 [WoodMac's] (ph), which arises at a long-term price of approximately $90 per tonne 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 this priority is 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-disruptive decisions.
I must also have a point that should prices weaken further for a productive period of time, and we don't see any material and sustained improvement in the rail 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 Deon to take us through the numbers for the second half of the year.
Deon Smith
Thank you very much, July. We are pleased to present a set of interim results for the period ended 30 June 2023 that demonstrates Thungela's ability to navigate the current challenging market conditions resulting from softer coal prices and continued underperformance by TFR.
Net profit for the period was ZAR3 billion compared to ZAR9.6 billion in the first-half of 2022, and we recorded an adjusted EBITDA of ZAR4.4 billion compared to ZAR16.7 billion in the first half of '22. These earnings numbers are lower mainly due to lower realized export coal prices, and I'll get on to 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 ton, excluding royalties, has increased to ZAR1,139 compared to ZAR927 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 ZAR22.45 compared to ZAR67.3 in the first half of 2022. This financial performance has, as July mentioned, enabled us to declare an interim dividend of ZAR10 per share, which equates to approximately ZAR1.4 billion or 33% of adjusted operating free cash flow for the first 6 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 prewinter stock levels across gas and coal.
South African exports have also faced increased competition from Russian coal into India, China and, surprisingly, even in 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 '23 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 offtake agreement with Anglo American, the grade discounts are agreed in absolute U.S. 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 U.S. 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 0.5 million at the port. As mentioned earlier, we produced 6.1 million tonnes of export saleable production and recorded 6.3 million tonne of export sales in the reporting period.
The export sales were enabled by the TFRL performance of 6.2 million tonnes in the first six months of 2023, compared to 6.5 million 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 track coal between operations and to third-party sidings. In addition, during the first-half of this year, we executed approximately 400,000 tonnes of what we call free on truck domestic sales 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 of 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 ZAR1,166, and excluding royalties, ZAR1,139 per tonne, compared to ZAR927 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, coincidentally also rail costs.
At the same time, we also -- 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 Zibulo, Greenside and Goedehoop, and as a result, we have reduced the associated variable costs for each of these sections, but continue to carry the fixed cost 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 and calculating FOB unit cost. The lower coal prices and resulted lower revenue applied to some of these domestic sales resulted in a headwind to our unit cost in the first-half of the year, compared to last year first-half. In addition, we have had lower-than-planned sales from Isibonelo resulting in a further low revenue offset to operating costs.
I'll reflect on our full-year cost outlook shortly, so 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 ZAR16.7 billion in H1 2022 to the ZAR4.4 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 ZAR600 million.
Contributions to trusts as a result of the Group's performance in 2022 and paid to beneficiaries in the first-half of 2023 led to expenses totaling ZAR400 million in the first-half of this year, compared to ZAR145 million in the prior period, driving the ZAR250-odd million variance you see on the slide.
In the first-half of 2023, we have spent almost ZAR900 million in capital expenditure, which represents approximately one-third of the full-year CapEx bill. Other CapEx spent in the first-half, ZAR444 million has been spent on sustaining capital, while ZAR449 million was spent on expansionary capital mainly relating to the Elders project. We have also provided guidance on the expected cash flow for the Zibulo North Shaft project, which was approved by the Board in Q2 of this year. This Zibulo North Shaft project is expected to cost approximately ZAR2.4 billion and will be completed by 2026. This project will extend the life of the Zibulo 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 as 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 a net cash balance of ZAR14.7 billion as at 31 December 2022. During the first six months of '23, we paid out dividends of ZAR5.5 billion. We generated cash from operations of ZAR4.8 billion for the first six months of '23 compared to ZAR15.2 billion for the same period last year. Further movements in the reporting period include the unwind of working capital of ZAR747 million, which is driven by a reduction in the trade receivables. Then as we've discussed, we also spent ZAR893 million on capital in the first-half, which brings our net cash position to ZAR13.6 billion at the end of June 2023.
