Thungela Resources Ltd

JSE:TGA

Earnings Call Transcript 2022-Q4

[Ryan Africa, IR Contact]

Good morning, everyone, and welcome to Thungela's 2022 Annual Results and Strategy Update 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 how the day will run. But before that, please let me draw your attention to a couple of disclaimers ahead of today's presentation. While you take a moment to read through the cautionary statement, remind you that the annual results documents are available on Thungela website, www.thungela.com, and the results there by the Investor section. Today's session will be recorded, and the recording will be available on the Thungela website from later this afternoon. A transcript of this session will also be made available on the website in the coming days.

Turning to today's agenda. Our CEO, July Ndlovu, will share Thungela's 2022 highlights and will also provide an update on safety as well as TFR performance, and how this has affected our business. Our CFO, Deon Smith, will then talk through operational and financial performance for 2022 as well as provide an update on guidance. And after this, July provide a brief update on the progress we're making on the strategic priorities, which we shared with the market previously.

This will be followed by a Q&A session of approximately 1 hour to give those on the call and the webinar the opportunity to ask questions. We'll then close the call to approximately quarter to 2.

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 the 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 laid out during the Q&A session. It is possible, of course, to follow today's session across both platforms simultaneously.

It is also possible to join the conference call facility only shortly before the Q&A session and directed from your computer. If you are planning to do this, I do encourage you to register for the conference call and advance the Q&A session, as you will need the link sent to you upon registration. Now allow me to hand over to our CEO, July Ndlovu to take us through Thungela's annual results for 2022.

[July Ndlovu, CEO & Executive Director]

Thank you, Ryan, and good day to everyone on the call. I'm very proud to share Thungela's 2022 annual results with the market today. We've once again delivered an exceptionally strong set of results, notwithstanding a difficult operating environment at times. In addition to the strong results, we are executing our strategy across a number of fronts and I'll provide you with the progress update on that today.

Let me start by reminding you of our purpose to responsibly create value together for a shared future. Our purpose is at the core of what we do as a business, and I'm pleased to say that we continue to deliver on our purpose. Let's take a closer look at how we've put our purpose into action in 2022. That is our #1 value. We are unconditional and single-minded about being a fatality-free business, and operated without a fatality in 2022. Thungela showed exceptional agility responding to the ongoing TFR challenges and delivered 13.1 million tonnes of export sellable production and 12.2 million tonnes of export equity sales, notwithstanding the rail-constrained environment.

The good operational performance, coupled with record core prices resulted in exceptional financial results, and we achieved a significant increase in adjusted EBITDA to ZAR29.5 billion and a net profit of ZAR18.2 billion. Adjusted operating free cash flow increased more than fourfold to ZAR18.1 billion, a remarkable achievement. The exceptional cash generation resulted in a cash -- in a net cash position of ZAR14.7 billion at year-end. We have secured access to ZAR3.2 billion in credit facilities with 2 leading South African banks, allowing us to maintain a sufficient level of liquidity in the face of continued poor rail performance.

The outstanding results and solid liquidity position allows us to declare a final ordinary cash dividend of ZAR40 per share. This final dividend represents returns to Thungela shareholders of ZAR5.6 billion or 61% of adjusted operating free cash flow generated in the second half of 2022. Combined with the interim dividend of ZAR60 per share, this amounts to a total dividend declared for 2022 of ZAR100 per share, 76% of adjusted operating free cash flow for the year.

In addition to the amounts returned to shareholders of Thungela, we are also distributing an additional ZAR396 million to our employee and community partnership plans, taking total contributions to these plans to $896 million in 2022, thus delivering on our commitment to share value that we create. In addition to delivering outstanding results in 2022, we've also made significant progress on the execution of our strategy. In driving our ESG aspirations, we continue to spike on social.

And since listing, we have created ZAR1.2 billion in value for Sisonke Employee Empowerment Trust and Nkulo Community Partnership plan. We also follow through on the commitment we made last year to do a full review of our intermediate emissions reduction targets. And we are pleased to announce that Thungela aims to reduce Scope 1 and 2 emissions by 30% by 2030 compared to our 2021 emissions baseline and will reach net zero by 2050.

In terms of maximizing the full potential of existing assets, the Board approved the development of the Elders production replacement project. We also continue to progress the Zibulo North Shaft feasibility study and expect to table this for board approval in 2023. We are also evaluating options for our gas resource in Limpopo, and I'll expand on this later in the presentation. The creation of diversification options remains an important focus for our business. And in February 2023, we announced the acquisition of a controlling shareholding in the Ensham thermal coal business in Australia.

Finally, in relation to our strategic priority of optimizing capital allocation, we acquired the remaining 27% shareholding in Anglo American Inyosi Coal. The entity which holds Zibulo and Elders, allowing us to benefit from the full economics of the most cash-generative assets in our portfolio. Recognizing that sustainability requires continued and predictable access to insurance, and as flagged on the CFO pre-close call in December last year, Thungela has implemented a self-insurance structure and made an initial capital contribution of ZAR1.2 billion towards the structure in 2022. These actions will make our business more resilient in the future and ensure that we're able to continue to provide superior returns to our shareholders.

Let me pause for a minute on safety. As I said earlier, we operated 2022 without a fatality, and in fact, had a scratch-free run of more than 100 days at a number of operations. Regrettably, in February 2023, Mr. Breeze Mahlangu, a mining operator at Zibulo tragically passed away following complications after an accident in December 2022. Our thoughts are with his family and loved ones. This has been devastating for all of us at Thungela and a reminder that we cannot waver nor relent, and that we must be unconditional about safety to ensure that everyone goes home safely every day. We continue our relentless pursuit of being a fatality free business through the implementation of our safety strategy.

These strategies built around 3 pillars: back to basics, work management and a culture of sustainable risk reduction. We are disappointed to report a deterioration in total recordable case frequency rate as we recorded the same number of injuries as in 2021, but off fewer working hours. We cannot be compliant in comes to safety, we redouble our efforts to learn from incidents and have instituted measures from the executive level through to the frontline to live up to the promise that everyone goes home safely everyday.

