South Africa: Energy giant Sasol prepares for new coal mining reality

By Xolisa Phillip
Posted on Tuesday, 1 March 2022 13:57

A man walks past South African petro-chemical company Sasol's synthetic fuel plant in Secunda
A man walks past South African petro-chemical company Sasol's synthetic fuel plant in Secunda, north of Johannesburg, in this picture taken March 1,2016.REUTERS/Siphiwe Sibeko/File Photo

South African chemicals and energy giant Sasol has hired a seasoned mining hand to resolve challenges at its coal mines as the company mulls the resumption of a dividend and weighs the future of its oil refinery.

The recovery in demand and prices of global oil and chemicals has been a boon for the company, but production problems at its South African coal mines have offset these benefits, according to Sasol’s latest update to the market.

“Sasol has […] been lucky to have […] mining [experts] at its executive level. [But] somehow, over the years, we haven’t had that focus,” President and CEO Fleetwood Grobler tells The Africa Report following the release of Sasol’s interim results for the second half of 2021 on Monday, 21 February.

“I am not a miner. We believe we have to bring that back,” Grobler says, citing the appointment of Riaan Rademan as executive vice president for mining starting 9 March. Rademan has worked at Sasol before and is well acquainted with the company’s mining operations. He will be part of the group executive committee.

“We think that will help us bed down our Fulco [full calendar operations integrated shift system] programme that we’ve implemented in mining [and] our recovery plans in the mining value chain,” says Grobler.

The appointment comes as Sasol’s mining has been plagued by coal quality and supply issues, as well as safety incidents, contributing to a 16% decline in productivity. Recent heavy rains and “slower-than-expected ramp-up” of Fulco have also added to the troubles, Grobler says.

“The big start of our value chain … is the consistent supply of coal to our operations to produce liquid fuels and chemicals,” he says. “That’s the starting point. We had a setback last year in our mining operations.”

[…] we had to shut down mines for a period to deal with, and mediate, the immediate issues that occurred

He says implementing and ramping up the Fulco programme was the first element that impacted productivity, with problems exacerbated by safety incidents in October and November at Sasol’s mining complexes.

This affected productivity because “we had to shut down mines for a period to deal with, and mediate, the immediate issues that occurred”, says Grobler.

He tells The Africa Report that low coal stockpiles, the Fulco-related productivity issues and the safety incidents “impacted our ability to produce the volumes we wanted through that period. We had to re-forecast our volumes for this year, having regard for those incidents”.

“We now target to produce between 6.7 million to 6.8 million tonnes out of (the Secunda mining complex in Mpumalanga province) compared to the 7.3 million tonnes [that] we indicated in October last year.”

Reining in debt

Sasol has made significant progress on its balance sheet deleveraging. In the period under review, the company lowered its net debt-to-EBITDA (earnings before interest, tax, depreciation and amortisation) ratio to 1.3 times and avoided a rights issue.

That is one precondition for resuming dividend payments. The second condition is lowering net debt to below $5bn.

“We have not diluted our shareholders by doing a rights issue. We’ve managed the balance sheet, but we need to manage it in such a way that we’ve got a sustainable balance sheet in terms of when we trigger the dividend,” says Grobler. “We’ve indicated that we want to be at a net debt level of below $5bn, and that we need to have a net debt-to-EBITDA ratio 1.5 and lower. If we are in that regime of 1.5 and lower and a net debt of below $5bn, that will trigger the decision for the board to consider the resumption of a dividend.”

Sasol’s net debt is at around $6bn. The asset remaining disposals, which are pending final approval, are expected to contribute $500m-$600m. That money will go directly to debt repayment.

That “plus our remaining six months’ operational cashflow, which we can apply to paying down debt, will bring us most probably in the range below $5bn”, says Grobler.

“When we read the tea leaves at the moment we believe that before this financial year those approvals, or conditions precedent which are outstanding, will be attained. That cash will help us to get below the $5bn,” Grobler says. “If all that plays out, we will be in a good position for the board to consider the conditions that we’ve said will trigger” the dividend resumption.

Sasol CFO Paul Victor says: “Although the balance sheet is in a much stronger position, we still have some work to do and want to take our absolute debt level to below $4bn while keeping the net debt-to-EBITDA levels to below 1.5 times.”

Analysts’ perspective

Two analysts tell The Africa Report about Sasol’s interim results on condition of anonymity because of company policy.

A South African-based analyst says Sasol has been consistent about the conditions it needs to fulfil before resuming its dividend payment.

“You could say they’re being overly prudent,” the analyst says. “I think given the last two years, you can maybe understand that. [Based on] where rand-oil prices are now, they should be below both those measures [net debt-to-EBITDA ratio and net debt going below $5bn] by their financial year end.”

The analyst says: “The carbon tax is a big issue. It could have a big impact on them – they’re South Africa’s second-biggest emitter after ( electricity public utility) Eskom. They’re progressing renewables and some other options which could potentially mitigate against that.”

An overseas-based analyst says some dividend pay is likely on the horizon.

“Clearly, the oil price … has come back. That’s made a massive difference for them,” the second analyst says. “I think they’ve done a decent job on costs [and] the disposal programme.”

Weighing options for oil refinery

In addition to the looming carbon tax, there is the matter of the South African government setting a September 2023 deadline for a switchover to clean fuels across the refining industry.

BP and Shell, the co-owners and operators of the South African Petroleum Refineries in Durban – the country’s largest crude oil-refining facility – have announced an indefinite shutdown of production starting at the end of March.

That has prompted questions about the future of the National Petroleum Refiners of South Africa (Natref) joint venture between Sasol and Total, the country’s sole inland crude oil-refining facility.

“We have not concluded the option … [for] Natref with our partner, Total. We will probably go to market in August with a clear picture,” says Grobler. “The whole refinery operator system in South Africa clearly indicated to [the] government that [the 2023 deadline] is not going to be feasible or practical.”

He says the company has made it clear that it believes the switchover to clean fuels will have to be regulated “at a much later date.”

“That discussion with [the] government is ongoing,” Grobler says. “We hope that [the] government can come back and give a better timeline that is feasible.”

Taxing times ahead

Victor flagged South Africa’s pending carbon tax as a policy issue on which “we are still engaging through the industry with [the] Treasury”.

“There’s a willingness to listen and to anticipate how carbon tax can be interpreted in term[s] of the carbon budgets in South Africa. We are also eager to see what the delivery in the budget speech will be,” Victor says. “Hopefully, that will provide more clarity when the minister of finance speaks to the nation about carbon tax and its future.”

We urge all our companies to develop plans to reduce emissions over the next 10 years, otherwise they will face these steep taxes.

During his first budget speech as finance minister on Wednesday 23 February, Enoch Godongwana made significant pronouncements about carbon tax.

He said the first phase of the carbon tax will be extended to 31 December 2025, “with substantial allowances and electricity price neutrality”. However, in line with South Africa’s commitments at the COP26 Climate Change Conference, the carbon tax rate will be progressively increased every year to reach $20 per tonne.

In the second phase that starts in 2026, the carbon tax rate will have larger annual increases to reach $30 by 2030, and allowances will fall away.

“We urge all our companies to develop plans to reduce emissions over the next 10 years, otherwise they will face these steep taxes,” Godongwana warned. “Our exporters will also face overseas border taxes for carbon-intensive goods such as iron and steel, which will reduce their competitiveness.”

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