Coal miner Thungela Resources (LSE: TGA) has seen its share price soar this year as the war in Ukraine has disrupted global coal supplies. Shares in the South African firm are worth nearly four times more than they were in January.
November was another good month for investors in this business. Thungela shares rose by nearly 20% during the period.
A 48% dividend yield?
Shareholders are also collecting an impressive income. August’s half-year results included an interim dividend of R60 per share — about £2.95.
Broker forecasts for the full year suggest shareholders could receive a total dividend of R150 per share in 2022. That gives the stock a forecast dividend yield of 48% at current levels — an incredible figure.
At face value, Thungela shares look pretty cheap to me. But extreme valuations like this are often a sign of underlying risks. I’ve been taking a closer look at this business to see whether the investment case still stacks up.
What’s going on?
Thungela Resources is one of the largest producers of thermal coal (used by power stations) in South Africa. The business was spun out of FTSE 100 mining group Anglo American in 2021, when Anglo decided to cut its exposure to coal.
In environmental terms, exiting the coal business was probably a good decision for the firm. But from a financial perspective, Anglo’s timing hasn’t been great.
The war in Ukraine has caused a massive spike in coal prices, as supplies from Russia have been disrupted. Coal exported from Richards Bay in South Africa is currently trading at around $240 per tonne, compared to around $125 per tonne at the end of 2021.
Thungela’s mining costs are fairly low. It can export coal for around $65 per tonne. Profits soared during the first half of this year, rising by 2,000% to R67 per share.
The shares could be cheap
Broker forecasts for 2022 put the company’s shares on a forecast price-to-earnings ratio of two, with a 48% dividend yield.
This is not a normal valuation at all. In my view, the clear message being sent by the market is that these profits aren’t sustainable and are expected to fall sharply at some point.
I can see several reasons why this might happen. Coal power is heavily polluting and expected to be gradually phased out in the future. Some of Thungela’s mines are also quite old, with estimated remaining lifespans of under 10 years.
Although coal prices are unusually high now, they could change fast if supplies improve or demand falls.
In the short term, I think the outlook for Thungela is probably quite good. Colder weather in the northern hemisphere could mean that the coal market has another good month in December. The shares could rise.
However, on a longer view, I think there’s a lot of uncertainty here. I’d guess that profits and the dividend are likely to fall over time, but I don’t know how quickly this might happen.
I see Thungela as an interesting speculative situation. But I’m not sure it’s likely to be a good long-term investment.
