The final payout for the year is ZAR10 (South African Rand), which is the same as the interim payment. However, all dividends from the company are subject to withholding tax at 20%. This means the total amount received by UK shareholders for FY23 will be 66.44p a share. Despite the deduction, the stock’s presently yielding a very impressive 10.6%.

Not to everyone’s taste

Before going any further, I need to address the elephant in the room. The company’s principal activity is coal mining in South Africa and Australia. It’s therefore not going to win any prizes for its environmental credentials.

But despite attempts to reduce the world’s carbon footprint, coal consumption reached an all-time high in 2023. The International Energy Agency expects global demand to peak this decade, although there’s too much uncertainty to accurately predict how quickly it will fall thereafter.

However, as can be seen from the chart below, coal prices have been falling lately. And they can be highly erratic.

The average Richards Bay Benchmark price — received by the company over the past four years — has been $121 (FY23), $271 (FY22), $124 (FY21) and $65 (FY20).

And ongoing problems with South Africa’s rail network — including regular thefts of signalling equipment and derailments — means the company frequently experiences difficulties in getting its product to the Richards Bay Coal Terminal, where it’s exported to the world.

The net result is a reduction of 40% in revenue, and a 72% fall in earnings, for FY23, compared to the previous year.

During FY23, the company exported 12.2m tonnes. Its guidance for FY24 is a range of 11.5-12.5m.

Volatility

With uncertainty over whether it can transport its coal to world markets — and the price it receives — the dividend that shareholders can expect to receive is impossible to predict. For example, in FY22 it was five times higher than in FY23. This proves the point that dividends are never guaranteed.

However, its share price has done very well recently. Since reaching its 52-week low in February, it’s climbed over 50%. I’m sure the enticing dividend has something to do with this performance. But otherwise it’s unclear what’s behind the movement.

However, looking back to the start of 2022, it appears to closely mirror the movement in global coal prices. That’s why, despite its recent good run, the company’s share price is still 65% below its all-time high of September 2022.

The headline to this article asks is Thungela Resources stock good for passive income? At first sight it does appear to offer the prospect of receiving above-average dividends. But the company’s reliance on a volatile coal price and South Africa’s rail infrastructure, which is suffering from decades of under investment, makes it a high-risk investment.

In fact, despite its attractive dividend, it’s a little too risky for me.

The post Are Thungela Resources shares brilliant for passive income? appeared first on The Motley Fool UK.

However, the company is growing rapidly, and pays generous dividends. This makes me want to investigate further.

What does it do?

Thungella has interests in seven coal mines in South Africa and has no intention of transitioning to clean energy. In September, the directors said unequivocally that they were “not focused on diversification into the renewable energy sector“.

Its future prospects are therefore entirely dependent upon the demand for coal.

The future of coal

More coal was produced in the world last year than ever before. Russia’s invasion of Ukraine led Europe to revert back to dirtier methods of electricity generation.

But the International Energy Agency isn’t expecting a rapid decline in coal production any time soon.

Strong demand has kept coal prices high. In 2021, the average price was $124 per tonne. For the first 11 months of 2022, this more than doubled to $277. For comparison, the current spot price is close to $150.

Results

Unsurprisingly, the financial performance of Thungella mirrors the rising coal price.

So it has been able to reward its owners handsomely.

The directors have a policy of returning “at least 30%” of operating free cash flow to shareholders. In its short existence, the company’s paid two dividends. Both of which have significantly exceeded the directors’ target.

Investors will know before the end of the month what the final dividend will be for 2022. Even if Thungella ‘only’ pays 50% of what it did for the first half, its shares are currently yielding an astonishing 45%. If the dividend is matched, the yield would be a mind-blowing 60%.

It’s important to remember that because the company is based in South Africa, withholding tax (up to 20%) will be deducted from any dividends paid. Also, the dividend is declared in rand, so the exchange rate will have an impact on the amount received in sterling.

What do I think?

Despite the amazing dividend, I’d be nervous about investing in the company. For a start, its product is a pollutant.

Also, Thungella has warned about the poor infrastructure in South Africa. Last year, the country’s railways experienced a 12-day strike. There was also a derailment which took 10 days to clear. This affects the company’s ability to get coal to the port, from where it’s exported.

The country also suffers frequent power cuts.

Both of these factors have adversely impacted production during the second half of 2022. In December, the firm released a trading statement indicating that coal output for 2022 was likely to have been 20% lower than in 2021. Even so, the historically high coal price will compensate for some of the lost production.

Looking forward, the coal price is likely to be closer to 2021 levels. The company’s performance in 2023 is therefore going to be more in line with two years ago, when the dividend was far less generous.

For these reasons, I’m not going to invest at the moment.

The post Are Thungella Resources shares going to yield 45% this year? appeared first on The Motley Fool UK.

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.

The post Will the Thungela Resources share price keep rising in December? appeared first on The Motley Fool UK.

Moreover, I reckon companies with low ESG ratings will suffer as investors become more informed about corporate responsibility and the costs of polluting increase. 

And with that being the case, I’d avoid UK shares with poor ESG ratings. Here are three companies I’d steer clear of for that reason. 

UK shares to avoid 

The first to avoid for ESG reasons is Thungela Resources (LSE: TGA). The firm was recently spun off from its former parent Anglo American, which was looking to tidy up its portfolio of mining assets.

The group owns interests in and produces thermal coal predominantly from seven collieries located in Mpumalanga, South Africa.

Not only is coal one of the dirtiest power sources around, but the mining industry in South Africa has attracted criticism in the past for poor working conditions. As such, I believe the company has terrible ESG credentials and would avoid the stock as a result. 

However, to its credit, the firm says it’s committed to advancing its ESG factors. To that end, it’s established an employee partnership and community partnership plan. And, of course, the demand for coal around the world is still high. This could mean the corporation’s outlook isn’t as bad as it first appears. 

High costs

The other company I’d avoid is North Sea oil and gas producer Harbour Energy (LSE: HBR). The North Sea is one of the most expensive places to produce oil and gas in the world. This means companies like Harbour are at a disadvantage. At the same time, the group has a large amount of debt on its balance sheet. 

According to the company’s own figures, free cash flow breakeven will be $30-$35 per barrel, and net debt is around $2.9bn. By comparison, some producers in the Middle East can extract oil for less than $7 a barrel. 

I think these figures put Harbour at a disadvantage and, as the world moves away from oil and gas, it could begin to struggle. 

That said, if oil prices remain elevated, the company could generate enough cash flow over the next few years to reduce its debt. This would put it in a strong financial position enabling it to invest for the future. 

Despite this, I’d still avoid the company considering its ESG risks. 

Disrupted business model 

Carnival (LSE: CCL) is the world’s largest cruise company. Unfortunately, the cruise industry is notorious for poor working practices and pollution. 

As such, I think the business has some of the worst ESG credentials of all UK shares. Further, the pandemic has decimated the group’s balance sheet, and it could take years to recover. 

These are the primary reasons why I’d avoid the stock today. However, there are some green shoots of recovery on the horizon. The company has resumed some sailings around the world, and consumers have been happy to book trips. Carnival is also making progress in reducing its emissions. 

Despite these brighter spots,  I’d avoid the enterprise as I think the risks facing the business will far outweigh the opportunities over the next five to 10 years. 

The post 3 UK shares to avoid appeared first on The Motley Fool UK.

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. 

The post Should I buy Thungela Resources shares? appeared first on The Motley Fool UK.