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. 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 re today's presentation. While you take a moment to read through the cautionary statement, a reminder that the end results documents are available on the Thungela website, www.thungela.com under the results tab of 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 the 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 on TFR performance and how this has affected our business. Our CFO Deon Smith, will then talk through operational financial performance for 2022, as well as provide an update on guidance. After this, July will 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 one hour to give those on the call and webinar the opportunity to ask questions. We'll then close the call at approximately 1:45 P.M. 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, and 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 session. It is possible, of course, to follow today's session across both platforms simultaneously. It is also possible to dial the conference call facility only shortly before the Q&A session and directly from your computer. If you are planning to do this, I do encourage you to register for the conference call in advance of 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.
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're executing our strategy across a number of fronts. I'll provide you with a 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. 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. Safety is our number one value.
We are unconditional and single-minded about being a fatality-free business and operated without a fatality in 2022. Thungela showed exceptional agility in responding to the ongoing TFR challenges and delivered 13.1 million tons of export saleable production and 12.2 million tons of export equity sales. Notwithstanding the rail-constrained environment. The good operational performance, coupled with record coal prices, resulted in exceptional financial results and we achieved a significant increase in adjusted EBITDA to ZAR 29.5 billion and a net profit to ZAR 18.2 billion. Adjusted operating free cash flow increased more than fourfold to ZAR 18.1 billion, a remarkable achievement. The exceptional cash generation resulted in a net cash position of ZAR 14.7 billion at year-end.
We've secured access to ZAR 3.2 billion in credit facilities with two 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 ZAR 40 per share. This final dividend represents returns to Thungela shareholders of ZAR 5.6 billion, or 61% of adjusted operating free cash flow generated in the second half of 2022. Combined with the interim dividend of ZAR 60 per share, this amounts to a total dividend declared for 2022 of ZAR 100 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 ZAR 396 million to our employee and community partnership plans, taking total contributions to these plans to ZAR 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 ZAR 1.2 billion in value for our Sisonke Employee Empowerment Trust and the Nkulo Community Partnership Plan.
We also followed through on the commitment we made last year to do a full review of our intermediate emissions reduction targets. We are pleased to announce that Thungela aims to reduce its Scope one and two 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. 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 ZAR 1.2 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. Bruce 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.
This strategy is built around three 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 complacent when it comes to safety. We redouble our efforts to learn from incidents and have instituted measures from the executive level through to the front line to live up to the promise that everyone goes home safely every day. Given the importance of rail performance, I suspect that many of your questions today will be related to the impact that TFR has had on the business and what we expect this impact to be going forward.
As has been well reported on, the 5.3 million tons 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 2022 performance was heavily impacted by the strike and significant derailment in Q4. The combined impact of these two once-off events was approximately 4.8 million tons of lost capacity in Q4. Thungela has borne the brunt of this deterioration in TFR performance being the largest coal exporter. If rail had performed at 2020 levels, Thungela could have produced close to 16 million tons of export saleable production. This means that rail performance has cost us 3 million tons in export sales.
Recognizing the broader impact the rail performance is having, Transnet in the mining industry has 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 priority actions include detailed assessments to better understand the core underlying issues that move the needle, fixing priority 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 tons. 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 South China Rail are brought back into service.
The time to find an alternative solution, apart from discussions with South China 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. 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. You would have seen mine in this morning's sales announcement that we've revised our export saleable production guidance to a range of 10.5 to 12.5 million tons 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 tons 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. 31 trains per week to achieve the high 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're not building material rail improvement to deliver on our guidance. On the other hand, should rail performance recover faster than expected, we'd maintain production at 12.5 million tons 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 a 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 as 67% of sales volume in H1 were higher than five-five CV. While this percentage increased in H2 to 79% as we responded to the deterioration in Q4. We were forced to curtail production in 2022, particularly at the operations where we could most easily take out 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 trial road transport, but the break-even price for road transport is probably around $110 per ton. Thus, it is becoming increasingly difficult to justify this in the current price environment. We are also starting to engage in free on truck sales of lower CV material. These sales are being concluded at the mine gate, and we are not able to realize full export parity prices for this material. It is, however, expected for it to contribute to cash generation. Bearing in mind that the alternative is for this material to sit on the ground. 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 ZAR 414 million each to the Sisonke Employee Empowerment Scheme and the Nkulo Partnership Trust in 2022. This brings total distributions since our listing in June 2021 to close to ZAR 1.2 billion, which gives meaning to creating shared value and a lasting positive social impact. Let me now hand over to our CFO Deon Smith, to take us through the detailed operational and financial performance. Deon?
