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Pop
your understanding is correct. They have not received any cash from AAL hence wont be sending anything back.
(Unless the coal price absolutely craters to below $70 between now and the end of the year. If that happens, the share price has bigger issues than the CSA).
fromage : I'm certain you know perfectly well what I'm talking about without having needed my verbose reply, but I wanted to elaborate for the benefit of those who may have taken your words literally and absolutely :)
tedmak/Shearclass : so if I'm understanding correctly, this means that any accounting done to reconcile this Capital Support Agreement does not affect cash flow and/or distributable earnings. From my point of view, the only important thing at the moment is that the dividends will not be impacted :)
pop31, they aren't losing anything, all of the fair value adjustments to the Capital Support agreement result in unrealised gains or losses. TGA have never utilised the capital support, so they can't owe anything...
Pop31
yes - the limit is on the maximum amount that AA will pay to TGA.
Hence - if the price of coal plunged to zero, the amount AAL would have to pay would be capped.
Now - if, say, AA pays an amount to TGA under the agreement and prices subsequently rose, TGA would be liable to pay back the amount AA paid to it.
TGA is writing down the value of the agreement because it is unlikely that any cash will be paid by AAL to TGA because prices are so far above the floor. In essence, the agreement, because it expires at the end of this year and prices are so high, is worthless.
That is all you need to think about.
Where there is confusion in the min
TGA has something it does not need and is writing the value of it down.
fromage : I thought someone would raise that :) :)
Not quite. In a casino (and often in CFDs), you can lose 100% of what you put down in one go. For the most part, you have more control on shares (unless you are investing in hyper-speculative shares). Usually, you are given ample opportunity to exit a share with 20%/40%/60%/80% of your initial stake when you are making losses - it's (usually!) not an instantaneous drop from 100% to 0%. With casino gambling, it usually is - if you put 100% of your money down, if you lose, you lose 100%, nothing inbetween .......
With shares, you can make judgement calls to take losses on one stock to re-invest in another one that you think will increase. I did this - I lost 50% of my wealth during the pandemic (fully realised - I sold the shares) to re-invest that money in shares that have subsequently recovered my money, without any further input of capital. You cannot do that with casino gambling.
So, shares are a little like casino gambling, but with much more flexibility on controlling the extent of your losses and also much greater chances of making informed decisions based on fundamental and technical analysis of your options.
"casino gambling with a stockmarket twist ."
Sound just like buying shares!
ShearClass: What I'm saying is that it does not look like Thungela can "lose" an indefinite amount as you are suggesting, as can happen in true futures trading. Rather, it's more like the way that CFDs are often run - once you have lost the amount of money you have invested, your broker forces your position closed and you come away with zero, ensuring you can only lose 100% ( at least in my understanding - I wouldn't touch CFDs with a barge pole after realising that they are merely casino gambling with a stockmarket twist .........)
Shearclass : You are of the opinion that the liability of Anglo to Thungela is limited, but that the liability of Thungela to Anglo is uncapped. If I'm reading the agreement correctly, that is not the case; see extracted text from Section 6 Capital Support Agreement:
"• the Actual Proceeds and the Trigger Price Revenue (which are based on year to date amounts) will be updated on a monthly basis. In the event that the difference between the Actual Proceeds and the Trigger Price Revenue is reduced (due to an update of the year to date amounts in any month), the Company will reimburse ASA, provided that the net payment between ASA and the Group will not at any point: (i) be less than zero; or (ii) exceed the Annual Support Cap"
This even specifically mentions that Thungela could owe Anglo, but only to the limit of the Annual Support Cap ............
"The maximum the write-down could be is the value that was put in on the balance sheet."
Nope. It's a derivative asset not an intangible asset!
A derivative contract asset can become a liability if the price of the underlying asset moves against you by >100%. It's just the same as an options contract. At >$140 coal the value of the capital support agreement derivative asset went below $0 and it became a liability.
"The fair value is determined by independent experts using external sources of information with reference to the forecasted quoted Benchmark coal price and exchange rates. A fair value loss of R584 million on the derivative asset was recognised in profit or loss for the reporting period on the basis of the sustained recovery in the Benchmark coal price to 30 June 2021. "
The calculations are black and white. You have a starting value for the derivative asset at a certain commodity price and you have the current value of the commodity. The accounting entries need to recognise the value of the contract asset at a certain point in time. If that asset has increased in value by 300% then the derivative asset will have to recognise that fact.
If as you claim the value of the derivative contract asset can't go below $0 then what are the accounting entries to recognise the underlying commodity move?
Let's wait and see what the financial accounts show next Monday.
@Pop31, there is no cash flow relating to the capital support agreement as no capital support has been received. All losses / gains are unrealised and will remain that way. When the contract end in December 2022 the derivative will be removed from the balance sheet.
All the above is obviously opinion, however it explains the trading statements not adding up and supposedly missing expenses...
tedmak : So the maximum writedown for Thungela cannot exceed a total of R900 million-odd? So in the agreement, is it only Anglo who is limiting their liability to the R1.5billion and R2.5 billion in the event the coal price dropped? It wasn't clear to me and seems to be worded that the agreement is fully reciprocal and Thungela's liability would then become R1.5 billion, etc. in the event of a price rise .........
