2023-06-20 06:52:41 ET
Summary
- African Rainbow Minerals Limited is subject to various structural shifts.
- The company's Bokoni project is progressing as planned and is set to deliver early PGM ounces in 2024. However, the cost-benefit remains in question.
- Will African Rainbow Energy solve African Rainbow Minerals' Eskom headwinds?
- A change in CEO is in progress with Mike Schmidt stepping down.
- Valuation impairments are likely inbound. Nonetheless, market-based metrics suggest African Rainbow Minerals provides a tremendous total return opportunity.
As many of our existing readers know by now, we consider African Rainbow Minerals Limited ( AFBOF ) a solid long-term investment. However, today's article assumes a different vantage point and provides an update on the company's recent endeavors to add to global market transparency. Therefore, although valuation is covered within, this article aims not to speculate on price discovery; instead, the aim is to discuss critical inflection points that have recently occurred.
Let us delve into a deeper discussion about a few of African Rainbow Minerals' recent events.
Early Ounces Inbound at Bokoni
In a recent occurrence, African Rainbow Minerals announced that it anticipates early ounces from its Bokoni project in early 2024. Bokoni is a recent acquisition (detailed later in the article) executed in an attempt to expand the firm's presence in the platinum group metals ((PGM)) arena.
African Rainbow Minerals completed the Bokoni acquisition in 2022 , acquiring the brownfield project from Anglo American plc ( AAUKF ). The portfolio was unable to deliver telling results under its previous owners; however, African Rainbow Minerals sees this as a turnaround opportunity and a value-add to its corporate plan, which includes doubling its PGM production within the next five years.
The project has an estimated life of 23 years and will focus on the UG 2 and Merensky reefs. Traditionally, UG2 lends potential for higher throughput, and Merensky provides an opportunity to deliver early gold and nickel to cover initial expenses.
Based on a feasibility study completed in 2020, the project's shafts have an ore hoisting capacity of 160 000 tonnes per month. Additionally, the project's midstream operations possess approximately 160 000 tonnes of concentrator capacity per month.
Will Bokoni be accretive? Well, considering the project is expected to deliver higher grades than Two Rivers and Modikwa (two of African Rainbow Minerals' flagship mines), one can conclude that it will provide synergies. However, a financial vantage point highlights risks as this is a previously 'failed' brownfield project, which is set to cost approximately $290 million in initial cost outlay. Moreover, although we believe Platinum is due to cash in on the green economy, Palladium might face significant headwinds from a possible slowdown in internal combustion vehicle sales (in the coming decades).
Price Support For Base Metals But Export Disruptions
A look at African Rainbow Minerals' production provides critical insight into one of its key drivers, which is its midstream operations. Based on personal experience, the company's midstream operations, especially in Cato Ridge, are well situated, providing a fast track to its export terminals. Nevertheless, export lines down to the terminals are in tatters as continuous sabotage of railways and defunct infrastructure has resulted in a slowdown in export capacity. Therefore, it is valid to argue that one of the company's competitive advantages is diminishing.
To read about struggling export lines, visit our recent article about Impala Platinum ( IMPUY ) via this link .
Despite production challenges, iron ore prices have recovered in recent months. Considering the Federal Reserve's recent narrative, an early 2024 interest rate pivot is used as a basis for our argument that traders will soon price an expected increase in industrial production amid an inflection point in the scarcity of debt, possibly allowing African Rainbow Minerals to recoup losses on its production headwinds.
Below is a diagram showing African Rainbow Minerals' total EBITDA contribution by commodity, illustrating the importance of iron ore to its operating results.
New CEO At The Helm
Although no official date has been set, African Rainbow Minerals announced last month that a change in CEO is due to take effect , with Mike Schmidt stepping down and handing the reigns to Velile Tobias. Tobias will be promoted from his role as the company's COO, suggesting that a smooth transition is en route.
Will this change things for the company?
The new appointment may not change much for African Rainbow Minerals. The company has a two-tiered board, meaning that the CEO's autonomy is constrained by those providing oversight, with Dr. Patrice Motsepe (Chairman) keeping close tabs on proceedings. Moreover, the appointment is internal, suggesting that the firm sought a CEO familiar with the company's corporate strategy instead of an external appointment that would shake things up.
Self-Sustained Energy?
For those unaware, South Africa is in the midst of an energy crisis, meaning that most miners are in dire need of energy alternatives; otherwise, they might face the possibility of higher input costs into perpetuity.
Although limited details about African Rainbow Minerals' self-sustainable plan exist, it must be noted that the company has a net-zero commitment that it plans to achieve by 2025. Moreover, African Rainbow Energy (An African Rainbow Minerals Subsidiary) is on a heavy investment spree in the renewable energy arena. Although the company plans to serve the general public within South Africa, it remains highly possible that the entity will serve African Rainbow Minerals' mining operations if needs must.
For more details about African Rainbow Energy, click on this link .
Valuation & Dividends
Investors must realize that an accumulation of lower year-over-year commodity prices, higher interest rates, and softer industry valuations might result in valuation impairments for African Rainbow Minerals, concurrently lowering its fair value. Miners usually utilize a Discounted Cash Flow technique to revalue their operating assets, and the aforementioned factors stack up unfavorably.
Nevertheless, as things stand, the stock owns a price-to-book ratio of 0.87 , which is well below its normalized average of 1.51. In addition, African Rainbow Minerals has a terrific dividend yield profile, with its three-year dividend yield on cost sitting at 18.77% . Therefore, considering its headline valuation metrics, we think the stock provides untapped fundamental value.
Lastly, and as mentioned in the opening section, African Rainbow Minerals is showing signs of an ideal cost-averaging opportunity. The asset is trading below its 10-, 50-, 100-, and 200-day moving averages, meaning that a technical investment opportunity exists if you believe in mean-variance efficiency.
Concluding Thoughts
African Rainbow Minerals provides exciting prospects as it is subject to various changes. In an abrupt move, the company has appointed a new incoming CEO to lead the firm into a new era. In addition, the Bokoni project is subject to much debate as high-quality early ounces are expected in early 2024, but at what cost?
Furthermore, factors such as renewable energy integration, a rebound in iron ore's prospects, and potential impairments could all play a role. And, let us not forget the stock's technical price level.
Our outlook on the stock remains positive. However, as stated in the introduction, this article serves as an update on recent undercovered events and does not entertain the purpose of price speculation.
For further details see:
African Rainbow Minerals: Critical Update