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ARM investors will be eyeing a juicy dividend

Following excellent results and strong cash generation.

African Rainbow Minerals announced a massive jump in headline earnings for the six months ending December on Thursday, underpinned by strong cash flows that will make investors eager to see the increase in the dividend when it announces full-year results.

Headline earnings increased by 234% to R1.69 billion, mainly due to strong earnings from iron ore, manganese, and Two Rivers Platinum Mine. Headline earnings per share increased by 283% to R8.93 per share. The company did not declare an interim dividend.

The bulk of the group’s profits, and the majority of the increase came from ARM Ferrous, and specifically the iron ore division, where ARM’s 50% interest in Khumani and Beeshoek contributed headline earnings of just over R1 billion. The manganese division contributed a further R378 million to the bottom line. ARM Ferrous as a whole, increased headline earnings by 197% to R1.8 billion. This was the product of both higher volumes and increases in the average realised US Dollar prices received by the group (see graphs below).

Change in sales volumes

Change in average realized US Dollar prices

Source: ARM

As you can see from the graph on sales volumes, there was some trauma in copper and nickel. The company impaired the Nkomati Nickel Mine by an attributable R711 million after tax. ARM said low waste stripping over the last two years has limited mining availability of high-grade ore. Due to the second pilewall under construction on the western side of the pit, mining has been limited to the eastern side of the pit which is lower grade in nature.

Executive chairman of ARM Patrice Motsepe, recommitted ARM’s desire and discipline to building a portfolio of world class assets. “If we can’t move our operations to below the 50th percentile [in terms of unit costs] we will hang the ‘For Sale’ sign on the door.”

Unit cash cost performance relative to respective industries

Source: ARM

The company expects to make an announcement regarding plans for Lubambe Copper shortly.

Motsepe also spoke at length about challenges the group was facing at its Modikwa Platinum Mine, where the community has been protesting for a greater share of equity of the mine (the local community currently owns 8.5%), more opportunities for local businesses to contract with the mine, and more locals to be represented at middle and senior management. ARM elected to impair Modikwa Platinum Mine by R734 million in these results.

Motsepe had just returned from personally engaging with the community. “Those businesses that don’t partner with communities and employees are going to have problems. But they [at Modikwa] want more equity and they want more dividends to flow from that equity. We are going to lose the argument unless we educate them, because this is an environment ripe for populism.”

While recognising the importance of community and stakeholder engagement, Motsepe spoke about broader themes the industry and country were facing when he said it was vital that the needs of business and industry are also considered. “I said, if we are not going to work together I am going to shut them down. But the locals with a political agenda tell the people, ‘let them close down the mine and then we will run it’, but in reality, they can’t even fasten their own shoe laces. The most successful economies in the world are those that create an excellent environment for entrepreneurs and the private sector. We have to be globally competitive as an investment destination. I am so much more confident we will make progress and win over our workers.”

Epic cash flow generation

The group’s results were also characterised by epic cash flow generation. ARM generated more than R1 billion from operating activities during the period, aided by cash dividends received from the Assmang joint venture, which increased to R988 million from R500 million. This left ARM’s net-debt-to-equity ratio at 15.4% at year end. Post year end ARM received a dividend of R1.5 billion from Assmang, effectively leaving the group unleveraged on a net basis.  

ARM spent R1.15 billion on capex in the first half of the financial year, and financial director Mike Arnold indicated that it was probably “unlikely” the group would achieve its budget of R2.65 billion for the full year. With capex for the group broadly trending down, and the effect of higher commodity prices still to be fully realised, it is quite possible ARM may declare a bumper dividend at the completion its 2017 financial year in June.

ARM’s share price dropped by 0.10% on Friday to close at R104.91 per share.

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