This is interesting. I am an engineer and not an accountant, so not really clear on the mechanism and actual cash flow effects of this Capital Support Agreement.
However, I have read through the agreement and the following questions arise:
1. The limits to liability either way are R1.5 billion in 2021 and R2.5 billion in 2022. It appears to be exclusive, i.e. once out of 2021, reverts to a total of R2.5 billion. Nevertheless, however read, liability (accounting?) cannot exceed R3.5 billion total.
2. If I understand correctly, these are real cash flows. If the price is under the threshold, Anglo transfers money to Thungela and vice versa. Is this right? If not, it is merely an accounting vehicle for the books and all gets cancelled out in the end, if reversed next year, correct? Not really sure I'm understanding this correctly (e.g. does it get reversed and when), so any accountants please elaborate/elucidate ........
3. Has any money been accounted for in the 2021 accounts for the high coal price? If so, my understanding is that the accounts for 2022 cannot exceed R2.5 billion ........ (see Point 1)
Shearclass, I am NOT incorrect.
It is capital support based upon a minimum sales price.
At floatation it was recorded as an asset with a value of R916M.
The coal price recovered sharply such that the value of the minimum price support had fallen (to be expected as less chance it will be utilised). The reduction of the value was booked at a fair market loss of R569M at year end 2021.
The price has risen even further, such that writing its value down to zero would incur a FV loss of R347M.
The maximum the write-down could be is the value that was put in on the balance sheet. Talking of billions is not helpful whatsoever.
The numbers you mention are incorrect as the agreement was MINIMUM price NOT fixed price.
Now - it is possible that there has been some forward hedging of front month(s) API4, that would have some movement.
That would be TOTALLY separate to the capital support agreement.
Nope that’s incorrect tedmak as far as I understand things. The capital support agreement was valued at R916m in March 2021 and used a base coal price of R1175 / $70. If the coal price had fallen below $70 then the capital support agreement would have been used to offset the price received by TGA and the cash received from AAL would have been deducted from the $916m derivative asset on the balance sheet and recognised as a cost on the P&L.
As it turns out the opposite has happened and the coal price has rocketed. Each dollar above the $70 minimum sales price in the capital support agreement increases the notional loss on the AAL agreement. At $140 coal the notional ‘fair value loss’ on the derivative would be equal to the initial contract at R916m, at $210 it would be R1.8b and $280 it would be R2.7b. The benchmark Richard’s Bay coal price at 30/06/22 was ~$330, so the fair value loss would have been booked at ~R3.4b. The full model for the derivative asset valuation is of course more complex and includes a volatility adjustment, however there is no doubt that the FV loss recorded in H1 will be huge.
In summary, as TGA would have benefitted and received cash if the coal price had fallen, accounting rules dictate that if the price of the underlying asset increases then the company has to record a notional loss until the contract no longer applies.
Once this contract with AAL expires in December 2022 then the notional loss will be reversed as the capital support agreement no longer applies.
There will also be realised losses from the coal swaps that settled in H122, exactly how large these will be depends on the coal price when the contract was closed.
Basically, there is very little point in trying to do a full reconciliation of revenues vs expenses unless you are privy to the specific derivative detail!
My reading of that is when the group was demerged from AAL, there was a degree of minimum pricing in the capital support agreement to tide the company over.
That agreement had a value which needs to be recorded.
As prices have skyrocketed, in essence that fallback pricing is effectively worthless. Hence the value of the fallback pricing needs to be written down. For the management - doing it now during high profits from the current business makes some sense.
The price fell the last couple of days because of a fall, nothing dramatic, in the API4 price.
There is volatility in this company, We know that.
The prices have
@HowardW, the below extract is from P19 of the 2021 summarised financial statements;
"Profit for the reporting period was further impacted by a fair value loss of R569 million (2020: Rnil) on the derivative
asset relating to the Capital support agreement with Anglo American which commenced on 1 June 2021. Given the higher forecasted Benchmark coal prices through to the end of the agreement in December 2022, compared to
the trigger price of R1,175/tonne when the agreement was concluded in March 2021, it is unlikely that the Group will
draw on the additional capital support available as set out in the agreement. Thus, an adjustment has been processed
to reflect the derivative asset at its fair value at 31 December 2021. This agreement has not resulted in any cash inflow
or outflow to date for the Group. The Capital support agreement will continue until 31 December 2022 with a
further R2.5 billion potentially available for drawdown should prices drop below the trigger price."
"The Group entered into a limited level of derivative trading activity consisting of forward coal swap agreements in
2021 which have been accounted for as derivative assets at fair value through profit or loss. For the period ended
31 December 2021, a fair value gain of R348 million has been recognised in the statement of profit or loss and other
comprehensive income representing the mark-to-market impact of these agreements"
Newboots, I've also been battling with reconciling the bottom line TGA numbers in the June and July trading statements. By my calculations there is a "missing" +-ZAR900m expense. After re-reading the two trading statements there is one sentence in the July trading statement that has me concerned: "Given the strong Benchmark coal price forward curve, earnings have also been negatively impacted by fair value losses on the price risk management programme undertaken by the Group and the capital support agreement."
I wonder if this is a price hedging loss coming from forward sales that hasn't been clearly explained in the trading statements? If so, this won't have a cash flow effect in the current period, but will depress cashflow in future periods as when they sell coal at the reduced price.