A LONG ROAD OF ENDURING RESILIENCE

The operational style of Afrimat’s management team has been hard to fault, writes

Afrimat CEO Andries van Heerden should really be a contestant on the TV show Dancing with the Stars. Since Afrimat’s IPO in 2006, both the CEO and the company have not put a foot wrong or been out of step with the commodities market.

Listed on the JSE in November 2007, the company raised R125m via its IPO at 500c a share to value the construction materials business at R600m.

The early years were tough due to a surge of new listings on the construction and materials sector of the JSE allied to the optimism about government infrastructure construction works and the 2010 Soccer World Cup. Many have fallen by the wayside — names such as Buildmax,

Esor, Protech Khuthele and WG Wearne. Afrimat remained resilient due to a simple and unwavering strategy.

The company is very choosy about which acquisitions it undertakes and what it is prepared to pay. Given its conservative nature, Afrimat does not like to be highly geared and has a penchant for strong cash generation.

Competitor companies ran around doing wild deals at crazy prices, but Afrimat abstained and watched and waited as the sector imploded after the World Cup. Then Afrimat was there with its powder dry, looking for value-accretive deals that would extend and diversify its base away from its core aggregates business. This has been an incredibly successful strategy.

In Afrimat’s early years after its IPO the stock slid alongside those of the entire sector. The share went well below its IPO price. Despite the sector carnage, Afrimat remained resolute. Its first major deal was in December 2010, when it paid R35m for dolomite business Glen Douglas. This allowed it to diversify into industrial minerals. In the years afterwards, Glen Douglas was making profits exceeding its original acquisition cost. This is a hallmark of Afrimat and its management team’s operational style.

Glen Douglas was a poster child for what would become the Afrimat way of doing deals: a well-placed resource and reserve base which had either been underinvested in by its owners to fully exploit its potential or was just poorly managed from a mining perspective.

In the next decade Afrimat shone in share price appreciation terms. Data shows that over 10 years Afrimat returned to shareholders 1,800%, against 1,400% in top-rated blue-chip colossus Naspers. Afrimat was the best-performing share on the JSE; a long way from its humble listing roots.

From 2011, the real magic in Afrimat started to emerge.

In 2021, Afrimat acquired Coza Mining for R300m to extend its iron ore interests

A series of well-timed acquisitions, usually spaced two years apart, led to further diversification and risk mitigation for the company away from its aggregates core business.

In 2011, Afrimat bought the Clinker Group for R123.5m. Clinker is used primarily by the concrete manufacturing industry. In 2013, the company bought fellow listed quarry group Infrasors after that business had fallen on hard times. The purchase of Cape Lime for R276m followed in 2015 and in 2017 the company took an initial stake in liquidated iron ore business Diro, which it renamed Demaneng. That would become the gold standard deal for Afrimat.

The small Diro mine near Sishen was a high-quality iron ore body with the ability to extract and export up to 1Mt a year. The market initially decried Afrimat’s move into bulk commodities; the venture was loss-making as it was being rehabilitated and re-equipped.

Within a few years, newlook Demaneng was the key profit contributor to Afrimat, with an initial loss of R33m on acquisition storming to a profit of R734m by 2021.

That’s how you turn around a mine the Afrimat way. More such deals would follow.

Afrimat also knows when to walk away from deals.

In 2019 it made a bid of R2.1bn for Australia-listed Universal Coal, whose asset base was in the South African coal fields. The deal was hailed as a “game-changer” and would have been the largest undertaken by Afrimat. However, exhaustive due diligence showed that the numbers didn’t quite stack up, and Van Heerden commented at the time that the cash flow didn’t meet Afrimat’s requirements.

Another recent deal that looked highly promising was a move into manganese via a greenfields project called Gravenhage. The R1.5bn capital expenditure (capex) project would have diversified Afrimat away from iron ore, but the deal fell apart after insufficient water rights were granted by the department of water & sanitation.

One deal that was to emulate the success of Glen Douglas and Diro was the 2020 acquisition of Unicorn Capital Partners for R120m. The core asset was the highquality anthracite mine Nkomati near Komatipoort in Mpumalanga.

