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Afrimat continuing its journey into a mid-tier mining house

Group’s diversification strategy has been underpinned by more than 10 years of consistent profit growth.
Diversification has worked well for the group. Image: Supplied

The diversification strategy embarked upon by Afrimat since the 2008 global financial crisis is transforming and propelling the JSE-listed open-pit mining company into a mid-tier mining house.

The acquisitions that have underpinned Afrimat’s diversification strategy have been facilitated by the group’s consistent profit performance and resulted in the group having three business segments – construction materials, industrial minerals and bulk commodities.

Afrimat CEO Andries van Heerden says the group has achieved a compound average growth rate in profit after tax of 22% between February 2009 and February 2021 and the diversification has made the group more resilient.

Van Heerden said Afrimat started as a construction materials business but has evolved over the years.

Acquisitions

“After the 2008 [global financial] crisis, we realised that construction can have a difficult road ahead and we diversified into industrial minerals and bought Glen Douglas and Infrasors and Cape Lime.

“Those businesses were integrated into our business and in 2015 we started looking seriously at the commodities space and … then identified Demaneng mine, bought it out of business rescue and since then we’ve have acquired the Nkomati anthracite mine and just last week [May 21] we announced that we have acquired Gravenhage manganese mine,” he said.

The Gravenhage manganese mine acquisition for R650 million is Afrimat’s biggest deal to date.

Afrimat chief financial officer Pieter de Wit highlighted last week when the group published its financial results for the year to end-February that the group’s iron ore business carried the group during the first half of the financial year when construction materials and industrial minerals were not producing any revenue during the harder Covid-19 lockdowns.

However, De Wit said all three business segments of the group produced exceptional performances in the second half of the financial year.

“It’s a very good diversified portfolio that has given us strong cash generation during this financial year and that cash will enable us to execute on a lot of opportunities that we see in the market,” he said.

“Gravenhage we have already announced but there are a few other exciting opportunities as well, so that cash that we generate will assist us with that.”

Even more diversification

Van Heerden added that Afrimat had entrenched its diversification with more acquisitions during the financial year, including the purchase of the remaining shares in Unicorn Capital Partners Limited (UCP), resulting in Afrimat owning 100% of Nkomati Anthracite Proprietary Limited.

“We are excited about the mine’s potential. The plan is for Nkomati to contribute to the second half of the coming financial year,” he said.

Van Heerden added that Afrimat is also in the final stages of getting the Jenkins iron ore mine, which was part of the Coza acquisition, up and running.

The mining licence was recently approved and it is also expected that Jenkins will contribute to the group in the second half of the new financial year, he said.

Van Heerden said the Gravenhage mine acquisition will add another commodity to its diversification strategy within the bulk commodities segment while also increasing the group’s scale in the ferrous-metal value chain and providing further exposure to foreign currency denominated earnings.

Group in best shape to date

He stressed Afrimat is today in the best and most healthy financial position it has ever been in, has consistently been delivering value for more than a decade and the recovery by the group’s businesses after the hard Covid-19 lockdown showed the resilience of the group’s entrepreneurial culture.

Van Heerden compared the headline earnings per share performance of Afrimat and other companies “it has respect for”, such as Raubex, Sephaku, PPC and the Consolidated Infrastructure Group, between February 2010 and February 2021.

“For every rand of headline earnings per share that we were generating in February 2010, Afrimat is now generating almost R9,” he said.

“Unfortunately you can see what the economy did to the other companies. They all went down and are at zero or close to zero and their growth rate was negative. So the diversification model did work for us.”

Source: Afrimat results presentation 2021

Van Heerden said if Afrimat had only remained exposed to construction materials, its headline earnings per share in the same period would have been much lower and negative compared to headline earnings per share of 441.7 cents in the year to end-February 2021.

The gap between the profit history of Afrimat over the past 10 years with and without acquisitions “has never been as wide as it is right now because of the good performance of our other businesses [acquisitions],” he said.

Results

Afrimat last week reported a 27% growth in headline earnings per share to 441.7c in the year to end-February from 347.7 cents in the previous year.

Revenue rose by 11.8% to R3.7 billion from R3.3 billion while operating profit increased by 47.5% to R886.3 million from R601.0 million.

Net cash from operating activities improved by 13.4% to R767.6 million, resulting in an improvement of the group’s net debt to equity ratio to 3.8% from 8.2% in the prior year.

Afrimat declared a final dividend of 112 cents per share, boosting the total dividend for the year to 148c per share, 26.5% higher than the 117 cents full year dividend declared for the previous year.

Van Heerden said Afrimat remains well positioned to capitalise on strategic initiatives and future opportunities, adding the group’s future growth will still be driven by the successful execution of its proven strategy, recent acquisitions and by bringing a wider product offering to the market.

Analysts’ comments

Rowan Goeller, an analyst at Chronux Research, said Afrimat achieved a very strong performance and the acquisition of the Gravenhage mine changes the profile of the company.

“They have now got a good quality large resource as opposed to the Demaneng mine, which was a little iron ore mine that they picked up at a good price.

“But they are now moving from buying good value little deposits to buying good value large deposits and breaking out of the mould of being a small miner and moving quickly towards being a good mid-sized mining house,” he said.

Goeller added that depending on the direction of the iron ore price, the cash flow generated by Afrimat’s iron ore operations “could cover all of their capital costs over the next year, including the acquisition and capital costs of bringing that manganese mine up to production”.

“They are looking in quite a healthy position,” he said.

Peregrine Capital executive chair David Fraser said Afrimat “is a good story” and the company has a top class management team.

Fraser said the contribution from iron ore is probably higher than it should be at the moment but Afrimat has “a nice pipeline of irons in the fire right now that should start kicking in when iron ore starts coming off the boil”.

“I think they have timed it to perfection and I don’t think there is going to be any dip in earnings,” he said.

Shares in Afrimat declined by 0.37% on Monday to close at R51.01.

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Small cap analyst Anthony Clark has been punting Afrimat since June 2020.

Good for Clark. I don’t see any mention of him in the article, though.

With patrice as a share holder things will look good for them

@BlackTin Are you implying that mining and associated licenses comes faster/ easier or something like that?

It amazes me how little due diligence junior and mid-tier miners carry out before acquiring a mineral resource, such as Nkomati Anthracite. The statement: “We are excited about the mine’s potential. The plan is for Nkomati to contribute to the second half of the coming financial year”, will haunt them for a long time. They just bought one of the most difficult coal mines in SA. Geologically complex, poor safety record, significant community issues, historical poor mining practices. All I can say is good luck, but I won’t be investing.

End of comments.

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