Thank you very much July. We're very pleased to present another set of strong annual financial results. Net profit for the period was ZAR 18.2 billion compared to ZAR 6.9 billion in 2021, with adjusted EBITDA of ZAR 29.5 billion, which represents an increase of about 195% compared to the ZAR 10 billion in 2021. 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 ZAR 18.1 billion. That's an increase of 364% compared to the ZAR 3.9 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 ZAR 3 billion in 2021. Our export 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 ton to ZAR 1,079 per ton. 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 ZAR 127 a share compared to ZAR 61 in 2021.
As July mentioned earlier, the strong financial performance has enabled us to declare a full year dividend, now totaling ZAR 100 per share or ZAR 13.8 billion in aggregate, which represents 76% of our adjusted operating free cash flow. You may recall on our first day of trade being 7th June 2021, that share price on the JSE, and when looking at that, recognize that the full year 2022 dividend of ZAR 100 is approximately four times that initial share price. 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 ton compared to $104 per ton in 2021.
The Ukraine and Russia conflict continued to fuel the energy security crisis for most of 2022, increasing de-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, we have also seen Russian coal displacing some South African coals into India and the South Asian markets. In Q3 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 the 16% in 2021 as we continue to prioritize our higher quality product on the available rail in order to maximize returns for shareholders. We have 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're currently seeing. 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's Navigation Pit, which we have not yet ramped up, as well as the Zibulo open cast mine. Despite the curtailment at these operations, we've increased on-mine stocks to around 3.1 million tonnes in stock at the port, just over 400,000 tonnes. 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. The TFR strike and derailment in Q4 of 2022 was the main driver of the on-mine stock build as our operations received limited trains during that period. If we now look at our unit cost, our FOB cost per ton was ZAR 1,079 per ton, which is marginally higher than the higher end of the guidance we issued in August 2022 of ZAR 1,065 per ton. 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 impacts during 2021.
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 three main drivers of this increase. The one was an even lower denominator given TFR's performance challenges. For clarity, whilst we sought to reduce production, where we were able to save variable costs and avoid some of the stranded costs, we were not able to eliminate all costs across operations where we had to curtail production. Secondly, the royalty charges, which are linked to price, and they were materially higher in 2021. The third bucket is cost inflation.
Cost inflation of about ZAR 110 per ton or 13.2% can be stratified into sort of general and structural South African inflation, such as wages, and import inflation. Import inflation was pronounced due to the higher energy cost, that's 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 applied 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 sellable production range for 2023, given continued rail 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 cost in the context of expected lower production denominator in 2023. As I mentioned earlier, we've reported a record adjusted EBITDA of ZAR 29.5 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 tailwind to our earnings is clearly the record prices we achieved in 2022, 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 and at port, but also the impact of 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 books, given the trust's shareholding is in the South African operating subsidiary below the Thungela listed entity level.
The environmental provisions impact of around ZAR 700 million is non-cash 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 ZAR 6.6 billion, which represents an effective tax rate of 25% for 2022. Cash settlements for the derivatives of ZAR 3.6 billion, ZAR 1.7 billion sustaining capital, and an increase in our working capital of approximately ZAR 600 million. We adjust for the non-cash increase in the environmental and other liabilities, which bring us to a total adjusted operating free cash flow of ZAR 18.1 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 ZAR 5.4 billion compared to the ZAR 13.8 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. Our strong cash flow generation result in net cash position of ZAR 14.7 billion at the end of last year. This already takes into account the funding of capital expenditure, the initial contribution of ZAR 1.25 billion to the self-insurance structure, and the improvement in our environmental liability coverage, which was a result of the additional contributions to the green fund during 2022. The board has resolved to fund the acquisition of Ensham, which is around ZAR 4.2 billion from cash on hand at year-end.
