[TOP STORY] Afrimat results prove it’s much more than an iron-ore company

‘Thank heavens we diversified our business when we did, because if it was only for construction materials we would’ve been in trouble’ – CEO Andries van Heerden.

SIMON BROWN: I’m chatting now with Andries van Heerden, CEO of Afrimat. Results to year-end February: revenue up 26.7%, operating profit margin 23.7%, headline earnings 22.9% higher, dividend of R1.46. Here’s a fun fact. The full-year dividend is R1.86, and you could have bought the share for less in the 2008 crisis.

Andries, I appreciate the time today. In the results presentation earlier [there was] a lot of talk around iron ore, and a lot of perception that you are an iron-ore company. You’re a lot more than that. I take that point. But the question is how much of your revenue these days is US dollar denominated?

ANDRIES VAN HEERDEN: I don’t have that exact number in front of me, but it’s probably about 25% – if I take a quick guess of our revenues – US dollar denominated.

SIMON BROWN: I want to drill into to some of the operations. Jenkins [Mine], relatively new, has practically paid for itself during this period under review, and you are saying it has still got potentially more upside to it.

ANDRIES VAN HEERDEN: Yeah. We have an agreement with our customer to buy – during the first year of operation, they bought 50 000 tonnes a month from us, and contractually we should now ramp up 100 000 tonnes a month. As soon as that kicks in, this business should do even better.

SIMON BROWN: Moving on to Nkomati with the anthracite for the full year – I remember chatting at the half year; it wasn’t yet fully profitable. But at this point it is now up, operating and generating profits.

ANDRIES VAN HEERDEN: Yeah, that’s correct. We bought it out of business rescue. The mine was in a really dire state when we bought it, and it took us almost a year to turn it around. It started making profits last year in August, and it has been consistently profitable since then. At the moment we are spending a bit of capital to open up more mining areas and opening up an underground operation. When all of that is done, this business should do really, really well,

SIMON BROWN: Glenover as well. Basically there you are mining stockpiles. The trend across all of these more recent acquisitions, and in truth acquisitions even over the last years before that, [is that] you’ve gone and got it working, but you’ve managed to improve efficiencies, make it frankly a better, more productive and ultimately more profitable mine.

ANDRIES VAN HEERDEN: Yeah. That’s pretty much what we try to do.

What we try to find is these assets with a really good underlying competitive advantage, and then we just go in there and try and keep things simple and make sure we do the right things right and try to get these things efficient. So far it’s worked well for us.

SIMON BROWN: In a sense, when you say keeping it simple, these are open-cast. I’m probably wrong, because I’m not the engineer here, but you started life in a quarry and this is kind of taking quarrying to a slightly different angle, where you’ve now got bulk commodities and the like [that] you’re pulling out of the ground, rather than just aggregate.

ANDRIES VAN HEERDEN: Yeah. It’s interesting – the whole evolution in our company’s core skills where, as you rightly say, we started off in quarrying and when the construction industry started going into more difficult times round about 2010, we started using that skill and added a little bit. And every time when we added a little more complexity, we had to bring in more specialised people. We’ve been able to build that team to become quite a powerful team. The operational team teams in this business are really guys that know what they’re doing and that’s pretty much what we try to do. We try not to get involved in things that we don’t have the skills for, but sometimes we have to go and acquire sort of some additional skills to really be able to take that next step.

SIMON BROWN: The operational team – is that in-house? This isn’t consultants or folks with fancy suits and the like; this is a team you’ve built up who can now move from project to project.

ANDRIES VAN HEERDEN: Yeah. We believe very strongly in building skills in-house. With all due respect to consultants, they are there to sell their services and they’ve got to look after their bottom line, which is not necessarily a hundred percent aligned with our bottom line.

So we prefer to build our own skills and only bring in consultants in very specific roles, where it’s more cost efficient to bring in a hired-in skill than to have our own skill.

SIMON BROWN: I get that. There’s going to be that occasional sort of very niche skill which you might need to bring in.

Your magnesium project – we spoke when you announced it. That’s still not concluded. You are expecting it in a few months. Is that [because of] holdups with water or the DMR [Department of Mineral Resources]?

ANDRIES VAN HEERDEN: It’s a manganese project in the Northern Cape, and at the moment we are waiting for a water-use licence. It is taking little bit longer than we thought. The approval for the transfer of the mining right has already been received, but now the only outstanding thing is the water-use licence. As soon as that is unconditional, then we can get moving,

SIMON BROWN: Mentioning water, the rains in April weren’t in this period under review, but you’ve got some KZN [sites]. My understanding is not that much. Was there much impact from that rain on you or perhaps maybe on your customers downstream?

ANDRIES VAN HEERDEN: In KZN not really. We have one of our quarries, one of the smaller quarries in Scottburgh near KZN, that was flooded, but that was very, very small in the bigger scheme of things for us. But what was a bit more of an impact, the entire northern part of the country – Gauteng, Mpumalanga, KZN – all those areas had a lot of rain days and, as we know, construction doesn’t happen on rain days. So it did have an impact on the business, but these things tend to catch up very quickly. As soon as the sun starts shining the contractors start catching up and we are already seeing that. So over the longer term we don’t expect much of an impact.

SIMON BROWN: How many sites do you have countrywide? I ask because it suddenly occurs to me that I’ve been driving around in the last six months, I’ve been in Gauteng, I’ve been in the Free State, I’ve been in KZN, and I think on every trip I’ve seen an Afrimat site.

ANDRIES VAN HEERDEN: Yeah. We actually have 45 active mining rights at the moment. And then, if I’m not mistaken, I think we’ve got 65 sites if we include factories and ready-mix businesses in that as well.

SIMON BROWN: Diesel prices – we’ve seen the increase there, [with] talk of about another R3 [increase] coming in June. How much does that impact your operations?

ANDRIES VAN HEERDEN: The diesel cost is about 8% of our total costs. So it’s not such a big impact for us.

SIMON BROWN: Okay, that’s not too bad. Last question. Construction materials, which is in a sense certainly the old Afrimat in some ways – I still consider it the core of the business – are you seeing much pickup? Revenue is flat there; there was a lot of talk around infrastructure spend and the like, but I don’t know. I look at the construction company results and I’m not seeing a lot coming out from them.

ANDRIES VAN HEERDEN: Yeah, you’re right. We are not seeing a lot of activity. The main drivers of construction spend are either road and civils or commercial building or residential building, and both commercial building and road and civils at the moment are relatively quiet. So thank heavens we diversified our business when we did, because if it was only for construction materials we would’ve been in trouble.

SIMON BROWN: You showed a great slide in your presentation. The old construction business Afrimat is still making money, but pretty much the same money it was [making] 15 years ago.

Andries van Heerden, CEO of Afrimat, I appreciate the time today.

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