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2012-01-07 Logistics are tricky in southern Africa - transport costs from Cape Town to Johannesburg are more than from Cape Town to Shanghai, and it takes 2 months to move ore from Zimbabwe to China. Thank goodness for companies like Metmar, which take care of the logistical nightmare for you. Metmar has 3 seperately managed operations, namely Metmar Trading, Metmar Polychem & Metmar Investments & Resources. It provides financing & logistical solutions -to the mining, production & trading of ores, alloys, metals, plastics, rubber & chemicals.

Metmar Trading

Metmar Trading is involved in metals & minerals trading, which involves sourcing commodities, eliminating pricing risks & shipping the commodity to the industrial consumer. The profitability of transactions are measured against the costs of removing the risks.

Metmar only executes trades "when a firm & unqualified offer from a seller is matched with an order from an identified willing buyer", speculative trading does not form part of Metmar's operating objective, and they avoid the activity of bulking & warehousing commodities before suitable buyers can be found.

Over the last decade the "clamour for resources from buyers in the East meant that finding clients was not an issue anymore. Instead, what was becoming vitally important was the ability to secure relationships with producers." Thus Metmar began taking strategic stakes in the businesses of preferred suppliers, and searching for projects with short/medium delivery time frames (e.g. dump reclamation).

The strong Rand Dollar exchange rate for the 6 months ending 31 August had a negative impact on results (PRESUMABLY THE SUBSEQUENT DEPRECIATION WILL HAVE HAD A POSITIVE IMPACT)

Metmar owns 100% of Metmar Finance.

Metmar owns 100% of Metmar Trading, including West African Group (WAG) & SNF International, the core trading activities of Metmar.

Metmar owns 100% of Metmar Global (an offshore trading operation based in the UK) & 100% of Metmar Mauritius (an offshore trading operation based in Mauritius, which owns 49% of Metmar Mauritius).

Some 13% to 16% of sales occur locally. As the value of the Rand shifts, the portion of profits from exports & imports shifts.

Metmar Polychem

Metmar Polychem manages the businesses of WAG, SNF (plastics & rubber) & food ingredients trading. It supplies the packaging, refrigeration, point-of-sale, rubber compounds, conveyor belting & tyre manufacturing industries.

West African Ventures & West African International (sister companies) were acquired in 2008, for R80m, and merged into WAG. Tufflex Plastic Products is marketed by the West African Group, a division of Metmar Polychem - plastic wood decks & pallets "have been particularly well received in the market".

SNF is an export marketing company for polymers (plastic raw materials) to countries north of the SA border.

Metmar Investments & Resources

Some investments are non-core and will be disposed of when the opportunity arises. Major interests are:

Chrome

Chromium's main uses are (1) mixing it with iron to form stainless steel, which is highly resistant to corrosion (this is how 80% of the world's ferrochrome is used), and (2) chrome plating. 70% of the world's chrome is in South Africa & 15% in Zimbabwe, with Kazakhstan & India also being significant producers. In 10 years Metmar would like to have a multi-country chrome play, providing different grades to the international markets.

In FY2011 Metmar acquired 20% of Eastern Belt Chrome, which owns 51% of Steelpoort Chrome, 49.9% of Bolepu Holdings (Bolepu owns 40% of Sefateng Chrome). Metmar Trading secured the off-take for 200,000 tons of crhome ore from Sefateng's Zwartkoppies mine. Metmar Trading also acquired the entire off-take for all chrome ore from the mining operations at Goudmyn. Subsequent to 31 August a transaction was consluded to purchase a further 60% of Eastern Belt Chrome Mines for R61m, increasing Metmar's exposure from 20% to 80%.

Metmar Mauritius owns 51% of Metmar Africa which owns 15% of Zimbabwe Alloys Chrome (acquired in FY2011). Metmar Trading has secured the marketing rights of the chrome ore, concentrated chrome ore & ferrochrome alloy.

Coal

Metmar Industrial, operating in SA & Zimbabwe, recovers slurry coal, recycles waste, re-screens of Zimbabwean coke stockpiles into various sizes (has long-term contracts with large consumers of coke). Gubha Resources, the coke screening operation at Zimbabwe's Hwange Colliery, was terminated & its assets transferred to Metmar Industrial (both Guhha Resources & Metmar Industrial are 80% owned by Metmar).

