Good morning, everyone, welcome to Thungela's 2023 interim results 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. Before that, please allow me to draw your attention to a couple of disclaimers ahead of today's presentation. While you take a moment to read through the cautionary statement, a reminder that the interim results documents are available on the Thungela website, www.thungela.com, under the Results tab of the Investors section. Today's session will be recorded, and the recording will be available on the Thungela website from later this afternoon. The presentation is also available on our website. Moving to today's agenda.
Our CEO, July Ndlovu, will provide an overview of Thungela's 2023 first half highlights, including how we're tracking on the execution of our strategic priorities. He will also provide insights on safety and discuss how rail performance has impacted the business. Our CFO, Deon Smith, will talk through the operational financial performance for H1, as well as provide an update and guidance for full-year 2023, before July provides a brief update on Ensham and concludes the presentation. This will be followed by a Q&A session to give those on the call and webinar the opportunity to ask questions. 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 direct questions through this facility.
In order to ask a question during the Q&A session, please dial star one on your keypad. This will register your intention to ask a question. Once the Q&A session starts, the operator will then open your line and ask you to go ahead with your question. For those joining via the webinar, you will have the opportunity to submit questions via text, which will then be read out during the Q&A section. Allow me to hand over to our CEO, July Ndlovu, to take us through Thungela's interim results for 2023.
Thank you, Ryan, and good day to everyone on the call. It's a pleasure to speak to you, our investment community, again. Our purpose, to responsibly create value together for a shared future, is core to everything that we do as a business. I'm pleased that we continue to deliver on our purpose and to execute our strategic objectives, even in a tough market environment such as the one we have seen in the first half of this year. With that, let's take a closer look at how we've managed to demonstrate resilience in H1. Safety is our first value, and we remain focused on operating a fatality-free business. I am sad to report that Mr. Breeze Mahlangu passed away in February of this year from complications following an accident at Zibulo in December last year. Our thoughts are with his family, his loved ones, and friends.
This is a singular reminder that we must be unconditional about safety to ensure that everyone goes home safely every day. Moving to operating and financial performance, we delivered a resilient set of results against backdrop of continued TFR challenges and a sharp decline in thermal coal prices. The group produced 6.1 million tons of export sellable production in H1 this year, similar to our performance in H1 last year. We also shipped 6.3 million tons of export sales, only marginally lower than the 6.5 million tons in the same period last year, as we were impacted severely by poor rail performance in Q1 and two derailments in May 2023. We showed unique agility to deliver this operational performance in the face of such poor rail performance. Weaker coal prices weighed heavily on our financial performance.
These weaker prices are reflected in our earnings and our cash generation. The business generated a profit for the period of ZAR 3 billion and adjusted operating free cash flow of ZAR 4.3 billion, significantly lower than the comparative period in H1 last year. Through disciplined capital allocation, we maintained a solid net cash position of ZAR 13.6 billion at the end of June 2023. In addition to the cash on hand, we also have access to ZAR 3.2 billion in undrawn credit facilities, providing additional liquidity in what continues to be a volatile market environment. The group's solid liquidity position allowed the board to declare an interim dividend of ZAR 10 per share. In aggregate, that amounts to a total of ZAR 1.4 billion returned to shareholders, or 33% of adjusted operating free cash flow.
We are pleased to reaffirm our dividend policy and to reiterate that we remain focused on creating shareholder value. I want to pause briefly to provide an update on the execution of our strategic objectives. On the previous slide, I discussed the value created for shareholders. We'll contribute ZAR 156 million to our employee and community, Community Partnership Trust as we continue to spike on social. Our ESG approach is holistic and encompasses all elements of ESG. In April, we published our Maiden Climate Change Report, aligned to the recommendations of the Task Force on Climate-related Financial Disclosures. We have had the opportunity to engage many of our investors on the topic of ESG, and I am encouraged by the positive and constructive feedback we have received.
In maximizing the full potential of our existing assets, the board approved the development of the Zibulo North Shaft project, which will sustain the Zibulo production profile for a further 10-12 years from 2025. We continue to make good progress on the Elders project, which will replace production from Goedehoop as the latter comes to the end of its life. The diversification of our business is well underway, and in February 2023, we announced the acquisition of a controlling shareholding in the Ensham Thermal Coal business in Australia. I'm pleased to report that we have made excellent progress on completing the conditions precedent, and we are confident that the transaction will close on August 31, 2023. Finally, in relation to our strategic priority of optimizing capital allocation, the board reaffirms its dividend policy by paying out 33% of adjusted operating free cash flow.
We expand on the board's consideration of a share buyback program later in the presentation. Safe to say that our capital allocation has been guided by the funding requirements for Ensham, Zibulo, and Elders, and also the continued uncertainties around market conditions and rail performance. In short, we continue to make good progress on our strategic priorities, and I must emphasize that even though we are facing short-term headwinds, our long-term priorities remain unchanged. Turning to safety, while the total recordable case frequency rate has actually improved in H1 2023, we cannot say that we are pleased with the safety improvement when we have had someone pass away earlier this year. We continue to be unconditional about safety, and this business must and will operate fatality-free. Moving on to rail performance.
It has been widely reported that TFIs continued to struggle in the first half of 2023, delivering an annualized industry run rate of only 48 million tonnes. The first half was a tale of two halves, an exceptionally poor Q1 and an improved, stable Q2, despite two derailments in May, which cost the industry 1.5 million tonnes, and in the case of Thungela, 340,000 tonnes. This stabilized performance of approximately 50 million tonnes per annum has given us sufficient confidence to narrow our export sellable production guidance, something Deon will pick up on later in the presentation. Of course, stability at 50 million tonnes per annum is not enough, and it is imperative that performance improves in the second half of the year towards at least the 60 million tonnes per annum run rate.
