The Afrimat price has more than doubled, from just less than R30 per share to the current level of just more than R60 in the past two years. It took time for investors to buy into Afrimat’s positive story, but Afrimat management stuck faithfully to its script, turning out strong results, even during the height of the pandemic in 2020. They have now been rewarded with a share price that more accurately reflects what is happening in the various underlying businesses.
They also believe in, and understand, the value of communicating properly with the investment community. Their twice-yearly presentations, augmented by an annual investor day in August, are full of information and management is always available to answer questions from all-comers.
But the best is yet to come in terms of fundamental performance as Afrimat becomes a fully fledged mid-tier mining operation. And it has recently attracted the attention of SA's largest fund manager, the Public Investment Corporation (PIC), which has upped its stake in Afrimat to 13.1%.
Afrimat’s segmental revenue is very balanced, with 43% of revenue being derived from bulk commodities (mainly iron ore and anthracite), 43% from construction materials and the balance of 14% from industrial minerals. But at an operating profit level, it is highly skewed towards bulk commodities, which contributed 82% of operating profit in 2020, with 12% coming from construction materials and only 6% from industrial minerals.
And that situation is likely to become even more extreme in future, as the recent acquisitions of Coza Mining, Nkomati Anthracite and Gravenhage manganese begin contributing. Nkomati contributed three months revenue and operating profit in 2020’s figures, so financial 2022 should see it contributing a full year. Jenkins iron ore mine, part of the Coza Mining group, which supplies the local SA steel market, will start contributing as from the second half of the current financial year.
There are understandable concerns from some investors regarding commodities, the prices of which are always going to be far beyond management’s control. Notwithstanding this observation, Afrimat has made all of its bulk commodity acquisitions at, or near, the bottom of the commodity cycle. So even although commodity prices have come off their recent highs, Afrimat’s cost of production is still significantly lower than the international commodity prices, resulting in very healthy, sustainable profit margins.
The timing of the acquisition and turnaround of Demaneng iron ore mine in the Northern Cape was exquisite. The first ore began being shipped in 2018, just as the international iron ore price was taking off. Hovering at about $75/tonne in those days, the iron ore price meant that Afrimat was making modest profits, based on an all-in production cost including shipping of about $45/tonne. But the price ramped up substantially and by 2019 it was well over $100/tonne. It peaked in June at just under $220/tonne, but has since fallen consistently to current levels of about $173.50 — a fall of about 20%.
The recent peak is unlikely to be attained again any time soon, as it appears to have been due to a combination of unusual factors such as global monetary easing associated with the pandemic, a lack of bargaining capability in pricing and unfettered speculation by market players. This last factor has been severely dealt with by the Chinese authorities, which have warned of a zero-tolerance approach to monopoly behaviour and hoarding by commodity firms.
Both of Afrimat’s iron operations, at Demaneng and Jenkins, are operating at all-in costs of about $45/tonne. So the iron ore price could fall back significantly even from current levels and the group would still be making strong profits. Nkomati Anthracite is also operating at healthy profit margins, albeit nowhere near as good as those enjoyed by iron ore.
Afrimat is now entering a more mature phase of its life cycle and has undoubtedly become a fully fledged mid-tier miner. But this doesn’t appear to have dulled its appetite for acquisitions and its debt-free balance sheet can sustain an acquisition-orientated approach to growth for the foreseeable future.
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