AT African Rainbow Minerals’ (ARM’s) interim results presentation on Friday, Chairman Patrice Motsepe said the group would “listen to shareholders” regarding its stake in Harmony, South Africa’s largest gold producer by volume.
All options were on the table to deliver maximum value to stakeholders over the medium to long term, he added. At current share prices, ARM’s 11.8% shareholding in Harmony is worth around R15bn, equal to roughly 42% of ARM’s market capitalisation.
This doesn’t imply a disposal is imminent, especially since ARM sees Harmony’s copper growth plans as strategically important. However, it lends some credibility to management’s assertion that “there are no holy cows”.
In the six months to December, ARM’s headline earnings per share dropped 49% to R7.75, as its iron ore division, which now makes up 74% of EBITDA, saw a 22% decline in the average realised dollar price for iron ore. Meanwhile, PGM losses increased more than twofold as poor prices persist.
The only highlight was manganese, now 24% of EBITDA, which saw a 713% jump in profit thanks to better production and pricing.
Although iron ore and manganese industry initiatives, in collaboration with Transnet, aim to improve port and rail performance over the long term, this will require significant time and investment. Frequent rail maintenance shutdowns are expected to decrease export volumes over the next few years by about 2.5%.
While ArcelorMittal’s planned closure of the Newcastle and Vereeniging steel plants is not expected to materially impact profits at the iron ore division, with 84% of volumes exported, it will hurt prospects of the Beeshoek iron ore mine.
ARM expects iron ore prices to fall over the next year due to supply growth and a softening Chinese demand outlook.
At ARM’s Bokoni PGM mine, high-cost mechanised development has been significantly scaled back in favour of conventional mining, which will increase production, lower unit cash costs and reduce operational losses. A section 189 restructuring process, in line with South African labour laws, has also been announced.
Motsepe believes recent developments in the US, where President Donald Trump has taken an axe to green energy initiatives, will delay the transition to electric vehicles and prolong demand for PGMs.
Analysts at Citi said in a note results missed expectations due to lower earnings from PGMs and the coal divisions, while a higher dividend payout ratio compensated somewhat. They maintained their target price of R180 per share.
Investment bank UBS was more negative, citing poor cash flows and higher-than-expected unit costs, which in their view might lead to a downgrade of full year guidance. However, they saw the restructuring at Bokoni as a positive catalyst for cash preservation going forward.
