Afarak Group PLC (LON:AFRK) is a vertically-integrated chrome ore miner and processor with a market capitalisation of around £240mln.
The company was formed by bringing together two sets of assets, a suite of chrome mining and processing operations in South Africa, and a portfolio of chrome ore mines in Turkey and speciality alloys assets in Germany.
WATCH: Afarak Group Plc confident on outlook despite challenging second quarter
Originally named Ruukki, the company has since had new management installed and has enjoyed a significant turnaround after some dark days following the global financial crisis.
The share price has responded accordingly, having more than doubled since December 2016, when executive director Guy Konsbruck was appointed, and co-incidentally, a time when chrome production from the South African operations also enjoyed a significant boost.
But if there’s already been something of a turnaround in the company, Konsbruck is confident that there is still plenty more growth to come.
For one thing, the long-term outlook for chrome is favourable. Demand continues to be driven by Chinese economic growth, while supply is limited to scarcely a handful of geographic locations, as Konsbruck explains.
“South Africa has 75% of the world’s chrome reserves,” he says. “And there’s another 10-15% in Zimbabwe.”
While the political situation in Zimbabwe remains uncertain, Konsbruck is reluctant to embark on any adventures there. But it hardly matters.
Because with its producing Stellite, Mecklenburg and Vlakpoort mines, and the Mogale alloys plant, Afarak is already firmly ensconced in the world’s number one chrome mining destination. What’s more, a fourth project, Zeerust, will also shortly come on stream.
“We need on monthly basis about 25,000 to 30,000 tonnes of ore for ourselves,” says Konsbruck.
“On top of that we can sell into the free market. China doesn’t have any chrome reserves.”
But Afarak does have access to estimated - 40-50 mln tonnes in total - across South Africa.
So, it’s in a commanding position to meet global demand head-on.
READ: Afarak Group suffers in highly volatile ferrochrome market
What’s more, customers have a long track record of production to look back on, both in South Africa and Germany - the company’s name may be new, but the product is a known quantity. Indeed, production at the German assets goes back around a hundred years.
Still, it isn’t always easy. The chrome price has dipped of late, and many suppliers in South Africa are suffering. At less than R1,000 per tonne, Afarak has some of the lowest production costs around, so the pressure is less intensely felt, but even so, there was a profit warning earlier this year as chrome prices dipped and forex markets moved unfavourably.
But Konsbruck is sanguine. For one thing, that negative news came after a bumper set of results at the end of 2017, so it’s not all one-way traffic. But more to the point, Afarak is actually well set up to absorb the vagaries of volatile pricing.
“We can always survive bad markets,” he says. We have a unique product base when it comes to our alloys. We are one of the lowest cost miners of chrome, and we are still small enough that we can reduce our output if necessary.”
As a baseline, he says, on any given year, the speciality business should deliver EBITDA of around €10mln, and the South African business EBITDA of around €6.5mln. Each year is, of course, unique though, so there will be fluctuations within those parameters.
Perhaps more pertinent looking ahead though, is the thought that Afarak may go on to acquire more assets. Zimbabwe is out for the time being, but South Africa is territory in which Afarak is more than comfortable.
Bumpy year but positive about the future
“We are constantly monitoring, especially in South Africa, to find assets that fit into our portfolio,” says Konsbruck. With Zeerust shortly to start making a contribution, and plans to acquire more projects, there’s every likelihood that baseline expectations for earnings will rise.
“This year has been a bumpy road,” says Konsbruck, and that’s not just because short-term market conditions have been tricky. There’s also been the ongoing distraction of a small group of minority dissident shareholders to contend with. The company remains very solidly supported by its key shareholders, but so there’s little real danger. But it’s a distraction that Konsbruck could do without, and one that he regards as being particularly unfair on the company’s broad retail shareholding in Finland, where Afarak has its roots.
But all told, Konsbruck is upbeat. There’s more production coming, there’s the possibility of acquiring new assets, and there’s the overall positioning of the company.
“I’m very positive about the future for Afarak and about the outlook for chrome,” he says.