The Board reaffirms Thungela's dividend policy by declaring a dividend of ZAR10 per share or ZAR1.4 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 Zibulo North Shaft through the cycle. A total of ZAR3.8 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 Jan 1, 2023. Although the exact figure will only be determined about three months after completion. We therefore have a total of ZAR7.2 billion in cash already committed towards Elders, Zibulo North Shaft 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 ZAR1.4 billion dividend to be paid to shareholders and the resultant ZAR156 million to be paid to the trust, this leaves us with a cash balance of approximately ZAR4.8 billion, assuming end of June. When considered together with the undrawn credit facilities of ZAR3.2 billion, we believe 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 Zibulo 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 the 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. We remain on the opinion that is appropriate to retain cash of approximately ZAR5 billion in addition to the undrawn facilities. I want to focus on the ZAR5.2 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 galvanize the funding required to execute Elders and Zibulo North Shaft as planned.
As I commented earlier, the Board has not ruled out the option of a buyback, and should we see good conditions, in particular TFR's performance improve on a sustainable basis. But at the same time, 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 6 months of the year, and the range for export saleable production is accordingly narrowed to between 11.5 million and 12.5 million tonnes.
So achieving the lower end of that guidance range requires an annualized 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 ZAR1,120 and ZAR1,200 excluding royalties. Including royalties, the guidance range is revised to between ZAR1,170 and ZAR1,250 per tonne using the forecast benchmark coal price, just about $100 per tonne.
This increase is primarily due to a lower domestic byproduct revenue offset from both Isibonelo and Mafube. 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 export coal washed sweeter.
Our sustaining capital expenditure guidance for 2023 is maintained at between ZAR1.3 billion and ZAR1.5 billion. Expansionary CapEx is expected to be between ZAR 1.6 billion and ZAR1.8 billion, relating primarily to the ZAR1.2 billion for Elders and ZAR600 million for the Zibulo North Shaft project. The guidance for 2023 sort of excludes the Ensham 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.
July Ndlovu
Thanks, Deon. We communicated the rationale for the Ensham transaction previously. So I want to repeat that now. Safe to say that we continue to believe that this will be value accretive for our shareholders and marks the first milestone on our journey towards geographic diversification. I'm pleased that the conditions precedent, if not positive stage where we are confident, that the transaction will complete on the 31st of August and to assume operational control from the 1st of September. A comprehensive integration road map has been developed to ensure a smooth transition.
As Deon explained, Ensham is not yet contemplated in the revised guidance ranges we have issued today. Once we have our feet under the desk, we have a more thorough understanding of the production, cost and CapEx potential and be able to inform the market when we next issue guidance, likely at the release of our 2023 full-year results in March next year.
So before I hand back to Ryan for Q&A, allow me to leave you with the following key messages. Thungela remains committed to operating a fatality-free business. Ensuring the health and safety of our employees is paramount. We continue to focus on our responsibilities to the environment and meeting our social obligations.
We've achieved a resilient set of results given the weak price and rail performance environment in H1. We continue to closely monitor the trajectory of prices and rail performance, but it is imperative that industry, government and Transnet find suitable solutions to the logistics challenges, which continue to plague South Africa.
We've reaffirmed our dividend policy and our commitment to shareholder returns through the declaration of a dividend amounting to 33% of adjusted operating free cash flow. We also continue to monitor the market for the appropriate timing to execute a share buyback, while ensuring that we maintain sufficient liquidity to execute our strategy.
The long-term market fundamentals for coal remains structurally attractive, as coal continues to play a significant part in the global energy mix, but without a steady replacement of tonnes on the supply side. We must maintain our focus on what we can control in order to safeguard our performance, while simultaneously ensuring the readiness of the business to take advantage of improved conditions in the future. Key to this will be ensuring the long-term competitiveness of the portfolio by investing in key projects through the cycle.
Finally, our strategic objectives remain unchanged, and we continue to drive ESG and invest in our strategic projects through the cycle. This ensures that we can maximize the full potential of our existing assets and deliver our geographic diversification ambitions. Together with disciplined and optimized capital allocation, this will ensure that we are able to continue to deliver on our purpose to responsibly create value together for a shared future.
Thank you very much, everyone, and I hand back to Ryan for Q&A.
Ryan Africa
Thank you very much, July, Deon. We’ll now move to Q&A [Operator Instructions] For those who have submitted questions via the webinar platform, and I can see there are a couple, I will be reading those out. Operator, please could I ask you to open the line for our first question?
Question-and-Answer Session
Operator
First question comes from Brian Morgan of RMB Morgan Stanley.
