The share price of mining and materials company Afrimat rose by more than 12% on June 20 after it announced the planned acquisition of Lafarge South Africa (LSA), including all its subsidiaries, subject to the fulfilment of conditions precedent relating to the receipt of customary regulatory approvals.

LSA Group, a member of the Holcim Group, is a provider of construction materials in South Africa, offering an extensive range of products to the construction and infrastructure industry, including aggregates, concrete, cement and fly-ash.

The acquisition will be housed in Afrimat's Construction Materials division, which together with its subsidiaries supply a variety of aggregates and concrete-based products to the market, and the Afrimat Group, in response to customer demand, continues to focus on market and product development within this segment.

Afrimat is highly cash-generative and effectively debt free, allowing this acquisition to be financed largely in cash.

The core LSA assets being acquired include aggregate quarries, readymix batching plants, an integrated cement plant, cement grinding plants, cement depots and high-quality fly-ash sources.

The lime and aggregate sources are long-life assets, well-designed and all with good-quality plants and infrastructure characterising the entire portfolio being acquired, Afrimat states.

The purchase price for the acquisition of the equity in the LSA Group is $6-million, with an additional amount of R900-million towards repayment by or on behalf of LSA of an amount owing by LSA to the Holcim Group. The effective date of the acquisition is ten business days after all the conditions precedent have been met.

During Afrimat’s Investor Day, held on January 20, the group outlined three conditions that need to be met for the deal to be finalised. These are Competition Commission approval, a Section 11 rights transfer and approval from the South African Reserve Bank.

Afrimat said it would continue to diversify its portfolio. It has made various acquisitions in the bulk commodities, as well as the construction materials, sectors in recent years.

It noted that the LSA transaction offered a good geographical split for Afrimat, as well as access to solid assets.

Afrimat’s debt to equity ratio at the end of February was very low at 4.4%, making the group essentially debt free, and this has come down even further since then, it was mentioned.

While the Lafarge acquisition will see this increase, it will still remain well within the target range for the board, Afrimat said.

It expects it will need to invest about R365-million of capital expenditure (capex) on the LSA assets in the next few years.

Afrimat will focus on improving operational efficiencies and spending the capex in the right places, to turn around the culture and get the business in good shape and unlock its value, the company said.

FINANCIAL
Afrimat’s executives said they were pleased with the cash the business was generating, with this almost reaching R1-billion, and being up 5% from the previous year.

It was highlighted that the group’s financial results show that its diversification strategy is working, with the business generating strong cash flows, and Afrimat able to use these cash flows to even grow the company even further with more acquisitions, and more capital employment.

Meanwhile, Afrimat has implemented an efficiency drive at three of its mines, that is, an efficiency tool that monitors machines to mitigate the increase in diesel and energy prices, with this already resulting in improvements. Afrimat is now rolling this out to other mines.

It was also highlighted that Afrimat spends considerably on employees. In the last year it spent almost R1-billion on salaries and cost of employment.

Also mentioned was the high return on investment that Afrimat is achieving. It is aiming to continue to grow the company at the current growth rate of 20% and for return on assets to stay at 24%.

Afrimat said it would continue to seek good acquisitions to diversify the business even further and keep this strategy going.

CONSTRUCTION MATERIALS
Profit was down in this division in the February results, owing to a tough period with increasing fuel and explosive prices, the impact of loadshedding and markets being down in general.

However, Afrimat said it had recently seen a considerable increase in volumes, with the first quarter of the year showing a significant increase in terms of profits, and this trend continuing.

Also, it was noted that business is spread throughout South Africa, and that there is a wide distribution of contracts, across different markets, including roads and rural markets, although private construction seems to be muted.

Afrimat is bullish about this division, as construction materials continues to give positive cash contribution through the various industry cycles. Moreover, it is a low-cost operator with good efficiencies.

To mitigate the impact of loadshedding, the bulk of quarries now have generator sets and a solar farm is also being implemented at one operation.

This has enabled more stability.

MINING DIVISION
Afrimat said it had invested heavily in optimising its production and cost basis in the mining sector, by using technology.

It focuses on doing things in-house where it can, to reduce costs.

To manage the risks of this industry, such as commodity slumps, Afrimat has diversified its commodity mix.

It is also pursuing being a low-cost producer to survive the downturns in the commodities sector.