Its about Volumes Not Prices
Key message: Iron ore prices have retreated significantly, but we still forecast revenue in FY24 to be 2.4 times that in FY21 due to volume growth in existing and new mines.
- Afrimat released 1H FY22 results, with HEPS up 60.5% to 295.1c off an increase in revenue and operating profit of 55% and 65% respectively. An interim dividend of 40c was declared.
- While high iron ore prices boosted the result (lump ore up over 50%), the investment case for Afrimat continues to be the strong volume growth they are set to realise over the next three years.
- Iron Ore: The Jenkins mine has started to contribute and should deliver 650kt to AMSA in the year to June 2022. Production will then increase to 1.25mtpa. Mining costs at Jenkins are lower than Demaneng is it is direct shipping ore (DSO) with minimal beneficiation. With Demaneng continuing to export 875ktpa the iron ore business will more than double over the next 12 months. Mining costs increased as stripping ratios were raised while iron prices were high (management intentionally took the opportunity) – these should reduce now that iron ore prices have moderated.
- Anthracite: The Nkomati mine has experienced a strong turnaround and has been profitable from August 2021. After a large operating loss in this period, we expect a recovery to just over breakeven by year end. Anthracite prices are set annually in ZAR and are not linked to international prices.
- Manganese: The Gravenhage mine is set to start to produce in early FY24 (all approval obtained end FY22, development FY23). A more conservative mine plan is in place with a 750ktpa mine envisaged initially, bringing down the anticipated capital cost by approx. R500m to R1.1-1.4bn.
- Peak funding for all the above operations is approx. US$45m (Gravenhage purchase price) and R760m mine development costs. The recent high iron ore prices have reduced the maximum net debt required to R500-600m. At commodity prices lower than current spot rates Afrimat could increase revenues by 2.4 times between FY21 and FY24, with all capital fully funded by internal cashflows.
- This increases our Sum-of-the-Parts valuation to R88 (from R81).