The establishment of the National Logistics Crisis Committee is a positive step in the direction of Transnet meeting its contractual obligations. The efforts to improve security and infrastructure performance continue relentlessly, and should see TFR continue to improve towards the 60 million tonne per annum tempo over time. Improving performance beyond 60 million tonnes per annum will require the return of the long-standing locomotives to the coal mine, and this is dependent on resolution of the impasse between Transnet and its Chinese supplier, CRRC. We remain encouraged by the discussions between the parties to find a solution. The continued TFR underperformance, coupled with lower benchmark coal prices, have weighed heavily on our performance so far.
While we expect both of these factors to improve over time, we must ensure that we are resilient to these short-term conditions, but also that we are ready to take advantage of improved prices and rail performance when they arise. The work to make our portfolio resilient is informed by four factors. Firstly, our expectation of TFR rail performance. We have responded to rail constraints by high-grading our product to ensure that high-margin coal is railed. We've also curtailed production in response to lower rail performance. You may recall that previously, we curtailed production at Khwezela, but we've now decided to ramp up Khwezela and to rather curtail production through the removal of three underground sections, which are starting to face increasingly complex geology. Secondly, the extent to which we are able to realize productivity improvements.
Improving the competitiveness of the portfolio will underpin the resilience and readiness of the business into the future. We've embarked on several initiatives aimed at increasing productivity, while also instituting targeted measures to ensure the correct cost base for the revised portfolio. Third, we must continue, we must consider the long-term fundamentals of the coal market. These fundamentals remain robust, and coal will continue to play an important parts, important part in the global energy mix, especially in our traditional export markets in Asia, where both China and India continue to add to their coal-fired power, coal power, coal-fired power station fleet. This robust demand is set to continue against an ever-tightening supply environment, with coal emerging as a chronically underinvested industry.
We expect the combination of these factors to be price supportive, though we continue to plan our business using the bottom-up analysis developed by WoodMac, which arrives at a long-term price of approximately $90 per ton for API 4. Lastly, we invest through the cycle in our projects, Elders, Zibulo, and Ensham. These key investments will improve the quality and competitiveness of our portfolio. Our ability to deliver on these priorities while protecting the business, requires a strong balance sheet and liquidity position. Disciplined capital allocation will be key to navigating the conditions we are currently facing, without having to take significant value-destructive decisions. I must, however, point that should prices weaken further for a protracted period of time, and we don't see any material and sustained improvement in the rail performance, we may have to consider changes to the size and shape of our portfolio.
We are confident in our ability to weather the challenging market conditions we are currently facing, while remaining focused on safety and executing on our strategy. Let me now hand over to Deon to take us through the numbers for the second half of the year.
Thank you very much, July. We are pleased to present a set of interim results for the period ending 30 June 2023, that demonstrates Thungela's ability to navigate the current challenging marketing conditions, resulting from softer coal prices and continued underperformance by TFR. Net profit for the period was ZAR 3 billion, compared to ZAR 9.6 billion in the first half of 2022. We recorded an adjusted EBITDA of ZAR 4.4 billion, compared to ZAR 16.7 billion in the first half of 2022. These earnings numbers are lower, mainly due to lower realized export coal prices. I'll get onto that a bit later.
Export saleable production of 6.1 million tons is in line with the previous year, while the FOB cost per export ton, excluding royalties, has increased to ZAR 1,139, compared to ZAR 927 per ton in the first half of 2022. Again, we will unpack this later in the presentation. Our earnings per share for the reporting period came in at ZAR 22.45, compared to ZAR 67.23 in the first half of 2022. This financial performance has, as July mentioned, enabled us to declare an interim dividend of ZAR 10 per share, which equates to approximately ZAR 1.4 billion or 33% of adjusted operating free cash flow for the first six months. Reflecting on benchmark coal price, after seeing record prices last year, we have seen a significant drop in the coal price since then.
The average coal price has dropped to $129.50 per ton in H1 2023, compared to $276.54 per ton in the comparative period. Global economic pressures and high gas and coal stocks in key demand regions, put downward pressure on coal prices in H1. This is especially prevalent in Europe, where we are seeing higher pre-winter stock levels across gas and coal. South African exports have also faced increased competition from Russian coal into India, China, and surprisingly, even South Korea. We are now starting to see some green shoots for price support, as China is securing increased LNG volumes, which should improve gas prices and reaffirm coal's competitive position in the energy mix.
As anticipated, the discount to the benchmark coal price has widened slightly to 18% in H1 2023, compared to 15% in 2022. The widening of the discount was primarily due to the time lag between when discounts are concluded in absolute dollar terms and the time of delivery, when cargoes are referenced to the monthly benchmark coal price, which in this period of declining prices, resulted in higher percentage discounts. For clarity, this could have been higher in a different product mix environment. In terms of the offtake agreement with Anglo American, the grade discounts are agreed in absolute U.S. dollar terms at the time that the order is placed. Meanwhile, the price we receive for coal-... depends on the average coal price during the month of delivery.
This means that if coal prices drop quickly, the fixed U.S. dollar discount can end up as a significantly higher portion of the coal price at date of delivery. Should prices remain at the current levels, we therefore expect the discount to narrow marginally in the second half of this year. Turning to operational performance, at the start of 2023, we had approximately 3.2 million tons of stock at operations, and approximately 0.5 million at the port. As mentioned earlier, we produced 6.1 million tons of export sale or production, and recorded 6.3 million ton of export sales in the reporting period. The export sales were enabled by the TFR performance of 6.2 million tons in the first six months of 2023, compared to 6.5 in the comparative period.
The 300,000 ton reduction in rail performance compared to the first half of 2022 is coincidentally the same as the rail volumes we lost as a result of the derailment in 2023, which implies a like-for-like rail run rate compared to the prior period. As we manage high stockpile levels across our mines, we continue to truck coal between operations and to third-party sidings. In addition, during the first half of this year, we executed approximately 400,000 tons of what we call free-on-truck domestic sales of lower quality stock to further alleviate stockpile pressure. This resulted in the lowering of our stockpiles across the operations to 2.7 million tons as at the end of June 2023, while stock at the port is reduced to approximately 400,000 tons.
