Listed in the General Mining sector of the Johannesburg Stock Exchange (JSE) Assore Limited is a mining holding company which was incorporated in South Africa in 1950. The company’s main investment is a 50% stake in Assmang, which it controls in conjunction with African Rainbow Minerals. Assmang is involved in the mining of iron, manganese and chrome, and also produces manganese alloys. The group also mines the pyrophyllite substance Wonderstone, a portion of which is used to produce high-precision components and durable tiles for mining, filtration and industrial applications.

As dictated by the Charter to the Mineral and Petroleum Resources Development Act, 26,1% of the Assore shares are held by black empowerment entities.

Assore is responsible for marketing all products produced by its subsidiaries and Assmang, through a subsidiary called Ore & Metal Company. The bulk of products are exported, with the remainder being sold locally or used in beneficiation processes.

Assore has a market cap of more than R 26 billion. Assore share prices and headline earnings have declined significantly recently, due to commodity markets in which the group trades being oversupplied.

At the end of 2014, Assore’s board warned that the group’s strong history of increased earnings would not continue, due to a significant weakening in worldwide ore prices. With iron and manganese prices continuing to drop and increasing competition from the Chinese market, this proved to be the case. Assore’s latest financial data shows that headline earnings for the second half of 2015 dropped 25.4% compared to the same period in the previous financial year.

Demand has been impacted by lowered economic growth in North America, Europe and Asia, which resulted in substantial price decreases in the group’s products. Earnings have also been severely hampered by increasingly expensive operating costs in the mining sector, due to electricity and labour price increases which exceed inflation. The group has therefore been forced to resize and restructure in order to maintain competitiveness. In addition to this, stocks have taken a knock due to currency fluctuations.

Assore has warned that demand is expected to remain subdued for the foreseeable future, with headline earnings anticipated to decline further. Assore share prices are also forecast to decline during this difficult period. The group does however rely on its ability to produce about half of its mined iron ore in lumpy grades, which attracts premiums and takes advantage of an increasing trend for steel mills to use lumpy grades in production processes.

Due to manganese prices being slightly more stable than iron ore, the company has invested significant capital expenditure into increasing its manganese production.

Despite the difficult trade conditions, Assore has followed a disciplined approach to conservation of cash, which has protected a devastating fall in share prices and allowed the company to still pay out dividends.

Steel and iron ore prices are predicted to decline further in the coming years, and concern exists over the sustainability of the South African steel industry. Markets in which the group operates in are likely to remain very volatile, making commodity prices and earnings hard to predict. Assore shares are therefore a very risky buy.

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