Construction: How Afrimat side-stepped death’s door
Diversification into mining has paid off and helped the company defy the demolition of the construction sector
Listed open-pit mining group Afrimat’s evolution and appetite for acquisitions over the years is the reason the company stands out from its construction-linked peers.
Afrimat has changed a lot since it listed on the JSE on November 7 2006, where it debuted at R8.05 a share, resulting in a R1bn market capitalisation. The company’s market cap is now R4.6bn, which goes against the depressing trend of declining market value among most construction-related companies.
“Five years ago, Afrimat was a much smaller company and we only focused on aggregates,” says CEO Andries van Heerden. Aggregate is a category of coarse particulate material used in construction, including sand, gravel and crushed stone.
A big change in Afrimat’s structure was the establishment of a bulk commodities division after it bought Demaneng iron ore mine in the Northern Cape in 2017. The division supplies iron ore to local and international markets.
Higher iron ore prices boosted the company’s performance, despite the lacklustre performance of the construction business in the year ended February.
Now the company has set its sights on buying Australian-listed Universal Coal. Afrimat has made a non-binding offer to purchase Universal Coal for A$40c a share. It is a multi-mine coal producer that counts Eskom among its customers.
Universal Coal’s thermal coal mines include Kangala and the New Clydesdale Colliery, both in Mpumalanga. The two mines have separate off-take agreements with Eskom until 2023.
As at the end of the 2018 financial year, about 80% of Universal’s sales were to domestic markets, while the remaining 20% of sales were destined for high-value international markets.
Afrimat says it is considering various financing alternatives for the transaction. Van Heerden has not ruled out a rights offer. “But we have not decided on the exact mechanism,” he says.
The company’s diversification into mining has paid off handsomely. In fact, in the year ended February 28, the bulk commodities business saved Afrimat.
Anthony Clark, an independent analyst from Small Talk Daily, says Demaneng, acquired and rehabilitated for about R400m, may turn out to be the best deal Van Heerden has ever done.
Where does this affection for bulk commodities leave Afrimat’s construction business?
“We all know what the situation is with construction right now. We saw a decline in the construction materials’ profitability. But [construction materials] is still a significant part of our business. It accounts for almost half of our profits. Given the really tough market out there, I am very happy with what we achieved,” says Van Heerden.“The business is fit and healthy. We need to focus on execution and to serve customers well. We must just ensure that we secure work at appropriate margins,” he says. Afrimat’s roots are in construction. When it went public, Afrimat was a black-empowered company supplying materials to the building and construction industries.
When Afrimat listed, the SA economy was buoyant and the building and construction sector was booming. In 2005, the year prior to Afrimat’s listing, the economy grew 4.5%. SA’s GDP grew 5% in 2006. In the February 2006 budget speech, the government committed more than R400bn to fund public infrastructure over a three-year period.