If we now look at our unit cost, our FOB cost per export ton was ZAR 1,166, and excluding royalties, ZAR 1,139 per ton, compared to ZAR 927 in the first half of 2022, which is within the guidance we previously communicated. You'll recall that in 2022, we saw a significant increase in inflation, particularly in the second half of the year, which was driven by the Russia-Ukraine conflict. Comparing the period-on-period cost, we have seen significant increases in explosives, electricity, coincidentally, also rail costs. At the same time, we also, we saw the benefit of higher energy-related costs in our coal price. Despite the subsequent decline in coal prices, we have not seen a decrease in these energy-related costs.
As July mentioned, we have reduced three underground mining sections, one each at Zibulo, Greenside, and Khwezela. As a result, we have reduced the associated variable costs for each of these sections, but continued to carry the fixed costs, as we've opted to redeploy staff. You may recall that revenue from our domestic product sales, which is normally margin neutral, is deducted from our operating costs in calculating FOB unit cost. The lower coal prices and resultant lower revenue applied to some of these domestic sales resulted in a headwind to our unit cost in the first half of the year, compared to last year, first half. In addition, we have had lower-than-planned sales from Isibonelo, resulting in a further lower domestic revenue offset to operating costs. I'll reflect on our full-year cost outlook shortly.
Safe to say that we have initiated a number of cost curtailment projects to offset the headwinds we have faced during this period. In reconciling adjusted EBITDA of ZAR 16.7 billion in H1 2022, to the ZAR 4.4 billion recorded in the first six months of 2023, the largest impact is the result of lower realized export prices, marginally offset by weakening of the rand. We have already covered the impact of inflation and costs over the period-on-period. Export sales have further impacted earnings by ZAR 600 million.
Contributions to trusts as a result of the group's performance in 2022 and paid to beneficiaries in the first half of 2023, led to expenses totaling ZAR 400 million in the first half of this year, compared to ZAR 145 million in the prior period, driving the ZAR 250 odd million variance you see on the slide. In the first half of 2023, we have spent almost ZAR 900 million in capital expenditure, which represents approximately one-third of the full-year CapEx bill. Of the CapEx spent in the first half, ZAR 444 million has been spent on sustaining capital, while ZAR 449 million was spent on expansionary capital, mainly relating to the Elders project.
We have also provided guidance on the expected cash flow for the Zibulo North Shaft project, which was approved by the board in Q2 of this year. The Zibulo North Shaft project is expected to cost approximately ZAR 2.4 billion and will be completed by 2026. This project will extend the life of the Zibulo underground operation by approximately 10 years, producing up to eight million tons per annum of run-of-mine coal. As in the previous years, our sustaining capital expenditure is typically skewed towards the second half of the year. In 2023, this is even more pronounced, as Elders' spend will ramp up in the second half of the year, in line with our project plans. Looking at our cash position, you will recall a net cash balance of ZAR 14.7 billion...
as at 31 December 2022, during the first six months of 2023, we paid our dividends of ZAR 5.5 billion. We generated cash from operations of ZAR 4.8 billion for the first six months of 2023, compared to ZAR 15.2 billion for the same period last year. Further movements in the reporting period include the unwind of working capital of ZAR 747 million, which is driven by a reduction in the trade receivables. As we've discussed, we also spent ZAR 893 million on capital in the first half, which brings our net cash position to ZAR 13.6 billion at the end of June 2023. The board reaffirms Thungela's dividend policy by declaring a dividend of ZAR 10 per share, or ZAR 1.4 billion in aggregate.
That represents, as I said earlier, 33% of adjusted operating free cash flow, slightly higher than the stated policy, which is to target a minimum payout of at least 30% of adjusted operating free cash flow. This commitment is underpinned by the group's flexible balance sheet position and is in line with our capital allocation framework. Let's look now at the uses of net cash balance. As July pointed out earlier, our long-term priorities remain unchanged. For this reason, it is imperative that we continue to fund our strategic capital projects, so that's Elders and Zibulo North Shaft, through the cycle. A total of ZAR 3.8 billion remains to be spent on these projects. We have thus reserved the sum as to avoid any value-destructive interruptions to the execution of these large capital projects.
Completion of the Ensham transaction is also imminent, and we have therefore reserved that cash for this acquisition. The acquisition cost will be offset by the locked-box mechanism in place since 1 January 2023, although the exact figure will only be determined about three months after completion. We therefore have a total of ZAR 7.2 billion in cash already committed towards Elders, Zibulo North Shaft, and Ensham. Projects that will not only enhance the quality of our portfolio, but also extend the life of our business. If we then deduct the ZAR 1.4 billion dividend to be paid to shareholders and the resultant ZAR 156 million to be paid to the trust, this leaves us with a cash balance of approximately ZAR 4.8 billion, assuming end of June.
When considered together with the undrawn credit facilities of ZAR 3.2 billion, we believe this to be an appropriate level of balance sheet flexibility in light of continued market and rail volatility. The difference between the approach we've communicated before and where we are now, is that previously we said that we would fund Elders and Zibulo North from continuing cash generation from operations. However, the volatility in prices and uncertainty about the timing of the rail recovery means that it's now prudent to reserve cash to fund these near-term capital commitments. This required level of balance sheet flexibility is also an important factor when we consider the potential share buyback. We remain cautious as we evaluate a potential buyback, given the continued uncertainty and dependency on various factors, most notably our exposure to TFR's performance.
For clarity, we must ensure the group has sufficient balance sheet flexibility to weather short-term headwinds while continuing to invest through the cycle. We also need a degree of comfort on both the speed and magnitude of a recovery in both prices and rail performance. Given the continued uncertainty relating to these factors currently, the board is of the opinion that a more cautious approach would be to wait for further clarity in order to execute a share buyback program that delivers long-term value for shareholders. If we unpack what I referred to in the previous slide for just for a minute, we've consistently said that given limited pools of capital available to coal-focused miners, we believe that it's appropriate to maintain a degree of balance sheet flexibility sufficient to manage the business and invest in our strategic projects through periods of volatility.
