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African Rainbow Minerals – BUY

Renaissance Capital

6 February 2019

Metals & Mining

Figure 77: African Rainbow Minerals, ZARmn (unless otherwise noted)
African Rainbow Minerals				ARIJ.J							Target price, ZAR:					160
Market capitalisation, ZARmn:				32,845							Last price, ZAR:					147
Enterprise value, ZARmn:				34,068							Potential 12-month return:					18.2%
Jun-YE			2017	2018		2019E	2020E	2021E		Jun-YE	2017	2018		2019E	2020E	2021E
Income statement										Balance sheet
Revenue			8,158	8,346		9,744	10,185	10,770		Net operating assets	23,738	24,822		25,178	24,103	23,412
Underlying EBITDA			922	1,799		2,652	2,661	2,894		Investments	1,573	1,561		1,772	1,772	1,772
Underlying EBIT			214	1,058		1,801	1,786	1,857		Equity	23,497	25,907		28,478	29,705	30,332
Net interest			-185	-183		135	343	481		Minority interest	543	1,471		1,561	1,657	1,739
Equity accounted income			3,446	4,129		4,629	3,070	2,250		Net debt (cash)	1,271	-995		-3,089	-5,487	-6,887
Taxation			409	-573		-542	-596	-655		Balance sheet ratios
Other			-2,512	131		-451	-478	-409
Net profit for the year			1,372	4,562		5,572	4,125	3,524		Gearing*	5.1%	-4.0%		-12.2%	-22.7%	-29.4%
Headline earnings			3,215	4,851		5,572	4,125	3,524		Net debt to EBITDA plus equity income	0.3x	-0.2x		-0.4x	-1.0x	-1.3x
HEPS, ZAc			1,684	2,526		2,916	2,159	1,844		RoCE (excluding Harmony)	19.9%	23.5%		30.4%	22.7%	19.3%
										RoIC	15.9%	22.1%		29.5%	21.2%	17.5%
Thomson Reuters consensus EPS, ZAc						2,626	2,195	2,004		RoE	13.5%	19.5%		20.5%	14.2%	11.7%
DPS declared, ZAc			650	1,000		1,400	1,400	1,360		*net debt/(net debt+equity)
Underlying EBIT										Cash flow statement
Platinum			832	1,026		1,563	1,666	1,422		Operating cash flow	2,312	3,914		6,833	6,662	5,422
EBIT margin			16%	18%		24%	24%	20%		Capex (net of disposals)	-981	-944		-1,282	-1,251	-1,163
Nkomati			120	18		-43	-34	399		Other cash flows	2,030	1,179		0	0	0
EBIT margin			6%	1%		-2%	-2%	17%		FCF	3,361	4,149		5,551	5,411	4,258
Goedgevonden			78	408		579	466	365		Equity shareholders' cash	3,390	3,980		5,096	5,296	4,297
EBIT margin			9%	40%		40%	33%	27%		Dividends and share buy-backs	-426	-1,714		-3,001	-2,898	-2,898
Other			-816	-394		-298	-312	-329		Movement in net debt	2,964	2,266		2,094	2,398	1,399
Underlying EBIT			214	1,058		1,801	1,786	1,857		Cash flow ratios
Income statement ratios*
										Working capital days	66	88		69	67	67
EBITDA margin			31%	34%		38%	32%	29%		Capex/EBITDA	106.4%	52.5%		48.3%	47.0%	40.2%
EBIT margin			3%	13%		18%	18%	17%		Cash conversion	1.1x	0.8x		0.9x	1.3x	1.2x
HEPS growth			241%	50%		15%	-26%	-15%		FCF yield	16.8%	19.1%		20.9%	22.2%	18.5%
Dividend payout ratio			39%	40%		48%	65%	74%		Equity shareholders' yield	18.7%	18.7%		18.1%	18.8%	15.3%
Input assumptions										Valuation
$/ZAR			13.60	12.85		14.25	14.25	14.09		SoTP DCF valuation and calculation of target price					ZARmn	ZAR/sh
Platinum, $/oz			988	940		820	970	1,134		Iron ore					9,099	44.0
Iron ore (62%Fe, CIF China), $/t			69	67		71	71	65		Manganese					9,947	48.1
Manganese ore (44%, CIF China), $/mtu			5.72	6.79		6.32	5.24	5.41		Two Rivers (effective interest = 54%)					2,604	12.6
Nickel, $/t			10,134	12,474		11,593	13,176	14,541		Modikwa (41.5%)					927	4.5
Required breakeven price										Nkomati					1,714	8.3
										PCB Coal less debt (effective interest = 20.2%)					1,971	9.5
3PGMs, $/3PGM oz			811	860		872	932	986		Goedgevonden (effective interest = 26%)					2,252	10.9
Nickel, $/t			9,132	12,384		12,454	13,782	11,316		Copper and exploration					0	0.0
Iron ore, $/t			37	46		43	52	54		Harmony at listed market value					2,129	10.3
Manganese ore, $/mtu			3.84	4.71		5.14	4.33	4.48		Corporate and other					-1,533	-7.4
Export thermal coal, $/t			62	65		65	66	67		Enterprise value					29,107	140.6
										Net cash and other					1,795	8.7
Sales volumes										Equity value					30,902	149.3
PGMs in concentrate - attributable, k oz			324	316		316	316	316		Plus: equity shareholders' cash/share						27.3
Iron ore, kt			8,638	8,937		8,700	8,700	8,700		Less: DPS						-14.0
Manganese ore, kt			1,487	1,589		1,550	1,550	1,860		TP, rounded to						160.0
Nickel, t			7,938	6,651		6,825	6,825	7,875		Share price on 1/2/2019						147.3
Attributable Cu eq volumes, kt			299	300		287	287	299		Expected share price return						8.6%
Volume growth			-1.2%	0.3%		-4.4%	0.0%	4.5%		Plus: expected dividend yield						9.6%
										Total implied one-year return						18.2%
										Share price range, ZAR:
										12-month high on 31/1/2019	151	12-month low on 4/4/2018				90
Contribution to FY19E attributable underlying EBITDA										Price move since high	-2.3%	Price move since low				63.2%
										Calculation of discount rate
					Platinum
		Coal								WACC	16.2%	Cost of debt				10.0%
					13%					Risk-free rate	9.0%	Tax rate				28%
20%							Nickel
										Equity risk premium	5.5%	After-tax cost of debt				7.2%
							1%			Beta	1.30	Debt weighting				0%
										Cost of equity	16.2%	Terminal growth rate				2.0%
										Valuation ratios
										Jun-YE	2017	2018		2019E	2020E	2021E
										P/E multiple	5.7x	4.4x		5.1x	6.8x	8.0x
										Dividend yield	6.8%	9.0%		9.5%	9.5%	9.2%
	Manganese
							Iron ore			EV/EBITDA	4.6x	3.7x		3.7x	4.2x	4.5x
	29%						37%			P/B	0.8x	0.8x		1.0x	0.9x	0.9x
										NAV per share, ZAR	124	136		149	155	159

* Proportionately consolidated

Source: Bloomberg, Thomson Reuters, Company data, Renaissance Capital estimates

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