Coal is back in vogue – Thungela Resources is one way to capitalize on it

At the COP26 conference, a 190-strong coalition of countries, banks and investors assembled to give their support for the coal phase-out.

The timing was far from perfect. Today, just a few months later, the coal market is experiencing a dramatic upswing.

Coal prices have increased tenfold

Global supply chain challenges and the war in Ukraine have ignited the coal market. Prices have risen 10-fold in just a few months, and producers are struggling to keep up. “It’s just not enough,” said Ernie Thrasher, CEO of Xcoal Energy & Resources, at the CERAWeek energy conference in Houston in early March.

The past few months have dispelled the myth that the world is poised to move away from coal. Despite the huge sums invested in renewable energy, coal still accounts for a third of global electricity generation, according to the International Energy Agency (IEA).

There is no doubt that coal’s prospects will remain uncertain as the world attempts to shift away from hydrocarbons. However, as coal prices have skyrocketed, the prospects for miners, which had written off many investors, have improved significantly.

In some cases, these windfalls help companies reinvent themselves. US coal producer Peabody Energy (NYSE:BTU) lost over $100 million in the fourth quarter of 2020 but made $513 million in the last three months of 2021. Management is using some of the windfall to create a joint venture called R3 Renewables. The new company plans to develop 3.3 GW of solar power and 1.6 GW of battery storage capacity on Peabody’s former mine sites.

A phoenix rising from the ashes

It could become the alternative to Peabody listed in London Thungela Resources (LSE:TGA). Focused on South Africa, Thungela, which means “ignite” in isiZulu, was created as a sort of dumping ground for Anglo-American (LSE: AAL) dirty coal plants.

The stock nearly halved on the first day, trading as low as 111p, before recovering as investors lumped in with the stock after the fork rushed to exit. Since then, shares of the thermal coal company are up 1,048%. That’s not a typo.

Over the past year, Thungela has transformed from a loss-making company with net debt into a profitable, high-yield pure-play thermal coal company. Profits in 2021 totaled R6.9 billion (£362 million) and the company ended the year with net cash of R8.7 billion (£456 million) versus its current market capitalization of 1, £7bn.

Thungela has aimed to return at least 30% of earnings to investors in dividends, but has already outlined plans to return 63% of 2021 earnings. That’s a dividend of 94 pence per share, or a yield of over 7.8%.

The company is also looking to secure its future by acquiring coal operations outside of South Africa and expanding into other commodities.

The company uses its stroke of luck to change for the better

These changes should mitigate some of the reasons investors have historically been reluctant to own the stock. The company’s strained relations with unions in South Africa, its focus on coal and the need for significant capital investments have given investors food for thought. Without investment, Thungela’s mines only have a remaining lifespan of five to eleven years.

Thungela also has to pay to clean up the environmental damage from its mining operation and has been criticized by short seller Boatman Capital for understating the costs. Boatman has argued that the miner’s liabilities exceed his estimates by as much as $1 billion.

But with cash pouring into the group’s bank accounts, that risk isn’t as life-threatening as it was a year ago.

Despite the clear risks and ESG issues, there’s no denying that Thungela looks attractive from a purely financial standpoint. Profits will continue to rise this year as the world scrambles for coal supplies. That means more firepower to pursue growth plans — it could even generate more shareholder returns.

The stock only trades at a historical price-to-earnings (P/E) ratio of 3.5. Even after accounting for all of the company’s risk factors, that looks favorable for a well-capitalized growth stock.

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