Given the importance of rail performance, I suspect that many of your questions today will be related to the impact that TFR, is it only business and what we expect this impact to be going forward. As has been well reported on, the 50.3 million tonnes, which TFR railed for the industry in 2022 calendar year was the lowest performance since at least 1996. In addition to the well-reported security incidents, maintenance challenges on rail infrastructure and rolling stock, the year 2022 performance was heavily impacted by the strike and significant derailment in quarter 4.

The combined impact of these 2 one-off events was approximately 4.8 million tonnes of lost capacity in Q4. Thungela is borne the brunt of this deterioration in TFR performance being the largest core exporter. If rail had performed at 2020 levels, then Thungela could then produced close to 60 million tonnes of export sellable production. This means that rail performance has cost us 3 million tonnes in export sales.

Now recognizing the broader impact the rail performance is having, translating the mining industry is set up a collaborative structure to stabilize in the short term and steadily improve performance back to historical levels in the medium term. The close collaboration effort has identified several constraints that are being resolved. The private actions include assessments to better understand the core underlying issues that move the needle; fixing private infrastructure; better tactics to secure key infrastructure; and realizing operational and maintenance efficiencies. These actions do not require major capital to optimize the performance of the existing fleet.

To be clear, the existing fleet is capable of delivering 60 million tonnes. In the longer term, a sustained increase in performance back to 2020 levels will require that locomotives that are currently standing as a result of the dispute with [indiscernible] are brought back into service. So the time to find an alternative solution apart from discussions with South [indiscernible] Rail is now.

There are early promising signs of improvement, but it is too early for us to take comfort. For this reason, we remain focused on controlling the controllables. Part of this relates to setting an appropriate range for production guidance and managing elevated mine product stockpiles. So let me be clear here. We said in the last few years we would prioritize shipping high-value coal down to the coast, and we've built stocks. So you have then seen -- in this morning since announcement, that we have revised our export sellable production guidance to a range of 10.5 to 12.5 million tonnes as a result of this continued TFR uncertainty. This range is easier to understand in terms of trains delivered to the port on a weekly basis.

In the first quarter of this calendar year 2023, TFR has achieved a run rate of 45.4 million tonnes per annum for the industry. To achieve our lower-end guidance, we need 26 trains per week, which is in line with the Q1 observed tempo so far. In 31 trains per week to achieve the higher end of our guidance, the 31 trains per week is similar to what was achieved in calendar year 2022. We are thus comfortable that we are not building material rail improvement to deliver on our guidance. On the other hand, should rail performance recover faster than expected, would maintain production at 12.5 million tonnes and use the additional rail capacity to run down the high on mine stockpiles and secure additional sales.

Having spoken to what we can expect this year. Let me explain the actions we have taken to mitigate the impact of the second year of poor TFR performance. We've continued to optimize our export sales mix, ensuring that higher quality coal gets a seat on the train. This can be seen in the graph at 67% of sales volume in H1 were higher than 55 CV. While this percentage increased in H2 to 79%, as we responded to the deterioration in Q4. We are forced to cut out production in 2022, particularly at the operations where we could most easily takeout related costs.

We also created additional stockpile capacity and further optimized the stockpile footprint by tracking coal between our sidings as well as third party sidings. We continue to travel road transport, but the breakeven price for road transport is probably around $110 per tonne. Thus, it is becoming increasingly difficult to justify this in the current price environment.

We are starting to engage in free on truck sales of lower CV material. These sales are being concluded at mine gate and we're not able to realize full export parent prices for this material. It is all I ever expected for it to contribute to cash generation. Bearing in mind that the alternative is for this material to sit on the ground. So to round off, I remain hopeful that TFR performance will be stabilized and improved in the near term.

In terms of sharing the value we have created, we're very pleased to have declared a distribution of approximately ZAR414 million each to the Sisonke Employee Empowerment Scheme and the Nkulo Partnership Trust in 2022. This brings total distribution since our listing in June 2021 to close to ZAR1.2 billion, which gives meaning to creating shared value in a lasting positive social impact. Let me now hand over to our CFO, Dean Smith, to take us through the detailed operational and financial performance. Dean?

[Gideon Smith, CFO & Executive Director]

Thank you very much, July. So we're very pleased to present another set of strong annual financial results. Net profit for the period was ZAR18.2 billion compared to ZAR6.9 billion in with adjusted EBITDA of ZAR29.5 billion, which represents an increase of about 195% compared to the ZAR10 billion in 2021. So these record results on the back of strong export prices, coupled with a weakening exchange rate.

Adjusted operating free cash flow, which is cash flow from operations, less sustaining capital expenditure, was recorded at ZAR18.1 billion. So that's an increase of 364% compared to ZAR3.9 billion in 2021. The increase in adjusted operating free cash flow was more pronounced, as you can see, than the increase in earnings, mainly due to the significant working capital build of ZAR3 billion in 2021. Our exports saleable production at 13.1 million tonnes for 2022 compared to 15 million tonnes in the prior year was negatively impacted by the poor TFR performance during the year, the lower saleable production denominator, coupled with the impact of higher royalties and the impact of inflation pushed FOB cost per tonne to ZAR1,079 per tonne. I will unpack the cost movements in more detail a bit later on.

Our earnings per share for the reporting period came in slightly above ZAR127 a share compared to ZAR61 in 2021. As July mentioned earlier, the strong financial performance has enabled us to declare a full year dividend, now totaling ZAR100 per share or ZAR13.8 billion in aggregate, which represents 76% of our adjusted operating free cash flow. You may recall our first half trade being 7 June 2021, the share price on the JSE. And when looking at that recognize that the full year 2022 dividend of ZAR100 is approximately 4x that in a short share price.