Brian Morgan
Thank so much, Ryan. July, can I ask you, are you still seriously looking for acquisitions? Or is that it for now?
July Ndlovu
Brian, I mean, when investor decircle you continue to look, whether we find an asset that is competitive in this current environment, we will see. But again, I must remind all of you, because that question is probably asked in the context that prices have softened. And therefore, we probably create the impression that this is now abnormally low. And yet, we plan our business at $90 per tonne. We should normalize what was abnormal. What we saw last year with the blood was as a result of the conflict in Europe and therefore prices at unprecedented levels. We should build a successful, value-accretive and competitive business at these kind of prices, because that's what we see in the long-term.
Brian Morgan
Okay cool. And then can I ask from a brownfield perspective, what's next after Elders and Zibulo?
July Ndlovu
I don't want to preempt what we're starting, other than I've already flagged that we're studying the gas project. And for obvious reasons, given the market fundamentals on gas at the moment, we clearly need to see a sustained improvement in Transnet and prices. Before we can make a call on future brownfield environment in this core basin. I mean, you can imagine, I mean, it couldn't make to make sense for me to be delivering additional tonnes when I'm rail constrained. So we need to see that before I can communicate what we're going to do.
Deon Smith
If I may add, Brian, obviously, what we would also want to do is, once we get our feet under the desk [Technical Difficulty] next brownfield could be, if indeed there needs to be one.
July Ndlovu
And you can imagine, I mean, Ensham, as we reported to you, Ensham is a 1 billion tonne endowment with only a reserve of 74 million tonnes. So it stands to reason that as we consider our brownfield opportunities, that Ensham will play a significant role in their consideration.
Brian Morgan
That’s very good. Thank you.
Operator
Thank you. The next question comes from Tim Clark of SBG Securities.
Tim Clark
Thank you very much. Thanks for taking my question. I suppose that the first question is just your comment on resilience. What are the sort of criteria or the drivers of making the next decision to curtail operations or to restructure, resize operations to optimize? Is it a price issue? Or is it a time frame of how long it's taking Transnet to reach a certain level? Is that level 60 million tonnes? I'm just trying to understand the decision point that you want to drive. That's my first question.
July Ndlovu
Thanks, Tim. The decision point is a combination of the two that you've just reflected. I mean, as you can imagine, the normal circumstances where -- when prices soften, you try and drive as much production to lower your unit cost. We don't have that lever. So we're going to have to see this interplay between the rail constraint and how quickly we can actually can leave that constraint and the price trajectory in terms of the forward cave. The reason why we continue to hold on that decision, Tim, is because we can see line of sight in terms of improving what they've got. But clearly, there is an unknown in terms of if we don't resolve the long-term standing low cost and availability of spares and components, that could in time start impacting the performance of the existing fleet.
That's why we say if we don't see improvement in the Transnet rail performance or a sustained worsening, because it's important that we know how much we're actually able to rail before we make a decision on resizing the portfolio. We -- this is an area where you can be taking short-term decision. You incur significant retrenchment costs and then a week later the constraint is actually resolved and then that decision just doesn't look like a good decision. So this interplay between how much can we produce in what price environment.
Tim Clark
Okay, thanks. It sort of leads me to my second question. Your rail agreement is up until March next year, I think, March '24. Is that part of your concern? That perhaps, we've had -- we've seen quite a lot of other rail agreements where emerging miners have taken a share of -- you guys have got massive potential to expand operations if you have the rail.
But if you're going into a new rail agreement -- and do you worry about the price of a new rail agreement? I would imagine that the economics of Transnet were better at 75 million tonnes than they are at the newer lower level. No one seems to be talking 70 anymore and people seem to talk something more 60-ish or something?
July Ndlovu
Look, Tim, I mean, I prefer not to negotiate with Transnet in the public domain. Safe to say that we have started in negotiations. We're exchanging the volumes in the industry and our own specific volumes specifically. We haven't actually got to a point where we are discussing the detailed commercial terms. But clearly, I mean, what you have captured in essence captures what we'd be concerned about, would we want to settle? Because it fundamentally affects the competitiveness of our business what volume we're going to get from Transnet and at what cost. But those discussions are ahead of us.
