BRAD Doig is Petmin’s business development director.
BUSINESS DAY TV: Petmin’s headline earnings jumped 70% for the six months ended December, although to some extent they have been flattered by fewer shares in issue as a result of the buyback programme. It’s not been an easy six months, though, thanks to geological issues at its Somkhele mine … mining rights issues and also the drought.
Joining us now on News Leader to discuss the six months and what the next six months may hold is Bradley Doig, business development director at Petmin.
The headline earnings figure increase is great, 70%, although there were fewer shares in issue but it’s clearly not been an easy six months for the company.
BRAD DOIG: No, everyone knows the commodity space has been tough but we have reached full production capacity at Somkhele so we’re running at maximum capacity, which obviously helps unit costs, so they’re down. And we’ve … had some interesting developments in the markets around our energy coal product so we’ve had quite a spike in pricing there. And we’ve also been helped … whilst there’s been a decline in the net price we’ve received for our export anthracite, we’ve had the exchange rate benefit as well. So we’ve had a couple of things that have been in our favour but we’ve mainly controlled costs pretty well at the mine.
BDTV: But the things that have maybe not been working well in your favour are harder geological conditions, so it sounds, and the drought. You need water to wash the coal and if the drought persists, what are the next six months going to be like? Will you have to scale back production quite substantially?
BD: We had lots of contingency plans in place obviously and one of them was we found a lot of underground water in the vicinity of our mine so we’re in a very fortunate position right now that we have sufficient water available to run all three plants at maximum capacity to the end of this calendar year.
BDTV: Is this something that you should do?
BD: Yes, we believe it’s necessary. The market is there for our product, we have the water available, and obviously we’re still anticipating rainfall … but assuming it does not rain at all, we still have sufficient water for 12 months.
BDTV: And the geological conditions that you’re experiencing?
BD: This naturally occurs with anthracite — it’s highly fragmented ore body with lots of dolerite sills and dykes. One of the pits we’re operating has been a bit tough this year so we’re actually opening up another pit earlier than we’d anticipated and that will obviously militate against the conditions we’re facing. But we don’t think long-term it’s an issue. Obviously part of our planning is to make sure we can overcome these issues.
BDTV: So then the things that are going to work in your favour … that have worked in your favour, such as the rand exchange rate and I suppose fairly significant demand for the coal product, is that likely to continue?
BD: Yes, we’ve seen an uptick in pricing and demand for what we call our 26 Ash product, which is going to Ukraine and Vietnam, new markets that we haven’t traditionally supplied so we’re quite excited about that. On the anthracite side obviously there’s a slowdown for the product that goes to our Brazilian customer base. We’re maintaining where we want to be but it’s obviously hard work and pricing is under pressure. On the local market our ferrochrome market is solid and sound.
BDTV: What about the iron ore market and what do you make of the massive spike that took place in the Asian markets this morning? I’m not sure if that’s a realistic spike, but have things improved?
BD: I don’t know how much paper has been traded, but it’s one of those things. But if you look at the steel world globally there’s been an uptick in the pricing of steel commodities, steel products, which will drag the iron ore price with it. This could be a function of restocking, it could be some paper business, there are a bunch of things. I don’t think it’s going to come back to a somewhat reversion of the norm I suppose. But a lot of commentators out there … we believe iron ore prices are going to improve a little bit and obviously it helps our Canadian project as well.
BDTV: I was going to ask … is it going to improve enough in order for that project to be a feasible one? Because you have invested a further $2m into it, you’ve taken your shareholding up to 40% so clearly you must be quite confident?
BD: We are quite bullish on that for the reasons that we’ve spent a lot of time re-evaluating the business from different production profiles. So what we’ve done is focus on a smaller plant to start with, which we think is appropriate in current conditions. We’re also focusing on a high-grade nodular pig iron, which is something that goes into the ductile iron industry. It’s all a bit technical but it’s quite a unique little product and it actually carries a $70 -$100 premium above the normal merchant pig iron that’s traded around the world. So our cost base remains the same to produce the product, there’s just a slight tweak to the process. The work on that has already been done and our BFS (bankable feasibility study) will be completed in June anyway with Tenova and SNC-Lavalin.
BDTV: How much would you have to spend in the next six to 18 months on this project?
BD: We are fully invested so from a Petmin perspective we’re not going to spend any more money at this point. We have an option to buy another 9.9% and obviously we would look to … if things are favourable, which we think they are. We are in negotiations with our partner there to take up that 9.9% but it must obviously be value accretive to our shareholders.
BDTV: Okay so there’s no further capex spend from you as such in the next short while?
BD: Absolutely.
BDTV: What about the issue back home with the Veremo project … the execution of the mining rights hasn’t taken place and now you’re claiming R195m against Kermas and Framework Investments. That’s a lot of money for a company the size of Petmin.
BD: Yes we are a small company and it’s a significant number. It stems from a transaction we did around 2005-07 where we entered into an agreement with Kermas and Framework Investments when we acquired part of the Veremo project. Part of that process was that there were some payments due arising from that transaction and very simply those payments haven’t been made and we’re pursuing the matter in arbitration.
BDTV: It sounds simple, but it clearly takes time and money and management’s (attention) … so is it quite a big distraction?
BD: Yes, but it’s not … we’re quite comfortable with our position so yes, it’s just a function of going through the process. It’s not productive by any stretch of the imagination but R195m is a significant amount of money so we will pursue it vigorously.
BDTV: And are you confident of getting that money?
BD: Yes we are.
BDTV: And one of the issues there seems to have been the execution of the mining rights. Are you having any issues with the broader DMR (Department of Mineral Resources) or is it simply that project where there was a delay in that mining right being executed?
BD: Yes, the execution and the delay is predicated around agreeing environmental liability numbers and those kinds of things, so it’s just been an ongoing negotiation with the DMR, so nothing dramatic from an administrative perspective. We just had to agree the numbers … it’s a relatively early-stage project and we wanted to make sure that we were pitching all environmental year-end numbers we had at the right numbers, etc. So that’s essentially where the delay has been, it’s been more of an interaction between ourselves and the DMR.
BDTV: I suppose as far as the next six months are concerned, and especially for shareholders who clearly have faith in Petmin — or maybe a few shareholders have faith in Petmin but maybe not the broader market because your shares are just marooned in this 120c range. Are you confident of paying a dividend?… Will there be a further buyback programme?… How is that likely to unfold?
BD: We have been doing this for 10-12 years, telling everybody … we have performed well. If you look at our numbers over the last three years, we’ve outperformed our peer group by a factor … a huge factor. So we feel that we’re dramatically undervalued. If you think of the PE (price-earnings ratio) we’ve been trading at, it’s around four … everyone is trading at between 12 and eight in the mining space. Yes, they’re bigger companies but there’s a lot to be said when looking at Petmin. Every year we’ve come to the party … we’ve said we’re going to make this and we do it. We’ve actually exceeded our guidance. So it’s a bit frustrating from that perspective. But yes, obviously the malaise around the general commodity market has affected us but with the spike in pricing now with the majors, we hope that will drag our share price up as well. We will continue to buy back shares as we think it’s a good way to spend our money and yes, that’s really where we are … it’s a frustrating position to find ourselves in, to be frank.
BDTV: Very. And are you likely to pay out a dividend at year end?
BD: We will maintain our 20% of HEPS (headline earnings per share) dividend … since we’ve implemented that, we’ve done it every year and will continue to do so.
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