The mine, like Glen Douglas, had not been managed well, and had difficult community relations and mining problems. In the end, the Nkomati asset cost Afrimat very little, as the sale of other assets within Unicorn — the old Sentula Mining group — pretty much covered its acquisition cost.

Again, the market was sceptical about Afrimat moving into the heated coal market. Total capex of R412m will be spent to rehabilitate, extend and ramp up anthracite production to 540,000t a year at Nkomati.

Much of the output is tied at a fixed price to a major commodities house. However, on a recent site visit it became clear that Nkomati will become very profitable to Afrimat in the FY2024 period. The entire capex cost will probably be recouped within 18 months from uplifted profitability tied to increased production tonnage.

In 2021, Afrimat acquired Coza Mining, renamed Jenkins, for R300m, to extend its iron ore interests and prolong the Demaneng prospect. Later in 2021, another R550m was spent to acquire phosphates, vermiculite and rare earth business Glenover.

The flurry of activity connected with Unicorn, Coza and Glenover caused some investors to wonder if Afrimat had taken on too much. However, the company was judiciously reinvesting the substantial profits from iron ore into expanding the business and was continuing to diversify its minerals production base.

Aside from Nkomati, Jenkins and Demaneng will remain Afrimat’s cash cows and are immensely profitable, Demaneng for the export market and Jenkins in an inland supply agreement to ArcelorMittal South Africa. This contract is at a fixed price per ton — IM estimates lower than the current spot iron ore price of $124, or R2,185, a ton. However, Afrimat’s operating cost per ton for Jenkins is low, allowing it to make a healthy margin and profit.

It is not a wild stretch to suggest that a combination of Demaneng, Jenkins and Nkomati alongside an initial contribution from Glenover in FY2024 could result in annual profits of R1.5bn. Add in the existing construction materials and industrial minerals contribution and Afrimat starts to look compelling at the current share price of R55.09. Afrimat’s operating profit in its most recent financial year to February 2021 was R1.1bn.

It is not long to wait for the full-year results to endFebruary. In 2022 Afrimat’s headline earnings rose 23% to a record 543c a share as revenue increased 27% to R4.7bn and bottom-line profit came in at R748m (up 25%). This result will be difficult to beat in financial 2023 due to the volatility in the iron ore price in the period.

Interim results to August 2022 already showed the impact of a materially lower iron ore price, which slid 50% in the six months. That, alongside the known inefficiency and problems at Transnet, hit Demaneng’s export business.

Headline earnings for the first half of the 2023 financial year fell 14.5% to 252.2c a share on a 7.2% growth in revenue to R2.6bn and a 12% decline in operating profit to R512m.

Bulk commodities was softened by a strong contributions from Jenkins where profits rose 142% and

Nkomati Coal swung into a small profit of R20.5m from a prior loss of R108m. Overall bulks saw a 13% decline in interim earnings. Construction materials fell 6% and industrial minerals 25%.

In Afrimat’s second-half, Q3 was dire due to the slide in iron ore but the commodity rallied hard in the fourth quarter with a swing from

$80 a ton to the current $124 a ton. That will recover some of the lost ground. However, a force majeure issued by Transnet in the period also hit export and inland volumes further compounding a weaker second half earnings expectation.

Afrimat hit R76.47 in April 2022 and as the year unfolded and iron ore weakened to bottom at $80 a ton in November 2022, Afrimat’s share price slid back to a 52week low of R43.66 in midOctober 2022.

The iron ore rally in late2022 pushed the stock back to the R60 level and its presently trading at R55 to value the company at R8.8bn. Afrimat has come a long way since the 2006 IPO.

For Financial 2023 IM is not forecasting a stellar year for Afrimat. The year was one of investment in the future of the business via hefty capex in Nkomati, Jenkins and Glenover. That will start to materially flow in financial 2024.

The recent weakness in Afrimat might create an opportunity. IM reckons that some recovery from the first half would have occurred in the second half from a higher iron ore price in the fourth quarter of 2022. But Transnet and a weak third quarter will still weigh. Overall, IM estimates Afrimat, from the 543c a share 2022 base, will record headline earnings down between 5% to 10% for this financial year.

The PE at around 11 times remains attractive given the quality of the company and earnings growth in the following two financial years.

In Afrimat’s second-half, Q3 was dire due to the slide in iron ore but the commodity rallied hard in the fourth quarter