Tim Clark
All right, thanks. And just my last one, it's quite a specific question. The 413,000 tonnes of domestic sales that you did free on track, can you give us an indication, just some sort of broad indication of what sort of pricing you're getting on that domestic sales. I mean, is it -- my guess would be something like taking a trucking cost of ZAR800 or ZAR1,000 a tonne off the API4 price to be a fair way of doing it. Would that be a fair way of looking at those 400,000?
Deon Smith
Yes. So...
July Ndlovu
I think of a slightly more nuanced and then Deon will give you more detail. It's not just the API4 minus the trucking cost. You also got to think about the margin we lose as a result of the differential between rail and trucking because trucking is more expensive. So all those factors come into a pricing decision. We did this driven primarily by the fact that we're holding stock and want to convert that stock in a constrained rail environment to cash rather than continue to hold it. And really, it came down to our view of how quickly rail could improve in 2023. Deon, do you want to...
Deon Smith
Absolutely. So just for clarity, Tim, that 413,000 tonnes, the lion's share went into the export market, but there were also some of that coal that made its way through the domestic market for domestic customers. And as July mentioned, it was very much a cash decision, so converting stockpiles to cash than what it was necessarily an earnings more -- in fact, it was earnings neutral if you overlay the incremental cash that we got for those sales of just over ZAR300 million. It was definitely a cash optimization rather than a margin creation opportunity.
The other benefits, Tim, obviously, is in lowering the stocks across our mines, you would see that going forward, we would have a lower cost of trucking coal between sidings and operations in that we've now created a bit more stockpile space and headroom for us to stretch our mines, legs and so to not be constrained by short-term stock constraints. So the economic decision is cash and flexibility rather than EBITDA margin.
Tim Clark
Thanks, Deon. Thanks, July.
Operator
Thank you. The next question comes from Ben Davis of Liberum.
Ben Davis
Good morning. Thanks for the call guys. A couple for me. Just one, how to think of how this cash buffer plus the -- kind of the modifiers might adjust obviously into the year-end. I mean, expansion CapEx will obviously come down as it gets spent. The Ensham acquisition will go out the door. But will that ZAR4.8 billion/ZAR 5 billion, will that change with the Ensham acquisition? Or should we consider a similar sort of level at year-end, assuming it does go through?
Deon Smith
So Ben, I think it is fair conclusion that Ensham is going to happen imminently. And therefore, obviously, that initial cash outflow is around ZAR4.1 billion. And approximately 3 months after that, we then earn back the economic benefit deep cash, so to speak, which if you do the math, we're anticipating that to be at least ZAR700 million. So that cash is outside of that buffer already as we've flagged it now.
The key change has clearly just been the unspent Zibulo and Elders cash that we are reserving at the moment. What would inform our view on an appropriate cash -- retained cash balance at the end of the year would be clearly the pace of spend on those projects as well as the outlook at that point in time.
But your question is absolutely valid. It's one that we will continue to exercise our mines as we move into that end of year position, and it might change slightly based on our perspective on the forward curve Transnet trajectory of recovery and so forth. And then the last one that would impact it is on any decision in the buyback between now and the end of the year. If such a decision is reached in this period, that would also impact the answer to your question.
Ben Davis
Actually that follows on nicely. I mean, with the buyback, certainly. I presume that decision could be made at any time during the second-half. And also, I mean, particularly given how long it would take to do a buyback because of the -- I assume it's a similar sort of constraints where you can only do about 10% of daily liquidity, it would take a long time to even do the buyback if you did initiate it in the second-half?
Deon Smith
So Ben, the first part of your question is absolutely spot on. We have not excluded any timing, but rather flagged what the elements are we would look at. And those are clearly, we want to see whilst TFR is clearly stabilized, and we're seeing a trajectory of improvement post the most recent shut week-on-week. We want to see that stabilize. And clearly, we want to have a supportive forward curve, and so a number of elements.
We'll monitor the liquidity on our balance sheet and the level of spend on those capital projects. All of those things fall into place, then absolutely, you're right that timing is not necessarily something that we've put an exact date or series on. We're open to it at any point in time. In terms of our liquidity, I think the last time we looked at it, our share remains very liquid. And we have approval for around a 10% buyback. So we don't see the time to execute one as a very material constraint, no. And we have until May next year, if we do announce a buyback, to fully execute it.