This is however a lockbox mechanism in place from Jan 1, 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 ZAR 40 per share for the second half of the year, which amounts to ZAR 5.6 billion. This also results in additional contribution of ZAR 396 million to the community and employee trusts. Taking these commitments into account, this leaves us with a theoretical cash balance around ZAR 5 billion at the end of 2022.
We have therefore reduced our cash buffer from the ZAR 6 billion previously to ZAR 5 billion and returned that cash to shareholders. We've also secured ZAR 3.2 billion in credit facilities from two leading banks in South Africa. These facilities, together with a revised cash buffer of ZAR 5 billion, will enhance our liquidity buffer to ZAR 8.2 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 ZAR 100 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 explained earlier, the bottom end of our export saleable production guidance for 2023 is conservatively set at 10.5 million tons, 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 tons 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 ton is between ZAR 1,047 and ZAR 1,180, excluding royalties. Including royalties, the guidance range is between ZAR 1,131 and ZAR 1,264 per ton, assuming a benchmark coal price of $130 a ton in determining the royalty rate of ZAR 84 per ton. We anticipate a full year effective tax rate closer to 27%. A slight increase from 2022 due to the deferred tax assets now having been fully utilized. Our sustaining capital expenditure for 2023 is expected to be between ZAR 1.3 billion and ZAR 1.5 billion.
Expansion in CapEx is expected to be between ZAR 1.6 billion-ZAR 1.8 billion, relating primarily to ZAR 1.2 billion for Elders and ZAR 600 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 rail performance improve in 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. With that, let me now hand back to July for an update on strategy.
Thanks Deon, for that comprehensive review. Let's now turn to an update on our strategic priorities. In the release of our results last year, we introduced our four strategic pillars, being: driving our ESG aspirations, maximizing the full potential of our 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 four 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 had been calling on developing nations to renounce coal altogether as a source of energy. However, when faced with an energy crisis of their own, these nations opted for a reliable and affordable source of energy and switched their coal-fired power plants back on. There simply isn't enough renewable energy yet in developed markets to reliably and affordably power their economies. The tragic events in Ukraine sharply brought into focus the energy trilemma, which is the need for sustainable, affordable, and reliable energy. The simple assertion that coal has a part to play in a secure and affordable energy system for at least the next two decades often sees one 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 we have a 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 off the 2021 baseline, and to net zero by 2050. In order to meet our 2050 net zero target, we have four distinct pathways available, all informed by climate change scenarios.
Looking at the summarized snapshot on this graph, we can see that the route that we will ultimately take hinges on two critical inflection points: the security of the energy system in South Africa and the pace of decarbonization globally. There are, however, no regrets steps that we'll take in the next two years, such as the construction of a 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're 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 wheeling 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 zero by 2050. In terms of intermediate emission reduction targets on the pathway to net zero, we are committing today to a reduction in Scope one and two emissions of at least 30% by 2030.
This will be achieved through several means, including the implementation of 19 MW renewable energy by 2030, as well as the closure of Goedehoop and 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, and 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 second strategic priority in our framework is maximizing value from our existing assets. To this end, the board approved the Elders production placement project last year.
Elders will produce high-quality coal and replace the volumes lost from the Kooroopp mine as the latter comes to the end of its life. Construction has ramped up at Elders, we spent around ZAR 200 million to date, with further forecast spend of ZAR 1.8 billion, taking the total expected CapEx to ZAR 2 billion in total. First coal 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 eight million tons per annum, allowing us to continue utilizing the Phola 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 Zibulo North, and we endeavor to keep the total annual expenditure across the two to between ZAR 1.6 billion-ZAR 1.8 billion in real terms once these two 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 coalbed methane project near Lephalale in the Waterberg. The asset has 3.5 trillion cubic feet of gas in place, of which one and a half million trillion cubic feet is extractable. To put this in perspective, these numbers are broadly consistent with the resources and reserves of the Mossgas gas field project developed off the coast of South Africa in the 1990s.
There is 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 planned for the second half of 2023. Initially, the focus will be on developing a proof of concept size 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 two years relating to this project. The creation of diversification options remains an important focus as we plan for the long-term future for our business. In February 2023, we announced the acquisition of a controlling shareholding in the Ensham thermal coal business in Australia. We provided detail on some of the technical aspects of Ensham on the call we hosted in early February.
