Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. File Image:IOL
Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. File Image:IOL

Share to watch: Mining supplier AECI could be a secondary beneficiary

By Amelia Morgenrood Time of article published Feb 10, 2020

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JOHANNESBURG - When AECI published its interim results in July 2019, they showed healthy revenue growth in all five of their business units.

Although revenue was up 14percent, their headline earnings per share dropped by 20percent. Management then said that they would reap the benefits of their restructuring in the second half when the benefits of these projects would offset the costs incurred.

AECI noted a change in its accounting policies also dented earnings, and in future years the sustainable annualised pretax benefit is expected to be at least R300million.

The chemicals division contributed 23percent of revenue, and 26percent and 24percent respectively of profit in 2018 and 2019. This division supplies chemical raw materials and related services for use in the manufacturing, infrastructure and general industrial sectors. The chemicals division grew revenue by more than 20percent at the interim stage.

AECI’s Chemical Solutions business stands to benefit from higher commodity prices that are likely to drive global mining output as mining producers look to take advantage of higher commodity prices.

By far the most significant segment of AECI is Mining Solutions, which contribute around 46percent of revenue, but 60percent of profits. This is increasing every year - in 2018 it was 57percent. The businesses in this pillar provide a mine-to-mineral solution for the mining sector internationally.

The offering includes surfactants for explosives manufacture, commercial explosives, initiating systems and blasting services right through the value chain to chemicals for ore beneficiation and tailings treatment.

Almost half of this division’s revenue is derived from Gold and Platinum Group Metals (PGM) mines. They also have a growing foreign revenue component, in the interim it was around 60percent of the total revenue of the mining division. Since the interim results the prices of both gold, platinum, rhodium and palladium increased substantially, which is a known driver of profits.

At the interim their overall bulk explosive volumes decreased by 3percent - South Africa was down 7percent and the rest of Africa up almost 15percent.

Mining gained a lot of momentum worldwide in the last few months. The price increases in palladium and rhodium have resulted in increased profitability of PGM producing companies. The significant improvements in these commodity prices, incentivise miners to increase production and supply of the metals due to significantly higher prices.

Therefore, one can assume to see a positive trickle-down effect on industry associated companies as a result. AECI’s mining solutions could benefit from miners increasing production, as there will be rising demand for its explosives and other mining services that are needed in underground and surface mining.

The higher demand for rhodium and palladium used in car-catalysts is likely to sustain demand and prices for PGM group metals in the medium term.

Given that the higher commodity prices are already reflected in the valuation of the gold and platinum miners, mining suppliers like AECI could be one of the secondary beneficiaries of the stronger PGM demand.

The group offers an attractive historical dividend yield of 5.1percent.

Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. AECI shares are held on behalf of clients.

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