We remain of the opinion that it's appropriate to retain cash of approximately ZAR 5 billion in addition to the undrawn facilities. I want to focus on the ZAR 5.2 billion surplus cash on the left-hand side of the graph. We can ignore the Ensham amount here, as it would be reserved under both scenarios, given the imminent funding requirement. The difference between the graphs on the left and the right-hand side respectively demonstrate the subtle change in approach necessitated by softer, although volatile, prices and variable rail performance on the part of TFR. The confluence of these factors has necessitated a more cautious approach, and we have accordingly resolved to fund approved projects where the spend is ongoing and highly certain from cash on hand rather than from future cash generation.
The board has not taken this decision lightly, but experience has taught us the importance of avoiding any interruptions or risk material value erosion to large capital projects that are critical to the future of the business. It is for this reason that we have opted to galvanize the funding required to execute Elders and Zibulo North Shaft as planned. I commented earlier, the board has not ruled out the option of a buyback, and should we see market conditions, in particular, TFR's performance, improve on a sustainable basis. The same time, if we're comfortable with our balance sheet position, we may opt to execute a buyback in the future. We now turn our focus to the guidance for 2023.
As July mentioned, we have updated our operational outlook for the 2023 year based on operations of the first six months of the year. The range for export saleable production is accordingly narrowed to between 11.5 and 12.5 million tons. Achieving the lower end of that guidance range requires an annualized TFR industry run rate of only 47 million tons in the second half of the year, while the upper end requires a run rate of approximately 54 million tons per annum. Our guidance for FOB cost for 2023 has been revised to between ZAR 1,120 and ZAR 1,200, excluding royalties.
Including royalties, the guidance range is revised to between 1,170 and 1,250 per tonne, using a full cost benchmark coal price, just about $100 per tonne. This increase is primarily due to a lower domestic by-product revenue, offset from both Khwezela and Mafube. The 2023 cost guidance provided also reflects the impact of the reduction in underground sections, which we've already taken out during this year, as well as the yield loss on export coal washed sweeter. Our sustaining capital expenditure guidance for 2023 is maintained at between ZAR 1.3 billion and ZAR 1.5 billion. Expansionary CapEx is expected to be between ZAR 1.6 billion and ZAR 1.8 billion, relating primarily to the ZAR 1.2 billion for Elders and ZAR 600 million for the Zibulo North Shaft project.
The guidance for 2023 still excludes the Ensham business, and we will accordingly only provide guidance after completion of the transaction. With that, let me hand back to July for an update on that transaction and some closing remarks. Thanks, July.
Thanks, Deon. We communicated the rationale for the Ensham transaction previously, so I won't repeat that now. Safe to say that we continue to believe that this will be value accretive for our shareholders and marks the 1st milestone on our journey towards geographic diversification. I'm pleased that the conditions precedent have now advanced to a stage where we are confident that the transaction will complete on the 31st of August, and will assume operational control from the 1st of September. A comprehensive integration roadmap has been developed to ensure a smooth transition. As Deon explained, Ensham is not yet contemplated in the revised guidance ranges we have issued today.
Once we have our feet under the desk, we have a more thorough understanding of the production, cost, and CapEx potential, and be able to inform the market when we next issue guidance, likely at the release of our 2023 full-year results in March next year. Before I end, I hand back to Ryan for Q&A. Allow me to leave you with the following key messages: Thungela remains committed to operating a fatality-free business. Ensuring the health and safety of our employees is paramount. We continue to focus on our responsibilities to the environment and meeting our social obligations. We've achieved a resilient set of results, given the weak price and rail performance environment in H1.
We continue to closely monitor the trajectory of prices and rail performance, but it is imperative that industry, government, and Transnet find suitable solutions to the logistics challenges which continue to plague South Africa. We have reaffirmed our dividend policy and our commitment to shareholder returns through the declaration of a dividend amounting to 33% of adjusted operating free cash flow. We also continue to monitor the market for the appropriate timing to execute a share buyback, while ensuring that we maintain sufficient liquidity to execute our strategy. The long-term market fundamentals for coal remain structurally attractive, as coal continues to play a significant part in the global energy mix, but without a steady replacement of tons on the supply side.
We must maintain our focus on what we can control in order to safeguard our performance, while simultaneously ensuring the readiness of the business to take advantage of improved conditions in the future. Key to this will be ensuring the long-term competitiveness of the portfolio by investing in key projects through the cycle. Finally, our strategic objectives remain unchanged, and we'll continue to drive ESG and invest in our strategic projects through the cycle. This ensures that we can maximize the full potential of our existing assets and deliver our geographic diversification ambitions. Together with disciplined and optimized capital allocation, this will ensure that we are able to continue to deliver on our purpose, to responsibly create value together for a shared future. Thank you very much, everyone, and I hand back to Ryan for Q&A. Thanks, Ryan.
Thank you very much, July, Deon. We will now move to Q&A. A reminder that if you wish to ask a question directly, please join the conference call facility using the link you'd have received upon registration. Dialing star one will indicate to the operator that you would like to ask a question. For those who have submitted questions via the webinar platform, and I can see there are a couple, I will be reading those out. Operator, please could I ask you to open the line for our first question?
Question comes from Brian Morgan of RMB Morgan Stanley.
Thanks so much, Ryan. Deon, can I ask you, are you still seriously looking for acquisitions, or is that it for now?
Brian, I mean, when you invest through the cycle, you continue to look. Whether we'll find an asset that is competitive in this current environment, we will see. Again, I must remind all of you, because that question is probably asked in the context that prices have softened, and therefore, we probably create the impression that this is now abnormally low, and yet we plan our business at $90 per ton. We shouldn't normalize what was abnormal. What we saw last year with the blowout was a result of the, the conflict in Europe, and therefore, prices at unprecedented levels. We should build a successful, value-accretive, and competitive business at this kind of prices, because that's what we see in the long term.
Okay, cool. Can I ask from a brownfield perspective, what's next after Elders and Zibulo?
I don't want, I don't want to preempt, what we're studying, other than, you know, I've already, flagged that we're studying the gas project. For obvious reasons, given the market fundamentals on gas at the moment, we clearly need to see, a sustained improvement in Transnet and prices before we can make a call on future brownfields environment in this core basin. I mean, you can imagine, I mean, it wouldn't make too much sense for me to be delivering additional tons, when I'm rail-constrained. So we need to see that before I can communicate what we're going to do.