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% shareholding 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 ZAR 1.2 billion in 2022, approximately 6.5% of net profit. While we issued approximately 3% of our shares to acquire this stake. 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. Let me wrap up before handing back to Ryan for Q&A. We covered a lot of ground today, allow me to leave you with the following key messages. Thungela remains committed to operating a fatality-free business, and safety continues to be our number one 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 the 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.
Thank you very much, July. We'll now move to Q&A. Reminder that if you wish to ask a question directly, please join the conference call facility using the link you did receive upon registration. Dialing star one will indicate to the operator that you'd like to ask a question. For those who have submitted questions via the webinar platform, I will be reading those out. Operator, please could I ask you to open the line for our first question.
Thank you very much sir. The first question comes from Ben Davis from Liberum Capital. Please proceed with your question, Ben.
Thank you. Can you hear me?
Yes.
Yes.
Go ahead Ben.
Great. Thanks guys for the call, g reat set of results. Just to dig in on the product discount that you're getting on the coal. It widened out to 16%, but that was also, and you did have a better quality mix as part of that. Do you know roughly what it would be if you were running at capacity? Is it still within the sort of normal thresholds that you've guided to in the past?
So Ben, 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. We experienced a bit of a widening in the second half. Some of those wider discounts also made its way into the orders for H1 2023, therefore we're probably going to see a similar discount percentage in the first half of 2023, being 16%. 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, we're expecting therefore that sort of 16 odd % range to prevail for the foreseeable future.
If you were producing all the selling, all your lower quality material as well, I mean, would it be just a couple extra %, or would it be sort of 20% sort of product discount?
Yeah, 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. Ben, theoretically, if we had to prioritize, which we wouldn't, a low quality 4,800 material, that discount could easily widen to 20%.
Okay great. Thank you. Then just one other quick one from me. Will you be seeking buyback approval at the AGM?
Ben, we've been consistent as a management team that we would enjoy all mechanisms to return cash to shareholders, so dividends and buyback mechanisms, that we think it's healthy to have those options available. 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. Yes, we would be seeking that. We will obviously have to wait for the AGM to see if such an approval is granted. Clearly that doesn't mean that we would immediately initiate a program, but we would certainly then have that optionality.
Perfect. Thanks, guys.
Thanks Ben .
Thank you. The next question comes from Brian Morgan from RMB Morgan Stanley. Please proceed with your question, Brian.
Hi good afternoon guys. Thanks for the call. Can you chat on Khwezela, if you don't mind? If I look at last year's cost numbers, it's about $135 a ton. It looks very high cost, pretty marginal. From the outside looking in, you know, keeping it going, keeping it alive, looks like a decision based on don't take this the wrong way, but hoping that Transnet comes right. Could you maybe just chat to us around the decisions that you're taking in the business between keeping things alive, stockpiling, putting them on care and maintenance? Just the thought processes around that.
Brian, your observation is correct, but see the Khwezela numbers more as impacted by management decisions. When we started curtailing operations, what we do is we measure 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. Khwezela, being an opencast mine, sometimes we are able to do that. The problem with looking at a unit cost is that given that you'd have curtailed it and you actually haven't taken some of its overhead, the cost looks obviously disproportionate. The third feature of Khwezela is it's an operation that is still in ramp up, and we decided, actually we're not going to ramp that up.
We'll ramp that up to full potential. Should these issues become a structural feature of our business going forward. In other words, all the efforts to stabilize the Transnet performance in the short term and improve the performance in the longer term by bringing the locos back online fail. Clearly, that then begins to call for us to look at the appropriate shape 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. Don't read Khwezela as it's, as the best it can be. That is far from it.
Can we just carry on on that, if you don't mind? What flags are you looking for, in, you know, Transnet's performance where you might decide to do restructuring?
I probably need to talk first 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 2 things. One is we've just said, on the lower end, if it doesn't improve what they did in the first quarter, what would that number look like? 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. 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 tons tempo.
Last week we reported 52 million tons. You'd hear those numbers and think, "Wow, that's a big improvement." Given that we want to be closer to 60, which is what they've got as capacity, I tend to think of this as stabilizing the system. Just out of interest, the 52 is more or less close to our upper end, but we need to see that sustainable. Brian, I'll need to see a resolution on the long-standing locos for us to decide whether we are seeing a structural change or not. That is what will tell us whether we are beginning to get capacity beyond the 60 million tons. There is work already being undertaken by Transnet.
