If there is a fatal flaw in mining companies, it is poorly timed capital allocation at the top of a particular commodity cycle. More than a few counters – especially of the ambitious junior mining ilk – have been badly caught out over the decades.
Even the mining giants can get it horribly wrong – recalling Anglo American’s ill-timed share buy-back exercise just over 15 years ago. Impala Platinum’s acquisition of Royal Bafokeng Platinum might be a more contemporary example.
One contender that seemingly has the magic touch when it comes to capital allocation is Afrimat, which these days can very much be regarded as a hybrid mining company.
The group listed on the JSE in 2006 as a quarrying specialist that provided aggregates for the construction and road-building sectors. That was an opportune time to list since South African infrastructure was set to boom after the country was awarded the Fifa Soccer World Cup hosting rights for 2010.
Predictably, by 2007/2008, every man and his concrete mixer turned up at the JSE … and most of the new “infrastructure-aligned” listings almost immediately embarked on a wild acquisition frenzy.
But Afrimat CEO Andries van Heerden remained cautious of building increased operational span at any cost. Consequently, Afrimat was conspicuously reserved in terms of corporate activity, making only one significant acquisition after listing (Malans Quarries for R125m) and the small purchase of Scottburgh Quarries. The lack of M&A froth at Afrimat saw the share shunned by investors with the share price dribbling down despite some solid operational showings and strong cash generation.
This article appeared in The Mining Yearbook 2024. Click here for the microsite and downloadable PDF.
For four long years, while its rivals were moving and shaking (and incurring heaps of debt in the process), Afrimat honed its operational strengths with the only non-operational capital allocation being the repurchase of its own marked-down shares. In retrospect, Van Heerden’s reticence was prudent, and he has since deservedly earned a reputation as one of the smartest capital allocators on the JSE.
The lack of M&A froth at Afrimat saw the share shunned by investors with the share price dribbling down despite some solid operational showings and strong cash generation
By 2010 the World Cup soccer gig was up. Afrimat’s rivals that had splurged on acquisitions and stretched their respective balance sheets were facing a squeeze, especially when the assets acquired at top dollar underperformed badly and did not generate the returns to justify the price tags. The fire sale of assets ensued.
Afrimat, thanks to its strong balance sheet, was able to mop up decent and repairable assets at bargain-basement prices – including its first forays into mining assets via dolomite business Glen Douglas, the Clinker Group and Infrasors (dolomite, limestone and silica sand).
The group stepped up its deal-making ambitions in 2015 when it acquired Cape Lime for R276m, and then a year later reinforced its mining ambitions by buying iron ore and manganese business Diro out of business rescue. In 2020 Afrimat acquired Unicorn Capital Partners (the old Scharrighuisen Mining services business) – which brought aboard a significant anthracite mining venture. That same year another iron ore and manganese business was acquired in the form of the R300m purchase of Coza Mining – bringing onboard the Jenkins, Driehoekspan and Doornpan projects.
The following year saw Afrimat’s transformative transaction with the purchase of the Gravenhage mining rights. This entailed a long-life near-development manganese resource 50km north of Hotazel – which the group, at the time, described as one of the last independently owned, undeveloped manganese deposits in South Africa.
In 2022 Afrimat made its pitch for new metals with the R550m acquisition of Glenover – which brought phosphate and rare earth minerals to the commodity portfolio. The group has also been working in the industrial hemp sector in Mozambique. Somewhat surprisingly, Afrimat recently returned to its infrastructure roots with the acquisition of cement business Lafarge.
A newfangled mining house
At this juncture, can Afrimat be regarded as a hybrid mining house in the making? Certainly, the operational span is impressive enough – taking in 35 active quarries, 41 readymix concrete sites, six brick-and-block operations, two clinker sources, a handful of sand mines, an integrated cement plant plus two grinding plants and a cement depot, fly ash, a couple of limestone and dolomite mines, and an agricultural limestone mine. Then add in the spread of “proper” mining operations – three iron ore mines, an anthracite mine, a manganese mine, a manganese source, as well as the new minerals projects in phosphate and rare earth minerals.
This diversity has paid off with Afrimat registering smooth growth for more than a decade – something that not too many mining counters can claim. Van Heerden, in a recent investment presentation, said Afrimat was fortunate to hold a “good blend” of local and international priced commodities with exposure to different currencies and economic cycles. Perhaps more important is Van Heerden’s contention that the different segments in Afrimat required similar operational skills.
Glenover is a longer-term investment which will be carefully positioned for sustainability – Andries van Heerden, Afrimat
It’s difficult to dismiss these points when Afrimat has managed an enviable profit after tax CAGR (compound annual growth rate) of 19% between end-February 2009 and end-February 2024.
The latest results for the year to end-February were impressive with revenue up 34% to R6.1bn and bottom-line earnings up by a similar margin to 567c a share. The return on net operating assets was a sprightly 25%.
Perhaps most reassuring was that net cash generated by operations was up 25% to R1.2bn.
The star of the show remains iron ore, which held its operating margin at a stout 32%. Even though iron ore only comprised 36% of revenue, at profit level its R768m donation represented 83% of the operating income. Van Heerden noted that international iron ore volumes were 15% below allocation due to Transnet’s underperformance, but that local iron ore volumes increased by more than three-quarters.
Afrimat is also making big strides in anthracite – and one must wonder whether the group still has ambitions to play a bigger part in the coal sector. The group walked away from a deal to buy Australian Securities Exchange-listed Universal Coal in 2019. Van Heerden said the underground mine had been established at Nkomati Anthracite and that volumes were ramping up “according to plan”.
Almost R900m has been spent on Nkomati over the past three financial years, and another R91m will be spent in the 2025 financial year. Van Heerden believed Nkomati was improving consistently towards steady state and was set to continue to deliver robust profits.
What will be worth watching is how quickly Afrimat can bring the Glenover assets into play. Van Heerden says Glenover will follow a steady, stable and profitable strategy. “Glenover is a longer-term investment which will be carefully positioned for sustainability.” He said the commissioning of the single superphosphate plant would ensure that product was ready for the agricultural planting season and that markets could be broadened.
Glenover’s performance in financial year 2025 will be intriguing to gauge. Perhaps more intriguing is whether Afrimat can uncover more opportunities in new metals and minerals.
If history can be relied on, then Van Heerden will probably focus on eking acceptable returns from recently acquired Lafarge in the short term. The time for acquiring more assets in the new metals and minerals segment might still be some way off … at least while asset prices are elevated and vendors greedy. Perhaps don’t write off another tilt at coal mining assets in the short to medium term?
