Thungela Resources (LON: TGA) is showing the benefits of the South African coal businesses’ demerger from Anglo American in the summer. The trading statement to mark the year-end says that the company will return to profit in this financial year. The stock has jumped 14% as a result.
One possible view is that it’s the demerger itself that is responsible for Thungela Resources’ recovery. The trading statement makes clear that the significant brake on corporate performance is the ability of the South African railway system to get material to the export ports. By optimising the mix of product shipped the management were able to increase the margin earned. This, presumably, was something that when under the wider corporate umbrella wasn’t done, or not to this extent. Making people directly responsible through the demerger has its merits that is.
The South African economy does have its problems as does the thermal coal business that the company is involved in. Those climate change concerns do mean that investors are shying away from the sector. This was the very drive behind the demerger itself.
On the other hand, no one really does believe coal is going away tomorrow. It might, in decades, but not right now. So there’s the possibility of a rerating here. A single resource – thermal coal – company like Thungela Resources will be attractive to a certain type of investor. As with other “sin stocks” like tobacco and gambling the more the ESG (“environmental, social, governance”) funds stay away from the sector then the more attractive the dividend streams become for other investors. It has long been true that there can be a significant outperformance in total income – largely from the yield – as a result in such sectors and stocks.
This is compounded by that possible rise in inflation and interest rates as the economy continues to recover. The effect of both is to make near-term income more valuable than longer. So, stocks that pay dividends – and Thungela Resources is suggesting that it will resume dividends after this recovery from covid lockdowns – gain in value relative to the so-called “growth stocks”.
This balance of probabilities is what offers the trading opportunity.
Thungela Resources is showing that the demerger from Anglo American seems to have revitalised the management and their optimisation of operations. There is also that growing realisation that while thermal coal is an unpopular sector it is still entirely possible for those not burdened with fashionable views to make a significant profit in the sector.
In the other direction is that long-term – decades long – indication that thermal coal will at some point really become the fuel of the past. As that happens prices will decline and export operations no longer be profitable.
It’s which way the balance of those factors will be assessed which will determine this near-term price for Tunglea Resources. The trading position is of course determined by what belief on that balance will be. There’s the possibility of a rerating upwards to come as investors reconsider the company since demerger.
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