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At the Market with Tetrad

Mining counters generate golden returns

By Brian K Mugabe

DESPITE the more acute challenges relative to other sectors that have assailed the mining industry, such as shortages of ene

rgy, uneconomic exchange rates, failure to access foreign currency supposedly warehoused on its behalf and even difficulty in receiving payment for gold delivered to the central bank, the generally overlooked mining index has in fact, outperformed the industrials on a year to date basis.

I say overlooked because the relative illiquidity of the seven listed mining counters compared with the industrials, the formers’ combined number of shares in issue at just 534 million shares being merely 16% of the issued shares of OK which has the highest number of shares in issue at 3,4 billion, has meant that the mining index has tended to be less popular with investors.

Those who managed to get or were holding reasonable volumes would however not have been disappointed. Whereas the industrial index has “only” put on 624% in the year to August 27, the minings have gained a massive 2 154%! Of the counters listed on both indices, Falgold is the top year-to-date performer with a return of 6 599%, four of the seven mining counters are in the top 10 performers while the least performing mining counter Ashant ZDR had gained 542%.

Recently announced interim results to June of Rio Tinto and Bindura, while both showing significantly improved performances, reveal the fact that great uncertainty still afflicts the sector and belie the superlative gains enjoyed by the mining index.

Starting with Rio, group turnover was up 412% to $8,9 billion, buoyed primarily by the movement to a more realistic exchange rate as both gold and nickel production were down when compared with the first half of 2002 by 37% and 19% respectively.

With the cost of sales and depreciation being kept well below the growth in revenues, and a shift from an interest payable to an interest receivable position, profit before tax grew twenty six-fold to $1,7 billion, operating margins having improved from 7% to 20%.

Attributable earnings of $1,2 billion were attained, this against $46 million in the comparative period last year.

The company laments the delay in adjusting the exchange rate on a quarterly basis by the authorities, a scenario that if not addressed will lead to viability problems resurfacing. It is however, anticipated that gold and nickel production will improve in the second half of the year, while the Murowa diamond mine project should have moved into its “next phase” during the third quarter of 2003.

Bindura saw its turnover for the half year increasing by just 117% to $17,3 billion as total sales volumes experienced a 38% reduction to 2 433 tonnes, courtesy of a 34% decline in gross nickel production to 3 731 tonnes, some production having been deferred to the second half of the year awaiting the furnace rebuild.

In contrast, operating profit was up 736% to $17,1 billion, the growth reflecting the inclusion of an approximately $14 billion exceptional item relating to the “realignment of the Zimbabwe dollar under the New Economic Revival Programme along with measures taken to protect the group’s interests and ability to continue as a going concern”. These naturally distorted operating margins which stood at 99% compared with 26% at interim 2002

The improved operational performance was reflected in the group’s cash-flows, with operating cash-flows increasing four-fold to $4,4 billion, and as a result net interest of $318 million was earned against an outflow of $4 million.

Attributable earnings of $12,8 billion were achieved, an increase of 737%.

Going forward, Bindura as with Rio, reiterates the need to realign the exchange rate appropriately.

Unless addressed soon, shortages of coal, foreign currency, power and other essential inputs will continue to hold back performance of the group, although international prices and demand for nickel are expected to remain firm.

Lastly, this week we look at the interim results of cable manufacturer Cafca. With the local market firmly in the grip of recession, domestic volumes came off by 64% and as a result domestic turnover grew by just 92% to $4,1 billion.

Against this backdrop, the company continued to push exports, and these saw a 581% increase in volumes whilst in value terms, they were up thirty times to $3,8 billion. The net effect was that group turnover increased by 250% to $7,9 billion.

Other income of $2 billion relating to exchange gains, as well as sub inflationary increases in expenditure dramatically improved operating margins which went from 22% in June 2002 to 43% at the half way stage this year. The upshot of these factors was growth in operating profit of 575% to $3,3 billion.

Increased working capital and establishment fee related borrowings saw finance charges up 628% to $262 million, but net debt of $144 million held as at the end of the period was 70% below the $473 million owed at the same stage in 2002.

Allied with a slightly higher tax rate, bottom line earnings growth was somewhat diluted, though to a still impressive 555%, to record a figure of $2,1 billion.

Domestic demand is expected to remain static in the second half of the year, but a continued drive towards exports should ensure that as is traditional, the last half of the year should prove the stronger.

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