Alec Hogg (00:01): Never this tough. That's what Afrimat CEO Andries van Heerden said in the trading update yesterday. And they've been listed for more than twenty years, so that's saying a lot. Iron ore, which was bought as a rand hedge by the company, has been mugged by a strong rand. And, well, we know what's happening with Transnet, but there's also an inflated price to get iron ore anywhere in the world because of what's going on in Iran.

The headline loss is up to 60 cents a share. Yet the Lafarge quarries, and this was a story that Andries told us at the BizNews conference, are kicking in. They were mocked at the time of their acquisition. They are booming now. So let's find out which Afrimat is real, remembering that Afrimat is a member of the BizNews Ricardo portfolio.

So we are shareholders. I got a little bit of a rap for being a shareholder in another company that I didn't disclose. So let's just continue to be fully transparent.

Andries, lovely to have you with us. You told us at the conference that your general manager was joking that he would go and vote for the ANC because they'd done so much at Ditsobotla, or Lichtenburg, where you've got your plant. And you said, but that's not really true, because business has done a lot of the work. I meant to follow up and ask: what are you guys actually doing in the town? We're going to talk about your trading operations in a moment, but we're getting close to elections. It'd be nice to understand better how your business and other businesses are contributing to the welfare of municipalities in outlying areas.

Andries van Heerden (01:50): Alec, what we're trying to do in Lichtenburg... one of the things there is that the roads are in a very, very bad state. That's one thing that we at least understand to a certain extent. So one of the projects that we are doing is to help fill some of the potholes and get the traffic flow through the town a little bit better.

That, for instance, is one thing that we try to do. And whenever they need an artisan, for instance, to fix a pump or something like that, I know that our guys have offered that help as well. But the big project that we are trying to do right now is to help fix the roads.

Alec Hogg (02:41): So by fixing the roads, you're giving the ANC votes, or at least your general manager thinks so.

Andries van Heerden (02:47): I think in the end, for us, it's also a little bit in our own interest. Getting trucks in and out of our factories is an absolute nightmare, and we need to fix those roads to be able to get our product in and out. So it's not only to help others, it's also helping ourselves.

Alec Hogg (03:09): Andries, talking about trucks, I wrote about this last week. We went up to Hluhluwe, to the Hluhluwe game reserve, and you go past Richards Bay, and there was a queue of five kilometres of trucks at the off-ramp to Richards Bay. Stuck, stationary, waiting to go in. The wastage that this must cause. Are you guys caught up in that chaos?

Andries van Heerden (03:36): Not really. Our product, our anthracite, is actually going out through Maputo at the moment. And if we go down to Richards Bay, we do it by rail, and we have seen the improvement. We've spoken about the improvement in rail. I was actually in Richards Bay two or three weeks ago.

One day we went past and there was no queue, and the next day there was a queue. Our local guy said that happens whenever there's some problem in the harbour, if something goes wrong in the harbour. But we still see a good split between road and rail on that side, it seems. Although we have limited exposure to that, because we don't export through Richards Bay.

Alec Hogg (04:34): I suppose the queues do show you how much of the product, and in this case it would be coal, I guess, through Richards Bay, is going by road when it should be going by rail. But an important point you make there as well is about the ports, and we are seeing some progress there. I don't know if you picked it up, it almost went unnoticed, but the ports authority is now going to be separated from Transnet. We're going to have the ports in a separate company. It was voted through in government, I think in the last week.

Andries van Heerden (05:06): I missed that. I didn't see that.

Alec Hogg (05:08): Yeah, I think most people did. So that could be another improvement. We know Durban's going to... well, we've got ICTSI, the Filipinos, busy there. So there is improvement, and you told us about that. But my goodness, your trading update yesterday, saying that these are the worst conditions ever. And if you remember, in 2008 your share price fell from R10.50 to R1.60. Now, if these are worse even than 2008, whoa. As shareholders, we are a little bit worried.

Andries van Heerden (05:41): Yeah. I think on the positive side, as you said in the introduction, the Lafarge transaction really did come at a very good time. If it wasn't for our aggregates business, we would have been in trouble. You'll see our cash generation when our results come out. The cash generation actually wasn't too bad. As an engineer, it's always very interesting for me to see how the accountants do these things, that you can look at no profitability, but the cash generation was positive.

