Shap­ing up as a value stock, but risk re­mains

Financial Mail - Investors Monthly - - Analysis - Petri Redel­inghuys

As­sore is re­garded as a di­ver­si­fied min­ing com­pany, but at first glance its op­er­a­tional struc­ture might be a tad dif­fi­cult to un­der­stand.

Its pri­mary in­vest­ment is a 50% hold­ing in Ass­mang, which it con­trols jointly with African Rain­bow Min­er­als. As­sore is re­spon­si­ble for the mar­ket­ing (or sale) of all the min­er­als mined by this part­ner­ship. Through this part­ner­ship and a se­ries of joint ven­ture en­ti­ties and sub­sidiaries, As­sore is also in­volved in the min­ing of iron ore, man­ganese ore and chrome ore, and the pro­duc­tion of man­ganese al­loys.

Dur­ing the pre­vi­ous fi­nan

cial year As­sore’s 50% stake in Ass­mang, which is pri­mar­ily in­volved in iron ore and man­ganese, earned it R3.5bn in head­line earn­ings. Earn­ings from other sub­sidiaries to­talled R1.6bn, in­clud­ing a R875m con­tri­bu­tion from its Dwarsriv­ier op­er­a­tion. This brought to­tal group earn­ings to R5.1bn, up 2% from the year be­fore.

In that fi­nan­cial year pro­duc­tion and sales vol­umes rose to a record high for the fourth year in a row, but the av­er­age rand-dol­lar ex­change rate was 6% stronger than the year be­fore. This year the rand is con­sid­er­ably weaker and thus should not be a drag on earn­ings. That said, the global eco

nomic en­vi­ron­ment is dif­fer­ent. The trade war be­tween the US and China is weigh­ing on in­dus­trial me­tals such as iron, man­ganese and chrome, thanks to a stronger dol­lar and to lower de­mand for these prod­ucts as the re­sult of the trade dis­pute and tar­iffs be­ing im­posed from both sides.

As­sore’s com­bined op­er­a­tions pro­duced 18.5Mt of iron ore dur­ing the 2018 fi­nan­cial year as well as 3.7Mt of man­ganese ore, 1.6Mt of chrome ore and 462,000t of man­ganese al­loys. Clearly the ma­jor­ity of the com­pany’s earn­ings is re­liant on iron ore, which poses a threat to earn­ings. The iron ore price has come un­der pres­sure, shed­ding some 30% over the past two months, iron­i­cally over the same pe­riod that the rand weak­ened. This is an un­lucky de­vel­op­ment as the price of iron ore prac­ti­cally dou­bled in the first half of the year while the rand was mostly sta­ble to stronger against the dol­lar.

In other words, when As­sore’s big­gest source of rev­enue, iron ore, was in­creas­ing in price in dol­lar terms, the im­pact was negated by a stronger rand, and when the rand fi­nally weak­ened in As­sore’s favour, the price of iron ore dropped like a stone.

Should there be a res­o­lu­tion to the trade war within the year, we could see a strong surge in in­dus­trial me­tals prices and a rally from the likes of As­sore.

That said, the more pres­sure is ex­erted on As­sore over the next few months, the more at­trac­tive the com­pany looks. At the time of writ­ing the div­i­dend yield is 6.8% with an earn­ings mul­ti­ple of just over five times — which means As­sore is start­ing to look a bit like a value stock. As­sore also looks like it is on track to pay out a fi­nal div­i­dend of R12 a share, which will push to­tal div­i­dends earned to a gen­er­ous R22 a share for the full year.

IM reck­ons As­sore shapes up as a longer-term HOLD. The risk of a global mar­ket slow­down on the back of con­flict over Hong Kong or a fur­ther es­ca­la­tion in the trade war means the risk re­mains too great for in­vestors to rush in. ●

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