Diamond problems continue at Anglo American (JSE: AGL)
I’ve been warning you about lab-grown diamonds for how long now?
Anglo American has released a production report for the three months to December 2024. All businesses delivered on full-year production guidance, with some highlights in the quarter being copper and iron ore.
Guidance going forward is unchanged for copper and iron ore. Alas, the same can’t be said for diamonds, where they have decreased guidance for 2025 and 2026. I don’t think we are anywhere near equilibrium yet for mined vs. lab-grown diamond sales, despite a 26% drop in production in the fourth quarter and a 22% drop for the full year. From the first half to the second half of the year, diamond prices fell by 22.6%!
At this point, the only way a mined diamond ring is an investment is if the rest of the ring is made of gold. This is a huge worry for Botswana in particular, where diamond production fell 27% for the full year. Management keeps blaming a “prolonged period of lower demand” – of course, what they fail to point out is that the lower demand is for mined diamonds in particular.
If you scan the full year production numbers, the only commodity that was higher was iron ore – and by just 1%! Even copper was down 6% due to shifts in the copper portfolio in the past year. Speaking of copper, which is where all the hype has been in the mining sector, prices were up 8% for the full year. I must however point out that they were 6% lower in the second half vs. the first half.
The share price is up 34% in the past year. It also happens to be trading at the same levels as February 2021!
No respite for Anglo American Platinum investors (JSE: AMS)
Earnings are still sliding lower
Anglo American Platinum released a fourth quarter production update and a trading statement dealing with the year ended December 2024. Regular readers will know that a trading statement is triggered by earnings differing by more than 20% to the comparable period in either direction. Those who have followed the woes of the platinum sector will already know which direction is relevant here.
For the period, HEPS is expected to drop by between 36% and 46%. That’s another truly awful year to add to the pain that has been experienced since the peaks in 2022:
There’s really not much that the company can do when ZAR realised PGM prices fell 13%. The company also notes that palladium and rhodium realised USD prices fell 24% and 30% respectively. It’s impossible to do well under these conditions.
At least the company is still profitable, with expected headline earnings of between R7.6 billion and R9.0 billion. With expected HEPS of between R28.89 and R34.21, the mid-point suggests a P/E multiple of 21x! The usual story in mining is that a high P/E is actually a sign of the bottom of the cycle, rather than the top. This is counter-intuitive and certainly not the way things work in tech.
The company achieved its refined production guidance for 2024 and had a strong final quarter, so they are doing as much as they can. Those who have been trying to pick the bottom in this sector have thus far been wrong for the last 18 months. Could the Trump administration’s policies and a possible swing in favour of internal combustion engines by consumers finally give this sector a boost? With all the trouble in the global auto sector and with platinum as such a notoriously difficult sector to make money in, I’m sitting this one out.
ArcelorMittal is still in discussions with government about the longs business (JSE: GFI)
Will there be a way to save these jobs?
When ArcelorMittal announced that the longs business would be closing, I did wonder if this wasn’t simply the next step in the dance with government. Clearly, they are losing a fortune and it cannot continue. The point is that government doesn’t seem to take things seriously until a final warning shot has been heard. That seems to be the case here, as the closure has been delayed by one month to enable ongoing discussions with government. The IDC also put in funding support and ArcelorMittal is trying to fulfil the surprisingly strong order book as well.
Will there be a miracle here? And if there is, will it be on anything close to reasonable economic terms? It sounds like we will find out late this month.
In the meantime, results for the year ended December 2024 show why the group is in crisis. ArcelorMittal describes the current conditions as the worst since the global financial crisis, with international prices under pressure and all kinds of noise around protectionist trade policies on the global stage.
ArcelorMittal suffered an operational EBITDA loss of R1.1 billion in FY24, much worse than an already terrible loss of R0.6 billion in FY23. That’s before the impairment and associated charges in the longs business of R1.8 billion!
The headline loss is R5.1 billion compared to R1.9 billion in the prior year. A fully subordinated shareholder loan is helping to keep things going but this is clearly not a sustainable solution, hence the need to cut losses where possible.
The ArcelorMittal share price chart is incredible. Tragically, it largely tells the story of South Africa from an economic perspective over the past couple of decades:
A huge jump in earnings at DRDGOLD (JSE: DRD)
Mostly thanks to the gold price, of course
DRDGOLD has released a trading statement for the six months to December 2024. They expect HEPS to be between 60% and 70% higher, so there’s some happy news for shareholders.
Group revenue increased 28% and the rand gold price was up 26%, so you can see that almost the entire increase was thanks to the gold price. The increase in gold sold by Far West Gold Recoveries was driven by an increase in yield, so there are some operational positives as well.
Cash operating costs increased by 6%, so you can now see why HEPS jumped by such a big number. The investment in Ergo’s solar plant is helping here, with a modest increase in electricity costs despite substantially higher consumption due to an increase in tonnage throughput.
