[miningmx.com] — FOR the past six years, Scharrig Mining (Schamin) has grown core earnings per share by a compound annual rate of 63%, and the 50% growth in the year to March, to 104c (69c), shows little slackening of the trend. For dividends, the five-year compound growth rate is 53%, and 42% last year alone, to 17c (12c).
But with revenue up to R1.4bn and operating profit to R297m, it’s no surprise that Schamin fears it’s nearing saturation in its core business of opencast coal mining. So it’s seeking to diversify both geographically and by activity, and recent acquisitions reflect this.
Contract mining is already down to 40% of group revenue, today’s results briefing was told, of which about 80% in turn is for one client, BHP Billiton.
But chief operating officer, Robin Berry, is not perturbed by the risk of a conflict of interests as Schamin becomes an operating miner, suggesting that the group has already built the equivalent of investment bankers’ Chinese walls between the businesses.
He sees the deal announced with Merafe this week as a model. The two have formed a 50/50 joint venture to combine five coal prospects. The biggest, Merafe’s, is valued at R60m; Schamin’s four at R5m. So Schamin will spend the next R5m of development costs to equalise their contributions.
The joint venture resource totals about 25 million tonnes, well spread among Eskom, export and local metallurgical grades.
While Berry concedes that in this case Schamin will provide most of the skills, he says Merafe has its own skills in ferrochrome mining, an area Schamin is especially interested in since the recent takeover of CCT.
But for the future, he sees the formation of joint ventures as a way of finding local partners in other African countries, and in South Africa of providing technical and financial support to junior miners who have promising deposits, with the added benefit of boosting Schamin’s BEE rating.
Schamin’s direct BEE shareholding is 7.5%. Berry adds it’s under pressure, especially from clients like BHP Billiton and Anglo, to improve its rating.
Capex last year totalled R494m, including R265m on opencast equipment, R154m on the newly acquired Benicon, a complementary business whose main client is Anglo Coal, R59m on drilling and blasting equipment, which has been upgraded to a separate division, and R16m on another acquisition, Geosearch, which plans to become Africa’s leading exploration driller.
As margins on direct mining should be higher than on contract mining, Berry hopes that Schamin as a group will be able to generate higher margins as this side of the business builds up. But while he says capex demands of coal mining are relatively low – though this depends on the extent to which the product is beneficiated – the aggressive expansion policy demands a continuation of the conservative dividend policy.
So one shouldn’t look for much reduction from last year’s cover of 6.1 times.
It’s hard to be bullish about a share that could have been bought in quantity for less than a Rand well into the present century and is now about R22.50. Surely it can’t keep running like this. But it held up well against today’s weaker market and a couple of shrewd investors I know haven’t turned sellers yet.
