Sasol: Downgraded Last Week, Up 12% Yesterday
The destoning plant is online. The market noticed.
Two months ago, I laid out the Sasol thesis in detail.
A South African coal-to-chemicals operation trading at 2.7x EBITDA and 60 cents on the dollar of book value, with the market pricing it for death in 2028 even though the engineering data suggested otherwise.
The core bet was simple: if management could fix the coal quality problem, the stock would re-rate. If not, we own a value trap.
On January 16th, JP Morgan downgraded the stock to Underweight. Wall Street hates it when unloved South African chemical companies stay unloved.
I added more.
Yesterday the stock ripped 12%.
The destoning thesis is playing out exactly as expected, and the price action reflects it.
The Destoning Plant Works
This was the whole thesis. Everything else was noise.
Sasol released their business performance metrics for the six months ended December 31, 2025, and the key data point is that the destoning plant reached beneficial operation in December.
This is the R1 billion facility that removes rocks from the coal before it hits the gasifiers, the fix for the coal quality degradation that had been crushing production volumes and inflating unit costs.
Sinks are now tracking toward the lower end of their 12% to 14% guidance range, and all previously closed low-quality mining sections are fully operational again.
The engineering fix is working. That’s why the stock moved.
Production Is Recovering
Secunda Operations production jumped 6% quarter-over-quarter, and for the first half of fiscal 2026, production ran 10% above last year.
Some of that comparison is flattered by a shutdown in September 2024, but the sequential improvement is real and reflects what happens when you stop feeding rocks to gasifiers.
Management is guiding for 7.0 to 7.2 million tons for the full year, which is consistent with the base case I laid out in November.
Natref had a blowout quarter with production surging 62% sequentially.
Part of this comes from their joint venture partner Prax SA filing for business rescue in October, which means Sasol is now running the refinery above its normal shareholding capacity while the lawyers sort things out.
It’s free optionality on a distressed partner’s assets.
Liquid fuels sales volumes were 27% higher quarter-over-quarter, and management raised their full-year guidance from 0-3% growth to 5-10% growth.
These are not the metrics of a dying company.
The Gas Situation Is Worse
However, not everything is improving.
Mozambique gas production fell 4% quarter-over-quarter as the Petroleum Production Agreement (PPA) asset continues its natural decline.
The Production Sharing Agreement was supposed to offset this decline, but it’s ramping slower than expected.
Management cut their gas guidance significantly.
They originally expected production to come in 0-10% above last year; now they expect 0-5% below.
The Richards Bay LNG decision matters more now than it did two months ago.
Without alternative gas supply secured, Secunda’s cost structure will suffer as the PPA depletes.
For now, management is juggling coal and gas on an integrated basis to keep operations running, which is exactly what you want to see from competent operators dealing with a constrained feedstock situation.
But the gas cliff got a little steeper.
Chemicals Still In The Trough
Global chemicals remain ugly, which shouldn’t surprise anyone who’s been following the sector.
Chemicals Africa revenue fell 3% quarter-over-quarter on weaker pricing, with the average basket price dropping from $955 to $914 per ton.
Volumes were up 2%, which is something, but pricing pressure remains the story.
Chemicals America got hit harder with revenue down 9% sequentially.
The LIP JV cracker had an extended outage during the quarter, though it restarted at year end.
Moreover, ethylene and polyethylene pricing remains depressed as the industry works through overcapacity.
Eurasia held up better with prices 14% above last year on palm kernel oil strength and favorable exchange rates, but volumes were soft as weaker demand weighed on selected product lines.
None of this is surprising.
The chemical cycle hasn’t turned yet, and we’re still in destocking mode across most end-markets.
When the cycle eventually turns, the operating leverage is there because the self-help measures have been lowering breakeven and costs have been coming down.
But for now, we wait.
What I’m Watching
The thesis is playing out according to the base case.
The destoning plant works, sinks are improving, and fuels are surprising to the upside. The stock reacted accordingly with yesterday’s 12% move.
Two things matter from here.
The Q3 update in April will give us more destoning data, and if sinks keep tracking at or below the low end of guidance, the coal quality problem is solved for good.
That would remove the biggest operational uncertainty from the thesis.
The February interim results will show whether net debt is approaching the $3 billion threshold for dividend restoration.
If they get there, income funds will have to look at the stock again, and that’s a different buyer base entirely.
Final Thoughts
JP Morgan downgraded this thing a week ago. Yesterday it ripped 12%.
The stock is still cheap by any reasonable metric, trading at a massive discount to replacement cost and to developed-market chemical peers.
The problems are operational, not terminal, and the fixes are funded and executing.
Two months ago I said the engineering would speak for itself. Yesterday it did.
Disclaimer
This content is for informational and educational purposes only. It is not investment advice. We may or may not hold positions in the securities discussed. Do your own due diligence before making any financial decisions. Market data projections are subject to change.