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Thungela’s Coal Brings With It Huge Liabilities

Shareholders in Anglo American (LON:AAL), one of the world’s largest mining companies, were given a gift by the company on Monday (June 7th). For every 10 shares in Anglo they own, they received one share in a new company called Thungela Resources [TGA].

But this is a gift that investors may not be happy receiving because we believe this demerger has transferred huge environmental liabilities from Anglo onto its unsuspecting shareholders. Anglo, which owns De Beers diamonds, confirmed last month that it would demerge its South African thermal coal assets into a new entity listed in London and Johannesburg.

We anticipate that there will be immediate pressure on Thungela’s share price as it starts trading because some institutional investors will not be able to hold the stock in their portfolios for technical reasons. Other investors may decide for ESG reasons that they do not want to own a company that produces coal.

We think that investors should also be concerned that Anglo is offloading assets that come with potentially enormous environmental liabilities attached.

Miners are required to clean up their mess and deal with pollution when their assets reach the end of their lives. Thungela said in its listing prospectus that it has provisioned R6,450 million ($468 million) for environmental rehabilitation, although 55% of this is an unfunded guarantee.

Thungela said in a call with analysts that it wants to increase the funded element of its environmental provisions as part of a commitment to being a “responsible operator”. However, over the past three years Anglo American contributed just R7 million ($500,000) in cash to the clean-up fund with the remaining increase coming from growth in the trust’s assets. This would appear to represent slow progress towards becoming a responsible operator.

Thungela’s estimate of environmental provisions is based on old legislation that governs how miners operate in South Africa. Those rules were due to be replaced on 19 June 2021, just 12 days after Thungela listed, with new rules called NEMA 2015 (they have now been delayed to June 2022).

The company admits the new rules will “substantially increase” its environmental liabilities but has given little further detail.

Using Thungela’s listing prospectus and the independent competent person’s reports for each of its mines, we have able to estimate that liabilities could be as much as R18,811 million ($1.36 billion). That is three times more than Thungela’s provision and is more than 10 times greater than the market capitalisation of the company on listing (approx. $290 million).

This partly reflects the increase in provisions required under the new NEMA rules but also includes numerous additional issues that Thungela’s independent expert identified in its reports. For example, SRK Consulting, the independent expert, said repeatedly that Thungela’s water treatment plans were “not sufficient” and it has detailed huge additional costs needed to remedy these issues. A detailed account of our estimate can be viewed here.

Based on Thungela’s independent expert’s findings, the company appears to have significantly under-estimated its environmental liabilities and could therefore be giving investors a misleading impression of the company’s value.

In response to our report, Anglo American told media that provisioning for environmental liabilities based on draft regulation did not accurately “reflect the actual or likely sums needed to discharge such liabilities”.
“It is precisely because these sums are considered to be artificial, and arbitrarily inflated, that the draft has remained under review since 2015. This is an industry- wide matter in South Africa, so the regulations on which the Boatman report apparently draws its conclusion are far from being finalised,” the company said.

Meanwhile, Anglo American has been praised by some analysts for reducing its exposure to coal, which is a major contributor to greenhouse gases. In reality, we think this demerger allows Anglo to dump enormous environmental costs onto a much less well capitalised company. To us, this looks like greenwashing: Anglo is claiming to be acting positively by reducing its greenhouse emissions while seemingly washing its hands of environmental clean-up obligations.

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