If I may add, Brian, obviously, what we would also wanna do is, once we get our feet under the desk, in Ensham land, is look at the portfolio across both geographies in order to understand what the most optimal next brownfield could be, if indeed there needs to be one.
You can imagine, I mean, Ensham, as we, as we reported to you, Ensham is a one billion ton endowment with only a reserve of 74 million tons. It stands to reason that as we consider our brownfield opportunities, that Ensham will play a significant role in that consideration.
That's very good. Thank you.
Thank you. The next question comes from Tim Clark of SBG Securities.
Thank you very much. Thanks for taking my question. I suppose the, the first question is just your, your comment on resilience. What, what are the sort of criteria or the drivers of making the next decision to curtail operations or to restructure, resize operations to optimize? Is it, is it a price issue, or is it a time frame of, of how long it's taking Transnet to, to reach a certain level? Is, is that level 60 million tons? I'm just trying to understand the decision point that you wanna drive. That's my first question.
Thanks, Tim. The decision point is a combination of the two that you've just reflected. I mean, as you can imagine, under normal circumstances where when prices soften, you try and drive as much production to lower your unit cost. We don't have that lever. We're going to have to see this interplay between the rail constraint and how quickly we can actually can lift that constraint and the price trajectory in terms of the forward curve.
The reason why we continue to hold on that decision, Tim, is because we can see line of sight in terms of improving what they've got, but clearly there is, there is a, an unknown in terms of if we don't resolve the long-term standing locals and availability of spares and components, that could, in time, start impacting the performance of the existing, of the existing fleet. That's why we say, if we don't see improvement in the Transnet rail performance or a sustained worsening, because it's important that we know how much we're actually able to, to rail before we make a decision, on resizing the portfolio. This is an area where you can't be taking short-term decisions.
You incur significant retrenchment costs, and then a week later, the constraint is actually resolved, and then, you know, then that decision just doesn't look like a good decision. This, this interplay between how much can we produce in what price environment?
Okay, thanks. It sort of leads me to my second question. Your rail agreement is up until March next year, I think March 2024. Is that part of your concern, that perhaps, you know, we've seen quite a lot of other rail agreements where, you know, emerging miners have taken a share or- You know, you guys have got massive potential to expand operations if you have the rail, but if you're going into a new rail agreement, and do you worry about the price of a new rail agreement? I would imagine that the economics of Transnet were better at 75 million tons than they are at the newer, lower level. No one seems to be talking 70 anymore. People seem to talk something more 60s or something.
Look, Tim, I, I mean, I prefer not to negotiate with Transnet in the public domain. Safe to say that, we've started negotiations. We're exchanging the, the volumes in the industry and our own specific volumes specifically. We haven't actually got to a point where we are discussing the detailed commercial terms. Clearly, I mean, what you've captured, in essence, captures what we'd be concerned about, we'd want to settle. Because it fundamentally affects the competitiveness of our business, what volume we're going to get from Transnet and at what cost. Those discussions are ahead of us.
All right. Thanks, Tim. Just my last one, it's quite a specific question. The 413,000 tons of domestic sales that you did free- on-t ruck, can you give us an indication, just some sort of broad indication of what sort of pricing you're getting on that domestic sales? I mean, is it... My guess would be something like taking a trucking cost of ZAR 800 or ZAR 1,000 a ton off the API 4 price would be a fair way of doing it. Would that be a fair way of looking at those 400,000?
Yes.
Think, think of a slightly more nuanced, and then Deon will give you the more detail. It's not just the, the API 4 minus, the trucking cost. You also got to think about the margin we lose as a result of the differential between rail and, and trucking, because trucking is more expensive. All those factors come into a pricing decision. We did this, driven primarily by the fact that we're holding stock and want to convert that co- that stock in a constrained rail environment to cash rather than continue to hold it. Really, it came down to our view of how quickly rail could improve in 2023. Deon, do you want to-
No, no, absolutely. Just for clarity, Tim, that 413,000 tons, the lion's share went into the export market, but there were also, some of that coal that made its way through the domestic market for domestic customers. It, as July mentioned, it was very much a cash decision, so, converting stockpiles to cash, than what it was necessarily an earnings in fact, it was earnings neutral. If you overlay the incremental cash that we got for those sales of just over ZAR 300 million, it was definitely a cash optimization rather than a margin creation opportunity.
Thank you very much.
The other benefit, Tim, obviously, is in lowering the stocks across our mines, you would see that, going forward, we would have a lower cost of trucking coal between sidings and operations, in that we've now created a bit more stockpile space and headroom for us to stretch our mines' legs and, and so to not be constrained by short-term stock constraints. The economic decision is cash and flexibility rather than EBITDA margin.
Thanks, Deon. Thanks, July.
Thank you. The next question comes from Ben Davis of Liberum.
Morning. Thanks, thanks for the call, guys. Yeah, a couple from me. Just one, how to think of how this cash buffer plus the kind of the modifiers might adjust, obviously, into the year end. I mean, the exploration, expansion CapEx will obviously come down as it gets spent. The Ensham acquisition will go out the door. Will that, that ZAR 4.8 billion or ZAR 5 billion, will that change with the Ensham acquisition, or should it, we consider a similar sort of level, at year end, assuming it does go through?
Ben, I think it is a f- fair conclusion that Ensham is going to happen imminently. And therefore, obviously, that initial cash outflow is around ZAR 4.1 billion. And approximately three months after that, we then earn back the economic benefit, deed cash, so to speak, which, if you do the math, we're anticipating that to be at least ZAR 700 million. That cash is outside of that buffer already, as we've flagged it now. The key change has clearly just been the unspent Zibulo and Elders cash that we are reserving at the moment.
