Anglo American’s Thungela to face shrinking markets for thermal coal

By David Whitehouse
Posted on Wednesday, 26 May 2021 08:50

Anglo American is among mining stocks likely to benefit from higher oil.
Anglo American is among mining stocks likely to benefit from higher oil. REUTERS/Siphiwe Sibeko

Anglo American's plan to demerge its thermal coal assets into a new listed company risks cordoning off a business which may struggle to manage end-of-life assets in a shrinking market.

The demerger of Anglo American’s South African thermal coal assets will be completed on 7 June. The new company, Thungela, will trade on the stock market in Johannesburg and London.

The move is part of the company’s aim of achieving carbon neutrality by 2040, which would be 10 years earlier than other miners such as BHP, Rio Tinto and Vale. CEO Mark Cutifani has said he is confident that Thungela will be “a responsible steward” of Anglo American’s South African thermal coal assets.

There is a real risk that export demand for South African coal will fall much faster than some anticipate and pure-play coal miners like Thungela will find it hard to attract investment.

A sale or spin-off of thermal coal businesses “removes a growing headache for big miners relatively quickly”, says Simon Nicholas, energy finance analyst at the Institute for Energy Economics and Financial Analysis in Sydney, Australia. Yet he questions whether this is the most responsible choice in environmental terms.

South Africa’s long mining history means it has the challenge of addressing the legacy impacts of almost 6,000 recorded abandoned mines. “Funding proper mine rehabilitation is a bigger concern when the mines are in the hands of pure-play coal mining companies rather than big, diversified miners,” Nicholas says. “How are these mines going to be rehabilitated if the demand for thermal coal falls quicker than they forecast?”

  • The major diversified miners will remain financially strong as coal demand drops and would be in a good position to fund coal mine rehabilitation if they still held  coal assets, Nicholas says.
  • “The risk with smaller, pure-play coal mining companies is that they will not remain financially strong as coal demand drops and will be unable to fund rehab,” he argues. “In that scenario, taxpayers will have to pick up the tab.”

Paul Kapelus, director at Synergy Global Consulting in Johannesburg, also sees dangers. “It’s often the case when larger companies sell off older assets to smaller companies, this can be combined with less focus on sustainability issues,” he says.

  • The environmental and social costs associated with closure will increase, especially as many operations are in coal communities which are “increasingly distressed due to poverty, risk of joblessness and air pollution,” Kapelus says.
  • Thungela is likely to face an increasing cost of capital due to many investors and insurers pulling out of coal, Kapelus says. “This will tighten coal miners’ margins.”
  • Yet the company will need to consider funding support for a “just transition” away from coal mining jobs.
  • “Renewable energy jobs will not compensate for loss of coal jobs. The transition of these communities will likely be tough.”
  • Government support in South Africa for former communities is likely to be limited, he says.
  • “This will increase expectations on Thungela. It won’t be an easy task when operating on tighter margins and managing assets getting to the end of their life.”

South Asian demand

Coal remains a viable energy source for South Africa for the medium term, Kapelus says. “As long as it needs to be mined, investors will want to put their money into operators where they believe their investments are safe. Thungela probably offers, this based on their capacity and experience under Anglo” as well as ongoing support, he adds.

Still, Nicolas questions whether Thungela will find itself trapped in a shrinking market. He disagrees with the company’s assessment in its capital markets day presentation in May, that there will be either “significant incremental coal demand growth from South Asia” or that India is “a good proxy for the rest of the market in South Asia.”

In 2020, 71% of thermal coal exports out of South Africa went to India and Pakistan.

  • But in India, coal-fired power is being “well beaten on price” by renewables, Nicolas says.
  • In Pakistan, expensive coal-fired power is “contributing to a major and escalating financial crisis within the power system”.
  • Pakistan is now planning to cease coal-fired power development and both Pakistan and India have significant expansion plans for renewable energy.
  • Furthermore, Nicolas adds, India and Pakistan have their own coal reserves and are aiming to switch from imported to domestic coal.
  • “There is a real risk that export demand for South African coal will fall much faster than some anticipate and pure-play coal miners like Thungela will find it hard to attract investment,” he says.

In South Africa, Resource Generation’s proposed Boikarabelo coal mine project in Limpopo province has struggled to secure funding. South Africa’s Industrial Development Corporation (IDC) pulled out of financing the project in October, saying market conditions for the project have deteriorated materially.

“The outlook for thermal coal has only gotten worse since then,” Nicholas says.  “I would agree with the IDC’s assessment rather than Thungela’s over-optimistic forecast.”

Bottom line

Thungela is likely to need external support to manage the transition of mines and communities away from coal.

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