That was a big focus for us as well: to make sure that we generate as much cash as possible and that we free up as much working capital as possible, which was too high in any case. So it was tough. The iron ore business, specifically on the export side, had a couple of things that just lined up the wrong way.

Firstly, our Demaneng mine is very close to the end of its life. I think I told you at the conference that we won the court case to get our mining licence transferred, to be able to move on to another mine called Doornfontein, which is a very exciting new prospect with a very low strip ratio. It's a direct shipping ore, which brings down our cost of production and will really make us competitive again, even at the current low, low realised rand values at the mine gate.

But for this reporting period, we were still mining at Demaneng. We had shipping rates going from, order of magnitude, $12 to $14 a while back to a peak of $20 to $32 in total.

Alec Hogg (07:25): Mm-hmm.

Andries van Heerden (07:36): And at the same time we saw the rand strengthening. So it was just a perfect storm. The moment we get traction at Doornfontein, hopefully that will be behind us. And if somewhere in future we see a reduction in shipping rates again, that will really make our iron ore business as profitable as it used to be. But the iron ore business was really the tough part of the first half.

Then on top of that, we also saw the ferrochrome smelters that were closed. Our Nkomati anthracite was actually a dedicated mine to Glencore's ferrochrome smelters. The positive about the team that we have there is that the fact that we now don't have that exclusivity anymore gave them the opportunity to really expand the market. The interesting thing is that although the profits fell a lot in that commodity, they were still marginally profitable, in spite of the fact that their primary customer bought nothing from them. And now we are starting up again, supplying the different ferrochrome smelters.

My colleague who looks after the marketing and commercial side of the bulk commodities told me yesterday that from December we are sold out. We sold the full capacity of the mine between the different South African consumers and the export market. So yeah, it was tough. I think I got about 30 years older in six months.

Alec Hogg (09:11): Wow.

Andries van Heerden (09:32): But fortunately there are good prospects from here.

Alec Hogg (09:37): What's going on with ArcelorMittal? I'm close to Newcastle, that's my original home town, so I keep a close eye on what's happening there. Are you completely out now of selling into that steel plant?

Andries van Heerden (09:51): So yes, Newcastle is completely closed and mothballed. We are the primary supplier of iron ore to Vanderbijlpark, although they are still using some product from the old stockpile that they bought. But we are starting to see a stabilisation at around 90,000 to 100,000 tons a month of sales to them.

The last time I spoke to Kobus Verster was probably about six weeks ago, and at that stage he was still very confident that the whole IDC deal will go through. I think that's in the public domain, so I can probably talk about that. And it seems that they are slowly stabilising things. There's also the import protection that's moving here, that's actually getting better, and some other improvements that they expect in some of the big costs that they are negotiating. So I think ArcelorMittal is hopefully going to stabilise and improve from here.

Alec Hogg (11:05): Yeah. As you say, it really was a tough period that you're talking about now, but there's some hope on the horizon. The one thing that I was a bit amused by is that your gearing ratio hasn't moved. In other words, the percentage is still high. What's going on there? Because you've actually sold off some stuff, you've done a lot of good housekeeping, and one might have expected in this period that you would see the debt falling.

Andries van Heerden (11:37): Yeah. The debt did fall a bit, not as much as I would have liked it to. We did spend some of that cash to really fix the cement business, which we are busy with. There are some very interesting discussions in the background around that, and we expect to unlock that value with a good return. So some of the cash went there.

Alec Hogg (11:41): Okay.

Andries van Heerden (12:03): But the gearing did improve a bit, and it is a big focus for us. With a little bit of blessing, we could be debt-free within the next two years.

Alec Hogg (12:18): Hmm. Talk about the cement business a bit more. I remember being pleasantly surprised at the conference when you said that on cement you are talking to international partners. Clearly negotiations don't happen overnight, but where are you in that whole process? Have you decided cement is to be sold?

Andries van Heerden (12:41): Yeah, I must be very careful in what I say, which is not in the public domain. Without getting myself into too much trouble, we are very excited about the discussions that we do have. We're also quite excited by what we see at an operational level in the business.

Alec Hogg (12:46): Okay.

