Building materials and mining group Afrimat expects to report sharply lower headline earnings at the halfway stage of the year, due mainly to lower iron ore sales volumes and revenue.
The group, which is valued at about R10bn on the JSE, expects headline earnings per share (HEPS) for the six months ended August to be between 65.9c and 39.5c, representing a decrease of 75%-85% compared with a year ago.
In the first quarter, sales volumes and revenue for local iron ore were significantly affected by a major customer’s furnace freeze.
International iron ore exports were adversely affected by a 5% decrease in dollar prices, a 31% increase in shipping costs and the concurrent strengthening of the rand.
Additionally, rail shipment volumes via Transnet decreased for the comparative period and are about 20% below the allocated rail capacity.
Small Talk Daily analyst Anthony Clark said a combination of factors including issues with the iron ore price, ArcelorMittal having a force majeure in place, problems on the export line to Saldanha and losses from the cement operations, “all came into the perfect storm for Afrimat,” which resulted in the profit warning and the trading update being released.
The newly acquired cement business incurred losses for four of the six months after the incorporation of the businesses into Afrimat on May 1, primarily due to known reliability issues at the cement factory, resulting in limited production and stock.
Management was prioritising the turnaround of the cement business, which was showing very good progress, Afrimat said.
Afrimat, which paid $6m to acquire Lafarge, was confident it could turn the ailing cement company around.
Although Clark predicted a further profit warning for the second half and did not expect a speedy turnaround for the group overall, he did note that Afrimat did have some encouraging growth nodes.
He said it was now likely that Lafarge Cement would break even or move into a profit in October — as opposed to the earlier forecasted December — with two kilns running and good operational efficiencies coming from the Lafarge Cement operation.
Additionally, he noted that the construction materials business was also performing exceptionally well, with very strong volumes going through, while the Nkomati Anthracite operation has seen some good sales, boding well for the group.
On Wednesday Afrimat reported that its construction materials segment contributed positively, with volume increases and the successful integration of the Lafarge quarries, fly-ash and ready-mix batching plants into Afrimat, demonstrating the underlying quality of these assets.
The industrial minerals business significantly improved over the previous year on the back of focused market development efforts and the reduction in load-shedding.
Iron ore sales in the domestic market improved significantly after the reporting period and the international iron ore price has also improved due to better market conditions in China, it noted.
Clark said though there has been some rebound in the price of iron ore in the previous few weeks, due to stimulus from the Chinese government, this has been somewhat counteracted by a higher rand.
“So all hinges again in the second half and where iron ore ends,” he said. “But my underlying assessment is that Afrimat is a great long-term shareholding stock to own, and I would certainly use any weakness in the share price going forward up until the results are indicated and, of course, the guidance of the second half to potentially accumulate.
The company’s financial results are expected to be released on October 24.
Afrimat share price slipped as much as 3.92% on Wednesday before recovering to close 0.37% lower at R65.12.
Update: October 9 2024
This story has been updated with new information
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