JOHANNESBURG (miningweekly.com) – Following a caution by JSE-listed Merafe Resources last month that it expected impairments to drag down its earnings for the first half of the year, the ferrochrome producer on Tuesday posted a 30% drop in headline earnings a share for the six months ended June 30.

The impairment loss, largely the result of the Xstrata-Merafe joint venture (JV) considering the sale of its Horizon mine, drove headline earnings down to 3.8c, from 5.5c a share posted in the first six months of 2012.

After taking into account depreciation of R69.4-million, an impairment loss of R75.9-million, net financing costs of R9.6-million, current tax expense of R800 000, deferred tax expense of R22.3-million and a R1.3-million write-back arising from the prior years’ overprovision of current tax, the company’s profit and total comprehensive income for the period settled at R33.5-million.

This was 75% less than the R138-million posted in the prior comparable period.

Similarly, Merafe’s agreed 20% share of earnings before interest, taxes, appreciation and amortisation from the Xstrata-Merafe JV for the first half of 2013 tapered from R279.3-million in the first half of 2012 to R236.5-million.

“This was primarily the result of the decrease in the average European benchmark ferrochrome price, inflationary increases, an increase in standing charges relating to the unprotected strike at the eastern mining operations, and foreign exchange losses incurred as a result of the weaker rand,” the company, led by CEO Zanele Matlala, said in an interim results statement.

The average rand/dollar exchange rate was R9.21 in the first half of 2013, compared to R7.90 for the 2012 comparative period, while the average European benchmark ferrochrome price dipped from $1.25/lb in the first half of 2012 to $1.20/lb in the first six months of 2013.

On the upside, Merafe’s share of ferrochrome sales volume from the JV for the first half of 2013 amounted to 137 000 t, which reflected a 10% improvement on the 2012 comparative period of 124 000 t.

The improvement in sales came as ferrochrome production for the first six months improved by 23% year-on-year, increasing from 118 000 t in the six months ended June 2012 to 145 000 t in the first half of 2013.

Merafe’s higher output was on the back of operational improvements at its ferrochrome furnaces, combined with higher winter month production and the impact of the successful commissioning and ramp up of the Tswelopele pelletising plant.

Consequently, operating capacity utilisation for the first six months of 2013 improved to 79% from the 64% for the prior comparative period.

Ferrochrome production volumes in the first half of 2013 were also impacted by the Eskom power buyback agreement.

Meanwhile, the producer was “delighted” to report good progress at its flagship Lion II smelter project, which should be ready for hot commissioning by the end of the year.

The Magareng mine, which would be supplying chrome ore to the smelter, was already in production, and the surface processing plant at the mine had recently been commissioned.

“The overall Lion II project remains on schedule and within budget and, to June 30, about 65% of the total budgeted cost of R5-billion – Merafe’s portion of which was R1-billion – has been spent,” the company said.

MARKET REVIEW

Merafe’s improved ferrochrome output came as global consumption for the metal reached 5.1-million tonnes in the first six months, driven by stronger stainless steel production.

“However, despite a strong start to the year, stainless steel production continues to be threatened by global economic uncertainty and weak market sentiment. In addition, the downward trend in the nickel price continues to negatively impact prices, keeping inventory levels and apparent consumption of stainless steel suppressed,” the company noted.

Global ferrochrome production reached 4.8-million tonnes in the first half of 2013 –3% higher than the comparative 2012 period, with 29% of this produced by South Africa.

China remained the determining factor in the industry, producing over 47% of the world’s stainless steel and accounting for 37% of the world’s total ferrochrome production in the first half of the year.

Ferrochrome supply from South Africa was most impacted in the first half by producers participating in Eskom’s buyback programme, and the company expected most local producers to produce at higher capacity utilisation rates in the second half of 2013.

“South African ferrochrome imports into China continue to be displaced by domestic Chinese ferrochrome production on the back of unbeneficiated chrome ore exports from South Africa,” the company said, adding that the local ferrochrome industry continued to advance its engagement with the South African government to find solutions to this challenge.