AEL Mining 2017 Review
AEL Mining Services (Z) Plc, Mining

Jordan Soko’s AEL Mining has been riding the great tide of the commodities resurgence. The Board Chairman of the explosives company was delighted with the company’s 2017 performance. Rightly so especially that this is the same year that Jordan welcomed new Managing Director Hendrik Rensburg to lead his management team. Hendrik arrived to position with a macro environment that was rather favorable for them leading to an explosive performance that saw the company record their highest EPS over the last 3 years.

According to their 2017 Annual Report, although the Board Chair acknowledges that effect of the tightening monetary policy that was synonymous with the Central Bank, it was Chinese demand for copper that pushed the drilling machines of the Copperbelt to extract more ore.  With ‘souring’ copper prices, it was inevitable for the company to have a good year at the office considering their dominant position as a major player in their market space. However, a closer analysis of the Chairman’s statement shows that although copper prices did increase by 28% in 2017, year on year revenue increase was only 4.9%. This despite an increase in both surface and underground mining.

The lackluster increase in revenue in a bullish market was attributed to buyer power influence which saw mining companies cut back on operation costs. Cost cutting was ubiquitous it seems in the mining industry last year and this had a ripple effect on businesses in the same ecosystem ergo AEL inclusive.

However, AEL was equal to the task and employed a strategy that focused on improving labour productivity and cutting costs. 2017 saw the company shave off 3.5% of its employees (that’s 9 employees exited in the 12 months of 2017). In addition, the company focused on prudent capital expenditure management. For example, most of the capital investment during the year under review focused on increasing plant efficiency and underground charging units to improve operational efficiency.

In a market that saw many companies struggle to keep existing contracts running, AEL was able to sustain all its contracts. They achieved this through consistent engagement and making their clients feel a part of their future developments. This required the development of value added services that not only ensure that the company remained the leader in explosives but also created sustainable value for its customers. An explosives partner of choice.

The effect of the strategy employed was a 4.9% increase in year on year revenue. Operating profit increased by 10.8% (9.7% for Profit before tax). All this sustained its EBITDA margin in the 20% range two years running. Further evidence in consistency of stewardship is the 1 point increase to 13% in return on sales. Furthermore, administration costs (that include staff costs) as a percentage of revenue reduced by 2 points to 13%. Another signal of consistency is in their working capital cycle (WCC) which showed a cycle of cash collection within 98 days (one day shy of their 2016 WCC). With current assets 5 times current liabilities, we believe their liquidity position makes them attractive to suppliers.

Shareholders will be pleased with the performance of their invested capital. Return on Capital employed remained above 30% with an improved return on equity of 25%. Shareholder equity grew by 8% therefore it was no surprise that the dividend for 2017 came in at double what was paid two years prior (2015).

Going into 2018, the company sees itself as a strategic partner to its clients through increasing technical resource capabilities that will assist them to continuously optimize their operations. In addition, they are investing in projects that will deliver cutting edge explosive systems to their clients. Reinvesting in their core capabilities is critical to their strategy. They recently completed work on a Bulk Plant upgrade project in 2017 that will help them improve safety as well as sustain high standards of operations regarding environmental management controls. Evidence of how seriously they take this is in the environmental rehabilitation provision that saw a year on year increase from K4million (2016) to K5.7 million (2017).  Overall should commodities continue to soar, we believe their fortunes will continue to be tied to their success.

 

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