Ben Davis
Got you. Perfect. And just lastly on Ensham, given when if it closes on the 31st of August, the lockbox mechanism economics, that was pretty much finished by the end of the second-half. So should we just model about two-thirds of the cash flows for the second-half?
Deon Smith
That is correct. I think there was a natural -- your correct. There's a natural cap or there was firm cap to it, but also time. And therefore, yes, it doesn't reflect the full period until end of August. It came to essentially a stop prior to that point, you are correct. So it's on a two-thirds of the year's cash flow.
Ben Davis
Okay, perfect. Alright, thank you very much.
Deon Smith
Thanks, Ben.
Operator
Thank you. The next question comes from Tebello Lebesa of Nedbank. Tebello, your line is open. You can go ahead and ask your question. Unfortunately, we're not getting any response from Tebello's line. That is the last question from the lines at this stage. Thank you.
Ryan Africa
Thank you very much, operator. I'm sure we'll give Tebello chance to get back online. But while we're waiting for him and for any other questions on the line, I'm quickly going to move to some of the questions that have come through on the webinar. So let's start with the first one, is from Lebohang Mofokeng at Argon Asset Management. Quick question, what is the Onmine stockpiling capacity and at port stockpiling capacity for Thungela?
Deon Smith
Very quick answer to that. Onmine is around 3.5 million tonnes of stockpile capacity. At port, it depends on how many grades we stockpile, but midpoint around 1.4 million tonnes of stockpile capacity.
Ryan Africa
Also as a second question, but I think we've addressed that. He's got a question around the cost of trucking. Our costs of trucking to the port, but as we referred through the presentation, that's not material for us.
Deon Smith
Yes. So -- but just the easy answer to it, it's more than double the cost of what it would take you to rail and send your coal through RBCT. That's around $20 a tonne, so it's more than double that.
Ryan Africa
Perfect. Thank you, Deon. The next question comes from Itumeleng Seanego at Eskom Pension and Provident Fund. And as it's around discounts. I suspect, Deon, you're also going to address your question. The question from me to billing. The discounts widened from an average of 15% in 2022 to 18% in H1 2023. What's your expectation for the discount in H2? Do you expect any improvement or expect a similar discount range to persist?
Deon Smith
Hi, Itumeleng, so a couple of questions and then let me quickly just unpack them. The -- let me start with the most difficult part of it. What will the crystal ball say about H2? we think that the discounts should narrow in H2. And the reason for that is also what I spoke to about the presentation that the reason it widened from last year's 15% and the first half of last year 13% to the -- what you've seen in 18% is because during October, November, December, prices were still fairly high. And during those periods, we would be taking orders. And the orders, the discount would be set at date of order in absolute U.S. dollar terms.
When we deliver the coal, the price of the coal is determined on the average API4 price in the month of shipping, which therefore means that, that absolute dollar discount, which was based on a high-price environment in H2 last year then results in a fairly high discount percentage in the first half of 2023. For clarity, that discount could have been much higher had we not increased the sweetness of the energy content of our sales mix, the way we have, yes? So that discount could have been higher. So therefore, the narrowing slightly in H2 would have been a much more dramatic narrowing in the event that we didn't manage this in H1.
Ryan Africa
Thank you very much, Deon. Just two more questions in the same vein as the earlier one. The first is from Bruce Williamson at Integral Asset Management. Do you have an estimate of how much non-RBCT coal is exported by Durban, Maputo? And what the current -- what are the current average trucking cost?
And related question from Jack Elliott, where do you see the breakeven point for truck coal volumes? Just a quick response on that one thing, Deon.
Deon Smith
I'm happy to quickly give you the statistics from our viewing glass recognized. You cannot take this as a run rate going forward because the multipurpose terminal port at Richards Bay has started putting constraints on the quantum of trucks that they are open to receive, and clearly, there has been a number of constraints across the network.
But the numbers are in the first-half, Richards Bay, around 5 million tonnes industry, put to about three in Durban, about 1 million tonnes of coal that's made its way trucks from the industry via those ports.
July Ndlovu
But you must also read that in the context of the fact that our prices in the first-half of the year, particularly at the beginning of the year, were quite high. And when people had contracts that were alive, they will give to continue to truck. And as you heard from one of our competitors a few days ago, trucking is no longer margin accretive at this stage. So to really give you a firm number for the remainder of the year would be way too speculative.
