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Afrimat’s move into mining pays off handsomely

Iron ore contribution counters drag on the construction side.
Afrimat's decision to diversify into mining is validated by the performance of the construction materials business, which was down nearly a quarter on the previous year. Picture: Supplied

Afrimat’s decision to diversify into iron ore mining several years ago has paid off in a big way. 

Traditionally a supplier of construction materials, it now earns roughly 40% of its operating profit from iron ore exports – and is planning a move into coal mining. Last month it announced that it had made a non-binding offer for 100% of Australian Stock Exchange-listed Universal Coal plc, which has three SA mines supplying about 80% of its output to Eskom and the balance for export. If the deal is successfully concluded, this will further diversify its revenue stream.

Results released on Wednesday show Afrimat has maintained its nearly 20% compound average growth rate in earnings for a decade.

This was the first full year of results for the iron ore business. Net cash from operating activities increased by 46.4% to R410.5 million, excluding about R80 million in cash received in the Afrimat BEE Trust. This allowed it to pay down debt, reducing the debt:equity ratio from 35.5% in the prior year to 23.8% in the current year.

Operating profit margins were 15.9%, which is outstanding for a construction-themed company.

Afrimat timed its entry into the iron ore business two years ago perfectly, riding the surge in iron ore prices which are up 40% since the start of this year. Prices hit a five-year high of US$103 per ton this week, helped by strong demand from China and a deadly dam disaster in Brazil, which reduced output from the world’s largest producer, Vale. Goldman Sachs says iron ore prices have likely peaked but will remain near these levels due to continued strong demand from China.

Read: Afrimat shines in a broken sector

Its Demaneng iron ore mine in the Northern Cape had an exceptional year. It completed the recommissioning of both of its dense media separation plants during the first half of the year, allowing it to achieve stable output in the second half of the year.

Iron ore prices

Source: Markets Insider

Afrimat’s revenue was up 24.6% to R3 billion, and headline earnings per share climbed 29.6% to 234.1 cents.

The decision to diversify into mining is validated by the performance of the construction materials business, which was down nearly a quarter on the previous year.

Industrial Minerals, which accounts for about 20% of the business, delivered solid results, although the impact of the economic slowdown in the construction sector was felt by the Lyttelton mine.

“It was our Construction Materials segment that felt the brunt of the slowdown in economic activity, with the KwaZulu-Natal and Gauteng businesses being impacted the most,” says CEO Andries van Heerden.

The contribution of construction materials to the bottom line has been reduced from 76% two years ago to about 40% this year.

‘Correct decision’

Chief financial officer Pieter de Wit sees further revenue diversification coming from the move into coal mining, should the deal with Universal Coal be concluded, which will shield the company from a dismal construction sector. “We recognised some time ago that we had to diversify away from construction materials, and I think the results show this was the correct decision,” he says.

The KwaZulu-Natal business was restructured to deliver improved results, and the lifespan of the Emfuleni Clinker Ash Dump in Vereeniging expanded. This will provide an additional three- to four-year lifespan for the Clinker business, with Clinker continuing to investigate further options in order to secure additional resources for the group.

In Mozambique, the business mainly supplied construction materials to a resettlement village in the north of the country and is well positioned to benefit from the main project, which is expected to commence imminently.

Afrimat vs the SA Construction and Materials Index

Source: ShareMagic

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