Interim Report for the Six Months to 31 August 2009

ROBIN PEGLER

INVESTMENT ANALYST

TEL & FAX (011) 646 5396 PO BOX 84566

GREENSIDE

2034

E-MAIL:

3 December 2009

INFRASORS LTD (IRA)

INTERIM REPORT FOR THE SIX MONTHS TO 31 AUGUST 2009

RECOMMENDATION: LONG-TERM BUY

-Infrasors owns mines which supply customers who were particularly badly affected by the recession. The earnings table below shows an erratic earnings history – a direct result of the global meltdown in demand for commodities and, indirectly, industrial minerals.

-Despite this, Infrasors has undertaken major capital expenditure at its mines in 2008/9. This is partly because foundries and other customers are expecting a considerable recovery during F2011. In addition, profit per ton increases substantially with a higher tonnage. Prospects for F2012 onwards look favourable as demand returns and Infrasors has increased capacity to meet it. .

-There is a possible timing risk that Infrasors’ customers are taking too optimistic a view concerning an early recovery, which would result in the mines operating below capacity in 2010 and only reaching full production later.

-Infrasors’ NTAV is 160,3c, with its assets largely consisting of its mines and subsequent capital expenditure. At 67c, it is priced at only 42% of NTAV. This eliminates much of the underlying balance sheet risk and suggests that Infrasors could be highly profitable to the patient investor.

Year end February 2008A 2009A 2010F 2011F

HEPS (c) 44,6 17,5 9,1 26,8

Dividend (c) 12,0 - - 10,0

PE on current price 67c 1,5 3,8 7,4 2,5

Div yield on 67c 17,9 - - 14,9

Issued share capital 173m shares.

12 month high 130c 12 month low 3c (on negligible volumes)

Infrasors was listed on the AltX on 31 July 2007. It is in the process of advancing to the main board under the General Mining sector. Like other AltX companies its price has suffered considerably in the present market conditions and its liquidity is limited.

OPERATIONS

Dolomite

There are two open cast mines, at Lyttelton (adjacent to Centurion), which is within a 50 km radius of Gauteng’s industrial operations, and at Marble Hall.

The Lyttelton mine has just completed capital expenditure to increase capacity to 150000 tpm. Its products are:

• Metallurgical grade dolomite with a low silica content. This is used by steelmills as a fluxing agent.
• Dolomite dust is used as a fire retardant in coal mines. Customers are BHP, Anglo and Xstrata.
• Aggregates to strengthen concrete. Lafarge is a tenant on the mine and takes the product directly into its plant. Lyttelton is the main supplier to the Gautrain and, indirectly, to the road contractor Samral.

Dolomite has a low value relative to weight and bulk; it would not be viable to transport it more than a short distance. The only other such mines in Gauteng are Mooiplaas, owned by PPC, and Glen Douglas, owned by Exxaro. There is a rail siding on site as road transport would be too expensive except for deliveries further than 80km for aggregates.

In F2009, Mooiplaas produced 1,8m tons compared with 922 863 which came from Lyttelton, so the latter produced about one-third of the total output for Gauteng.

An independent technical report just completed estimates the life of the quarry at 41 years at 100000 tpm, which would be about 27 years at 150000 tpm.

The total cost of the upgrading capital expenditure was estimated at R30m of which R25m has already been spent.

Increasing tonnage would lower the cost per ton considerably as higher volumes provide direct contribution to profit, existing production having already covered fixed costs.

Marble Hall is a smaller operation with a capacity of 350000 tpa. As it is some distance from Gauteng’s industrial operations, its customers are fewer. It produces white stonedust used in coal mines, limestone dolomite as fertiliser for neighbouring farms and stone for road building. Its life is virtually unlimited. Its medium-term prospects are promising given increased activity in the area.

Silica

Delf Sand is an open cast mine to the east of Pretoria on the Bronkhorstspruit road.Two others, Cullinan Farm and, later on, Pienaarspoort, are in the process of being developed.Delf and Cullinan are on alluvial ground, mining silica off the original river bed, and Pienaarspoort is a quartzite operation.

At Delf, silica sand is washed and classified into different grades, depending on the fineness of the particles. It then moves through drum driers for those customers who require dried sand.

The silica sand is mainly consumed by the foundry and tile-adhesive industries. Casts for foundries are made out of silica sand, which has a high melting temperature.

Foundries are at present operating at approximately40% capacity. Infrasors’ foundry customers forecast that this will recover to about 80% within the next 15 months.

It also supplies the glass industry (Consol and Nampak). The highest grade (amber) is used to produce coloured glass. This commands a price of R135 pt.

In contrast, plaster sand supplied to the building industry commands a much lower price of R25-30 pt.

Taking advantage of quiet market conditions, Delf refurbished driers 3 and 4 and a much larger fifth drier was added, doubling the Delf dried silica output capacity to 25000 tpm.

Cullinan Farm is intended to extend the life of the sand operation. It should be ready by Q2 of calendar 2010. It has an estimated life of 20 years.

Pienaarspoort completed a comprehensive drilling programme in 2008. Its life is estimated at over 40 years. Production is expected to start in the latter half of calendar 2010. It will produce high grade amber for the glass industry, filter media, aggregate and construction sand.

The only other glass silica producers in Gauteng are Samquartz, owned by Petmin, and Silica Quartz. Samquartz is a larger operation and in F2009 it produced 1,5mt compared with 337130t at Delf.

In addition to the above, there was a third subsidiary, Infrabric, which produced cement stock bricks and was badly affected by the slowdown in residential building. The lease is expiring, so the plant is being relocated to Pienaarspoort.