You would have noticed that they've taken a bold decision, in our view, certainly as industry, to go out on tender to fix these long-standing 180-200 locos. If we are successful with that, I think we are back to acceptable performance whilst we obviously need to solve some of the operational challenges within the system. I think personally that is, and certainly that's our view as management, that that is the single biggest indicator of whether we'll get capacity back to historical levels or not.
Okay. Super. Thanks very much, Brian. That's it from my side.
Thank you. Mr. Africa, at this time, there are no further questions on the phone lines.
Perfect. Thank you very much. We will move to a couple of questions that have come in over the webinar. The first question is from Jandré Pieterse 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?
We'll take Tim this Jandré between me and Deon, because you answer the buffer question. I'll deal 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've a right to win, that being geographical. In geographical, we meant areas where we know we know how to operate, typically emerging markets. Also we said-
Would target bulks. In the first instance, we're very clear to say we'll be looking in coal, be that thermal coal or met coal. As we have demonstrated with Ensham, that strategy is well underway. We continue to look, you know, the timing of opportunities is whenever they are. 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 have got something interesting to announce to the market, we'll share that with you. Deon, do you want to talk to the buffer question?
Yeah. Just for clarity, we've reduced rather than kept a higher cash buffer, so reduced that from the number that you would've seen previously is around ZAR 6 billion. This time around, we've reduced that to ZAR 5 billion cash. Yes, we've signed up additional liquidity of facilities with two of the leading banks. 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 a 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.
Thank you very much July and Deon. The next question comes from Zachary Oster. Why would a material acquisition such as Ensham not be put to a shareholder vote?
Zachary, yes, it's a good question. In terms of the JSE Listings Requirements, shareholder vote's required for Category one 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 ZAR 4.2 billion, so prior to the reducing it for a potential consideration re-reduction as a result of the lockbox mechanism, was about 13% of that, so less than half. Typically, transactions are only deemed material and require shareholder vote above that 30% of market cap level.
Thank you Deon. I see there are a couple of further Ensham questions, I'm going to go ahead with those before I come back to the rest. The next question is from Errol Shear from Sasfin Asset Managers. If you can buy back extremely cheap shares in Thungela, a company you know well, why invest in Australia with its unknown risks?
Errol, 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 de-risk our environmental liabilities, and there we've allocated around ZAR 200 million to the green fund. We would also invest in our own business, so through sustaining CapEx, and that we've done also, ZAR 1.7 billion last year. After that, we would fund a minimum of 30% dividend to our shareholders, which would've been around ZAR 19 a share.
We've 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 P/E of around one times earnings, an attractive investment, and still is.
If you look at that lock box mechanism and the cash that we continue to earn from the 1st of January, by the time that the transaction complete, we think it'll continue to be a very, very attractive investment. In terms of diversification, we've seen the impact that Transnet and reliance from a single rail network has had on our business, and you would've seen it in our guidance today in how we have had to reduce and curtail operations and the associated impact on cost per ton. 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. We believe that it was a very good investment to seek to start our diversification journey, at least from a geographic perspective.
Perfect. Thanks. 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 % of sales have been sold forward and what prices, % discount on the product relative to Newcastle or cash cost guidance for FY23?
Hi Trishane. We haven't guided yet, and the reason for it is, we don't own the asset yet. Completion is still anticipated for mid-2023. There are around four conditions present that needs to be met. The first one is SOP 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. 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 cost at Ensham has come to an end.
It's now mainly the underground mine, which is around three or just over 3 million tons of export sellable per annum. Last year, excluding royalties, it cost about $100 a ton to get that product into the market, so FOB cost per ton basis.
Perfect. Thank you very much, Dion. One final question that's come through on Ensham. This question comes from Matabale Khodi at Capital One Partners. Is the excess capacity of supporting infrastructure, i.e. rail capacity, to support the production increase at Ensham?
Yes, indeed Matabale. There is approximately 4.2 million tons of rail entitlement allocated to the Ensham operation. You can now compare that 4.2 roughly with the current 3.4 million-3.2 million tons from the underground. There's significant rail headroom at Ensham. Needless to say, 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 tons would be very useful to have at hand.