Ryan Africa
Thank you, Deon. Thank you, July. Staying on the theme of markets. The next question is from Xolani Mazomba from Noah Capital Markets. How do you see production from Russia? And how is that impacting on your market share? And I think it means South Africa -- South African market share?
July Ndlovu
So production for Russia, last year, if you look at the commentary, actually, they also achieved record production for the year. And the reason for that is that we're able to redirect a lot of that production into India, China. And as Deon commented surprisingly, North Korea, which we didn't expect.
At current prices, what we are beginning to pick up in the market is that production that typically would use the Western ports is really beginning to struggle to be margin accretive. And therefore, would expect that some of that production issues start coming offline going forward. But how quickly does that given the freight differentials is something that we wait to see. But I think for modeling, one would have to assume that certainly for the remainder of this year, we shouldn't see a significant come off of Russian production. It might actually be a 2024 issue.
Ryan Africa
Thank you very much, July. The next question is from Ashley Bellum. With the deal coming to an end with Anglo America, I suspect your speaking about the offtake agreement there. With the deal coming to an end with Anglo America next year, how will that impact your discounts to the Richards Bay pricing?
Deon Smith
So the aim of our marketing strategy and approach is to establish our own team to market our coal. We started that as we flagged before approximately a year ago, almost already. We expect that team to be able to capture more of the opportunities that we've seen in the market and some of the premiums for the high-quality coals that we produce.
So over time, we anticipate that -- and this is now ceteris paribus relative to the mix and what we have available to sell as a result of our ore bodies. But we expect, all else being equal, that realization to improve slightly, and that you'll see, obviously in our revenue line.
Ryan Africa
Thank you, Deon. The next one I'm going to move to July is a question from Laurence Stolt at Atlas Peak Investments. [Indiscernible] remain a pure-play coal company going forward? Are there any plans to follow the suit of Exxaro and Seriti that have made financial commitments to diversify the operations into the production of green energy?
July Ndlovu
Laurence, the second part of your question is easier to answer. I don't intend to comment on other people's strategies other than to reiterate what we have said, which is part of your -- the first part of your question. We have very clearly said, our diversification strategy is quite simple. We diversify into areas where we have the right to win. And where we have the right to win is in coal, but we know that very specifically by saying we want to diversify geographically for the simple reason that we are a single country, single commodity asset entirely dependent on one piece of infrastructure, which has impacted our business quite significantly. And therefore, that's why we're pursuing geographic diversification.
We also have said we'll look for opportunities in regions where we have got know how to operate. And clearly, emerging markets, Africa is something that we know how to operate. But if you think about the sequencing of our thinking, and you've seen by the first opportunity that we've got over the line, we want to look for coal, and we think the fundamentals for coal are very attractive and robust. And that will be our way of geographic diversification. Beyond that, I wouldn't comment on other people's strategy.
Ryan Africa
Then just moving to a couple of more finance-related questions. Deon, the first one from Mark Butler at Global IR. Please comment on the increase in the effective tax rate to 30% from 18% for the first six months ended June 2022. I think Mark might have just confused a little bit the question, but just is the EPR of 30%.
Deon Smith
Thanks, Ryan. Thanks, Mark. Got the gist of your question. So the answer is that in -- up to 2022, we still had various assessed losses in unredeemed CapEx, which was deductible from profits during that period. And that shielded our effective tax rate. In the current period, we've obviously paid the full corporate tax, because we've now depleted the use of those historic deductions and losses. And actually, it's slightly higher than the corporate tax rate at the moment and that's mainly due to a deductibility of the costs incurred in the two trusts, so the employee and the community trust, which is high in this current period as a result of the high dividends we declared last year but is not deductible currently from our taxable income. And that's why you've seen this slightly higher ETR in the current period.
Ryan Africa
Thank you very much, Deon. Then from Sandile Magagula at Tombowell. Regarding the upward FOB cost division, is this associated with production curtailment? Secondly, at which level of TFR performance in coal price would you be able to cut the cash buffer?
Deon Smith
Further north.
July Ndlovu
The FOB cost revision is, in our case, likely, it's kind of a complex calculation. And now I'll let Deon give you, if you want the mechanics because he showed you what has happened. We have taken a number of actions in the light of TFR underperformance. We've high-graded our production for a reason. I mean, we always say we want to send the IS margin tonne to the port. We've also have spoken about taking production capacity out, three underground CM sections and a plant at Greenside. What we have not done is triggered a retrenchment. We're releasing those people via natural attrition. So in some respect, there is a timing issue in terms of those costs coming out. While some of the variable costs have come out, you can imagine that we're still holding on to some of those costs.