HISTORIC RESULTS FOR F2008/F2009 AND H1 F2010

The fall in the demand for Infrasors’ products started in H2 F2009 but has improved in H1 2010. If one were to take earnings for the last 12 months, HEPS would be only 7,5c.

Major foundries and steelmills cut production by up to 60%. This reduced demand for metallurgical dolomite and alluvial silica. Infrasors was able to make up the tonnage of dolomite by increasing sales of aggregate dolomite, but at a lower profit margin. The increasing demand for the latter is coming from government infrastructure and the Soccer World Cup.

Refurbishment was undertaken at Lyttelton to take advantage of the expected recovery in the economy, but this brought about higher costs and three weeks downtime in F2009.

Lower demand for wet metallurgical silica was compensated for by larger sales of dried silica to the tile adhesive market. However, this market commands a lower profit margin, partly because of the cost structure.

From F2009, Delf’s foundry market was down 23% and the building and construction market fell by 47%.

As stated above, Infabric suffered poor demand from builders and operations were relocated.

Lyttelton was affected to some extent by labour problems in H2 F2009.

There were steep cost increases in fuel, transport and labour during F2009.

CASH FLOW AND THE FINANCIAL POSITION

For H1, net operating cash flow was much lower at R5,3m, representing a cash conversion rate of 73%. This compares with R32,9m for H1 F2009 and R46,6m for F2009, both these figures before payment of dividend.

Cash outflow from investing activities last year was R13,9m, so the operating cash flow was insufficient to cover this.

Net debt amounted to R73m, giving a debt:equity ratio of 20%.

NTAV at 31 August was 160,3c, far above the current price. This mainly consists of fixed assets and freehold land.

CURRENT CAPITAL EXPENDITURE

Despite the recession and consequent lower cash flow, Infrasors is continuing its capital programme. There is good reason for this.

There are constraints on capacity at Lyttelton and it can sell everything that it can produce. Demand is now exceeding available supply. By the end of calendar 2010, its steel company customers expect to be operating at 80% of 2007 levels compared with 40% at present. This means more metallurgical dolomite being produced and less for aggregates (a more favourable mix).

Delf can also expect a revival in demand from its foundry customers similar to that of Lyttelton. Capital will also need to be spent to develop the market for tile adhesive.

Capital expenditure forecasts made by management are:

Rm 18 mos to 6 mos to Already spent

Feb 2011 Feb 2010 in programme

Lyttelton 10,0 5,0 26,1

Delf Sand/Cullinan 30,0 - 38,2

Pienaarspoort/SQ 20,0 - 7,1

Total 60,0 5,0 71,4

There are considerable cost savings with increased production.

Rough profit before tax forecasts made by management based on increasing production and expected future circumstances are as follows:

Lyttelton

TPA 000 PBT Rm Profit per ton R

Break even 800 -

F2010 1 300 24,0 18,5

F2011 1 700 46,7 27,5

F2012 1 900 61,7 32,5

F2013 2 100 78,8 37,5

Delf, Cullinan and Pienaarspoort

Break even 125 -

F2010 283 19,8 70,0

F2011 450 44,6 99,1

F2012 475 55,0 115,8

F2013 525 67,6 128,8

More than half of the capital programme has been completed and management are reasonably confident that Infrasors will be able to fund the expenditure from current resources and future cash flows. This would mean that any additional borrowings, if any, would be relatively small.

A CAUTIONARY

Infrasors is trading under a cautionary at present. I have disregarded any possibility of future acquisitions in my earnings forecast.

MY EARNINGS FORECAST FOR 2010

I am not expecting much improvement for this year. The effect of increasing electricity costs has to be taken into account, though there is now considerable debate about making these charges less severe.

I have assumed:

Lyttelton and Marble Hall

1,3mt @ R18,5 profit per ton

Delf, Cullinan and Pienaarspoort

270 000t @ R70 profit per ton

Depreciation and amortisation R10m (R4,7m H1)

Interest charges R11m (R5,3m H1).

Tax 28%

Issued share capital unchanged at 173m shares.

No dividend.

This would give us: Rm

Lyttelton EBITDA 24,0

Delf EBITDA 18,9

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Total EBITDA 42,9

Depreciation and amortisation 10,0

Interest charges 11,0

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Profit before tax 21,9

Tax 6,1

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Headline earnings 15,8

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HEPS (c) 9,1

MY EARNINGS FORECAST FOR 2011

This should be a better year. I have assumed:

Lyttelton and Marble Hall

1,667mt @R27 pt profit

Delf, Cullinan and Pienaarspoort

400 000t @ R99pt profit, as there should be a more profitable product mix.

Depreciation and amortisation increasing to R12m

Interest charges lower at R8,2m as some of the debt should have been repaid.

Tax 28%

Issued share capital unchanged at 173m shares.

This would give us: Rm

Lyttelton EBITDA 45,0

Delf EBITDA 39,6

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Total EBITDA 84,6

Depreciation and amortisation 12,0

Interest charges 8,2

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Profit before tax 64,4

Tax 18,0

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Headline earnings 46,4

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HEPS (c) 26,8

Dividend (c) 10,0

ROBIN PEGLER

There is no limitation on the distribution of this report, and you may use it as freely as you wish, provided only that you attribute its authorship to me. You may quote me by name, and I welcome questions about what I have written and about the company’s prospects in general.

I have taken every care in the writing of this report, but those who act upon it must do so entirely at their own risk and on their own responsibility.

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