So reflecting on benchmark coal price graph in front of you, we saw very strong prices in the first half of 2022, followed by the softening of prices starting in Q3. Our full year realized price was $229 per tonne compared to $104 per tonne in 2021. The Ukraine and Russia conflict continue to fuel the energy security crisis for most of 2022, increasing the demand for thermal coal in regions where thermal coal demand started to soften over the last couple of years, such as in Europe. This demand, coupled with supply constraints across various coal-supplying regions further supported prices in the first half of the year. We have seen an increase in coal flows from South Africa into the EU, but we have also seen Russian coal displacing some South African coals into India and the South Asian markets.

In quarter 3 of 2022, trade flows settled somewhat, and we started to see prices soften mainly as a result of the milder European winter and the buildup of coal and gas stocks across the EU. Demand from China also decreased in the last quarter as a result of strict responses imposed by the Chinese government following a further outbreak of COVID-19 infections. The discount to the benchmark coal price around 15% for 2022 has narrowed slightly from 16% in '21 as we continue to prioritize our higher-quality product on the available rail in order to maximize returns for shareholders.

We've seen discounts remain slightly wider in Q1 of 2023, mainly due to the timing of inbound coal purchase orders in late 2022 when absolute discounts in dollar terms were wider than what we currently see. We are accordingly expecting discounts in the first half of 2023 to be in line with what we've seen in the second half of 2022.

Turning to our operational performance. Export saleable production at 13.1 million tonnes was 13% lower than the prior year, mainly as a result of the curtailment of production at some of our operations for a second consecutive year. Our export sales of 12.2 million tonnes is 12% lower than the prior year, which reflects the weaker TFR performance in 2022. Production was curtailed at Khwezela as navigation pit, which we have not yet ramped up as well as the Zibulo open cast mine despite the curtailment of these operations, we've increased online stocks to around 3.1 million tonnes and stock at the port just over 400,000 tonnes.

So this represents an on mine stock build of about 700,000 tonnes during 2022. At some of our operations, we created additional stockpile facilities in order to keep some of our operations running and have incurred additional stockpile handling costs. So the two of our strike in derailment in Q4 of 2022 was the main driver of the online stock build as our operations received limited trains during that period.

Operations running and have incurred additional stockpile handling costs. So the T for strike and derailment in Q4 of 2022 was the main driver of the online stock build as operations received limited trains during that period. If we now look at our unit cost, our FOB cost per tonne was ZAR1,079 per tonne, which is marginally higher than the higher end of the guidance we issued in August 2022 of ZAR1065 per tonne. You may, however, recall that we issued that guidance before the Q4 TFR strike and derailment. We managed to shield our costs from elevated global inflation and supply chain impact during 2021. And if you recall, in fact, we were able to keep our unit cost flat as compared to 2020, notwithstanding a lower denominator in 2021.

In 2022, however, resulted in a unit cost increase higher than inflation. There were 3 main drivers of this increase. So the one was an even lower denominator, given TFR's performance challenges. And then for clarity, whilst we sought to reduce production, where we were able to say variable costs and avoid some of the stranded costs, we were not able to eliminate all cost to cross operations where we had to curtail production. Secondly, the royalty charges, which are linked to price, and they were materially higher in 2021. And then the third bucket is cost inflation. Cost inflation of about $110 per tonne or 13.2% can be stratified into sort of general and structural South African inflation such as wages and imported inflation.

So import inflation was pronounced due to the higher energy cost. That sort of fuel and explosives. The benefit of the higher energy input cost is either also reflected in our revenue for 2022. If you strip out the impact of the energy input cost, the year-on-year inflation increase on our unit cost was around 9.4%. You may recall that revenue from our domestic product sales, which is normally margin-neutral, is deducted from our FOB unit cost calculation. The higher benchmark coal prices apply to some of our domestic production provided a tailwind to our unit cost in 2022.

In summary, if we assume that the TFR performance as well as the royalty impact on our unit costs are indeed transient. -- one can expect our unit cost to moderate over the next couple of years. We are, however, guiding a modest saleable production range for 2023 given continued well uncertainty with the associated pressure on unit cost. We have, therefore, launched a cash cost and cash optimization project across our mines and corporate office to mitigate the impact of the stranded costs in the context of expected lower production denominator in 2023.

As I mentioned earlier, we've reported a record adjusted EBITDA of ZAR29.5 billion for the reporting period and improved our EBITDA margin from around 38% in 2021 to 58% in 2022. If we reconcile the adjusted EBITDA from '21 to 2022, the biggest element to our earnings is clearly the record prices we achieved in 2023, which has been offset by a couple of headwinds, such as inflation, sales volumes due to the TFR performance and costs.

The inventory build relates to the increase of stocks across the mines in that port, but also the impact of the higher costs, which drove up the valuation of our stock. Although the contributions to the community employee trusts are derived from the Thungela dividend and indeed flows as a dividend. These are recorded as a cost in our book given the trust's shareholding is in the South African operating subsidiary below the Thungela listed entity level. the environmental provisions impact of around ZAR700 million is noncash and mainly relates to the increased provision of the rehabilitation liability due to the impact of inflation and the impact of illegal mining in areas which had previously been rehabilitated.

In bridging adjusted EBITDA to the adjusted operating free cash flow, the major movements include income taxes of ZAR6.6 billion, which represents an effective tax rate of 25% for 2022. Cash settlements or the derivatives of ZAR3.6 billion, ZAR1.7 billion sustaining capital and an increase in our working capital of approximately ZAR600 million. Then we adjust for the noncash increase in the environmental and other liabilities, which bring us to a total adjusted operating free cash flow of ZAR18.1 billion.

If we were to apply our dividend policy of a minimum of 30% of adjusted operating free cash flow, the dividend would have been ZAR5.4 billion compared to the ZAR13.8 billion declared for the full year. Our payout ratio for the full year is, as I mentioned before, 76% of this adjusted operating free cash flow number. So our strong cash flow generation resulted in a net cash position of ZAR14.7 billion at the end of last year. This already takes into account the funding of capital expenditure, the initial contribution of ZAR1.25 billion to the self-insurance structure and the improvement in our environmental liability coverage, which was the result of the additional contributions to the Green Fund during 2022.