What would inform our view on an appropriate cash, retained cash balance at the end of the year would be clearly, the pace of spend on those projects, as well as the outlook at that point in time. Your question is absolutely valid. It's one that we will continue to exercise our minds as we move into that end-of-year position, and it, it, it might change slightly, based on our perspective on the forward curve, Transnet's trajectory of recovery and so forth. Then the last one that would impact it is on any decision in the buyback between now and, the end of the year. If such a decision is reached in this period, that would also impact the, the answer to your question.
Yeah, actually, that, that, that follows on nicely. I mean, with the, the buyback, certainly, I, I presume that decision could be made at any time during the second half. Also, I mean, particularly given how long it would take to do a buyback, because of the, I, I assume it's a similar sort of constraints, where you can only do about 10% of daily liquidity. It would, it would take a long time to do, to spend, to, to even do the buyback if you, if you did initiate it in the second half.
The first part of your question is, is absolutely spot on. We have not excluded any timing, but rather flagged what the elements are we would look at. Those are clearly, we wanna see, whilst TFR is clearly stabilized and we're seeing a trajectory of improvement post the most recent shut week on week. We wanna see that stabilize. Clearly, we want to have a supportive forward curve. A number of elements. We'll monitor the liquidity on our balance sheet and the level of spend on those capital projects. All of those things fall into place, then absolutely you're right, that timing is not necessarily something that we've put an exact date or series on. We're open to it at any point in time.
In terms of our liquidity, I think the last time we looked at it, our share remains very liquid, and we have approval for around a 10% buyback. We don't see the time to execute one as a very material constraint, no. We have until May next year, if we do announce a buyback, to fully execute it.
Gotcha. Perfect. Just lastly, on Ensham, given, when, if it closes on the 31st of August, that, the locked-box mechanism of economics, that was pretty much finished by the end of the second half. Should we just model about 2/3 of the cash flows for the second half effectively?
That, that is, that is correct. I think there was a natural... You are correct.
Yeah.
There's a natural cap to it, or there was a firm cap to it, also a time, therefore, yes, it, it doesn't reflect the full period until end of August. It came to essentially, a stop prior to that point. You are correct. It's only 2/3 of the year's cash flow.
Okay, perfect. All right. Thank you very much.
Thanks, Ben.
Thank you. The next question comes from Thobela Bixa of Nedbank. Thobela, your line is open, you can go ahead and ask your question. Unfortunately, we're not getting any response from Thobela's line. That is the last question from the lines at this stage. Thank you.
Thank you very much, operator. I'm sure we'll give Thobela a chance to get back, back online. While we're waiting for, for him and for any other questions on the line, I'm quickly going to move to some of the questions that have come through on the webinar. Let's start with the first one, is from Lebohang Mofokeng at Argon Asset Management. Quick question: What is the online stockpiling capacity and at-port stockpiling capacity for Thungela?
A very quick answer to that. On mine is around 3.5 million tons of stockpile capacity. At port, it depends on how many grades we stockpile, but midpoint, around 1.4 million tons of stockpile capacity.
Lebohang also has a second question, but I think we've addressed that. He's got a question around the cost of trucking. Our cost of trucking to the port, but as we've heard through the presentation, that's not-
Yeah
... material for us.
The easy answer to it, it's, it's more than double the cost of what it would take you to rail and send your coal through RBCT, and that's around $20 a ton, so it's more than double that.
Perfect. Thank you, Deon. The next question comes from Itumeleng Seanego at Eskom Pension and Provident Fund. As it's around discounts, I suspect, Deon, this is also going to address your question. The question from Itumeleng: The discounts widened from an average of 15% in 2022 to 18% in H1 2023. What's your expectation for the discount in H2? Do you expect any improvements or expect a similar discount range to persist?
Hi, Itumeleng. A couple of questions in there. Let me quickly just unpack them. Let me start with the most difficult part of it. What will the crystal ball say about H2? We think that the discounts should narrow in H2, and the reason for that is also what I spoke to about the presentation, that the reason it widened from last year's 15%, and the first half of last year, 13%, to the, what you've seen, 18%, is because during October, November, December, prices were still fairly high, and during those periods, we would be taking orders, and the orders, the discount would be set at date of order in absolute U.S. dollar terms. When we deliver the coal, the price of the coal is determined on the average API 4 price in the month of shipping.
Which therefore means that that absolute dollar discount, which was based on a high price environment in H2 last year, then results in a fairly high discount percentage in the first half of 2023. For clarity, that discount could have been much higher had we not increased the sweetness or the energy content of our sales mix the way we have. Yeah, that discount could have been higher. Therefore, the narrowing slightly in H2 would've been a much more dramatic narrowing, did we, in the event that we didn't manage this in H1.
... Thank you very much, Deon. Just two more questions in the same vein as the earlier one. The first is from Bruce Williamson at Integral Asset Management. Do you have an estimate of how much non-RBCT coal is exported via Durban and Maputo, and what are the current average trucking costs? A related question from Jack Elliott: Where do you see the break-even point for truck coal volumes? Just a quick response on that one, I think, Deon.
I'm happy to quickly give you the statistics from our viewing glass. Recognize that you cannot take this as a run rate going forward, because the multipurpose terminal port at Richards Bay has started putting constraints on the quantum of trucks that they are open to receive, and clearly, there has been a number of constraints across the network. The numbers are, in the first half, Richards Bay, around five million tons industry, Maputo about three million tons, and Durban about one million tons of coal that's made its way, trucks, from the industry via those ports.
You must, you must also read that in the context of the fact that prices in the first half of the year, particularly at the beginning of the year, were quite high, and where people had contracts that were alive, they would have had to continue to truck. As you heard from one of our competitors a few days ago, trucking is no longer margin accretive at this stage. To really give you a firm number for the remainder of the year would be way too speculative.
Thank you, Deon. Thank you, July. Staying on the theme of markets, the next question is from Xolani Mazomba, from Noah Capital Markets. How do you see production from Russia, and how is that impacting on your market share? I take it he means, South Africa, South African market share.
