Construction materials and mining group Afrimat is an entirely different beast to what it was when South Africa hosted the Soccer World Cup: a diversified miner with exposure to iron ore, anthracite, phosphates, rare earths and now cement. While its shares have ground out a flat performance this year, interim headline earnings per share of 263.4c are an exponential increase on the 29.9c a share the company earned in the 2010 interim period. The FM spoke to CEO Andries van Heerden.
It’s been much tougher for iron ore markets of late, yet your iron ore operations saw an increase in volume of 29.7% — unlike, say, Kumba Iron Ore. How’d you buck the trend?
Kumba [is] a very large and stable company and in our case we’re relatively young and growing. Two years ago we started a new mine [Jenkins] that was part of the Coza transaction … so it was really a ramp-up of a relatively new mine and selling into the domestic market, so we didn’t have all the challenges with rail.
How important is your recent acquisition Glenover, which is building up a phosphate and rare earths operation?
At one stage we sat down and said: “What does the Afrimat of the future look like?” And we decided we at least needed to get our toe in the water with some of the more modern-type minerals. In that specific deposit, the phosphate and rare earths occur together.
The phosphate at this stage is a little easier to monetise: the capital investment is lower and the market is more developed. In the typical Afrimat way, we try to get some sort of a positive cash flow as quickly as possible. It’s something we see as a longer-term growth business, which hopefully three to four years from now will be a significant contributor.
Which rare earths? And where is this deposit?
The easy part of your question is the location: it’s situated near a town called Steenbokpan, close to the Botswana border. Remember when we were at school there was a little bar on the periodic table which the teacher said don’t worry about? Well, one of those minerals is praseodymium. It’s a critical component of permanent magnets, for use in electric motors and renewable energy in wind turbines. The idea is to initially manufacture a rare earth concentrate, and then sell it to people around the world who will do the further beneficiation.
Remember when we were at school there was a little bar on the periodic table which the teacher said don’t worry about? Well, one of those minerals is praseodymium
Integral Asset Management’s Keith McLachlan has a great chart showing the difference between earnings for the original Afrimat vs the business today. Did it ever occur to you to not diversify?
In our DNA is the fact that we are a group of entrepreneurs who got together years ago; we operated our own small quarrying businesses, merged and then thought we’d do that for a long time. And then come 2010 we realised the construction party was over.
But we had a certain set of skills and a competent team, so we bought a lime and dolomite mine and formed our industrial minerals division. And that served us well until about 2015 and Nenegate [the abrupt removal of Nhlanhla Nene as finance minister in December 2015, which had severe and dramatic economic consequences] when we looked around for some hard currency insurance. We’d always been looking for a good iron ore opportunity and the stars really aligned: on the one hand Kumba retrenched a whole lot of competent people; we had the ambition and at that stage a strong balance sheet, and then we identified Demaneng, which we found out was in business rescue.
When prices are at a record low the competition is less, sellers are desperate to get out and you can do good deals. So to your question: in strategic management you’ve got to look at the reality. Back in 2010 we would have loved to just carry on with construction materials, but we realised our growth ambitions and the realities of the market were out of sync.
So that takes us to your deal to buy Lafarge. It’s a horrible time for cement players. Why should it do better under you than under its present owners?
Lafarge is not just a cement company. It has 12 operating quarries around the country formed way before we built a little company like Afrimat; it’s got the best locations with the best-quality quarries. Given its turnover, with our margins, we pay for the Lafarge acquisition within 3½ years.
The second part of that business, which is an absolute jewel, is the fly ash business. It’s used as an extender in the cement markets and there’s a shortage of that in the Gauteng area especially. It’s always easy to stand on the side and criticise, but it’s a big international company and it sent expats in on three-year contracts, and I just think the company culture was out of sync with what it needed in South Africa.
You also said in your presentation on Lafarge that the market is low, but turning. What are you seeing that maybe we aren’t?
There are two areas where we are seeing a significant uptick in volumes of aggregate materials going out [of] the quarries’ gates, and one might surprise you: road building around the country, and rail — Transnet. I’ve seen a definite change in some of Transnet’s maintenance practices: a significant increase in the sale of ballast (those stones that support the rail lines).
That bodes very well. Our volumes of aggregates increased 17% year on year and our profits went up 114%. I spoke to a consulting engineer recently and he said he’s very busy. Now, one person doesn’t make a whole industry, but his colleagues are also busy and that bodes well as they prepare the tenders for Sanral [the South African National Roads Agency]. If they are busy, the tenders will come out in the next couple of months. Long may it last.
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