The Board has resolved to fund the acquisition of Ensham, which is around ZAR4.2 billion from cash on hand at year-end. This is, however, a lockbox mechanism in place from 1 Jan 2023, meaning that economics from this date until completion of the transaction accrues to Thungela and we expect to receive this shortly after completion. The maximum amount that can be earned by the group in this construct is limited to AUD 102 million before any working capital adjustment. The Board has declared a final dividend of ZAR40 per share for the second half of the year, which amounts to ZAR5.6 billion. This also results in additional contribution of ZAR396 million to the community and employee trusts. Taking these commitments into account, this leaves us with a theoretical cash balance around ZAR5 billion at the end of 2022.

We have, therefore, reduced our cash buffer from the ZAR6 billion previously to ZAR5 billion and returned that cash to shareholders. We've also secured ZAR3.2 billion in credit facilities from 2 leading banks in South Africa. These facilities, together with the revised cash buffer of ZAR5 billion will enhance our liquidity buffer to ZAR8.2 billion. The Board believes that the increase in the liquidity is prudent in light of the material change in our structure following the acquisition of Ensham, but more importantly, the continued rail performance, uncertainty and challenges around Transnet.

The full year 2022 dividend of ZAR100 per share represents a very healthy return for shareholders while the incremental liquidity helps build a more resilient balance sheet as we continue to deliver on our strategy. If we now turn to -- our focus to guidance for 2023, in particular, our South African assets, given Ensham is only likely to complete later this year. Since the start of the year, we have continued to see poor rail performance. As a result of this inconsistent performance and uncertainty regarding the timing of the TFR recovery, we have reset our production guidance for 2023 as July expanded earlier, the bottom end of our export saleable production guidance for 2023 is conservatively set at 10.5 million tonnes. -- aligned to the run rate we have observed in the first couple of months of 2023.

The upper end of this guidance at 12.5 million tonnes represents a 19% increase in the year-to-date industry run rate. In the event that rail performance improves beyond this production range, which is possible, we plan to draw down on high on mine stockpiles. Our guidance for FOB cost per tonne is a bit between ZAR1,047 and ZAR1,180, excluding royalties and including royalties, the guidance ranges between 1,131 and ZAR1,264 per tonne, assuming a benchmark coal price of $150 a tonne in determining the royalty rate of ZAR84 per tonne. We anticipate a full year effective tax rate closer to 27%, a slight increase from 2022 due to the different deferred tax assets now having been fully utilized. Our sustaining capital expenditure for 2023 is expected to be between ZAR1.3 billion and ZAR1.5 billion.

Expansion in CapEx is expected to be between ZAR1.6 billion and ZAR1.8 billion relating primarily to ZAR1.2 billion for Elders and ZAR600 million for the Zibulo North Shaft. That's now assuming that the latter achieves support from our Board. We will ensure that the business remains capable of continuing to deliver safe production and that we maintain operational flexibility to ramp volumes up, should well performance improve in the future. As mentioned earlier, we have instituted a program to reduce costs across our operations in an effort to manage the unit cost impact of the reduced production guidance. The expected impact of this program has been taken into account in our FOB unit cost guidance set out on the slide. So with that, let me now hand back to July for an update on strategy.

[July Ndlovu, CEO & Executive Director]

Thanks, Dean, for that comprehensive review. So let's now turn to an update on our strategic priorities. And the list of our results last year, we introduced our 4 strategic pillars, being driving our ESG aspirations, maximizing the full potential of existing assets, creating future diversification options and the fourth being optimizing capital allocation. I'm pleased to share that not only have we delivered exceptional results in 2022, but we've also made progress across all 4 strategic priorities.

Let me start with what we are doing in terms of our ESG aspirations. In 2022, the world faced an unprecedented energy crisis. Which sent the prices of gas and coal to record highs. The impact of this crisis was perhaps most felt in the developed nations of Europe, many of which have been calling on developing nations to renounce coal altogether as a source of energy. However, when faced with an energy crisis we are on, these nations opted for a reliable and affordable source of energy. And switched their coal-fired power plants back on. This simply isn't enough renewable energy yet in developed markets to reliably and affordably power the economies.

The tragic event in Ukraine sharply brought into focus the energy trilemma, which is the need for sustainable, affordable and reliable energy. This simple accession that coal is a part to play in a secure and affordable energy system for at least the next 2 decades, often sees 1 being labeled as a climate change denialist. Of course, we are not denialists. We are acutely aware that the need for climate action has never been more critical than it is today. And it is our responsibility to contribute to the mitigation of climate change.

As a result, we've done a full review of our climate-related risks and opportunities and have taken a scenario-based approach to charting our path to net zero using the IEA's 2022 scenarios. Following the completion of this work, I'm pleased to announce that Thungela commits to reducing our Scope 1 and 2 emissions by 30% by 2030 of the 2021 baseline and to net zero by 2050.

In order to meet our 2050 net zero target, we have 4 distinct pathways available, all informed by climate change scenarios. Looking at the summarized map-shot on this graph, we can see that the route we will ultimately take hinges on 2 critical inflection points. The security of the NH system in South Africa and the pace of decarbonization globally.

There are [indiscernible] steps that will take in the next 2 years, such as the construction of the 4-megawatt solar plant at Elders. Beyond 2024, the path will be informed in the first instance by the State of the Energy Security System in South Africa. Today, high-intensity electricity consumers such as Thungela are subject to load curtailment, not unscheduled load shedding. And currently, we are able to manage this impact given the excess capacity in our business due to the rail constraint we discussed earlier. In a world where energy security deteriorates, so you're looking at the red line in the graph. We look to install renewable energy solutions behind the meter rather than really over the grid.

