DM168

PHANTOM SHARES

The Finance Ghost: Mining margins are getting tight; Mondi’s operations are flying

The Finance Ghost: Mining margins are getting tight; Mondi’s operations are flying
The Ergo Mining Proprietary Ltd metallurgical gold processing plant, operated by DRDGold, in Brakpan, South Africa, on 25 February 2015. (Photo: Waldo Swiegers / Bloomberg via Getty Images)

If you haven’t seen the impact of inflation on a market before, you’re seeing it now. The timing difference between input cost pressures and pricing increases can play havoc with margins and balance sheets.

The mining sector has been seen as an attractive place to hide as commodity prices have been raging – causing much of the inflation in the process. If expenses grow faster than commodity prices, though, mines face shrinking margins. The situation is exacerbated by any disappointments in production volumes. In an environment of Covid-related absenteeism, floods and erratic electricity supply, this makes the sector vulnerable.

For example, DRDGold suffered a 6% drop in sales in the three months to March 2022 compared with the preceding quarter. Although the average gold price increased by 3% over the same period, it wasn’t enough to offset the impact of lower volumes.

Looking beyond mining, consumer goods importer and distributor Nu-World Holdings reported a 15.1% drop in revenue and a 19.1% drop in headline earnings per share (HEPS) for the six months to February 2022. Cash from operations swung wildly into the red, sucking up R287-million in cash in this period compared with generating nearly R35-million in the comparable period.

Mondi is looking interesting

Not every company is losing out from inflation. Mondi’s operations are flying, with 63% year-on-year growth in Ebitda in the latest quarter.

Mondi’s Russian operations contribute about 20% of group Ebitda and the company has decided to sell this business. Naturally, there’s no certainty about pricing or whether there will even be a buyer. In the meantime, the market has priced Mondi as though the Russian operations will become worthless, arguably creating an opportunity for punters.

Can car market keep it up?

With CMH reporting HEPS of 501 cents in FY22, we are reminded that shortages in new car availability drove a period of inflation in used car prices. In the past year, you were better off buying yourself a car than buying US tech stocks! Although supply issues in the industry are worsening for some manufacturers, there will surely come a time when consumer spending puts a damper on the party for businesses like CMH. We are already seeing significant pressure in demand for semidurable goods by consumers. If people can’t afford a new TV, I fail to see how they can afford a new car. BM/DM

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.

Gallery

Comments - Please in order to comment.

Please peer review 3 community comments before your comment can be posted

Get DM168 delivered to your door

Subscribe to DM168 home delivery and get your favourite newspaper delivered every weekend.

Delivery is available in Gauteng, the Western Cape, KwaZulu-Natal, and the Eastern Cape.

Subscribe Now→

Daily Maverick Elections Toolbox

Download the Daily Maverick Elections Toolbox.

+ Your election day questions answered
+ What's different this election
+ Test yourself! Take the quiz