ESG Pressures And Decarbonization Will Choke Thermal Coal Exports

Key Takeaways

• Accelerating decarbonization and renewable energy adoption threaten to shrink Thungela's export markets and compress future revenue and margins.
  
• Heightened ESG scrutiny and stricter environmental regulations increase costs, restrict financing, and jeopardize long-term profitability for thermal coal producers.
  
• Thungela is positioned for long-term growth and resilience through supply-constrained markets, operational improvements, strategic asset investments, and disciplined financial management.

Catalysts

Engages in the mining and production of thermal coal in South Africa and Australia.

• Accelerating global decarbonization and reinforced net-zero commitments threaten to drastically reduce long-term demand for thermal coal, directly shrinking Thungela's addressable export markets and putting severe pressure on both future revenue and earnings.
  
• Growing momentum behind renewable energy adoption and rapid advancements in battery storage technology will increasingly displace coal-fired power generation, eroding coal's competitiveness, which is expected to cause a structural decline in revenue and persistently lower profit margins over the next decade.
  
• As ESG considerations become more deeply entrenched in global capital markets, fossil-fuel producers like Thungela face restricted access to financing, rising risk premiums, and increasing operational costs, which will likely compress future earnings and reduce the company's ability to reinvest or return cash to shareholders.
  
• Intensifying regulatory scrutiny and environmental obligations in Thungela's key markets will drive up compliance and rehabilitation costs, necessitating larger balance sheet provisions and depressing long-term net margins and free cash flow.
  
• Ongoing structural decline in global thermal coal pricing, exacerbated by major utilities' transitions away from coal and potential loss of key export destinations due to stricter emissions standards, will contribute to a sustained reduction in realized selling prices and jeopardize the long-term profitability of Thungela's operations.

Thungela Resources Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Thungela Resources compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Thungela Resources's revenue will decrease by 4.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 7.6% today to 4.2% in 3 years time.
• The bearish analysts expect earnings to reach ZAR 1.2 billion (and earnings per share of ZAR 9.47) by about August 2028, down from ZAR 2.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.4x on those 2028 earnings, up from 4.8x today. This future PE is greater than the current PE for the ZA Oil and Gas industry at 5.3x.
• Analysts expect the number of shares outstanding to decline by 3.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.74%, as per the Simply Wall St company report.

Thungela Resources Future Earnings Per Share Growth

Risks

• Robust long-term demand for thermal coal in developing Asian economies, combined with constrained new supply, may support Thungela's export volumes and enable higher realized prices, strengthening revenue and margins over the long term.
  
• Recent rail and logistics improvements in South Africa are easing export bottlenecks, potentially enabling higher sales volumes and lower per-unit costs, which could positively affect net earnings and boost free cash flow.
  
• Thungela's ongoing investment in strategic growth projects like Elders and Zibulo North Shaft, as well as the full ownership of Ensham, provides the company with long-life producing assets, securing stable future production and underpinning long-term earnings and shareholder returns.
  
• A strong balance sheet with substantial net cash, a disciplined dividend policy, and flexibility to invest through commodity cycles increases financial resilience and may allow steady or growing dividends, supporting the company's share price against macroeconomic volatility.
  
• Underinvestment in global coal supply due to ESG pressures and regulatory constraints is leading to the consolidation of high-quality coal assets, positioning established producers like Thungela to benefit from supply scarcity and potential industry-wide pricing power, thereby supporting revenues and profit margins over time.

Valuation

• The assumed bearish price target for Thungela Resources is ZAR92.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Thungela Resources's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR135.0, and the most bearish reporting a price target of just ZAR92.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ZAR29.5 billion, earnings will come to ZAR1.2 billion, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 16.7%.
  
• Given the current share price of ZAR94.84, the bearish analyst price target of ZAR92.0 is 3.1% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.