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Steadying SA mining sector bolsters AECI’s FY earnings

Steadying SA mining sector bolsters AECI’s FY earnings

Photo by Bloomberg

25th February 2014

By: Natalie Greve

Creamer Media Contributing Editor Online

  

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JOHANNESBURG (miningweekly.com) – Increased demand for chemical explosives by the South African mining sector drove speciality group AECI’s earnings for the year ended December 31 northwards, pointing to a stronger minerals industry than that of 2012.

However, strikes in the platinum mining industry this year had already impacted on the company’s results in the early part of 2014, said AECI CEO Mark Dytor during a presentation of the group’s results on Tuesday.

Nonetheless, Dytor said AECI’s explosives and mining chemicals businesses were poised for further growth in South Africa – which he said experienced “more stability” during the period under review than in 2012 – in opencast mining, particularly in iron-ore and coal.

Although, the narrow reef platinum and gold sectors were expected to remain under pressure owing to weaker commodity prices and escalating costs.

“We have seen increased demand [for explosives] from [local] opencast mining operations and increased mining activity in the rest of Africa from existing customers and new projects, with heightened international competition for market share on the continent,” Dytor said with regard to the year ended December 31.

The company’s mining solutions businesses contributed 61% of overall yearly revenue, which increased by 15% to R15.9-billion, while revenue generated outside South Africa was 20% higher at R5.3-billion, representing 33% of total revenue.

Of the 61% of yearly turnover provided by the group’s mining services division, 23% was delivered by the platinum sector, 21% by the copper, cobalt, chrome and nickel sectors, 16% by the gold sector and 11% by the diamond sector.

EARNINGS LEAP

Meanwhile, the company’s headline earnings improved by a hefty 57% to R885-million, while profit from operations increased 17% to R1.4-billion compared with R1.2-billion in 2012.

This drove a substantial improvement in earnings per share from 520c for the previous financial year to 845c for the period under review and headline earnings per share from 503c in the prior 12 months to 791c for the 2013 financial year.

“Key drivers of performance were pleasing year-on-year improvements in the explosives and property businesses, the nonrecurrence of the noncash International Finance Reporting Standard charge relating to the community share trust component of a broad-based black economic-empowerment (BBBEE) transaction concluded in 2012, the weaker rand:dollar exchange rate and increased selling prices,” said Dytor.

The company declared a final cash dividend of 210c an ordinary share for the period, bringing the total cash dividend for the year to 315c a share – a 20% increase on 2012’s 263c a share.

EXPLOSIVES DIVISION

AEL Mining Services achieved a 17% increase in revenue to R7.4-billion, as overall explosives volumes to mining and quarrying customers grew by 5.6%.

Profit from operations improved to R572-million after taking into account an R84-million retrenchment charge for the closure of the old explosives initiating systems plants and the subsequent relocation of production to the Initiating Systems Automated Plant (ISAP), in Modderfontein.

“AEL benefitted from the weakening rand as more than 50% of its revenue is generated outside South Africa and is mostly denominated in dollars. Consequently, the profit improvement in AEL’s foreign operations enhanced the overall result by R72-million,” Dytor noted.

The South African business performed well over the period, notwithstanding lower gold and platinum prices.

Explosives volumes were 6.8% higher than in 2012, while market share grew in the opencast and massive businesses, particularly in the iron-ore and coal sectors.

New supply contracts were secured, which enabled AEL to diversify its commodity portfolio further in line with its strategy.

“Major contracts in initiating systems were retained, although volumes declined in line with decreased output from the narrow reef gold and platinum mining sectors in South Africa,” the company reported.

Meanwhile, the African business continued to expand its footprint as a result of an increase in mining activity with the start of greenfield projects and the commissioning of three new bulk explosive plants in Burkina Faso, the Democratic Republic of Congo and Egypt.

In addition, AEL gained new explosives supply contracts in the copper and gold mining sectors, leading to a 5.4% growth in the demand for explosives on the continent.

AEL’S international business recorded improved profitability and growth, even though some new contracts were delayed by customers, owing to low thermal coal and gold prices.

Meanwhile, the ammonium nitrate plant in Indonesia, part of AECI’s minority investment in Black Bear Resources Indonesia, had been commissioned by year-end and would provide AEL with a secure in-country source of ammonium nitrate.

During the period under review, the ISAP facility – which was “commercially complete” and boasted a verified 120-million-a-year detonator output capacity – produced 98.9-million detonators and assembled 31.8-million units, in line with market demand.

Further expansion of AEL Mining Services into Africa and other territories of interest was expected in 2014.

SPECIALITY CHEMICALS

The group’s speciality chemicals business posted a 10% increase in revenue to R8.4-billion, with overall volumes growing by 5.2%.

Profit from operations increased by 3% to R922-million while the operating margin narrowed from 11.7% in 2012 to 11% for the period under review.

“Although commodity prices increased, profit margins in rand terms did not follow the same trend, owing to the subdued trading environment in South Africa’s manufacturing sector. Higher sales at typically lower margins to the agricultural sector diluted the segment’s overall margin further,” the company held.

Meanwhile, the acquisition of South Africa (SA) Premix was finalised in June last year and integrated into AECI’s Chemfit business in the third quarter.

SA Premix produced and distributed animal feed formulations that fortified and enhanced the nutritional content of feeds. A new blending plant was scheduled to come on line early this year.

In line with its strategy of growing its footprint in the water solutions sector, AECI announced in January that it had reached an agreement with Clariant Southern Africa for AECI’s wholly owned subsidiary ImproChem to acquire Clariant’s water treatment business in Africa and its South African assets for a total cash consideration of R409-million.

Also included in the acquisition was a 50% shareholding in Blendtech, Clariant’s BBBEE partner in South Africa.

PROPERTY

Revenue from the combined activities of group subsidiary Heartlands, which was focused on realising the value of AECI’s surplus land-holdings across South Africa, increased by 68% over the period to R672-million, while operating profit grew from R33-million to R219-million in the period under review.

Revenue comprised the recognition of industrial land sale transactions totalling R306-million over the 12 months.

However, the company noted in its yearly results statement on Tuesday that Heartland’s results did not include income from the sale of the company’s Modderfontein property, which would take effect later this year.

In January, the Competition Commission approved the sale of about 1 600 ha of AECI’s vacant land to Chinese diversified property development company Shanghai Zendai Property for R1.06-billion.

Meanwhile, on the back of weak demand for office space and no discernible improvement in vacancy rates, office market rentals and office land sales continued to show lacklustre growth overall, although there was better demand for office space in Somerset West, in the Western Cape.

The group continued to investigate solutions for the disposal of its surplus land and assets in Somerset West.

PROSPECTS

The benefits of growth outside South Africa from both greenfield and brownfield expansion projects in the copper, gold and iron-ore mining sectors were expected from this year.

“The expansion of the group’s African footprint will continue to be supported, not only in mining solutions, but also in other markets of strategic interest, namely water, oil, energy and gas, food additives, agriculture and speciality chemicals distribution,” Dytor said.

Further restructuring in the explosives business as well as the speciality chemicals cluster could be expected as the group continued to review its portfolio and cost base to increase growth opportunities in the countries in which it operated.

Acquisitions in South Africa, the rest of Africa and in other selected regions in AECI’s markets of interest would continue to be pursued in the coming year.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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