In the recent announcement of its record set of results, Afrimat noted the growing importance of its Bulk Commodities division to the company’s overall business. CEO Andries van Heerden tells Munesu Shoko that Afrimat sees the mid-tier mining space, especially in bulk commodities, as highly attractive, and the company is cash positive to make further investments in new assets to grow the division. The move has been set in motion with the intended acquisition of new iron ore assets and a company that owns a high-grade anthracite operation.
Leading open-pit mining company providing industrial minerals, commodities and construction materials, Afrimat, recently released full-year results for the year ended 29 February 2020, reporting a record set of results for the second-year running, with group revenue up 11,4% to R3,3-billion and an operating profit margin of 18%.
CEO Andries van Heerden says the record results are a result of a healthy entrepreneurial culture, supported by the company’s diversification strategy and consistent efficiency improvement initiatives. This resulted in improved earnings generated by all the company’s three operating segments – Bulk Commodities, Industrial Minerals and Construction Materials – contributing to record results in the face of a difficult economy.
External revenue improved by 11,4% from R3-billion to R3,3 billion. Operating profit increased by an impressive 27,5% from R471,2-million to R601-million, principally due to an improvement across all three business segments, including an excellent performance by the Bulk Commodities segment.
Growing significance
Talking of the Bulk Commodities segment, Van Heerden says its establishment following the 2016 acquisition of the Demaneng iron ore mine, previously known as Diro Manganese Proprietary Limited and Diro Iron Ore Proprietary Limited, the segment is continuously becoming a significant part of the business.
The Bulk Commodities segment delivered an exceptional contribution to the results, producing 31,4% of the revenue, compared with 28,9% the previous year. The operating profit of this segment increased by 59,8% from R201,3-million to R321,7-million as a result of an increase in volumes and favourable pricing across the year. This translated into an increase in the operating margin from 29,5% to 31%.
“We grew our volumes at Demaneg by 34% year-on-year. This was complemented by favourable iron ore prices, which grew by almost 14% year-on-year,” he says.
Speaking to Modern Mining, van Heerden says while the company remains diversified, with a strong footprint in its traditional Construction Materials and Industrial Minerals businesses – which saw an increase in operating profit of 22,5% to R95,6-million and 1,2% to R192,4-million respectively – Afrimat finds the mid-tier mining, especially in bulk commodities, highly-attractive. The company sees a lot of potential in those assets deemed unattractive, mainly because of their size, to the big mining houses.
“We see the mid-tier mining space as very attractive,” says Van Heerden. “Demaneng, for example, was regarded as too small for the big mining houses, and that’s the type of assets we find lucrative to us.”
Further growth
To further grow its Bulk Commodities segment, Afrimat has identified more opportunities in the iron ore sector. “We are looking at an opportunity to acquire additional iron ore assets in Northern Cape. This will significantly increase our reserves in the iron ore business.”
Staying true to its diversification culture, Afrimat is also in the process of expanding its bulk commodities footprint into the anthracite sector, which Van Heerden regards as “a very interesting business space”.
The company recently announced that it had approached Unicorn Capital Partners Limited (Unicorn) to acquire, subject to outstanding conditions and a formal offer being made, the remaining shares in Unicorn.
Afrimat currently holds 27,27% of the issued share capital in Unicorn. It is envisaged that the remaining shareholding will be acquired in exchange for new listed Afrimat ordinary shares at a ratio of 1 new Afrimat share for every 280 Unicorn shares held. Afrimat has obtained irrevocable undertakings from 57% of Unicorn shareholders who have indicated that they will vote in favour of the scheme of arrangement.
Unicorn’s primary asset, Nkomati Anthracite Proprietary Limited (Nkomati), mines high-grade anthracite, which positions it as a key supplier to the local market. The existing operations are both open pit and underground, with the current Life of Mine (LoM) for the open pit section estimated to be nine years, with the underground portion’s LoM being in excess of 20 years. There is currently a total managed coal resource of 41-million tonnes and a total managed run of mine (ROM) coal reserve of 5,9-million tonnes.
The transaction, says Van Heerden, accords well with the group’s diversification strategy and will open up an additional product line to Afrimat’s customers as well as add to the composition of the company’s Bulk Commodities segment.
“We are of course very familiar with open-pit mining operations, and while we understand that underground mining of anthracite comes with its challenges, we have completed numerous assessments to ensure the safe mining of the anthracite using precise, technical methods.”
Van Heerden adds that there is good demand for anthracite in South Africa. “Nkomati’s anthracite has the lowest sulphur impurities of all anthracite producers in South Africa, while its phosphorus levels are on par with the best producing mines,” he says.
“As an effective reductant, anthracite remains one of the cleaner fossil fuels used for smelting, particularly compared to thermal coal, which makes it more attractive to users.”
Van Heerden reiterates that this acquisition will afford Afrimat another product with unique properties, pricing structures and a fit into Afrimat’s core competencies.
Opportunity abounds
Van Heerden believes that opportunity tends to come at the most unforeseen times, and has always maintained that “it’s always the best time to acquire a business at the bottom of the business cycle”, something Afrimat has done well over the years.
He believes that a period of volatility like this one, given the current downturn in the mining sector as a result of the Covid-19 pandemic, may offer unique opportunities that mining businesses can leverage if prepared. He reasons that now might be the time for Afrimat, given its cash-positive status, to invest in key resources – specifically, assets.
Van Heerden believes that going into this Covid-19 influenced downturn with balance sheet strength puts Afrimat in good stead to acquire assets. He argues that making strategic acquisitions at depressed multiples will create long-term accretive value for the company.
Afrimat has consistently delivered pleasing financial results in recent years, maintaining a compound average growth rate in headline earnings per share of 21,6% per annum for 11 years since the end of the global financial crisis. This has resulted in a business with a very strong balance sheet, bolstering its ability to weather storms and preparing it to benefit from opportunities that may present themselves in the aftermath of the Covid-19 crisis.
“We have decided not to declare a final dividend at this stage. The decision supports the group’s general conservative nature and ensures the further preservation of cash, which is desirable due to the uncertain nature of the current economic climate. We are seeing an increase in opportunities that could justify a cash investment, which in turn are expected to deliver excellent returns. However, I should concede that the full impact of Covid-19 is currently unknown and it requires prudent cash management,” he says.
Prospects
On the operational front, Afrimat entered the Covid-19 lockdown, which started a month after its reporting period, with a very strong balance sheet, positioning it strongly for the uncertain and volatile business climate, which is expected to continue for the immediate future.
“Fortunately, the impact of the national Covid-19 lockdown was dampened by the partial reopening of Demaneng iron ore and certain Industrial Minerals operations early in the lockdown period. The re-opening was done giving the utmost care to ensure the safety and well-being of all employees.”
At the time of writing, Van Heerden said Demaneng was producing at 100%, in line with the country’s Alert Level 4 regulations at the time. “We are at 100% production and the volumes are good. We are, however, a little bit constrained on the logistics side of the business with hiccups on the trains and the harbour,” he says.
Looking ahead, Van Heerden says while the company is in a good financial position, the effects of Covid-19 will be felt in the current financial year. “Realistically we will not be able to maintain the performance levels that we had in the past financial year. But, relatively speaking, our business is well geared to weather the storm,” he says.
“We have an incredible team of people who give it their all and an extremely strong balance sheet. As we speak, we effectively have no debt, which will still leave the business in a healthy position even after the lockdown. I am quite bullish about the future. We will obviously show some short-term pain during the first half, but I am confident we will see a very good improvement towards the end of the financial year,” he concludes.