Production for, for Russia last year, if you, if you look at the commentary, actually, they also achieved record production for, for, for the year. The, the, the reason for that is they were able to redirect a lot of that production into India, China, and as Deon commented, surprisingly, North Korea, which we didn't expect. At current prices, what we're beginning to pick up in the, in the market is that production that typically would use the western ports is really beginning to struggle to be margin accretive, and therefore, would expect that some of that production should start coming off, coming offline, going forward. How quickly does that, given the freight differentials, is something that we wait to see.
I think for modeling it, one would have to assume that certainly for the remainder of this year, we shouldn't see a significant come off of Russian production. It might actually be a 2024 issue.
Thank you very much, July. The next question is from Ashley Bellum: With the deal coming to an end with Anglo American, I suspect we're speaking about the offtake agreement there. With the deal coming to an end with Anglo American next year, how will that impact your discounts to the Richards Bay pricing?
The aim of our marketing strategy and approach is to establish our own team to market our coal. We started that, as we flagged before, approximately one year ago, almost already. We expect that team to be able to capture more of the opportunities that we've seen in the market and some of the premiums for the high-quality coals that we produce. Over time, we anticipate that, and this is now ceteris paribus relative to the mix and what we have available to sell as a result of our ore bodies. We expect, all else being equal, that realization to improve slightly, and that you'll see obviously in our revenue line.
Thank you, Deon. The next one I'm going to move to July is a question from Laurence Sithole at Atlas Peak Investments. Will Thungela remain a pure-play coal company going forward? Are there any plans to follow the suit of Exxaro and Seriti, that have made financial commitments to diversify their operations into the production of green energy?
Laurence, the second part of your question is easier to answer. I don't intend to comment on other people's strategies, other than to reiterate what we have said, which is part of the first part of your question. We have very clearly said our diversification strategy is quite simple. We diversify into areas where we have a right to win, and where we have a right to win is in coal. We nuance that very specifically by saying we want to diversify geographically for the simple reason that we're a single country, single commodity asset, entirely dependent on one piece of infrastructure, which has impacted our business quite significantly. Therefore, that's why we're pursuing geographic diversification.
We also have said we'll look for opportunities in regions where we have got know how to operate and clearly emerging markets. Africa is something that we know how to operate, but if you think about the sequencing of our thinking, and you've seen by the first opportunity that we got over the line, we want to look for coal, and we think the fundamentals for coal are very attractive and robust, and that will be our way of geographic diversification. Beyond that, I wouldn't comment on other people's strategy.
Thank you very much, July. Just moving to a couple of more finance-related questions. Deon, the first one from Mark Butler at Global IR: Please comment on the increase in the effective tax rate to 30% from 18% for the first six months ended June 2023. I think Mark might have just confused a little bit here the question, but the gist is the ETR of 30%.
Thanks, Ryan. Thanks, Mark. Got the gist of your, of your question. The answer is that in up to 2022, we still had various assessed losses in unredeemed CapEx, which was deductible from profits during that period, and that shielded our effective tax rate. In the current period, we've obviously paid the full corporate tax because we've now depleted the use of those historic deductions and losses. Actually, it's slightly higher than the corporate tax rate at the moment, and that's mainly due to a deductibility of the costs incurred in the two trusts, so the employee and the community trust, which is high in this current period as a result of the high dividends we declared last year, but is not deductible currently from, from, from our taxable income. That's why you've seen this slightly higher ETR in the current period.
Thank you very much, Deon. From Sandile Magagula at Umthombo Wealth. Regarding the upward FOB cost revision, is this associated with production curtailment? Secondly, at which level of TFR performance and coal price would you be able to cut the cash buffer further north?
The FOB cost revision is, in our case, Sandile, it, it's kind of a complex, complex calculation, and I'll, I'll let Deon give you, if you want, the mechanics, because he, he showed you what has happened. We have taken a number of actions in the light of TFR underperformance. We've high-graded our, our up, our, our, our, our production for a reason. I mean, we, we always said, we want to send the highest margin ton to, to the port. We also have spoken about taking production capacity out. Three underground CM sections and a plant at Greenside. What we have not done is triggered a retrenchment. We, we, we, we, we're releasing those people via natural attrition. In some respect, there is a timing issue in terms of those costs coming out.
While some of the variable costs have come out, you can imagine that we're still holding onto some of those costs. As we go forward, and I hope you see that in our results going forward, what we're driving is productivity. Again, a fairly different approach. We are now ramping up, Khwezela, so you would not have seen the improvements in Khwezela in H1, because we were curtailing it, and we're now ramping it up. It's a very complex set of interplays, given the constraints that we're trying to manage. Deon, do you want to add anything on the revision upwards?
No, that, that's absolutely correct, what July said. If you, if you reflect on the revision, the slight revision upwards, when you're washing sweeter and therefore slightly lower, export saleable denominator, your cost naturally is slightly higher per ton, but your energy content per ton is also slightly higher. Absent, absent those actions, clearly, our discount to the benchmark price would have been wider, and we've clearly solved for a value and a cash outcome rather than necessarily only a FOB cost per ton outcome. Equally, you also see that we didn't take the free on truck sales into consideration in determining that FOB cost per ton. We used the lower denominator of just the export saleable, consistent with our past practice. Absolutely right. Thanks, July.
Thank you, Deon. Thank you, July. I see that Thobela has managed to send in his question. Excuse my line earlier. Two questions. I'll give them one by one. The first question from Thobela: Given the poor performance from TFR, how come they haven't declared a force majeure? What triggers a FM, and do you earn any income from such a breach of contractual agreements?
I'm happy to, to sort of, answer Thobela's part of that question, not necessarily TFR's. Our perspective has been that the current rail constraint certainly doesn't qualify or classify anywhere near a force majeure definition. Therefore, we don't think that that's ever been a question mark or a discussion. If you look at the cost that we incurred to rail, clearly, that continues to be under pressure, but I wouldn't be comfortable to comment on whether there's any other economic or legal benefit of the poor performance at this stage. Safe to say that it is something that is at the heart of ongoing discussions between the industry and Transnet, and as the industry has, and July has made it very clear, historically, what we've opted to focus on is improving the future for all, rather than necessarily focusing on the elements of your question.
