JOHANNESBURG (miningweekly.com) – South African miner Merafe Resources expects the demand for ferrochrome to recover in the short to medium-term, CEO Steve Phiri said on Tuesday.
Speaking at the company’s interim financial results presentation in Johannesburg, Phiri said that it was still “early days”, but noted that several industry bodies had noted signs of overall recovery.
Merafe, which has a chrome venture with diversified-miner Xstrata, has already increased its production capacity to 60%, in response to the strengthening demand for ferrochrome.
Merafe had mothballed 17 out of its 20 furnaces in January this year, as ferrochrome prices bottomed out and the company scrambled to maintain costs. However, Phiri said that 14 furnaces were now running as international demand for ferrochrome had increased.
Merafe was “cautiously optimistic” that demand would remain at current levels in the fourth quarter of 2009.
“The deferral of most planned expansions is expected to continue in South Africa and globally, in response to the current uncertain global economic outlook.”
Phiri reported that Merafe’s ferrochrome stockpile levels had lowered “significantly” during the six-months under review. He explained that although it was producing at 30% of its capacity, the company’s sales had been at around 60% of its capacity, necessitating the use of stockpiled ore.
Phiri noted that if sales continued at its current trend, without the start up of additional production capacity, the stockpile levels would become “far below” the normalised levels. “It is a good position to find ourselves in,” he noted.
As Merafe had not retrenched any of its 6 000 permanent workers during the economic downturn, Phiri noted that it would be fairly easy to restart the furnaces, as experienced staff were already on hand.
During the economic downturn, which started in the fourth quarter of 2008 and moved until the second quarter of 2009, Merafe implemented a number of cost saving initiatives.
“Cost efficiency is our number one priority in so far as it relates to our operations,” Phiri noted. During the first half of the 2009 financial year, Merafe froze all appointments and promotions, reduced the number of fixed-term employees, and reduced the use of contractors.
The company also had a limited maintenance expenditure and eliminated overtime where possible.
“We continue to focus on the deferment of major sustaining and expansion capital expenditure, and it is important to do so. It is important not to become too excited when we see a recovery, we need to measure our steps very carefully. We continue to manage our working capital very strictly and we continue to optimise our costs,” said Phiri.
During the six months ended June, Merafe reported that it had sustained loss of R84,2-million for the six months ended June. This compared with the R602,4-million profit recorded in the corresponding period of 2008.
The company recorded a headline loss a share of 3c for the period under review, compared with the 25c headline earnings recorded in the corresponding period.
Merafe’s income is generated from the Xstrata-Merafe chrome venture, with a total managed capacity of 1,98-million tons of ferrochrome production a year.
Merafe shares in 20,5% of the earnings before interest, taxation, depreciation and amortisation (Ebitda) from the venture.
The loss was primarily as a result of the decrease in the average European benchmark ferrochrome price from $0,156/lb in the first half of 2008 to $0,79/lb in the first quarter of 2009 and $0,69/lb in the second quarter of 2009.
This, coupled with the rapid strengthening of the rand in the second quarter of 2009, also contributed to the Ebitda loss.
Merafe’s share of saleable ferrochrome production decreased by 15% from 150 500 t in the first half of 2008 to 128 100 t in the first half of 2009.
Merafe’s share of Ebitda loss from the venture for the six months ended June was R56,5-million. The Ebitda loss from the venture includes Merafe’s attributable share of standing charges from the temporary suspension of furnaces and mining operations of R116-million.
After accounting for corporate costs of R15,1-million and a share-based payment expense of R3,1-million, Merafe’s Ebitda loss was R74,7-million.