Further changes in this approach over time will be informed by our strategy and the pace of decarbonization. It is important for me to reiterate that these options provide flexibility in our approach as well as deliver on our commitment to the achievement of net 0 by 2050. So in terms of intermediate emission reduction targets on the pathway to net zero, we are committing today to a reduction in Scope 1 and 2 emissions of at least 30% by 2030. This is achieved through several means, including the implementation of 19 megawatts of renewable energy by 2030 as well as the closure of Goedehoop in Greenside mines as they come to the end of their lives.

The pathway and 2030 commitments also include the mitigation of emissions from Ensham which is included in the 2021 baseline in the gas project, which is not included in the 2021 baseline. The emissions remaining in 2050 are those related to the eMalahleni Water Reclamation Plant, which will continue to treat water for the municipality beyond the life of our mines. These emissions will be offset. The strategic priority in our framework is maximizing value from our existing assets. To this end, the Board approved the Elders production replacement project last year. Elders will produce high-quality coal and replace the volume loss from the Goedehoop mine as the latter comes to the end of its life.

Construction is ramped up at Elders. And we spent around ZAR200 million to date, with feather focused spend of ZAR1.8 billion taking the total expected CapEx to ZAR2 billion in total. First, go from underground operation is expected in the first quarter of 2024 with the operation ramping up to steady state after that. In 2023, the Zibulo North Shaft project will be tabled for Board approval. This project will extend the life of our flagship Zibulo mine by between 10 and 12 years.

Sustaining run-of-mine production levels at around 8 million tonnes per annum and allowing us to continue utilizing the plant at full capacity. Given our focus on optimized capital allocation, we continue to review the appropriate sequencing of activities and spend across both Elders and the Zibulo North and we endeavor to keep the total annual expenditure across the two to between ZAR1.6 billion to ZAR1.8 billion in real terms once these 2 projects are overlapping.

Those of you who have carefully studied our pre-listing statement or last year's integrated annual report, will know that Thungela holds several gas exploration rights related to a coal-bed methane project near Lephalale in the water bank. The asset is 3.5 trillion cubic feet of gas in place, of which 1.5 million -- trillion cubic feet is extractable. To put this in perspective, these numbers are broadly consistent with the resources and reserves of the most gas field project developed on the coastal South Africa in the 1990s. There's potential to develop the project, to supply compressed or liquefied natural gas into the domestic market.

A feasibility study is ongoing, and a production right application plan for the second half of 2023. Initially, the focus will be on developing a proof-of-concept sized operation before scaling up to commercial size. I must flag though that it is still early in the process for this project, and we don't anticipate significant capital outlays in the next 2 years relating to this project. The creation of diversification options remains an important forecast as we plan for the long-term future of our business. In February 2023, we announced the acquisition of a controlling shareholding in the Ensham Thermal coal business in Australia.

We provide detail on some of the technical aspects of Ensham on the call we hosted in early February. But allow me to remind you of the rationale for the acquisition. Ensham provides geographic diversification into a leading mining jurisdiction through an attractive high-quality, long-life asset with mining methodology aligned to Thungela's operational expertise. The transaction is expected to be earnings and cash flow accretive with strong potential for a short payback period. From an ESG perspective, it also met our criteria, and Ensham is being acquired from a responsible owner.

Finally, on the subject of optimized capital allocation, in November 2022, we acquired the remaining 27% share holding in Anglo American Inyosi Coal, the entity which holds Zibulo and Elders through the issuing of approximately 4.2 million shares in Thungela. This transaction will allow us to benefit from the full economics of the most cash-generative asset in our portfolio, resulting in an increase in earnings attributable to equity shareholders of Thungela.

The profits attributable to this 27% shareholding in AAIC before the transaction was ZAR1.2 billion in 2022, approximately 6.5% of net profit. While we issued approximately 3% of our shares to acquire this stock. While this is a great outcome for Thungela. It also unlocks value and liquidity for Inyosi, as they transition from being asset partners for the last 12 years to investors in Thungela. This transaction underscores our commitment to sound capital discipline. As we invest in a highly cash generative asset that we know exceptionally well, our own operations.

So, let me wrap up before handing back to Ryan for Q&A. We covered a lot of ground today, but allow me to leave you with the following key messages. Thungela remains committed to operating a fatality-free business, and set continues to be our #1 value. We've delivered strong results in 2022, notwithstanding a very challenging operating environment. We are committed to disciplined capital allocation and have once again delivered superior shareholder returns well in excess of our stated dividend policy. We've secured facilities to bolster our liquidity position rather than holding more cash.

We are proud to continue making meaningful difference in the lives of our people through significant contributions to Nkulo and Sisonke Trust. Whilst we spike on social, we also set robust targets for intermediate emissions reduction and net zero by 2050. Finally, we continue to make progress on our strategic priorities in order to ensure the sustainability and resilience of the business into the future so that we can continue to deliver on our purpose to responsibly create value together for a shared future.

Thank you very much, and back to you, Ryan, for Q&A.

[Ryan Africa, IR Contact]

[Operator Instructions]. Operator, could I ask you to open the line for our first question.

[Operator]

First question comes from Ben Davis of Liberum Capital.

[Benjamin Davis, Liberum Capital Limited]

Great set of results. Just to dig in on the product discount that you're getting on the coal widened out to 16%, but that was also and you did have a better quality mix as part of that. What -- do you know roughly what it would be if you were running at capacity? And is it still within the sort of normal thresholds that you've guided to in the past?

[Gideon Smith, CFO & Executive Director]

So been happy to pick that up. The discounts in the second half widened a bit for a variety of sort of market-driven reasons as the energy complex prices softened also. So we experienced a bit of a widening in the second half. Some of those wider discounts have also made its way into the orders for H1 2023. And therefore, we're probably going to see a similar discount percentage in the first half of 2023 being 16%, so slightly wider than what we've seen in H1 2022. Clearly, what happens in the second half of 2023 is a bit of a crystal ball still, but we're expecting, therefore, that sort of 16-odd percent range to prevail for the foreseeable future.

