DURBANVILLE-based building materials producer Afrimat looks set to venture further into the mining sector with a proposal to acquire the South African operations of Australia-based Universal Coal plc.
Afrimat – probably best known for its aggregates and lime operations – has already confirmed its intent to play in the bulk commodity space when in ventured into iron ore and manganese mining recently.
But the proposed Universal transaction – estimated to cost Afrimat more than R2 billion – is far larger. In fact, it will be the largest transaction ever pursued by Afrimat, and will probably require the group to tap its shareholders for fresh capital to fund the transaction.
Afrimat – headed by astute CEO Andries van Heerden – has over the years built a reputation as a smart and determined deal-maker with a rare ability to secure well priced deals on assets that can be tweaked for greater profitability.
Afrimat, famously, resisted acquiring (expensive) assets in the run up to the 2010 Soccer World Cup. The group was later able to pick up struggling assets at bargain basement prices as the construction and building industries faltered.
The Universal deal comes at an intriguing juncture for Afrimat as its diversification into bulk – specifically iron ore – looks like starting to pay off.
At last count bulk commodities represented around a quarter of Afrimat’s total business at the end of August last year. If Universal is dragged aboard, that ratio would change markedly.
Afrimat’s iron ore story is a compelling one – securing hard currency exposure, higher margins and an ability to operate the mine as a quarry (meaning it’s cost effective and has scalability).
Presumably some of these attributes also apply to Universal Coal.
Independent analyst Anthony Clark recently wrote in the Investors Monthly magazine that Universal’s coal mines in Mpumalanga and Limpopo could add some R500m in additional profit to Afrimat. He also believed there were some Afrimat efficiencies that could be bought to bear on Universal to lift operational capacity, lower costs and increase profit margins.
Fortunately for Afrimat, the performance for the full year to end February (which will be published next month) looks as resilient as ever.
Last month Afrimat advised its shareholders that it expected bottom line profits to increase by between 20% and 30%.