Will the Thungela Resources share price keep rising in December?

Shares in Thungela Resources have risen by 270% this year and boast a forecast dividend yield of 48%. Roland Head explains what’s going on.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young female business analyst looking at a graph chart while working from home

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »