Key message: 1H FY22 will get a boost from high iron ore prices, but the recent iron price pullback is not unexpected and built into our forecast. Growth is driven by production increases, not higher than normal commodity prices.
- Afrimat released a Trading Update for 1H FY22 (six months to 31 August 2021).
- HEPS is expected to increase by 58 – 63% to 290.6 – 299.8c. The guidance is just below our 1H FY22 HEPS forecast of 312c.
- All three segments are reported to have experienced strong growth compared to the lockdown impacted comparable period.
- High iron ore prices did benefit the Bulk Commodities division, boosted by the new Jenkins iron ore mine contributing positively. Nkomati also contributed positively.
- The recent spike and pullback in iron prices will provide a short-term boost to earnings, with the iron ore price trajectory not unsurprising and forecast by market commentators. We have made no changes to our iron ore price forecasts (we had average prices for 2H FY22 at USD110/t and FY23 prices at USD93/t).
- The investment case for Afrimat remains strong, driven by:
- more than doubling of iron ore sales at a similar profit margin through inland sales to AMSA
- internal cash flows from iron ore funding the bulk of the cost to acquire and develop Gravenhage
- Nkomati contribution
- little debt funding required
- Consequently, revenues are set to triple over the next three years and debt forecast to fully paid off at the end of that period.
- The increased iron ore production added approx. R1.6bn and the new manganese operation added approx. R4.7bn to our valuation, at a total capital cost of just over R2bn.
- We retain our current forecasts and maintain our target Price at R81.