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Black-owned Merafe ferrochrome company entering sweet spot

Merafe Resources CEO Zanele Matlala tells Mining Weekly Online’s Martin Creamer that the black-owned JSE-listed company has had an exception six months of record production and soaring earnings from a buoyant ferrochrome market. Video and Video Editing: Nicholas Boyd.

12th August 2014

By: Martin Creamer

Creamer Media Editor

  

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JOHANNESBURG (miningweekly.com) – After ten years of ongoing investment, the black-owned and black-managed ferrochrome company Merafe Resources is in a sweet spot of being able to harvest the cash-flow fruit from a suite of projects in which investments have been made over the past decade.

The shares of the JSE-listed company, which is linked to Glencore, soared 7.75% on Tuesday after posting a strong set of first-half (H1) results, which yielded a R28-million interim dividend and confirmation of a hybrid dividend policy that will include special dividends when there is excess cash.

Merafe’s 20.5% earnings before interest, taxation, depreciation and amortisation (Ebitda) from the Glencore Merafe Chrome Venture were R460.2-million compared with R236.5-million in the 2013 H1 and included a lower foreign exchange loss of R3.5-million (R28.7-million), as a result of the lower utilisation of the venture’s dollar facilities.

“We’ve been on a ten-year journey of project investment and we’re now at a stage where we’re able to maximise the case flows from our operations,” Merafe CEO Zanele Matlala told Mining Weekly Online in a video interview on the sidelines of the results presentation of a 134% increase in headline earnings a share to 8.9c for the six months ended June 30, on the back of a 35% rise in revenue to R2-billion and 25% higher ferrochrome sales to 171 000 oz. (Also see attached video).

The projects have included the low-energy Lion smelter complex, the Bokamoso and Tswelopele pelletising and sintering plants, upper group two (UG2) plants and the Wonderkop acquisition.

Within the new sweet spot, the company – in which the Bafokeng community and the State-owned Industrial Development Corporation are the main holdings – will be able to reduce the debt it acquired to invest in the project suite and also return cash to shareholders and concentrate only on ferrochrome.

Diversification plans have been put on hold, the corporate office shrunk, corporate executives let go and debt cut in the current environment of rising interest rates.

For the next three to five years, capital expansion will be put on hold and mark-time capital will keep what has already been built in tip-top shape.

“As much as you sweat the assets, it’s also important that you maintain them,” Matlala commented to Mining Weekly Online in the attached video.

Merafe’s revenue and operating income are primarily generated from the venture, which is one of the global market leaders in ferrochrome production, with a total installed capacity of 2.3-million tons of ferrochrome a year.

In taking over from Xstrata, the diversified mining giant Glencore has given Merafe the benefit of knife-edge shipping rates and is as keen on sweating the assets as its partner.

With some of the platinum producers reviewing their own operations in the aftermath of the five-months strike in the platinum belt, Matlala questions whether the South African platinum industry will return to pre-strike UG2-related chrome levels.

With certain shafts being closed, there will be less UG2 chrome available, which is seen as positive for ferrochrome prices, which have been hampered by the sale of raw South African chrome to China.

For several years the South African ferrochrome industry lobbied the South African government as a collective to restrict the export of raw chrome.

“But I think we’re over those times now and it seems like the market forces will achieve exactly that without us having to lobby anybody,” Matlala commented to Mining Weekly Online.

In the H1 2014, South Africa increased its ferrochrome production by 36%, which may herald a return of South Africa to being the world’s biggest producer of ferrochrome.

The current cost curve shows South Africa in pole position and outdoing Chinese rivals.

The country has the capacity and can step on the accelerator to meet demand.

Rising energy costs are a concern and the low-energy Premus technology that the company has within its Lion complex and other smelters does not lend itself to retrofitting.

Still on the horizon for Merafe are wage talks with the National Union of Metalworkers of South Africa (Numsa) for its operations on the western limb of the Bushveld Complex, having already completed a one-year wage deal with the National Union of Mineworkers (NUM) for its operations on the eastern limb.

The positive for Merafe is that it has different unions on the different limbs and has the advantage of being able to continue operating where NUM is the union should there be issues where Numsa is the union.

  H1 ferrochrome production was up 16% to 168 000 t in the six months to June 30, when revenue rose 35% to R2-billion and headline earnings a share soared 134% to 8.9c a share.

Merafe generated cash from operating activities of R265-million as the venture’s low-energy flagship operation, Project Lion II, moved into production.

The 35% revenue increase on the prior year was supported by a 25% increase in ferrochrome sales to 171 000 t (2013 H1: 137 000 t) and a 16% weaker rand:dollar exchange rate.

Chrome ore revenue as a percentage of total revenue decreased to 10% in the first half of 2014, compared with 12% last year.

After accounting for corporate costs of R37.4-million, which included a share-based payment expense of R3.3-million, Merafe’s Ebitda was R422.8-million (2013 H1: R210.2-million).

Corporate costs increased mainly as a result of restructuring costs at Merafe head-office level.

Profit for the six months was R224.7-million compared with R33.5-million in H1 last year.

The impairment in the prior period related to the Horizon mine, which has since been placed on care and maintenance.

Net financing costs increased largely because of higher debt levels and the reduced capitalisation of borrowing costs related to Project Lion II, which was brought into use in the second quarter of 2014.

Expansionary capital of R9.5-million was down on the R11.3-million for H1 last year.

Merafe’s capital commitments at June 30 were R231-million.

The company had a net cash balance of R19-million and debt owing to Absa Capital of R592-million at June 30.

Accountant Ditabe Chocho will leave the company’s employ in December, company secretary Ami Mahendranath in September, and long-standing commercial director Bruce McBride in March next year.

Chartered accountant Kajal Bissessor will succeed Chocho as financial director.

Merafe’s operating capacity utilisation for the first half of 2014 was 90%, which is equivalent to an increase of 16% compared to the previous corresponding period.

This increase is primarily attributable to a stronger market and the impact of the nonrecurring Eskom buy-back agreements that were entered into in H1 2013.

Despite the start-up costs of Lion II and the impact of the strike action in the platinum sector, the total ferrochrome cost per ton increase was below mining inflation, primarily as a result of higher production volumes and cost saving initiatives.

An accident on April 9 at the Kroondal mine in Rustenburg resulted in Andries Shomolekae being fatally injured.

The venture’s total recordable injury frequency rate increased to 4.41 owing to two additional H1 injuries.

Global stainless steel production for H1 2014 reached 21.1-million tons, primarily due to a 14.3% increase in China, while higher production in India and the US also played a role.

As a result, 2014 estimated global stainless steel production of 41.9-million tons is on track to surpass last year’s all time annual high of 38.5-million tons.

Global ferrochrome demand continued to rise, reaching 5.7-million H1 tons.

Global ferrochrome production increased by 20.5% to a matching 5.7-million tons, the majority from China with 12.4% more, and South Africa with 36.2% more.

Stainless steel production and demand is expected to increase by 5.5% a year for the next three years and the demand for ferrochrome is expected to follow suit with an increase of 6% a year for the next three years.

Edited by Creamer Media Reporter

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