Petmin twists sand into hard profit

Anthracite and silica sand - the industrial minerals that underpin miner Petmin - can hardly be described as glamorous.

But who needs glamour if a corporate niche in basic industrial feedstocks can deliver solid cash flows and a gross profit margin of 37% in a year that was, to a large extent, all about emerging from recessionary setbacks?

Petmin's year to end-June hardly started well - the first three quarters were tough as glass makers only slowly lifted purchases of silica from the emergency levels of the recession.

Matters improved in the fourth quarter, but executive chairman Ian Cockerill has said that recovery has further to go.

Petmin's SamQuarz, which provides about a third of SA's silica needs, suffered a 25% drop in volume sales to 1.17million tons, not only because of the glass industry's problems but also due to weaker demand for chert rock for infrastructure developments by parastatals. Still, by the fourth quarter, sales were back to normal with full order books.

There were other "challenges" at the anthracite operations.

Petmin had sold its low-margin Springlake colliery, allowing the more-profitable Somkhele colliery to help improve operating margins. But, to put it mildly, the rand's progressive strengthening over the year did not help rand revenues from export anthracite.

But that's short term. Last month a start was made on the R120-million construction of a second coal processing plant that is slated to double Somkhele's production to an annual 1.1million tons within two years.

Petmin can easily afford the capital costs - at the end of June it had cash of R283-million and undrawn bank facilities of R110-million.

The additional coal capacity is destined for export markets. It will need it. The company has been through a couple of years of heavy capital spending, including the Somkhele expansion.

Then there is a 25% stake in the Veremo pig-iron project to exploit a titanium-rich magnetite deposit. Kermas, which owns the other 75% of Veremo, is talking to Chinese mining equipment manufacturers and financiers and prospective customers in Korea.

Organic growth will need to be complemented by acquisitive expansion in SA and elsewhere.

The focus will be on commodities that contribute to the needs of infrastructure development and urbanisation. Cockerill is not interested in low-margin operations. New projects have to pay for themselves - operations, capital cost and returns to shareholders - and match demanding return criteria.

Petmin has declared a maiden dividend of 6c a share - 4c based on earnings and a 2c special distribution from the sale of Springfield. The plan is for dividends to be covered five times by headline earnings. This past year's earnings increased to 19.09 cents a share, a 5% improvement on 2009.