Andries van Heerden (13:06): How things are improving, and also what is happening in the macro environment, with government now actually intervening on both the cheap imports and the low-quality blenders. They are starting to take formal action there. So I think the prospects for cement are... and [if] I'm sorry I'm dodging the question, because I think it could come down to insider information, which I don't want to get us into trouble for.

Alec Hogg (13:27): No, no, I get it. Yeah.

Andries van Heerden (13:37): But there's some very exciting stuff in the near future. Let's say in the second half of this year we'll be able to make some very exciting announcements.

Alec Hogg (13:49): I was just looking at your share price as well. Go back two years and it was at R70, and it came all the way down to below R27. Recently it's picked up a bit. The market didn't like the trading update too much yesterday, so it's come back. But it's almost like there might be a sign that you've got through the worst, and that investors are saying the worst is behind you.

But we've heard this before, that times are tough, really tough. Is this it now? Do you think the trough is over?

Andries van Heerden (14:29): It's very, very difficult to say that, and we always try to be as transparent as we possibly can. The big challenge in the first half was the iron ore business. And as I said, Doornfontein is a big initiative to help us reduce our cost and get us down the cost curve so that we can make a margin again. Secondly, we are in serious discussions, a process, with Transnet to get additional volume on the export line once we're on Doornfontein and ready to produce, which will hopefully be around November, December this year. When that allocation comes, we're going to see good prospects from that.

Alec Hogg (14:41): Hmm.

Andries van Heerden (14:58): I told you about the improvements at Nkomati and the better prospects there. We spoke about cement and its better prospects, and also what that could mean for our balance sheet. And then the aggregates business, which is really starting to deliver what we promised the market. We're starting to get that right. So I think the bigger institutional shareholders do their homework, and I think that's probably what caused the little bit of improvement in the share price. We did expect the weakness when the trading update went out yesterday.

But in the end, our job is to make sure that we position the business, in spite of all the strategic challenges that we might have from time to time. We must position the business to be successful in the long run, and I think there's confidence among our institutional shareholders that we're on the right track. There are also some interesting prospects, for instance on Glenover and the whole thing around battery minerals and the rare earths that we spoke about at the conference. That's potential upside that the market is starting to see. And hopefully we'll get through this in the not-too-distant future.

Your question is, is this it? If the iron ore price falls further and the shipping rates increase further, it could not be the worst. We could still see it continuing. So I can never say we're through the worst. But what I can say is that we've done what we have to do to try and position the business in the new realities.

Alec Hogg (17:19): Yeah, and I think that's all that investors really want. You look at the global picture and there are so many moving parts at the moment. If something breaks positively in the Middle East, who knows how that could impact things, but it would certainly impact your company.

I think we need to dwell a little on the quarries, because this is the highlight. You flagged it at the conference, you flagged it again yesterday. You called it aggregates, but I think we all know it as quarries. Why would that be picking up so strongly at this particular point? Does it tell us anything about the country generally?

Andries van Heerden (18:01): I think the biggest reason for that is just the turnaround in the old Lafarge businesses. We're starting to see the value that we thought we would see from them, and a really good contribution. We see the margins opening up very nicely in most of those quarries that had low single-digit or even negative margins. Those have now turned, and we're starting to see margins exceeding 20% in some cases. So that is very exciting.

We don't see the volume growth that we all hope to see yet. There is good demand for roadstone products in rural KZN, your area. So that's quite nice to see.

Alec Hogg (18:55): Mm. Yeah.

Andries van Heerden (18:58): I actually travelled all the way from Bethlehem through all our sites right down to Richards Bay two or three weeks ago, and we are busy there. So that part of the world is almost the highlight of the country at the moment. We can see there's a lot of spending. Transnet is spending a lot of money on ballast, that's the stone that goes under the rail, both on the Sishen-Saldanha line and on the Richards Bay line, and some of the others. So that's a big driver of demand as well.

We did have a good period in the Western Cape after the floods earlier this year. We saw some extra sales for flood repair, so that helped us a bit. In the bigger scheme of things it's not such a big percentage, but for the local businesses it did help. But I think the most important part is the turnaround in the old Lafarge businesses, where they are now starting to earn their keep, just giving what they should be giving.