[Benjamin Davis, Liberum Capital Limited]

It were producing all the selling all your lower quality material as well? I mean would it be just a capital extra percent or would it be sort of 20% sort of product discount.

[Gideon Smith, CFO & Executive Director]

Yes, it's a good question. It will certainly -- it's a factor of mix, as you know, because the one element of it is certainly the linear product discount. So Ben, theoretically, if we had to prioritize, which we wouldn't, a low-quality 4800 material, that discount could easily widen to 20%.

[Benjamin Davis, Liberum Capital Limited]

Great. And then just one other quick one for me. Will you be seeking buyback approval at the AGM?

[Gideon Smith, CFO & Executive Director]

So Ben, we've been consistent as a management team that we would enjoy all mechanisms to return cash to shareholders, dividends and buyback mechanisms that we think it's healthy to have those options available. So this time around, we will certainly continue to engage some of our key shareholders to get us into that position that at least we have that in our armory. So yes, we would be seeking that. We will obviously have to wait for the AGM to see if such an approval is granted. And then clearly, that doesn't mean that we would immediately initiate a program, but we would certainly then have that optionality.

[Operator]

The next question comes from Brian Morgan from RMB Morgan Stanley.

[Brian Morgan, Morgan Stanley]

If you Khwezela mine, if don't mind, if we look at last year's cost numbers, it's about $135 a tonne is very high cost, pretty marginal. And from the outside looking in, keeping it going, keeping it alive looks like a decision based on, don't take this the wrong way, but hoping that Transnet comes live. Could you maybe just chat to us around the decisions that you've taken in the business between keeping things alive, stockpiling, putting them on care and maintenance. Just the thought process around that?

[July Ndlovu, CEO & Executive Director]

Brian, it's -- your observation is correct, but see Khwezela numbers more is impacted by management decisions. So when we started curtailing operations, what we do is we made and rank all our operations, and we decide which ones we -- in the first instance, we should curtail. The second thing we also do is we look at which operations we are able to take out as much cost as we possibly can. And Khwezela being an open cast mine, sometimes we are able to do that. The problem with looking at the unit cost is that given that you have curtailed it and you actually have taken some of its overhead, the cost looks obviously disproportionate.

The third feature of Khwezela is, it's an operation that has been -- that is still in ramp-up, and we decided, actually, we're not going to ramp that up to full potential. Should these issues become a structural feature of our business going forward. In other words, all the efforts are to stabilize the Transnet performance in the short term and improve the performance in the longer term by bringing the lockers back online fail. Clearly, that then begins to call for us to look at the appropriate ship and size of our business. I need to be clear that we're not there yet. But clearly, this is something that we're beginning to review both as management and as a Board. So don't read Khwezela is the best it can be. That is far from it.

[Brian Morgan, Morgan Stanley]

So can we just carry on, on that, if you don't mind, what flags are you looking for in Transnet's performance where you might look -- where you might decide to do restructuring?

[July Ndlovu, CEO & Executive Director]

So I probably need to talk firstly in answering that question talk to how we have thought about the guidance because that informs what you're asking. The guidance is informed by two things. One is I just said on the lower end, if it doesn't improve what they did in the first quarter, what did that number look like? And as I said in my address earlier, we're beginning to see some improvements.

We're making progress on security, we're making progress on the infrastructure maintenance and so forth and so on. But if we don't see an improvement, we tend to see that as stabilizing the system. The numbers end of January were roughly just under 40 million tonnes tempo. Last week, we reported 52 million tonnes. You'd hear those numbers and think, wow, that's a big improvement given that we want to be closer to 60 million tonnes, which is what they've got is capacity, I tend to think of this as stabilizing the system. Just out of interest, the 52 million tonnes is more or less close to our upper end but we need to see that sustainable.

Brian, I need to see a resolution on the long-standing locals for us to decide whether we are seeing a structural change or not because that is what will tell us whether we are beginning to get capacity beyond the 60 million tonnes. There is work already being undertaken by Transnet. You noticed that they have taken a bold decision, in our view, certainly as industry to go out on tender to fix these long-standing at 80 to 200 locals. If we are successful with that, I think we are back to accept the performance. Once we obviously need to solve some of the operational challenges within the system. So I think, personally, that is -- and certainly, that's our view as management. That is the single biggest indicator of whether we'll get capacity back to historical levels or not.

[Operator]

Mr. Africa, at this time, there are no further questions on the phone line.

[Ryan Africa, IR Contact]

Perfect. Thank you very much. So we'll move to a couple of questions that have come in over the webinar. The first question is from Jandre Peterson at Visio Fund Management. How much further appetite do you have for M&A? Should we read your higher cash buffer as an indication of keeping options open for further M&A?

[July Ndlovu, CEO & Executive Director]

So we'll tag team this Jandre, between me and Dean, because you answer the buffer question and I'll do with the appetite for M&A Firstly, to just provide clarity, we haven't kept a higher cash buffer. We've increased our liquidity buffer, but we've reduced our cash buffer, I think it's important to emphasize that. In terms of M&A, we have been very consistent from day one that we're looking to diversify our business into areas where we are, right to win that being geographical.

In geographical we meant areas where we know, we know how to operate typically emerging markets, but also we said would target bulks. But in the first instance, we're very clear to say we'll be looking in coal be that thermal coal or met coal, and it is demonstrated with the Ensham, that strategy is well underway. We continue to look, but determining of opportunities is whatever they are, and we've got some interesting things we're looking in our pipeline. But at this stage, there's nothing for us to announce. When we've got something interesting to announce in the market, we share that with you. Do you want to talk to the buffer question?

[Gideon Smith, CFO & Executive Director]

Yes. Just for clarity, we've reduced rather than kept a higher cash buffer. So we reduced that from the number that you would have seen previously is around ZAR6 billion. This time around, we've reduced that to ZAR5 billion, cash. But yes, we've signed up additional liquidity or facilities with two of the leading banks. But certainly, none of that has been necessarily done primarily to prepare or get ready for any particular M&A. It is rather just a factor of continued prudent balance sheet management or approach given the various uncertainties not only in price that we've seen recently, but also clearly in a heightened uncertainty around Transnet's continued performance.

