JOHANNESBURG (miningweekly.com) - Ferrochrome producer, the Xstrata-Merafe Chrome Venture, was sticking to its policy of not retrenching any of its 6 000 permanent workers through the successful implementation of a "cash-burn-avoidance" strategy.

On presenting a spectacular set of results which sent the Merafe share price rising more than 14% on Tuesday, Merafe said that the company was taking the opportunity to upskill its idle workforce during this period in which 80% of its ferrochrome production capacity had been shut.

CEO Steve Phiri told Mining Weekly Online that the company had generated R540-million worth of cash in the 2008 year and was not suffering any cash-burn, even though the Xstrata-Merafe Chrome Venture had decided to retain all of its permanent workforce during the period of downturn. It had, however, laid off 400 contractor staff.

The avoidance of cash burn had resulted from the ability of the company to sell far more product than it was currently producing by running down its paid-for stockpiles. The company achieved a fourfold earnings increase to a R1-billion in the 12 months to December 31.

CFO Stuart Elliot acknowledged that cash burn was generally worst when operations had been switched off – the Xstrata-Merafe Chrome Venture is currently operating only three of its 20 furnaces – but continued to have to bear the fixed costs of its employee base.

"We do have that permanent cost, from the monthly payment to our staff, however we are selling far more ferrochrome than the 20% of capacity that we are producing," Elliot said.

He was "comfortable" with Merafe's working capital position and was not seeing the element of cash burn that other businesses were looking into.

Debt was winding down and ferrochrome stock was being turned into debtors.

Phiri said that at current offtake, the joint venture's stockpile would endure for six months, depending on the rate at which it was sold down.

"We are looking to getting our stockpiles down to two months supply," he said.

Owing to the introduction of efficient new smelters and pelletisers, the company was till profitable at the currently low European benchmark ferrochrome price of 79 USc/lb in the first quarter of 2009.

The three smelters that were continuing to produce were the three lowest-cost smelters in the Lydenburg and Steelpoort area, which made use of the advanced Premus technology.

The labour costs directly associated with those smelters went into the cost of production and currently those operations were producing "well below" the current 79c/lb ferrochrome price.

The balance of the fixed costs, in which a labour force was being paid that was not working at operating smelters, would be charged against sales from paid-for inventory and were at break-even.

Despite increased power and raw material costs, cost savings were achieved as a result of ongoing process improvement initiatives and investments to reduce costs, including lower cost capacity at the Lion Ferrochrome smelter and the Bokamoso pelletising and sintering plant, which resulted in an improvement of 13% in power efficiencies and a 9% increase in ore consumption efficiencies.

These technologies allowed for some replacements of metallurgical grade coke with lower priced reductants,

Revenue was up from R1,6 billion to R2,8 billion, earnings before interest, tax, depreciation and amortisation rose from R465 million to R1,6 billion and debt was cut by R458 million to R350 million, the bulk of which was repayable only in 2012.

Merafe Chrome GM Dr Jurg Zaayman told Mining Weekly Online that many were promoted to new positions during the period of mining boom and many new people were employed and the lull in ferrochrome demand presented a perfect opportunity to upskill employees.

"We are training people," Zaayman said.

He added that sustainable-development legislation required important training to be given to employees.

"We don't just see the downturn as bad news. We see this as an oppotunity to advance out people and we are making the best of it," Zaayman added.

The black-controlled, JSE-listed Merafe, which has become an Xstrata proxy in South Africa, expects to see a "slight" return of stronger demand to the ferrochrome market later this year.

"When the market turns, past decisions to defer and cancel ferrochrome capacity expansions will again provide the momentum for swift upward movements in the ferrochrome price," Phiri said.

Merafe`s earnings from the Xstrta-Merafe Chrome Venture increased significantly to December 31, 2008, from the twelve-month comparative period, primarily as a result of an increase in the average European benchmark ferrochrome price from 89 USc/lb in 2007 to 176 USc/lb in 2008 and the weakening of the rand against the dollar, particularly in the second half of 2008.

Merafe's share of saleable ferrochrome production decreased by 21% from 284 000 t in 2007 to 223 000 t in 2008, mainly attributable to the significant decrease in demand for ferrochrome in the fourth quarter as a result of the global economic slowdown.

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