Message Ven 8 Mar 2013 13:29

Spectrum of choices for African Rainbow Minerals

African Rainbow Minerals (ARM) management has been hinting at acquisitions for several years but has highlighted that with so many commodities of interest, it is impossible to guess specific targets.

ARM executive chairman Patrice Motsepe said at last week's results presentation that the company had been engaged in "exploratory discussions" over the past few months.

He said that "in the medium to long term" ARM expected to expand beyond Africa. He said he had recently visited Papua New Guinea in his role as chairman of Harmony Gold Mining, which has a project there. He was impressed by the country's copper and gold opportunities and the eagerness of government ministers for foreign investment. He had also received welcoming overtures from the finance minister of Chile, another major copper-producing country.

ARM Exploration & Technical Services CE Jan Steenkamp says ARM has identified six commodities in which it would consider investing, copper being top of the list. The others are manganese, nickel, platinum, coking coal and iron ore.

The most obvious expansion opportunities for ARM in SA lie in platinum and manganese, which were its second- and third-biggest revenue contributors in the six months to December. Iron ore continued to deliver most of the group's revenue, though iron ore prices weakened.

The drop in iron ore prices and above-inflation increases in unit costs in manganese, iron ore and platinum production resulted in a 30% drop in headline earnings to 654c/share compared with a year ago.

Copper has not made a contribution to earnings in the current period as ARM's first project, Lubambe in Zambia, is only starting to come on stream. ARM is in a 50:50 joint venture with Vale of Brazil on the project.

CE Mike Schmidt says the project has been completed early and within the budget, in 2010 terms, of US$410m.

By the end of the interim period, 3214t of copper in concentrate had been produced; another 15000t was forecast in the second half. By 2015 Lubambe should be producing 45000t of copper a year. There is also potential for an extension to the existing mine area, where initial drilling suggests grades, at around 3,6%, will be better than the 2,0-2,6% in the current mining area. A feasibility study on the extension should be completed in a year's time.

Kagiso Asset Management head of research Abdul Davids doubts ARM would explore for copper outside Africa or embark on new copper projects.

Anyway, prevailing market views are negative on the short-term outlook for copper prices. In its latest Metals Review, Natixis suggests the copper market will move from deficit to surplus towards the end of this year and, by next year, rapid growth in copper supply will bring the market back into its first annual surplus since 2009.

Natixis forecasts an average copper price of $7500/t next year, from $8500/t this year.

Davids agrees the copper market is likely to go into oversupply in a few years, but says ARM's Zambia copper project will be in the 50th percentile of the cost curve when it reaches full production by the 2015 financial year. Vale's participation also reduces the risks in Lubambe.

"We believe that substantial scope for consolidation exists in the platinum industry and ARM could play an active part in the consolidation process," Davids says. "Significant organic growth is achievable in ARM's existing platinum, coal and nickel businesses."

Steenkamp says ARM's long-term view is that demand for copper will increase as China needs the metal for construction and communications networks. But the group has specific hurdle rates for the kinds of copper opportunities it would consider, including the quality of the deposit and how it measures against other opportunities open to ARM.

Whatever ARM invests in, it would avoid greenfields projects and if it went into a partnership, its partner would have to offer expertise in specific areas like marketing or refining. ARM's preference is to have management and control of its projects, Steenkamp says.

Diversification has helped to buoy ARM's share price, despite its platinum exposure. The shares, at R191, are similar to their year-ago level, but are well placed to rise further when the global economy steadies.