[Ryan Africa, IR Contact]

Thank you very much, July and Deon. The next question comes from Zackly Austin. Why are the material acquisitions such as Ensham not be put to a shareholders vote.

[Gideon Smith, CFO & Executive Director]

Exactly, yes. It's a good question. So in terms of the JSE listing requirements, shareholder votes required for Category 1 transaction, which is any transaction exceeding 30% of our market cap at the time of entering into that transaction. From memory, I think, Ensham at ZAR4.2 billion. So prior to the reducing it for a potential consideration reduction as a result of the lockbox mechanism was about 13% of that. So less than half. So typically, transactions are only deemed material and require a shareholder vote above that 30% of market cap level.

[Ryan Africa, IR Contact]

Thank you, Deon. Let's see we have a couple of further internal questions, so I'm going to go ahead with those before I come back to the rest. The next question then is from Adol Sheer from Assessment Asset Managers. If you can buy back extremely cheap shares in Thungela, a company you know well, why in Australia with its unknown risks?

[Gideon Smith, CFO & Executive Director]

So I'm happy to start that off for us. We've consistently said that we would apply a capital allocation lens as follows. We would generate operating free cash flow. And in this particular instance, as you've seen, that was very healthy for 2022, we would, in the first instance, seek to derisk our environmental liabilities. And there, we've allocated around ZAR200 million to the green fund. We would also invest in our own business, so through sustaining CapEx and that we've done also ZAR1.7 billion last year. And after that, we would fund a minimum of 30% dividend to our shareholders, which would have been around ZAR19 a share.

We've then said we would look at other projects and opportunities to create a pathway to diversify our business. And in doing that, we also said that the measure we would use is buying back our own shares. As you might have picked up from a question earlier on from Ben on the call, we did not have -- notwithstanding seeking approval from shareholders. We did not have approval to acquire our own shares. And clearly, in looking at Ensham at a multiple, it was similar, if not less expensive than our shares at the time. That is certainly a very attractive at a trailing PE of around 1x earnings, an attractive investment and still is. If you look at that lockbox mechanism and the cash that we continue to earn from the 1st of January by the time that the transaction complete, we think it will continue to be a very, very attractive investment.

In terms of diversification, we've seen the impact that Transnet and reliance on a single rail network has had in our business, and you would have seen it in our guidance today in how we have had to reduce and curtail operations and the associated impact on cost per tonne. The Ensham business has essentially very few bottlenecks, if any, and has very material infrastructure, very established infrastructure and therefore, poses lower risk from a number of perspectives compared to the South African landscape. So we believe that it was a very good investment to seek to start our diversification journey at least from a geographic perspective.

[Ryan Africa, IR Contact]

Perfect. And then just one further follow-up on Ensham. This is from Thishan Govender at Truffle Asset Management. Can you give us some details on Ensham at the moment? What percentage of sales have been sold forward? And what prices percentage discount on the product [indiscernible] or cash cost guidance for FY '23?

[Gideon Smith, CFO & Executive Director]

So Thishan, so we haven't guided yet. And the reason for it is, is we don't own the asset yet. Completion is still anticipated for mid 2023. There are around 4 conditions present that needs to be met. The first 1 is SIB approval, FIRB inbound approval into Australia being the second, ministerial approval in that product country and then participation. So in Australia, participation in the Queensland pool.

So clearly, we haven't yet had our feet under the desk and certainly not jumping the gun on that transaction, and that's why we're not guiding anything in particular from a production perspective or a cost perspective. What I can share, obviously, with you is if you look historically, the open cast at Ensham has come to an end, it's now mainly the underground mine, which is around 3 or just over 3 million tonnes of export sealable per annum. And last year, excluding royalties, cost about $100 a tonne to get that product into the market, so FOB cost per tonne basis.

[Ryan Africa, IR Contact]

Perfect. One final question that's come through on Ensham. This question comes from at Capital One Partners. Is there excess capacity of supporting infrastructure, i.e. rail capacity to support the production increase at Ensham?

[Gideon Smith, CFO & Executive Director]

Yes, indeed, there is approximately 4.2 million tonnes of rail entitlement allocated to the Ensham operation. And you can now compare that 4.2 million tonnes roughly with the current 3 million tonnes to 3.2 million tonnes from the underground. So there's a significant rail headroom at Ensham. Needless to say, and whilst we did not bank on any incremental productivity improvements at Ensham in order for us to justify the acquisition at the time, we do have thoughts on productivity, which we would very much like to pursue once we own the asset, which means that, that 4.2 million tonnes would be very useful to have at hand.

[Ryan Africa, IR Contact]

Thank you very much, Deon. Just moving to a couple of different questions now. We've got a question from Bruce Williamson from Integral Asset Management. What ongoing annual allocations do you expect to make for self-insurance?

[Gideon Smith, CFO & Executive Director]

So the answer to that is we believe that the allocation we've made for our South African business is sufficient, and we're therefore not predicting any further allocations at this time. Clearly, we don't have our feet on desk in Ensham. We would like to understand that insurance market and what's required in that part of the world before being able to answer that question definitively. At this point in time, we're not expecting to have to put any further capital into that fund.

[Ryan Africa, IR Contact]

Thank you, Deon. There are a couple of further questions, which we'll take on the webinar before we go back to the line. Just a quick one then from Akshat Modi from HSBC. July is just regarding the CBM project. Regarding the CBM project, is the technology transferable to other existing coal mines?

[July Ndlovu, CEO & Executive Director]

So Akshat, the technology would be transferable to any other resource, which has got coal bed methane at the right levels of concentration and permeability, clearly in our mines, this is the only resource that we've got where it's applicable.

[Ryan Africa, IR Contact]

Perfect. And then we have a question from [indiscernible] Absa. Two questions, actually. The first question is how much risk will you say is composed on the operation of the business? The update has been focused largely on TFR.

