Shaping up as a value stock, but risk remains

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. ●