Key message: Gravenhage may have slipped through its grasp, but current operations offer better returns and new opportunities may present.
- Afrimat held a pre-close update for 1H FY23. The main topics were the failure to meet to conditions precedent for the Gravenhage purchase and the recent capital raise (done mainly to fund the Gravenhage acquisition and development).
- The Water Use Licence issued for Gravenhage was deficient in at least five areas. This was the last item required to fulfil the conditions for the purchase. The seller had taken upon themselves to apply for the licence and Afrimat had no role in the application.
- The date to fulfil conditions was 20 August 2022 and the seller has not extended the date. Afrimat has declared a dispute, although there is a high chance that this deal is now off the table (the seller, Baosteel, still wants to sell but under conditions Afrimat is unwilling to agree to).
- While Gravenhage would have been a significant asset within Afrimat and boosted the bulk commodity division substantially, the ability to walk away from a transaction is as important as securing the right ones. Afrimat’s current new projects (Nkomati, Glenover) will produce higher returns than Gravenhage and new opportunities have presented themselves.
- In retrospect, management point to the less than premium grade manganese at Gravenhage (it was always a tier below the main producers in the region) and supply chain challenges (Mn transport has become an environmental issue) that make chasing the deal less attractive. Management may look at it again should the seller adjust terms, but one suspects Afrimat will offer less for it in future.
- The operational performance and product quality and opportunity at Nkomati and Glenover have exceeded management expectations and investment in these assets is seen as the best allocation of capital.
- The recent capital raise (R680m, issue of 13.38m shares) was probably not required but does provide Afrimat with the flexibility to expand current operations and be able to move quickly on new opportunities should they arise.
- We have adjusted our Afrimat model to remove Gravenhage – while revenue was not expected until FY25 it does impact the valuation. Our new valuation comes to R80 (down from R90).