Thungela Resources (LSE: TGA) shares are the FTSE 100‘s newest constituent. The company, which has been spun off from parent Anglo American, joined the market on Monday.
The shares listed at 150p and have since been on a wild ride. After plunging to around 111p, the stock then bounced back to 151p. It seems as if the market can’t make up its mind whether it likes the business or not.
It’s easy to see why. Thungela owns interests in and produces thermal coal predominantly from seven collieries located in Mpumalanga, South Africa.
While these mines are among the highest quality thermal coal mines in South Africa by calorific value, the environmental costs have forced many investors to move away from the sector in recent years.
ESG commitments
For its part, the company is committed to enhancing its environmental, social and governance (ESG) factors. It has established an employee partnership and community partnership plan. Management also claims the group has a robust ESG framework in place, which underpins its licence to operate.
However, specialist short-selling firm Boatman Capital Research has claimed the company is underestimating its environmental liabilities. Thungela has set aside around $468m for end-of-life mine rehabilitation costs.
But Boatman claims that new rules, known as NEMA 2015, will impose more demanding and more expensive environmental standards on miners in South Africa. The new rules are set to take effect in June 2022, delayed from the original date of June 2021.
Under these new rules, the short seller claims the total end-of-life environmental costs could be more than three times higher than Thungela’s owns estimates.
As well as this uncertainty, there’s also a great deal of uncertainty surrounding the future for coal as a power source. The world is rapidly moving away from its use. Clean energy sources are quickly becoming cheaper and more efficient. As such, it’s difficult to predict how the demand for coal will evolve over the next five to 10 years.
What’s more, the company won’t remain a FTSE 100 constituent for long. It’s moving from the UK to South Africa this week, with its primary listing in Johannesburg. After the move, it won’t be eligible for inclusion in the FTSE UK indices.
Uncertainty surrounding Thungela Resources shares
All of the above makes it incredibly challenging for me to place a value on Thungela Resources shares.
Still, short-sellers aren’t always correct. Boatman’s analysis of the company’s liabilities may be overstating the true picture. If that’s the case, the group could become a cash cow if its high-quality mines start throwing off profits.
Indeed, coal is still being used heavily across the developing world as an energy source, although it’s not clear how much longer this will last. Nevertheless, if current demand levels persist, management is confident the company’s high-quality assets can produce cash flow to support attractive dividends.
Thungela Resources shares may be suitable for some investors with a high-risk tolerance who are happy to have exposure to the coal sector. Personally, I’d rather put my money to work in businesses with a more predictable outlook. Therefore, I wouldn’t buy Thungela Resources shares for my portfolio today.