[July Ndlovu, CEO & Executive Director]

The reason why we are focused on TFR significantly more than ASCOM is not to say that to South Africa, ASCOM is not as important it is. In our case, our effort because we're sitting with excess capacity following the curtailment of our operations, we are always able to catch up when we get curtailed rather than load shed. And that's why Transnet on the other hand is such a bottleneck that we simply don't have any catch-up capacity. And that's why it's quite an important issue for us.

[Ryan Africa, IR Contact]

And the second part of that question, is Europe becoming a permanent client to say coal mines? How much does this mean for Thungela shareholders?

[July Ndlovu, CEO & Executive Director]

I think what you see is probably transient shift in terms of trade flows of coal given the sanctions on Russian coal. And what is happening certainly in the short-term is, South African coals and Australian coals finding their way into Europe and Russian coals replacing our coals in our traditional markets. The one thing that we play whether these structural changes in terms of flows are permanent is what freight rates are going to do. We still think that, if coal -- if Europe is going to continue to consume coal, we are well placed to take advantage of that opportunity as a country.

[Ryan Africa, IR Contact]

We'll take another two questions from the webinar before we go back to the lines. The next one is from David Fraser at Peregrine Capital. Please can you clarify around the facilities that you have secured? You mentioned these related to the current TFR uncertainty. Does this relate to the funding of potential BPP with Transnet? Do you capitalize the coal line? Or is it to fund potential losses should Transnet continue to underperform?

[Gideon Smith, CFO & Executive Director]

So David, we haven't choked up use of the facilities in specific terms for either of the items that you list. But we know that given the continued uncertainty, firepower to either help solve a problem or alternatively, see us through a difficult time is the right thing to do from a balance sheet perspective at this minute. But there is no definitive allocation, so to speak, of that liquidity at this point.

[July Ndlovu, CEO & Executive Director]

And then, just to be clear, at current prices, even at our lower guidance, we still are a profitable business. So we did not necessarily secure these facilities because we're worried about the lower guidance. Deon is right is about if something else completely unpredictable, untoward, we just needed to make sure we have future-proofed our business.

[Gideon Smith, CFO & Executive Director]

Yes. Just maybe to add on that, what July said about profitability, given the guidance range at the upper end of that 12.5 million tonnes range, and this is assuming that we produce that range, and obviously, there's opportunity to sell above it, which would change these numbers. But at that range, we require about $83 a tonne to be profitable and upwards. And then clearly, at the lower end of 10.5 million tonnes, we require about $92 a tonne to be profitable. So just to give you a sense from a profitability perspective that at current sort of 130s, that's not certainly not the primary consideration.

[Ryan Africa, IR Contact]

The last one we'll take from the webinar before we go back to the lines is from Luvuyo Booi at Investec. The marketing contracts at Anglo American, last to look for external parties to offer marketing services from June this year. What's your thinking around this?

[July Ndlovu, CEO & Executive Director]

So clearly, we've continued to develop our options, one, did ourselves; two, continue with external parties and other third-party and/or Anglo should that be necessary. We do have time to make a decision. And once we've made a decision, we'll give you an update, most likely towards the end of this year.

[Gideon Smith, CFO & Executive Director]

And just for clarity there for all of you, it's not middle this year. It's not June 2023, it's June 2024.

[Ryan Africa, IR Contact]

Thank you very much, July. There are a couple of other questions on the web, but I think many of them have been addressed as we've gone through the presentation in response to other questions. So at this stage, operator, I'd like for us to go back to questions on the line.

[Operator]

Next question is a follow-up question from Ben Davis from Liberum Capital.

[Benjamin Davis, Liberum Capital Limited]

Just sorry, one more from me. Again, on the coal bed methane project. I'm not quite sure how the dynamics are domestically in South Africa. How does natural gas price in, say, reference to some of the more well-known prices like Henry Hub or the European gas prices? And if not, how -- is there any excess existing LNG compression facilities that you could access to with that project?

[July Ndlovu, CEO & Executive Director]

Yes. We'll answer that question Ben -- I just want everyone to understand, we are so early in the process, I don't want you building your model just on whatever De0n is going to say.

[Gideon Smith, CFO & Executive Director]

It is indeed. So we're in feasibility, but it's feasibility for to demonstrate the commercial utilization of the gas rather than a full-scale development. And that's why July clarified earlier, Ben, that this is not the next 2, 3 years, it's probably beyond that time frame for any material potential investment if we believe that it's a good investment at that point in time. So in South Africa, the prices for gas is regulated by NERSA, National Energy Regulator of South Africa, which is also the regulator that would set ASCOM'S prices.

And I'll get back to ASCOM because I recognize there was a question ASCOM earlier. But the prices are generally set from historic -- what we've been able to deduct from it in reference to sort of a diesel cost equivalent, if that makes sense. So it's a local delivered price. And when you look at the diesel price in South Africa, there are features clearly of the international parity in it, but there are also local features in it. So that's sort of the pricing mechanism that we would have to play into at that point in time. Needless to say early indications are that, clearly, we can deliver well below that NERSA price, which is a local type of pricing index.

[Ryan Africa, IR Contact]

Thank you very much, Dean. I can see that there are no further questions on the line, nor on the webinar. So with that, allow to thank everybody for your participation today. If you do have any follow-up questions, please do get in touch with me via e-mail. My e-mail address is [e-mail], and I will get back to you. With that, please let me hand over to July to close out the day.

[July Ndlovu, CEO & Executive Director]

Thanks, Ryan. Thank you very much, everyone, for joining the call. The year gone past, a very solid, credible, outstanding set of results in a very challenging environment. We do understand what our challenge is, which is logistics to the port. We think we have developed a credible plan to be able to navigate the short-term future certainly, and we understand what we need to do going into the future. So for shareholders, I wanted you to know we're executing our strategy, and we'll continue to deliver attractive returns going forward.