Anglovaal puts out tentative feelers for a 'missing link'
'The introduction of international best practice can lead to productivity comparable with international standards'
IT WAS a jovial Anglovaal chairman Basil Hersov who presented his group's credentials and prospects to the Investment Analysts Society in Johannesburg this week - so jolly was he that a quick joke after every touchy question deflected the attention away from the issue at hand.
Anglovaal is so close to some monumental change, months or even weeks away, that it was perhaps an inopportune time to have hosted the session. Most of the audience is familiar with the status quo and an indication of the future would have been more useful. Yet some interpreted the timing as an open invitation to foreign parties interested in forming an association with the group: the missing link, according to Hersov.
Over the past year or two, Anglovaal has concentrated its activities into two listed entities covering mining and industrial interests. Anglovaal Industries houses branded fast-moving consumer goods, packaging, fixed investment and diversified interests and is run by Richard Savage. Avmin holds interests in diamonds, gold, ferrous metals, base minerals, coal and industrial minerals, and has Rick Menell at the helm.
This leaves a rather limited role for Anglovaal itself, which was founded in 1933 by Hersov's father Bob and Menell's grandfather Flip as a mining and industrial company. The centre boasts substantial cash resources, a portfolio of nonstrategic investments, a 22% stake in diamond investment holding company Saturn Partnership, and treasury, risk management, trading functions, and provides strategic direction.
To Hersov's dismay, after years of trading at a premium, Anglovaal is now at a discount to its net asset value, which itself decreased by 7% over the past year to R161.15 a share. It is currently trading at R103.
In the year to June 1997, group headline earnings were lifted 17% to 923c and the dividend by the same margin to 214c. Hersov acknowledges that 1990's dividend cover of 5.8 times was perhaps too high and it has been reduced to 4.3.
The total Saturn Partnership, which participates in the distributions made by the Venetia diamond mine in the Limpopo valley, contributed just over a third of Anglovaal's composite earnings in the year to June 1997. Mining as a whole chipped in 44%, reflecting a fairly grim year from gold in particular. Industrials made half the earnings, and other interests 6%.
While Hersov is delighted with the level of income from Venetia, the challenge is to reduce the proportion it makes to earnings. "We would never want to see Venetia's contribution fall in absolute terms." This needs to be achieved by raising earnings elsewhere.
Excluding Venetia, Anglovaal's 1997 operating profit of R1-billion was earned from turnover of R16.8-billion, indicating a fall in profit margin from 7% to 6% since 1994. "This is not unique to Anglovaal as South Africa's economic growth has not met expectations, but the trend is being vigorously addressed." In the year under review the earnings of Consol slipped 27%, National Brands 42%, Associated Manganese 56% and Avgold 24%. Hersov says they present a material opportunity to be turned around. I&J lifted earnings 46%.
National Brands management has been realigned from being product-based to functional-based and the information technology support upgraded.
On the fixed investment businesses, Hersov is pleased that cement company Alpha has adapted well to the dismantling of the cartel. It too seeks to expand beyond the border. Back to its roots after the disposal of its electronics arm, Grinaker Construction has a strong order book and is achieving superior returns. Trident Steel raised headline earnings 14% in a difficult market, but after years of consistent growth, Bearing Man had a flat year as it suffered from the rand's 1996 crash: it was unable to pass on cost increases immediately.
Packaging giant Consol is halfway through a R1-billion expansion programme. American group Owens Illinois retains a 25% shareholding and seconded a top technical executive to help with the plant improvements. Savage notes that between 1990 and 1993, only R40-million was invested in Consol, compared with the R0.6-billion to R1-billion going into it since. Volume efficiencies are climbing and the bottom line should follow.
AVI relinquished majority control of tyre group Contred to Goodyear USA, which has 60% of the equity. Rationalisation and export growth have helped Contred, but as Hersov notes, there is an exit strategy via a put option if the group so desires. On the industrial side, AVI left the electronics business partly in a black empowerment deal with Kunene Brothers.
Avmin also participates in Venetia; Hersov warns that income is seasonal and that of the second half of 1997 will be less than that of the first half, but more than in the second six months of last year. Avmin owns half of Avgold, whose mines have struggled in line with the industry. However, a large hedge book is in place at prices greater than the rand gold price, and Hersov notes a positive move at Hartebeestfontein with respect to operating shifts which should lift productivity. He looks forward to completion of the feasibility study at Target in the northern Free State adjacent to the Loraine mine, where gold is expected to be mined at a cost of less than $200/oz.
Hersov discloses a R20-million and rising annual budget for gold exploration in Africa; teams are also active in southeast Asia and South America.
In ferrous metals, Associated Manganese's iron ore exports grew marginally, but Hersov expresses concern about the loss-making ferrochrome operations Machadodorp: "We are considering our options."
The R160-million base metal MSB mine Nkomati, which was officially opened on Friday, is progressing. The richest ore body is finite and studies suggest that while a new large mine with integrated smelter and refinery will not be feasible, a medium operation with tollsmelting could make sense.
Avmin has made great strides in coal mining, to which it is a relative newcomer. "Forzando is a shining example of where the introduction of international best practice can lead to productivity comparable with international standards and better than South Africa's average," says Hersov.
Forzando has been developed for less than R100-million, and production is to be doubled to 2-million tons a year. The 500 000-ton-a-year Dorstfontein mine is at an advanced stage of development as a small-volume but high-margin operation.
Menell in particular is keen on the term asset-building within Avmin. There is plenty of potential on the Zambian copperbelt, possibly including participation in the privatisation of ZCCM (Zambian Consolidated Copper Mines); Avmin is represented in the Kafue bidding consortium with three foreign partners.
The result of several portfolio changes, sales and a high retention of earnings over the years is a cash pile of close to R2-billion. "Cash does not generate superior returns so we aim to redeploy it. The obvious missing link for us is a material international element," Hersov says.
That was it, and the questions surrounded this missing link. Would the introduction of a foreign element mean that the controlling families of Hersov and Menell would relinquish the helm? "We're sitting together," replies Hersov (next to Menell), "would you like us to hold hands as well?" He says that at no time has the family control ever restrained the expansion of the company. "It's been difficult at times but we have always found a way around it." Anglovaal was the first to issue low-voting N shares in recent years.
Yes, the families do intend to retain control. Says Menell: "We really do believe that the medium- to long-term consequences of this focus will succeed as it has in the past."
Will it make a bid for Lonrho? "How do you spell that?" responds Hersov, then expresses his gratitude that there were no bombshells among the questions. Perhaps the earth-shattering answers are yet to come.