Storm over the rain­bow

What’s wor­ry­ing the mar­ket?

Finweek English Edition - - Companies & Markets - SHAUN HAR­RIS

THE RE­CENT DOWN­TURN in a num­ber of com­mod­ity prices and the ef­fect on South African min­ing and re­sources com­pa­nies’ shares doesn’t fully ex­plain weak­ness in the price of African Rain­bow Min­er­als (ARM). It started be­fore com­mod­ity prices came off the boil, with the share los­ing more than a third of its value over the past three months. In the last month alone R10bn has been shaved off ARM’s mar­ket cap­i­tal­i­sa­tion, re­duc­ing it to R38,5bn.

What’s go­ing on? Un­der the ex­ec­u­tive chair­man­ship of Pa­trice Mot­sepe and man­age­ment of CEO An­dré Wilkens, it’s a top rate op­er­a­tion, at­trac­tive as an in­vest­ment due to its di­ver­sity and niche fo­cus. It’s well placed in most of the growth com­mod­ity in­dus­tries – fer­rous and base met­als, platinum, coal and even gold, through its in­vest­ment in Har­mony. But the mar­ket seems to have turned against the share.

One pos­si­ble rea­son might be the ex­plo­sion at its Num­ber Six fur­nace at its Cato Ridge (KwaZulu-Natal) fer­ro­man­ganese works in Fe­bru­ary. Though not yet fully quan­ti­fied, the smelter ac­ci­dent shouldn’t have a huge ef­fect on ARM’s fi­nan­cial re­sults. But it seems to have knocked the com­pany’s im­age.

Fer­rous met­als are the big num­ber in ARM’s ac­counts, con­tribut­ing R2,78bn to head­line earn­ings of R4bn (which in­creased a re­mark­able 232% over its past fi­nan­cial year). Its op­er­a­tions, chiefly iron ore, man­ganese and chrome, are held through ARM’s 50% in­vest­ment in Ass­mang.

Lat­est re­sults ex­cluded any pos­si­ble re­cov­ery from in­sur­ers (their in­ves­ti­ga­tion

is on­go­ing) for as­set dam­age and busi­ness in­ter­rup­tion losses at its Cato Ridge op­er­a­tion. But ARM did pro­vide for a R9m as­set im­pair­ment write-down and R37m for fixed costs dur­ing the fur­nace’s down­time.

That’s small for a com­pany with cash of R2,6bn on its bal­ance sheet. But ARM’s safety record also took a knock. There were nine fatal­i­ties (seven at Cato Ridge) over its past fi­nan­cial year com­pared with one in the pre­vi­ous year, and lost-time in­juries in­creased from 157 to 247.

The record is prob­a­bly good com­pared to some of SA’s gold mines but is a de­te­ri­o­ra­tion by ARM’s stan­dards. Wilkens says the in­creased fatal­i­ties and in­juries are a con­cern and that ARM’s safety, health and en­vi­ron­ment depart­ment has been re­struc­tured. So has its med­i­cal sur­veil­lance pro­gramme at Cato Ridge for the di­ag­no­sis of man­gan­ism (man­ganese poi­son­ing). The Depart­ment of Labour is con­duct­ing an in­quiry into the pos­si­ble in­ci­dence of man­gan­ism at the plant.

If that’s what’s been weigh­ing down ARM’s share price re­cently, it will pass. Mot­sepe’s shrewd in­vest­ments and com­mit­ment to cap­i­tal projects – about R11bn planned for the next three years – should re­store ARM as a di­ver­si­fied com­mod­ity play. With its his­toric earn­ings mul­ti­ple dip­ping be­low 10 times and for­ward mul­ti­ple around 5,7 times, ARM looks a re­ward­ing buy for in­vestors with the stom­ach for what might be a year or two of volatile com­mod­ity prices.

Trou­bled times. Pa­trice Mot­sepe

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