Even the cash flow story is positive, with a 12% decrease in capital expenditure and thus a major improvement to free cash flow. The group has no bank debt.
The share price is up 38% in the past 12 months.
Gold Fields delivered in line with guidance (JSE: GFI)
They had a solid finish to the year
In the mining industry, guidance on key metrics like production and all-in-sustaining costs (AISC) is the primary driver of the share price. It allows analysts and investors to form reasonable predictions for profits at different commodity prices. It’s hard enough estimating those prices, so mining companies that hit their guidance are rewarded by the market for at least taking that variability out of the equation. Of course, companies that miss guidance are punished.
Thankfully, Gold Fields delivered on its (admittedly revised) guidance for FY24, thanks to a helpful Q4 performance that saw the ramp-up of Salares Norte and a 26% jump in gold production. Group attributable gold production was 2,071koz (revised guidance was 2,050koz – 2,150koz) and AISC was $1,629/oz, up 26% year-on-year.
The substantial jump in costs was driven by a 10% decrease in gold sold, along with inflationary cost pressures and the usual suspects.
Despite the cost pressure, the gold price has worked its magic in the past year. This is why Gold Fields has indicated growth in HEPS of between 41% and 52%!
Hudaco had a much-improved second half, but it couldn’t save the full-year result (JSE: HDC)
And yet, the share price is up 22% in the past 12 months
Hudaco had a rough interim period in 2024. Earnings were down 15% at the halfway mark. They ended the year down 6.3%, so they had a reasonable finish to the year.
For all the GNU exuberance out there and the disappearance of load shedding, Hudaco notes that they “did not notice any meaningful change in business activity” – and that’s a concern. The ports are still a substantial problem and this is putting pressure on supply chains everywhere.
Turnover for the year was down 5.8% and operating profit fell 6.0%. It’s impressive to maintain operating margins when turnover is falling, so there’s solid cost-control at play here and a focus on gross margins. As we look at the segments though, you’ll see that there’s a mix effect here as well.
Hudaco’s consumer segment bore the brunt of the pain, with sales down 12.3% and operating profit down 19.9%. Operating profit margin was 12.2%, a drop of 120 basis points – this is what you would expect to see when sales are down. It was the engineering consumables business that saved the day, with turnover up 0.6% and operating profit up 7.6%. Acquisitions had a substantial positive impact here.
The balance sheet is also in good shape, with net borrowings down substantially over the past year. Working capital benefits were realised by inventory reductions in the group, particularly in the alternative energy business which found itself heavily overstocked at a time when load shedding went away.
Importantly, despite a 6.3% decrease in HEPS, the dividend per share was maintained at R10.25. This puts Hudaco on a 5% dividend yield, which means investors are getting paid to sit and wait for better profits.
Improved momentum at KAL Group (JSE: KAL)
This is one of the more interesting strategies on the JSE
KAL Group is a pretty fascinating business. They operate in specialist retail in the agriculture industry, as well as in adjacent categories in agriculture and manufacturing. A large part of the business is fuel retail and they’ve made substantial acquisitions in that space.
Essentially, if you can imagine a farmer out there driving along in a Hilux or Land Cruiser, there’s a very good chance that this white (or sometimes brown!) Toyota has been driven to a KAL business of some description.
At the end of FY24, trading profit growth was trending lower. The good news is that an update at the AGM has confirmed that the first quarter of FY25 has reversed that trend, other than in the manufacturing segment. Margins are still facing some pressure though, with EBITDA only up 1.8% despite revenue being 4.1% higher. This is a good indication of like-for-like growth, as there haven’t been any major expansions or acquisitions affecting this period.
So, aside from disappointment in building materials, KAL has seen much improvement after a slow finish to FY24. They’ve also experienced an increase in fuel trading profit despite an average 18% decrease in fuel prices!
Net interest-bearing debt has also reduced and the debt-to-equity ratio is down from 59% to 49%.
Although key metrics are going the right way, the same can’t be said for the share price. It has suffered the sell-off that we’ve seen across most South African consumer stocks and needs to find some support:
Another year of deteriorating rail performance made things difficult for Kumba Iron Ore (JSE: KIO)
Transnet remains the biggest constraint here
Kumba Iron Ore released both a production update and a trading statement. Let’s jump straight to the latter, where we find the most unfortunate news that HEPS for the year ended December 2024 is expected to be down by between 43% and 48%. Ouch!
The reasons? Lower export prices and a 2% drop in sales volumes. If your two key drivers of revenue head in the wrong direction, you’re going to have a bad time.
There’s nothing that Kumba can do about export prices. Sadly, sales volumes are also largely out of their hands, as Transnet’s rail performance remains the bottleneck. All that Kumba can do is produce in line with the volumes that Transnet is able to transport by rail. Otherwise, they just end up with expensive stockpiles.
