Serfontein gives extra thought to making contract mining work
CONTRACT mining, leasing and fleet management group Eqstra has enjoyed a recent fillip in its share price — up more than 60% since scratching all-time lows of R2.01 a share earlier this year. Fund managers such as Conduit Capital have been snapping up stock, even though Eqstra’s performance since unbundling from Imperial in 2008 leaves much to be desired — down 79% since. Full-year results under new CEO Jannie Serfontein showed a 2.6% lift in headline earnings but a 5.2% drop in revenue, to R9.46-billion. BT asked him . . . Why is Eqstra still keen to be involved in contract mining, which is under such pressure and has seen a number of business failures in the past two years?
We want to become a lot more asset-light and evolve into the services game. We believe that [if] MCC [the primary business unit in the contract-mining division] becomes an asset-light business that is correctly capitalised, with the new ideas that a guy like Justin Colling [CEO of the unit] brings to the table, we can get good returns even in a down-cycle, where we’re currently at, and I think that business in the up-cycle really generates superior profits and excellent returns. But what if the cycle doesn’t turn for a long time?
I think in the past contract miners used to provide the balance sheet for a lot of the mining houses, a lot of people that didn’t necessarily want to use their balance sheet and it was almost like a funder of last resort. We want to advance it to become a lot more asset-light and services-oriented and back up some of these assets to the original equipment manufacturers and partner with them by pro- viding us a balance sheet to put the assets on, and we provide the services. Will that actually work in the present downturn?
I believe that if you get the right exposure to a variety of commodities, you correctly capitalise that business, and with the right focus I believe that even in the down-cycle you can get maybe not superior returns but at least a return that would satisfy shareholders. You talk about capitalising the contract-mining business correctly — some analysts think you’re just throwing good money after bad.
If I look at the results this year from an MCC perspective, they were negatively impacted by R97-million of impairments. We had, give or take, R750-million of excess assets that cost us R147-million this year. If you take those two figures, it adds up to about R250-million, and despite those two things, that business unit was still able to break even.
Of the R600-million interest bill we have annually, about R300-million of that is lying in the contract-mining unit. So if you correctly capitalise that, there’s another R100-million to R150million that you can get out of that business. And then this division on a stand-alone basis looks a lot more attractive. I’m not saying it will give you the returns you want, but at that level I think there’s not a lot of contract-mining divisions or companies out there that will show that type of result. What are the options then to capitalise it?
We want to almost halve our debt in the next two to three years to about the R4-billion mark. We are looking at specially the South African leasing bits — the ones in the industrial equipment division as well as the fleet management and logistics division.
Currently, the marginal rate leasing business doesn’t warrant it being on our balance sheet. We can do far better by partnering either with big financial institutions or anybody else out there that’s quite keen on those. I think if you do that there’s a lot of equity currently lying in those leases — about R1.2billion to R1.3-billion — that we can then take from that and then capitalise the contract-mining business. Have you had any talks with the original equipment manufacturers and banks about your ideas?
Yes. On the leasing books there’s quite keen interest from financial institutions, we’re in discussions. We’ve told the market we want to do that over the next 12 to 18 months; I believe it could happen a bit quicker. How did Eqstra get itself into a situation where your leverage is now 220%?
This was almost based on a GE Capital model when [Eqstra] was part of Imperial. You had the Imperial balance sheet that you could actually grow on and there was a lot of, I could call it cheap funding. But as [Eqstra] unbundled and became a stand-alone entity with no big daddy standing behind you, obviously there’s more risk, and I think the market has been telling us that this whole gearing model has become too risky for them. Was that why Walter Hill left as CEO recently?
No, at the end of the day Walter retired. He always said to our board that he wanted to retire age 55, 56. And it is a fundamental change in model . . . he believed that on this new journey we’re on I should take over and start running the business.
Talevi is a BDTV anchor