Afrimat: It’s a dirty business but someone’s got to do it well
Mining and quarry operator is still in a very good space, is highly cash generative and has a strong balance sheet
Listed in the Construction and Building Materials sector of the JSE, Afrimat’s main operations are in mid-tier open pit mining and quarrying. So while many of the traditional building and construction players in SA are struggling due to lack of work, Afrimat has managed to maintain a very enviable five-year compound annual growth rate in earnings of around 17%, crediting its wide diversification strategy and agility.
However, headline earnings per share for the full year to February 2018 were 8% lower than last year’s. On a 10% rise in group revenue, operating profit fell by 14%, due mainly to a 13% increase in operating expenses. At the pre-tax level, profits fell by 20%, but a significantly reduced tax rate of 24% compared with 31% the previous year resulted in attributable profits falling by a lesser 12%.
The main reason why Afrimat performed poorly in comparison with its historic trend is the recent acquisition of the Diro iron ore mine at Demaneng in the Northern Cape. Not only did Demaneng make a loss for the year but the sharply higher interest bill associated with the purchase of this business in 2017 also affected profitability.There are three main segments to Afrimat’s operations, being mining and quarrying of Aggregates and Industrial Minerals (65% of revenue); the newly established Bulk Commodities (which is the Demaneng iron ore mine, brought out of business rescue, contributing 10% of revenue); and Concrete Based Products (25% of revenue).
Glen Douglas, the dolomite, aggregates and lime operation in the Vaal area, turned in a good performance, especially when viewed against a relatively weak demand scenario.
Cape Lime, which Afrimat believes is the best quality limestone mine in SA, has a very long life and also turned in a reasonable performance.
“A limestone mine may become more valuable than a platinum mine”, says Van Heerden, alluding to the fact that while limestone may be less glamorous than platinum, it currently has better intrinsic demand characteristics.The iron ore segment made a loss for the year but a profit in the month of February. The newly purchased Demaneng operation in the Northern Cape near Sishen is proving to be extremely frustrating. Having reached full production in February, a month ahead of schedule, the company was dealt a severe blow with the succession of derailments on the Sishen to Saldanha train line, operated by Transnet. This is the world’s longest train, at over 3km and 342 wagons. Such is the scale and frequency of derailments on the line that Kumba Iron Ore, the dominant player in the South African iron ore scene, had to declare force majeure to its customers as it was unable to get its product to port.Demaneng is currently at breakeven, producing 45,000 tonnes of iron ore a month, with capacity to ramp this up to 80,000 tons per month. Van Heerden is confident that the Transnet situation will be fully resolved by September or October of this year, after which Demaneng can recommence its exports to Saldanha.
Van Heerden says they can sell every ton they want to domestically into the SA market which is sized at eight million tons per year. However they believe their product is superior quality and accordingly prefer to receive US dollars for it.
Afrimat is still in a very good space, is highly cash generative and has a strong balance sheet, even though gearing has moved up somewhat following the acquisition of Demaneng. Van Heerden points out that certain international mining players are waiting to exit and that opportunities to acquire those businesses exist. “We are in a buyer’s market.”
The Afrimat share price has largely traded sideways in a band between R25 and R32 since Demaneng started producing in August last year. On a price to earnings ratio of 15.3 times, at a share price of R29.15, the company seems reasonably priced.
Chris Gilmour is an investment analyst.