The CEO of Afrimat says the firm is negotiating a “game-changing deal” that will strengthen its cement operations as it continues to integrate and turn around Lafarge.
It acquired the cement specialist and its assets at a discount in what was dubbed “the deal of the century”.
Andries van Heerden told Business Day on Thursday that while the group took a serious blow in the first half in its cement business, which operates under the construction materials segment, Afrimat had invested in employing specialists to the division.
He said the newly refreshed team was pushing ahead with the business turnaround, with significant improvements evident in the Lichtenberg cement factory and with the grinding plant in Randfontein performing to high standards.
The CEO said that in addition to the operational improvements, the company was also working on clinching a deal towards the end of the year that is set to put the cement business on a growth trajectory. He did not provide details.
“We have some interesting trump cards up our sleeve that we hopefully will be able to share with the market soon,” he said. “We need some approvals from certain authorities before we can make any announcements. But once we do that, I think this business can be a game-changer.
“And then we’ll be able to show our hand and show the real reason we bought the business.”
The construction materials segment (excluding cement) delivered a solid performance, increasing operating profit by 39.4% to R217.6m in the six months ended August, largely due to the successful integration of the Lafarge quarries.
The cement business incurred losses of R146.2m. Van Heerden said the losses were expected to a certain extent and the group had “bought the business at an absolute bargain price”, knowing it would have its work cut out to fix it.
“What we paid even if we account for the operational losses until the turnaround happened and the capital that we need to spend to catch up, even if we add that all in, we probably paid less than a third of what just the one cement factory would cost if we had to build it,” he said.
The building materials and mining group acquired 100% of Lafarge SA and its subsidiaries for $6m in a move that has given it access to some of the best assets in the SA construction industry.
Afrimat reported an 80% decline in headline earnings per share (HEPS) to 53c from 263.4c a year ago, as a raft of negative factors weighed on its first-half performance.
The group felt the effects of a declining iron ore price, a stronger rand, continued limitations on the export rail line, large industrial customers reducing offtake because of economic and unforeseeable circumstances, and losses in the cement business.
Group revenue increased 44.3% to R4.1bn with the inclusion of the Lafarge business but operating profit, excluding a gain on bargain purchase, fell 45.2% from R534.1m to R292.7m.
Weak cement
This was mainly due to the weak cement performance coupled with iron ore mines’ operating profit decreasing 63.6% to R148.1m. International iron ore exports were adversely affected by a 5% decrease in US dollar prices, a 31% increase in shipping costs and the strengthening of the rand.
ArcelorMittal SA’s (Amsa) furnace freeze in the first quarter also significantly affected sales volumes and revenue for local iron ore.
Smalltalkdaily analyst Anthony Clark said the challenges were not due to strategic or structural issues inside Afrimat but rather the result of a combination of extraneous factors beyond the company’s control.
“I now believe that in October, the company in cement is breaking even, if not making a profit,” said Clark. “So those losses should hopefully abate in the second half,” he said, adding that much hinged on iron ore.
Van Heerden said that while there was improvement in the factors that hampered growth in the first half — including a pickup of activity at Amsa and a significant improvement in turnaround times and volumes being transported by Transnet —Afrimat was unlikely to bounce back from the setbacks in the next six months. But it would begin to show strong growth in the new financial year.
The board declared an interim dividend of 10c per share.
Update: October 24 2024
This story has been updated with new information.
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