Storm over the rainbow
What’s worrying the market?
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