Alec Hogg (20:13): An interesting point you make there about Transnet, with the privatisation of lines. Transnet did warn, though, that some of the rail lines are in bad shape. So you would imagine that with the, I think it was eleven or twelve, private sector bidders who are coming in to take over something like 40 different lines or areas, there'll be a lot of upgrading, a lot of maintenance that hasn't been done for a while. Has that been worked into your numbers?

Andries van Heerden (20:46): Well, we haven't seen any of the private players coming in yet. But with Transnet specifically, there's a massive increase in the volumes that we deliver to Transnet, both on the Sishen-Saldanha line and on the Richards Bay line. So if these other players start coming in, I'm sure we'll see even more volume.

But just talking to the leadership at Transnet, we expect the demand for the aggregates that they use to stay strong for a couple of years still, because they have this massive backlog, which they are working on. As a matter of fact, they are just about to enter the second shutdown on the Sishen-Saldanha line for this year, in October.

Alec Hogg (21:41): Yeah, I suppose it's tough when the maintenance hasn't been done for a long time and things break down, but there's going to be quite a boom when you have to start maintaining again.

Just to close off: at the conference you spoke about businesses that you looked at and acquired, and that they basically decline in a set order. Systems fall flat, good people leave, equipment deteriorates, and the leader that got you there is not the leader that'll get you out. I thought it was one of the more interesting things that came out of the whole event. But if you apply that test to Afrimat today, and the turnaround that you are busy with, what stage would you be at in that whole process? Or is it even relevant?

Andries van Heerden (22:38): That's a difficult question to answer, because Afrimat is not a single unit. If I look at the turnarounds that we've done at the different business units, the recent turnarounds, Lafarge, I would say we are 95% there. The cement business still has a little bit of tweaking to do, but not much. The aggregates businesses, I think we are there.

Alec Hogg (22:48): Yeah.

Andries van Heerden (23:10): If I look at something like Nkomati, that was a turnaround that took us quite a bit longer than we had hoped for. Looking at the current performance, I think we're there. On iron ore, we now need to get ourselves established, and that's not a matter of systems and people that fell flat. It's a structural change in the market that we have to adapt to. We have to bring our structural cost down, and we have to get from Demaneng to Doornfontein, and that will do that.

There we are 50% there. We're on site at Doornfontein, we're getting ourselves ready, first production is going to start shortly, and then sales will probably start running from there at the end of November, into maybe January. Somewhere around there we'll start selling from there.

Getting the balance sheet right is another aspect that we need to get to. Afrimat has always been very conservative on its balance sheet, and we need to get back there. Realistically, given how our deal flow works, approvals and things like that, we're probably six to twelve months away from getting real impact there.

Hopefully the Afrimat story is not a turnaround in the way that I explained there, with bad management, systems falling flat, people leaving. We haven't seen good people leaving, and hopefully our systems are working well. It's for the market to decide whether the leader is still relevant. I do believe that we are on the right track.

Alec Hogg (24:36): Mm-hmm. Yeah.

Andries van Heerden (25:01): I just had a discussion with one of my colleagues earlier this morning, asking, looking at where we are, what should we have done differently two years ago? It's very, very difficult to say, because the initiatives we took have all proved to be the right ones. But who knew that it was going to take us so long to get Doornfontein, and that we eventually had to go to the High Court to get the licence approved? Theoretically it shouldn't take that long.

But to your question of where we are in the process, I think we have everything in place. We've got the right people, the right systems, the right execution, and we now just need to get that implemented, and assume that we're working in a new normal, with lower rand values for iron ore at the mine gate, and get the mine to work in that space. And if that changes in future, then we'll just make more profit.

Alec Hogg (26:09): Hmm. Well, that's always a good way, isn't it? When you've got your baseline low and prices improve, as they tend to do in the commodity industry, you get good bonuses and good benefits for shareholders. Well, we're not going anywhere. We're very happy sticking with Afrimat, and I certainly will not be at the shareholders' meeting asking for your head. I'm sure most people feel the same way.

Andries, lovely talking with you. Thanks again for sharing so transparently, as you do, what's going on in the business. We'll be keeping a close eye, and hopefully we'll have a more in-depth chat after your results on the 22nd. Andries van Heerden is the chief executive of Afrimat. I'm Alec Hogg from BizNews.com.

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