Perfect. Thanks, Deon. I'm gonna go to the second part of Thobela's question. Stockpiles. What's the hindrance in depleting your stockpiling, your stockpiles at mine, excluding TFR, and at port?
Well, I mean, it, it... Given everything we have said, the only other way to deplete your stockpiles is one of two options. You close down the mines for a period of time, and then you work down those stockpiles whilst the mines are closed. I mean, that's not, that's not the smartest tactic, because you're carrying the cost during that period. You'd have to believe in doing that, you don't believe that Transnet will ever improve. That's the, that's one consideration. The other alternative, really, is to track it. Whether you do that by way of flotation cells or you track yourself to some way, and that's not half as easy as, as we have just described.
The third one is the route that we have taken. We've been consistent about this, that we, as a company, we think that working with Transnet to improve their performance is probably, in the long term, the right thing to do. Certainly, the early indications from the shutdown suggest that the plans that we've put in place are beginning to work. Let's see where it lands us.
Thank you very much, July. We've got two more on the webcast. The next question is from Chris Reddy at All Weather Capital. What do you need to see in order to start the buyback? The share's down over 50% year- to- date. What else can give you a higher return on capital than buying your own shares at existing levels?
Yeah, thanks for that, Chris. Clearly, when you consider a buyback, we don't exclusively or only look at a return on capital. We look at a broader capital allocation perspective, and what we have been solving for over the last 1.5 years, or two years since we've been listed, has been a couple of things. One, extending the life of our business. Two, diversifying from a geographic perspective, and those type of decisions clearly are attractive in a return on capital, but might not be as attractive as buying our own shares. But absent a longer life of our business and geographic diversification, the quality of that underlying cash generation might not otherwise be as high.
We agree with you that, clearly, it's always a very attractive prospect to acquire your own shares, but we have been absolutely clear with our shareholders that have supported us in getting the authority to do so, that we'll be responsible in making such a buyback decision. Do so, to answer your question explicitly, when we have confidence in, in the sustained trajectory and improvement path of Transnet, clearly, the forward price supports that. We have eaten through the bulk of the very significant capital commitments lying ahead of us. Not the bulk, but a good sort of portion of it. Once we have those type of indicators, a buyback decision would be much simpler and, and more confident.
Thank you. Moving on to the last couple of questions. I've seen there are a number of them. Well, three of them. Let's first go to Bruce Williamson at Integral Asset Management. Hi, July. Have you had any resignations of senior staff at Ensham in recent months? As we know, there's a shortage of mining-related skills in Australia.
The resignations that have been reported to us, bearing in mind that Idemitsu are still running the mine, are in, are not critical at this stage. They look to me like, would be business as usual. We're not concerned at this stage that the mine is losing critical skills. Clearly, I- we want this to close as soon as possible, because that uncertainty is not helpful to the employee morale, and the performance of the mine.
Thank you, July. There are a couple of questions from Steven Beat. I think we've addressed a number of them, as we've gone through the Q&A, but just one that perhaps we haven't touched on. Tell me more about your Transnet discussions between government and private sector.
Steven, I mean, the discussions we're having with Transnet, you can classify them into, as I've used with a number of people, I've called them number of swim lanes. The one is working with Transnet on the ground, making sure that we're getting the infrastructure, the locals, the maintenance, the scheduling, and all that, working as best as we can. Hopefully, with what they've got, they can get to 60 million tons. The second swim lane is related to how do we get from 60 to beyond 70, which is what they've got capacity for, but also secure spares and components for the existing fleet. That requires, as I said earlier on, resolution of the impasse between Transnet and its supplier, CRRC.
There's a lot of discussions happening, and, and we, we remain quietly optimistic that in time we will see this resolution. The third one is a longer-term discussion, and that is one that is of a policy nature. In other words, what we have learnt from this is that, and this is a global phenomenon, not just a South African phenomenon, is that governments are not, in today's market dynamics, best placed to manage critical infrastructure. What they should be able to do is to set the right regulations and free our best-of-breed operators to invest and run critical part of that. In, in, in our view, similar to what happens in, in other geographies, provide access to best-of-breed rolling stock operators on a commonly owned rail system.
You have seen the white paper, if you've been following it, and we're quite encouraged with the white paper, what the white paper seeks to do. Clearly, at a national level, we've got to implement those proposals. So I see three swim lanes, if, if you like.
Thank you very much, July. The last question that we've got on the webcast comes from Ashley Bellum. Can you give us a sense, please, of what the monthly free cash flow of the company is at current coal prices?
Hi, Ashley. We, we clearly don't forecast profits, or, or cash flows, and wouldn't be able to be drawn on it. I can give you, with two caveats, a couple of data points, and you can take your own view on it. The two caveats are, one, you need to reflect on what you think the right sales profile is. We, we guide production, not sales. And then, two, you need to have your own view on what you think the coal price is likely to be, rather than on a day-to-day basis, but the average coal price per month over the next sort of, number of months. At current FX, our all-in sustaining costs, so that's all the OpEx and the sustaining CapEx that we spend, is around $90 a ton.
That's at an API 4 equivalent CV coal. Yes, our cost is actually lower, but then you gross it up for a 6,000 CV, and that number you can then compare to, you had a $110 a ton number. That's sort of order of magnitude, again, all other factors being consistent, such as, FX and so forth.
Thank you very much, Deon. Thank you, July. I can see that there are no further questions on the call either. We will wrap up the Q&A session here. Reminder that if there are any further questions that you do have, please do get in touch with me via email. My email address is ryan.africa@thungela.com. I'll get back to you. With that, please allow me to hand back to July to close out the day.
Thank you very much, and let's end the day with thanking all of you, our shareholders, and investment community for joining the call. We want to leave you with the understanding that our commitment is absolutely to run a fatality-free business, making sure that people go home safely, but also to control the controllables. A lot of the exogenous factors that we have discussed are beyond our control, but those things that are in our control, which is our cost, our productivity, is something that we're absolutely focused on. Investing in the right projects that ensure that the future quality and competitiveness of this portfolio will ensure attractive returns to you, our shareholders. Thank you very much.