Thanks to the weak rand these commodity shares are set to rocket

by , 01 November 2017
Thanks to the weak rand these commodity shares are set to rocket
The rand started out 2017 at 13.78, and quickly strengthened to R12.42 in mid-March.

This would've negated strengthening commodity prices world-wide.

The price of copper, ferrochrome, gold and aluminium all rose during 2017.

But - fortunately for South African producers of these commodities the rand weakened yet again, now trading in the R14 range.

And that means all of these commodities are booming when you look at their rand-based returns.

 
  
On average these four commodities are up 21% in 2017 thus far! 
 
Considering the dollar moves these commodities have made during 2017, and adjusting for the movement in the rand/dollar exchange rate you’ll see their prices are up significantly.
 
My favourite two metals right now are copper and aluminium – both up 26%. But all of these metals present a great opportunity to their producers right now.
 
For instance – if a gold mine produces gold at R450,000/kg, and it mines 1000kg of gold, it made a profit of R61.185 million per year based on the start of 2017 gold price.
 
Based on the current gold price, the same gold miner would bag a profit of R125.485 million.
 
Simply put – a 12% movement in the gold price could see a gold miner more than DOUBLE its profit!
 
And the same is true for most miners and commodity producers.
 
Four companies set to profit from these rising commodity prices right now
  
  • Share #1 - The aluminium manufacturer:

Hulamin is the only major aluminium rolling operation in Sub-Saharan Africa, and one of the largest exporters, representing more than 60% of sales.
 
In addition to this the company also recently opened an aluminium recycling plant – which gives it an even bigger profit when the aluminium price rises as it just has…
 
Back in 2014 Hulamin announced it would invest R300 million in a new recycling plant. But as these things go it takes a long time for these projects to be built, commissioned and to reach steady production.
 
The project reached full production in 2016, so 2017 will be the first year of full production for the plant on Hulamin’s books.
 
The recycling plant can process 65,000 tons per year of aluminium. Based on the increase in the aluminium price this year – the company should see nearly R200 million additional income flow in. Considering the company had a record high net profit of R385 million last year, an additional R200 million adds 52% upside potential to the company’s profits…
 
If Hulamin only repeats its first half performance in the second half of the year, the company will bank a profit of 112cps, putting it on a PE of 6.16 – which is way too cheap… 
 
 
  • Share #2 – The copper recycler:

Insimbi is a tiny company that acquired a copper recycler in the past year.
 
On the back of this acquisition Insimbi reported first half profits in 2017 increased to 11.95cps, a 151% increase on that of next year… Now imagine what it can do in the second half of this year with the copper price as high as it is now in rand terms?
 
This share is only up 26% in the past year, not at all reflecting the massive increase in earnings it has seen. More importantly, it sits on a PE of 7, and pays dividends…
 
  • Share #3 – The Ferrochrome smelter

Merafe is a ferrochrome producer taking full benefit of high prices. The company’s technology puts it amongst the lowest cost producers of ferrochrome in the world.
 
And thanks to high prices it has been able to pay off a large amount of debt in the past three years. So much so, that I’ve predicted (unless its share price moves up significantly) that Merafe will be amongst the top 5% of dividend paying small cap shares on the JSE by March 2018 when it next reports results!
 
  • Share #4 – The gold miner

Gold miners have been notoriously bad at returning growth to investors. But Pan African Resources have long been that exception.
 
And with the current high gold price the company is set to make massive profit gains in the coming months.
 
But the big upside in Pan Af is a new gold project.
 
The company plans on adding a whopping 50,000 ounces per year to its current 180,000 ounces operations by end of 2018…
 
Pan Af has started construction on this new mega project. This single project will increase its gold production by around 25%.
 
Adding 56,000 ounces of gold production a year, the Elikhulu project will cost Pan Af around R1.8 billion. 
 
The all-in cost of production over the life of this project is estimated at $532/ounce. So, considering the current gold price and exchange rate the project could add an annual profit of around half a billion rand per year. Putting that in perspective – it could easily DOUBLE Pan Af’s profits!
 
I hope you grab these opportunities
 
Whilst the political going-ons in South Africa might affect our exchange rate negatively – it creates opportunities like this. Good businesses, that sell products in dollars – but pay salaries in rands are bound to grow profits – and their share prices will follow!
 
Here’s to unleashing real value
 
Francois Joubert

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