But as we go forward, and I hope you see that in our results going forward, what we're driving is productivity. So again, a fairly different approach we spoke to. We are now ramping up Khwezela. So you would not have seen the improvements in Khwezela in H1 because we were curtailing it and we're now ramping it up. So it's a very complex set of interplays given the constraints that we're trying to manage. Deon, you want to add anything on the revision upwards?
Deon Smith
No. So that's absolutely correct what July said. If you reflect on the revision, the slight revision upwards. When you're washing sweeter and therefore, slightly lower export saleable denominator, your cost naturally is slightly higher per tonne, but your energy content per tonne is also slightly higher. Absent those actions, clearly our discount to the benchmark price would have been wider. And we've clearly solved for a value and a cash outcome rather than necessarily only FOB cost per tonne outcome. And equally, you also see that we didn't take the truck sales into consideration in determining that FOB cost per tonne. So we use the lower denominator of just the export saleable, consistent with our past practice. So absolutely right. Thanks, July.
Ryan Africa
Thank you, Deon. Thank you, July. Then I see that Tibele has managed to send in his question. Excuse my line earlier. Two questions. I'll give them one by one. The first question from Tibele. Given the performance from TFR, how come they haven't declared a force majeure? What triggers AFM? And do you earn any income from such a breach of contractual agreements?
Deon Smith
So I'm happy to sort of answer Thungela's part of that question, not necessarily TFRs. Our perspective has been that the current rail constraints certainly doesn't qualify or classify anywhere near a force majeure definition. And therefore, we don't think that's ever been a question mark or a discussion. If you look at the cost that we incur to rail, clearly that continues to be under pressure. But I wouldn't be comfortable to comment on whether there's any other economic or legal benefit of the poor performance at this stage. Safe to say that it is something that is at the heart of ongoing discussions between the industry and Transnet. And as the industry is -- and July has made it very clear, historically what we've opted to focus on is improving the future for all rather than necessarily focusing on the elements of your question.
Ryan Africa
Perfect. Thanks, Deon. I'm going to go to the second part of Tibele's question. Stockpiles, what's the hindrance in depleting your stockpiles at mine excluding TFR and at port?
July Ndlovu
Well, I mean, given everything we have said, the early other way to deplete your stockpiles is 1 of 2 options. You closed down the mines for a period of time, and then you work down those stockpiles once the mines are closed. That's not -- that's not this much as tactic because you're carrying the cost during that period. But you have to believe in doing that you don't believe that translate will ever improve. So that's one consideration. The other alternative really is to truck it whether you do that by way of effort yourselves, you track yourself to some way. And that's not half as easy as we have just described.
The third one is the route that we have taken, and we have been consistent about this that we as a company, we think that working with Transnet to improve their performance is probably in the long term the right thing to do. And certainly, the early indications from the shutdown suggest that the plans that we have put in place are beginning to work and let's see where it lands us.
Operator
Thank you very much, July. We've got a couple more on the webcast. The next question is from Chris Reddy at All Weather Capital. What do you need to see in order to start the buyback? The share is down over 50% year-to-date. What else can give you a higher return on capital than buying your own shares at existing levels?
Deon Smith
Yes. Thanks for that, Chris. Clearly, when you consider a buyback, we don't exclusively only look at a return on capital. We look at a broader capital allocation perspective. And what we have been solving for over the last 1.5 years or two years since we've been listed has been a couple of things. One, extending the life of our business; two, diversifying from a geographic perspective, and those type of decisions clearly are attractive in a return on capital, but might not be as attractive as buying our own shares but absent the longer life of our business and geographic diversification, the quality of that underlying cash generation might not otherwise be as high.
We agree with you that the -- clearly, it's always a very attractive prospect to acquire your own shares. But we have been absolutely clear with our shareholders that have supported us in getting the authority to do so that we'll be responsible in making such a buyback decision and do so, to answer your question explicitly, when we have confidence in the sustained trajectory and improvement path of Transnet, clearly the forward price supports that and we have eaten through the bulk of the very significant capital commitments lying ahead of us. Once not the bulk, but a good sort of portion of it. Once we have those type of indicators, a buyback decision would be much simpler and more confident.