Tin & Tantalum

Metmar owns 8.9% of Kivu Resources, which conducts mining exploration in Rwanda & the eastern DRC. "Metmar has an exclusive marketing agreement for this high-value ore for current & future production". A small scale mile is operating, & a "new management team has been appointed to increase monthly production of tin & tantalum, with niobium & tungsten being secondary commodities." Kivu Resources owns some 80% of a Gatumba JV, with the Rwandan government owning the remaining 20%. Post 31 Aug 2011 70% of the shares in Kivu were exchanged for shares for Alphamin Resources Corp (an entity listed in Canada).

Manganese

Metmar owns 11.66% of Kalahari Resources, which owns 40% of Kalagadi Manganese, which is developing a manganese mine in the Northern Cape Province, which may produce 3m tons of ore p.a., beneficiated by the sinter plant at the mine to produce 2.4m tons p.a. A smelter will be built at Coega to produce 320,000 tons of Manganese alloys p.a. (the smelter will consume 700,000 tons of sinter, leaving 1.7m tons for export). The mine & sinter plant are planned to be finished in the 2nd half of 2012, and the smelter at Coega in the 2nd half of 2013.

Zinc & lead

Metmar owns 20% of Pering Base Metals (more than 50% black owned), which owns zinc & lead assets in the North West Province of South Africa. Funding is being sought for mining operations & to build a plant.

Vanadium

Metmar owns 40% of of Metmar Speciality Metals, which owns vanadium slag stockpiles (participation in the off-take is being reviewed, with a view to either disposing of the project or increasing its stake).

Metmar owns 20% of SA Metals Equity aims to build a plant to extract pig iron from vanadium calcine dumps. Capital raising is planned for 2012, and there are "at least 22 years' worth of supply of raw material commencing in 2014"

Tangible asset value

At 31 Aug 2011 Metmar had a tangible net asset value per share of R2.31

Total equity at 31 Aug 2011 was R597m, including financial assets of R341m.

Exchange rate sensitivity

Metmar's profit is sensitive to exchange rate changes. In their annual report to 28 Feb 2011, they stated that if the Rand had weakened by 10% against the Euro the result would have been R0.157m worse (0.3% worse) and that if the Rand had weakened by 10% against the US Dollar the result would have been R7.251m better (14% higher than the R51m earnings). In 2010 a 10% weakening against the Euro would have resulted in R0.157m more profit, and a 10% weakening against the USD would have resulted in R0.305m less profit. However, these estimates are based on the financial position at the end of reporting periods, which will have changed subsequently, so one doesn't know whether there's a surplus of financial assets over liabilities in Euros or USD in the current reporting period.

How has value of assets moved since 31 Aug 2011?

Check Metmar in the news

Check SENS announcements

Valuation

My valuation model says that Metmar is worth somewhere between R2.05 a share and R2.82 a share. If the results of the last 6 months are indicative of what's to be expected in the future then the R2.05 valuation rules, but if the average results over the last 2.5 years are more indicative of what's to be expected in the future then the valuation is closer to R2.82.

It is difficult to say how macro factors like the depreciation in the exchange rate will impact Metmar, and that hasn't been taken into account in the valuation. However, a weak rand will mean make it cheaper to export from South Africa.

A risk is a slowdown in the Chinese economy, as (1) Metmar seem to be trading well there, and (2) it may lead to oversupply of resources hurting Metmar's underlying investments (this is already evidenced somewhat in the ferrochrome market, where Steel Guru reported that leading ferrochrome producers have been reducing output).

Shareholders

Metmar's major shareholders are 4 of its executive directors. In 2006 Metmar listed on the JSE in order to access funding, to pursue its strategy of acquiring minority stakes in strategic producers.

BEE shareholders are Ms Daphne Mashile-Nkosi (3.99%) and Ehlobo Holdings (3.89%).

Management

The 4 executive directors who also own a slug of the company are key to Metmar's future. They are all in their 50s, so as long as their interest remains they have enough petrol left in the tank to keep going for some time.

Disclosure

The author is considering purcashing a bit of Metmar

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