Prices for aluminium products have fallen in recent years. Picture: Woohae Cho/Bloomberg via Getty Images
Prices for aluminium products have fallen in recent years. Picture: Woohae Cho/Bloomberg via Getty Images

Aluminium extraction specialist Hulamin — which was unbundled from Tongaat Hulett in 2007 — came under fire at last week’s AGM for not "setting the tone at the top" in terms of its much-hyped cost-cutting endeavours.

You can see why Hulamin would be looking to slim down — its share price has dropped 28% over the past year (and 39.8% over three years) as it changed the valuation of assets and recorded a R950m operating loss. At R3.25 it is some way below the R40 at which it traded when it first split from Tongaat.

So Hulamin probably wasn’t expecting an easy ride at the AGM anyway. But then shareholder activist Chris Logan, who has locked horns with Tongaat before, pitched up.

Logan’s first point was that Hulamin’s 14-strong board was excessive for a company with a market capitalisation of less than R1.2bn. He pointed out that mining conglomerate Anglo American (with a market capitalisation of more than R500bn) had 12 directors, while investment behemoth Remgro (market capitalisation: R104bn) had 13. "A relative minnow like Hulamin has 14 directors, which cost shareholders a substantial R5.1m," he said.

This large and expensive board, he said, contradicted Hulamin’s talk of a cost-conscious culture. After all, its annual report spoke of a determination to "aggressively attack costs and develop a cost-focused culture".

In response, Hulamin chair Thabo Leeuw said the board was reviewed on a regular basis and assured investors the board would consider this issue again.

But Logan wasn’t satisfied. "This is called ‘tone at the top’," he said.

Leeuw said the board was obliged to cover certain areas in terms of the duties of nonexecutive directors. "We are alive to the issue of costs. The board will make sure the costs associated with its obligations are justified."

Logan asked why it was that the weaker rand hadn’t translated into better profits, since Hulamin is paid in dollars for its aluminium. Back in October 2011, when the rand was trading at R7.50/$, Hulamin estimated that for every R1 move weaker in the rand-dollar rate, the company would see a R200m-R220m profit boost.

So, with the rand now at R14.50/$, Logan argued that this should have equated to an additional R1.4bn of profit over the past eight years. "Why did this not materialise and where does Hulamin see itself on the global cost curve?" he asked.

Leeuw said Hulamin was still benefiting by around R200m for every R1 move in the exchange rate. But he added that prices for aluminium products had fallen in recent years due to greater competition, especially from China. Plus, higher costs — like energy — had swallowed up most of the gains from a weak rand.

Hulamin is also in the top quartile of low-cost producers globally. "In future we will refocus on products where the combination of costs and capability competitiveness results in optimum returns for shareholders," said Leeuw.

More concerningly, the short-term outlook for aluminium is brittle. In his statement at the AGM, Leeuw reported that trade conditions had turned "particularly turbulent" in recent months. "Prices for Hulamin products have softened in the US in recent weeks."

Automotive demand had fallen, in SA and globally, he added.

But there was one bright spot: demand for can stock products was firming.

Either way, Leeuw said, the net result was that Hulamin was realising fewer dollars for its products, which "is expected to impact negatively on profits in the first half of the current year".

While Leeuw also talked of "appropriate remedial action", like cutting costs, the volatility in the dollar thanks to US President Donald Trump’s trade spat with China hasn’t helped. "This may also affect market conditions for our products in future, and efforts are being directed to achieve a positive outcome for Hulamin," he said.

It’s a grim warning, especially since a research note from Fractal Value Advisors (FVA) in recent days clearly showed that Hulamin’s return on invested capital was well below the cost of capital.

David Holland, a director of FVA, said that since 2013 Hulamin’s economic losses amounted to a combined R2.5bn.

"The company’s strategy and remuneration policy should focus on improving economic profit," he said.