Ryan Africa
Thank you, Deon. Moving on to the last couple of questions. I've seen a -- there are a number of them -- well, three of them. Let's first go to Bruce Williamson at Integral Asset Management. Hi July, have you had any resignations of senior staff at the interim in recent months? As we know, there is a shortage of mining-related skills in Australia.
July Ndlovu
There is a glitches that have been reported to us are bearing in mind that it needs us to running the mine are not critical at this stage. They look to me like it would be business as usual. So we're not concerned at this stage that the mine is losing critical skills. But clearly, we want this to close as soon as possible because that uncertainty is not helpful to the employee morale and the performance of the mine.
Ryan Africa
Thank you, July. Then there are a couple of questions from Stephen Beat. I think we've released a number of them as we've gone through the Q&A, but just one that perhaps we haven't touched on. Tell me more about your Transnet discussions between government and private sector.
July Ndlovu
Stephen, I mean, the discussions we have with the Transnet, you can classify them into -- as I've used with a number of people, I've called them a number of swim lanes. The one is working with Transnet on the ground, making sure that we're getting the infrastructure, the low cost, the maintenance, the scheduling and all that working as best as we can. Hopefully, with what they've got, they can get to 60 million tonnes. The second swim lane is related to how do we get from 60 million tonnes to beyond 70 million tonnes, which is what they've got capacity for, but also secure spares and components for the existing fleet. That requires, as I said earlier on, resolution of the impact between Transnet and is supply CRRC. There's a lot of discussions happening and we remain quietly optimistic that in time, we see this resolution.
The third one is a longer-term discussion, and that is one that is of a policy nature. In other words, we all -- what we have learned from this is that -- and this is a global phenomenon, not just a South African phenomenon, is that governments are not, in today's market dynamics, best placed to manage critical infrastructure. What they should be able to do is to set the right regulations and free up best-of-breed operators to invest and run critical part of that, and in our view, similar to what happens in other geographies, provide access to best-of-breed rolling stock operators on a commonly owned rail system. And you have seen the white paper, if you've been following it, and we are quite encouraged with the white paper, what the white paper seeks to do. Clearly, at a international level, we've got to implement those proposals. So I see three swim lanes, if you like.
Ryan Africa
The last question that we've got on the webcast comes from Ashley Billham. Can you give us a sense, please, of what the monthly free cash flow to the company is at current coal prices?
Deon Smith
Ashley, we clearly don't forecast profits or cash flows and wouldn't be able to be drawn on it. But I can give you with two caveats, a couple of data points, and you can take your own view on it. The two caveats are one, you need to reflect what you think the right sales profile is. We guide production not sales. And then two, you need to have your own view on what you think the coal price is likely to be rather than on a day-to-day basis, but the average coal price per month over the next sort of number of months.
But at current FX, our all-in sustaining costs, so that's all the OpEx and the sustaining CapEx that we spend is around $90 a tonne. That's an API 4 equivalent CV coal, yes. So our cost is actually lower, but then you gross it up for a 6,000 CV. And that number, you can then compare to -- you had $110 a tonne number. So that's sort of order of magnitude, again, all other factors being consistent, such as FX and so forth.
Ryan Africa
Thank you very much, Deon. Thank you, July. I can see that there are no further questions on the call either. So we will wrap up the Q&A session here. Remind you that if there are any further questions that you do have, please do get in touch with me via e-mail. My e-mail address is ryan.africa@thungela.com, and I'll get back to you.
With that, please allow me to hand back to July to close out the day.
July Ndlovu
Thank you very much. And let's end the day with thanking all of you, our shareholders and investment community for joining the call. We want to leave you with the understanding that our commitment is absolutely to run a fatality-free business, making sure that people go home safely, but also to control the controllables.
A lot of the exogenous factors that we have discussed are beyond our control, but those things that are in our control, which is our cost, our productivity, is something that we're absolutely focused on and investing in the right projects that ensure that the future quality and competitiveness of this portfolio to ensure attractive returns to our shareholders. Thank you very much.
For further details see:
Thungela Resources Limited (TNGRF) Q2 2023 Earnings Call Transcript