Investors set to smile as ARM rides high on iron ore prices
• Diversified miner to pay out 30% more than previous year after average prices of metal increased 34%
Any firm mining iron ore is sitting pretty now, thanks to the metal’s high price, and Patrice Motsepe’s African Rainbow Minerals (ARM) is no exception.
Record iron ore earnings for the year ended June 2019 helped the diversified miner’s headline earnings rise 9% to R5.2bn. A final dividend of R9 a share was declared, bringing the total dividend for the past financial year to R13 a share, a 30% increase on the previous year.
The performance was driven by the Ferrous business, which flourished as average iron ore prices increased 34%.
Other parts of the diversified miner’s business did not fare as well. The platinum division posted disappointing results, with a decline in headline earnings of 73%, despite higher platinum group metal basket prices.
ARM also confirmed it would close its loss-making Nkomati nickel mine, which it owns with Russia’s Norilsk Nickel. The mine made a loss of R315m in the 2019 financial year and its assets were impaired by R1bn.
Rene Hochreiter and Luvuyo Booi, analysts at Noah Capital Markets, said in a note this was a positive move as the mine had not been generating returns.
They said the operational challenges at the Two Rivers platinum mine will continue to pose a risk to the mine’s profitability in the near term.
Iron ore prices have been flying high, but are correcting. After surpassing $120 a ton in July, the price dropped to near $90 as of Friday.
Hochreiter and Booi attribute this to an increase in supply in the seaborne market and signs of slower demand in China. As a result, Hochreiter and Booi forecast profits from ARM’s iron ore business declining 16% in the current financial year.
Abdul Davids, portfolio manager at Kagiso Asset Management, said ARM had cited a muted outlook for 2020 based on a slowdown in global growth that has been worsened by the US-China trade war.
However, “further weakness in iron ore and manganese prices should be offset by continued strength in platinum group metal prices and a weaker rand exchange rate”.
In the medium to long term, ARM said global emission reduction initiatives and the move to cleaner mobility and energy are expected to put pressure on demand for platinum group metals and thermal coal, but create opportunities for other commodities in their portfolio, including high-grade iron ore and manganese ore.
On Friday the group said it had set aside R319m for a lawsuit aimed at compensating victims of silicosis and other occupational lung diseases.
In July, a R5bn settlement between six gold miners, including ARM, and workers, was approved by the high court in Johannesburg. This was the result of a historic class action dating back to 2012.
ARM said it had made a financial provision of R319m to cover the legal costs of the claimants’ attorneys, the costs of establishing and administering a trust, and payment of benefit contributions to the trust over a 13-year period.
“ARM has a contingency policy in this regard, which covers environmental site liability and silicosis liability, with Guardrisk Insurance Company,” it said.
The group said Guardrisk had reinsured the specified risks with Mannequin Insurance.