Cash-flush Afrimat is confident its most recent acquisition will serve to further diversify its portfolio, as the building materials and mining group looks to reduce its exposure to bulk commodities, especially iron ore.
Afrimat CEO Andries van Heerde told Business Day that given the way the business has evolved over the last five years, “we’ve become very exposed to our bulk commodities division, specifically to iron ore”.
He pointed out that the diversified group had a windfall period in 2021 due to high iron ore prices. However, the iron ore price has since fallen from an average of $160 to about $95 over the last six months.
With operations that span a broad range, Afrimat’s offerings include construction materials, which encompass aggregates, bricks, blocks, pavers and ready-mix concrete, industrial minerals including lime, and bulk commodities including iron ore, anthracite and manganese.
About two-thirds of Afrimat’s operating profit was generated by its bulk commodities segment in the reporting period, which includes iron ore exports and local sales.
“So the strategy is to keep that the way it is and to start growing into other sources of income, so that we get our diversification model more balanced again,” Van Heerden told Business Day.
Van Heerden said Afrimat was exploring ways to grow the other parts of its business. That included increasing its exposure to the modern energy trend with rare earths, which is expected to boom in the long term, and eyeing further growth opportunities in the subcontinent of Africa.
The Cape Town-based group's net cash balance was bolstered by close to one-third to R772.7m, and van Heerden said the group had “sufficient capital” to focus on new business development which it considers key to its growth.
These include commissioning the Jenkins iron ore mine, the turnaround of the Nkomati anthracite mine, and improving the group’s existing operations.
“Diversification, cost reduction and efficiency improvements remain the cornerstone of our strategy and we use these to counter economic impacts, which are beyond our control,” he said.
The company has the Driehoekspan and Doornpan mines to bring online once volumes from Demaneng start to reduce to boost the bulk commodities segment, which generates just over half of Afrimat’s revenue. This is expected to happen in the next four years, and the first blast was undertaken at Driehoekspan during the year.
“To optimise production, Nkomati is in the process of opening up two opencast mine areas as well as an underground access point. Volumes are expected to ramp up and the processing plant is well maintained and able to take on additional production,” Van Heerden said.
“The first anthracite is expected to be extracted early in the new calendar year from these developments,” he added.
Moreover, the CEO said the group was projecting that the international iron ore price would soon come under pressure given the recent developments in China.
Steel demand in top producer China, particularly from the construction sector, usually picks up in September and October, but this week iron ore futures slumped as a peak season in China for construction-led steel demand drew to an end with a disappointing outcome.
“We think the iron ore prices can soften a bit so that’s why we think it’s quite important for us to diversify the business even wider,” Van Heerden said.
Speaking to Business Day, analyst at Small Talk Daily Anthony Clark said though Afrimat’s operating margin fell from 24.1% to 19.7%, there were glimmers of hope in the underlying business.
He said that in this instance, diversification had been a saving grace for the company that saw losses in some of its businesses offset by large gains in others
“Diversification of Afrimat has significantly paid off and saved the company’s bacon,” Clark said. He added that he anticipated that Nkomati would be a big profit contributor in 2023.
On Thursday, the company told shareholders that the board had approved R300m to purchase all the shares in Glenover — a plan the company first announced in December 2021.
Mining and fertiliser company Glenover Phosphate generated revenue of R17.8m, with start-up losses of R3.9m during the period under review.
The CEO said that the mine’s advanced phosphate and rare- earth project in Limpopo, whose mineral resources include rare-earth oxides, phosphate, niobium and scandium, would allow the group to venture into the territory of food security.
“The big trend there is food security and with the phosphates,” he said. “There is a huge demand worldwide for fertiliser and fertiliser prices are very strong at the moment,” he added.
Afrimat kept its dividend unchanged despite a drop in profit in its interim results.
The company, valued at R6.68bn on the JSE, declared a dividend of 40c per share while its profit fell by over one-tenth to R356.1m in the period end-August.
The downturn was partly because of lower iron ore prices, the economic slowdown and increases in input costs such as diesel, explosives and electricity.
Group revenue increased 7.2% to R2.6bn and cost of sales 14.2% to R1.73bn. Afrimat generates most of its revenue from bulk commodities (52.14%), construction materials (35.32%) and industrial minerals (11.28%).
Afrimat’s share price rose 3.05% to R47 on Thursday, after falling more than 20% since the beginning of 2022.
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