Don’t get excited about improvement in years to come. After producing 35.7 Mt in 2024, guidance for 2025 is 35 – 37 Mt. Due to planned work around the plants, production guidance in 2026 is only 31 – 33 Mt. In 2027, they think it could come back up to 35 – 37 Mt.
So, unless iron ore prices head in the right direction, it’s a rough few years ahead. This is why the share price is down 36% in the past year.
Lesaka’s adjusted EBITDA looks promising (JSE: LSK)
The share price has had an excellent 12 months
Lesaka Technologies is a genuinely interesting local company that is building out an empire in the fintech space. This means you’re going to see a style of reporting that is typical of tech startups, with focus on adjusted EBITDA in particular.
It’s also all about hitting guidance rather than being highly profitable at the moment, as the group is firmly in growth phase. It’s therefore very helpful that Lesaka achieved its revenue guidance for Q2 2025 and was ahead of adjusted EBITDA guidance, even though the net loss actually increased substantially year-on-year due mainly to negative fair value movements in a non-core asset.
They also report something called fundamental earnings per share, which improved by 12% and was positive.
Moving on from the various ways of slicing and dicing the group results, we reach the segmental view. The merchant division saw revenue decline 5%, but net revenue (which is more important) was up 68% and adjusted EBITDA was up 32%. The consumer division saw net revenue increase by 31% and adjusted EBITDA jump by 61%.
The group has now delivered on profitability guidance for ten quarters in a row. The market appreciates this kind of consistency, which is one of the reasons why the share price is up 34% in the past 12 months.
Guidance for FY25 is adjusted EBITDA of R900 million – R1 billion. In FY25, they expect this to jump to R1.25 – R1.45 billion. The acquisition of Recharger is included in that guidance.
Nibbles:
- Director dealings:
- An independent director of KAL Group (JSE: KAL) bought shares worth around R475k.
- MAS (JSE: MAS) has renewed the cautionary announcement related to negotiations with Prime Kapital regarding the 60% interest in PKM Development Limited. They hope to finalise contracts before the release of results for the six months to December 2024, so that implies that there are only a few more weeks to wait.
- After the suspension of Exxaro’s (JSE: EXX) CEO Nombasa Tsengwa and all kinds of allegations flying around of an intimidating management style, we’ve now arrived at an outcome where she has resigned with immediate effect. This is despite a court bid to challenge the suspension, so I’m not sure what will now happen there. The details may all stay under wraps now, as is often the case when an executive chooses to leave. Finance Director Riaan Koppeschaar has been acting as CEO during the suspension and will continue to do so until a permanent CEO has been appointed.
- Mantengu Mining (JSE: MTU) is acquiring an iron beneficiation plant in Limpopo for just under R19 million. The plant is modular by design and Mantengu can deploy it at strategic locations to reduce the cost of production. Mantengu has acquired the plant out of a liquidation sale and so they probably got it for a great price. The announcement certainly has lots of promising statements around lower cost production and creating value for shareholders. There’s also a chance of Mantengu acquiring the entity that is currently being liquidated, which would lead to it holding shares alongside the IDC.
- To support its acquisition and business plans in the UK, Sirius Real Estate (JSE: SRE) has appointed a senior executive to BizSpace. Here’s the interesting thing: the executive comes with deep experience in the self storage space, an area that Sirius already has extensive investments in. Clearly, they are looking to add to that. This will include the conversion of several sites within the existing portfolio.
- Jubilee Metals (JSE: JBL) is ready to catch up on lost time at its Roan operations. With a power source now secured, they are investing in 200,000 tonnes of copper material which is available for immediate processing at Roan. This more than doubles the waste material currently being processed. If all goes well, they have the capacity to do far more high grade material and they also have the option to increase the allocation of material. Perhaps most interestingly, they are paying for the material by issuing new shares! The issue price is 4.20 pence per share, which is slightly above the current spot price. The shares are subject to a 180-day lockup period. For context in terms of size, this copper materials deal is valued at $2.7 million and Jubilee’s market cap is R2.8 billion. This seems like a very cute trade to me! They are also finalising the due diligence on the Large Waste Project and hope to conclude the transaction by March 2025.
- Hosken Consolidated Investments (JSE: HCI) holds 51% in Impact Oil and Gas, which in turn is a 9.5% participant in two blocks offshore Namibia. Impact released an update after completing drilling in one of the blocks, where black oil was encountered. The management commentary sounds bullish about what this means for the strategy to “prove up” resources and move towards the first development.
- Trencor (JSE: TRE) has finalised the dates for its R7.30 special dividend. The current share price is R8.25, so this is the bulk of the value in the group being distributed to shareholders. The record date is 21st February and the payment date is 24th February.
