SIMON BROWN: I’m chatting now with Serfaas Badenhorst. He is portfolio manager at Momentum Securities. Serfaas, I appreciate the early morning time. The talk of 2022 in many ways has been around Thungela, but you’re saying, hang on sec, there’s Exxaro out there as well.
Before we get to the stock itself, coal is still largely how we power planet Earth, and the Ukraine war has fundamentally changed some of those dynamics.
SERFAAS BADENHORST: Yes, Simon. I think that’s very true. The Germans actually wanted to phase out coal by 2038, but that’s quite a bitter pill for the government at this stage with the Russian War. So they fired up a lot of [their] coal stations, which obviously is driving up the price.
SIMON BROWN: And what we’re seeing, as you mentioned, [is the] prices. If you look at coal prices, [there is] the Richards Bay Coal Terminal. But there are many other different spot and contract prices for coal. These are trading at maybe not record highs, but certainly the highest levels we have seen in a very long time. As I said in the intro there, coal is still largely how Planet Earth works.
SERFAAS BADENHORST: That’s correct. So unfortunately what’s happening now – let’s just take Germany as an example – before the war Germany actually got 50% of its coal from Russia but now, with the Eurozone imposing all these sanctions on the Russian Federation, [the coal] needs to be sourced somewhere else. This is driving up the price, and [among] the beneficiaries of that are the South African coal companies.
SIMON BROWN: Absolutely. And winning from it.
Turning to Exxaro, as I said everyone usually – well, certainly this year – has been focusing on Thungela, and, make no mistake, Thungela has done incredibly well. Exxaro has had a good year too, and of course they’re the other really large coal miner in South Africa. They are well positioned and they’ve, I’m looking at their dividend yield, a 12% dividend yield. They are maybe the forgotten coal child in our market, but they’re a quality business and, you say, an opportunity.
SERFAAS BADENHORST: Yes, definitely. Thungela is a great company, but I think one should note that there’s a concentrated risk in a company like that. With Exxaro you’re getting more of a diversified play and from our side a diversified play is the safer option. You even have the exposure to iron ore, which is coming off a very low base. So the potential for upside is definitely there, continuing with higher coal prices and then also the possibility of renewables going into the future.
SIMON BROWN: Of course, I’d forgotten that. They’re actually looking towards renewables, which is quite cunning [of] them. They are currently a ‘dirty energy’ provider and [looking] out to renewables which, as you say, is in the future some time off. But that really could become quite a biggie for them.
SERFAAS BADENHORST: Exactly. If you look once again at what’s happening in the Eurozone with its dependency on Russian gas, a lot of these governments are realising, listen, we have to speed up the renewable play quite quickly. So you have Exxaro benefiting from the high coal prices at this stage, but also poised for a future positioning of renewables.
SIMON BROWN: Gotcha. How big is iron ore in Exxaro’s life? There was a point in time when it was considered more of an iron ore company, but these days coal is probably very much more the dominant part of the equation.
SERFAAS BADENHORST: Definitely more the dominant part of the of the equation. If I remember correctly, iron ore makes up just over 20%, but that’s an extra kicker to the income statement and, as I said, it will be a good kicker coming off a low base this year.
SIMON BROWN: The iron ore price has been a little volatile, but I can still remember when it was back at, what, $40/tonne. It is now trading closer to $100/tonne. Exxaro – you are mentioning a target price of around R270/share. That I imagine probably is in the short to medium term, particularly as we head into the European winter.
SERFAAS BADENHORST: Yes. Unfortunately the coal price is going to be [high/short term]because of the demand and supply with the demand being higher in the winter. That is definitely something to take into consideration. So that’s a target price set hopefully until the end of winter in the Eurozone.
SIMON BROWN: I mentioned there a 12% dividend yield. What these companies are doing is in many senses really generating cash, and sending cash back to shareholders. This is typical mining; when it’s booming they make money and they reward shareholders.
SERFAAS BADENHORST: That is definitely so. I think one of the limiting factors that could have been more beneficial for shareholders is Transnet, unfortunately, at this stage. They can’t fully benefit from everything that’s happening in the current zone. But, even with that, [coal] exports to the Eurozone [are] up 700% this year. So even with the downturn at Transnet, there’s definitely upside potential for the shareholders and hopefully a bigger dividend payment as well.
SIMON BROWN: Yes. If Transnet can even just do as promised, then there’s probably some more capacity for these folks, and maybe even some more upside in that space.
Servaas Badenhorst, portfolio manager at Momentum Securities, I appreciate the early morning insights.
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