Thank you very much, Dion. 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?
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 highly expecting to have to put any further capital into that fund.
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 Shilan Modi from HSBC. Shilan, this is just regarding CBM project. Regarding the Lephalale CBM project, is the technology transferable to other existing coal mines?
Shilan, the technology would be transferable to any other resource which has got coalbed methane at the right levels of concentration and permeability. Clearly, in our minds, this is the only resource that we've got where it's applicable.
Perfect. Thank you very much Shilan. We have a question from Minenhle Mbele at Absa. Two questions, actually. The first question is, how much risk will you say Eskom poses on the operation of the business? The update has been focused largely on TFR.
The reason why we are focused on TFR significantly more than Eskom is not to say that to South Africa, Eskom is not as important it is. In our case, however, 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. That's why Transnet, on the other hand, is such a bottleneck that we simply don't have any catch-up capacity. That's why it's quite an important issue for us.
Thank you Shilan. The second part of that question. Is Europe becoming a permanent client to SA Coal Mines? How much does this mean for Thungela shareholders?
I think what you see is probably transient shifts 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 will 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 is Europe is going to continue to consume coal, we are well placed to take advantage of that opportunity as a country.
Perfect. Thank you Shilan. 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 PPP with Transnet to recapitalize the coal line, or is it to fund potential losses should Transnet continue to underperform?
So hi David. We haven't chalked up a use of the facilities in specific terms for either of the items that you list. 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. There is no definitive allocation, so to speak, of that liquidity at this point.
Just to be clear, at current prices, even at our lower guidance, we still are a profitable business. We did not necessarily secure these facilities because we're worried about the lower guidance. Deon is right, it's about if something else completely unpredictable, untold, we just needed to make sure we have future-proofed our business.
Just maybe to add on that, what July said about profitability, given the guidance range at the upper end of that 12.5 range, this is assuming that we produce at that range, obviously there's opportunity to sell above it, which would change these numbers. At that range, we require about $83 a ton to be profitable and upwards. Clearly at the lower end of 10.5, we require about $92 a ton to be profitable. Just to give you a sense from a profitability perspective, that at current sort of 130s, that's not, certainly not the primary consideration.
Thank you very much July, and thank you Deon. The last one we'll take from the webinar before we go back to the lines is from Luvuyo Booi at Investec. The marketing contract with Anglo American allows Thungela to look for external parties to offer marketing services from June this year. What's your thinking around this?
Clearly, we've continued to develop our options. One, do it ourselves, t wo, continue with external parties, another 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.
Just for clarity there for Luvuyo, it's not middle this year.
The end of next year.
... June 2023, it's June 2024.
Yeah.
Perfect. Thank you very much July. There are a couple of other questions on the webinar, but I think many of them have been addressed as we've gone through the presentation in response to other questions. At this stage, operator, I'd like for us to go back to questions on the line.
Thank you very much sir. The next question is a follow-up question from Ben Davis from Liberum Capital. Please proceed with your question sir.
Hi guys. Just sorry, one more from me. Again, on the coalbed methane project. Not quite sure how the dynamics are domestically in South Africa. How does natural gas price in, say, reference to, you know, some of the more well-known prices like Henry Hub or the European gas prices? If not, well, is there any excess existing LNG compression facilities that you could access to with that project?
Yeah.
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 Deon is going to say.
Indeed. We in feasibility, but it's feasibility 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 two, three years. It's probably beyond that timeframe for any material potential investment if we believe that it's a good investment at that point in time. 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 Eskom's prices. And I'll get back to Eskom because I recognize there was a question on Eskom earlier.
The prices are generally set from a historic what we've been able to deduct from it in reference to sort of a diesel cost equivalent, if that makes sense. It's a local delivered price. 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. 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.
Gotcha. Okay Great. Thanks very much.
Thank you very much Deon. I can see that there are no further questions on the line nor on the webinar. With that, allow me to thank everybody for your participation today. If you do have any follow-up questions, please do get in touch with me via email. My email address is ryan.africa@thungela.com and I will get back to you. With that, please allow me to hand over to July to close out the day.
Thanks. 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've 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. For shareholders, I want you to know we're executing our strategy, and we'll continue to deliver attractive returns going forward.