JOHANNESBURG (miningweekly.com) – Chrome and ferrochrome company Merafe, which has zero debt and R600-million cash on hand, sees ferrochrome prices being supported by the cost of production in China, solid projected stainless steel production growth and the absence of any major additional ferrochrome supply capacity coming on stream soon.
With the cost of production in China estimated to be around 93 c/lb, the ferrochrome price is not expected to fall below that level as the company moves towards the second quarter of 2018.
Given that stainless steel production is projected at 4.1% this year and 3% a year for the three years thereafter, the demand outlook for ferrochrome is seen as firm, and the supply side bereft of major new capacity, which prompted Merafe CEO Zanele Matlala to comment that the near term "is looking quite good", when she spoke to Mining Weekly Online, together with Merafe FD Kajal Bissessor and Merafe Chrome GM Jurg Zaayman.
"Obviously, the damper has been the strength of the rand, which is good for the economy. There are ups and downs, but overall, I think we're well placed," Matlala added.
Although Merafe gushed unfettered cash, that has not been the case for parts of the rest of South Africa's ferrochrome business, where business rescue processes and liquidation procedures surfaced.
While the company intends to remain in harvest mode for the foreseeable future, Matala made it clear that it would not turn away from positive consolidation opportunities should they present themselves; accretive acquisition possibilities are not off its radar screen.
The Glencore Merafe Chrome Venture, from which Merafe receives 20.5% of earnings, is strengthening its position as South Africa's the lowest cost ferrochrome producer.
"We paid off our debt last year and we have R600-million net cash. We have a dividend policy of at least 30% of headline earnings going to dividends, and we're serious about ensuring that our dividend policy is implemented," said Bissessor.
On the electricity price outlook, Zaayman said he expected reason to prevail. "We're positive that things will go in the right direction", with even the punitive winter tariff able to be turned to the company's favour: "If you plan all your maintenance during the winter, you reduce your electricity costs, and that is what we do," he outlined to Mining Weekly Online.
Moreover, the large Lion smelter not only makes do with far less electricity but with the prices of reductants rising, the efficiency gap between Lion and other plants is widening.
Last year, record ferrochrome production was achieved at the Lion and Wonderkop smelters, with record pellet production at the Tswelopele and Bokamoso pelletising and sintering plants. "They are both world class," Zaayman said of Tswelepele and Bokamoso.
SUPPORT FOR COMMUNITIES
Merafe's corporate costs of R40.4-million in 2017 included corporate social Investment expenses of R3.5-million, which involved the company taking care of schools in the communities where it operates by upgrading science laboratories.
"Every plant does its own thing because different communities have different needs," Zaayman explained to Mining Weekly Online.
Profit in the 12 months to December 31 amounted to R914.1-million after taking into account depreciation of R368.2-million, net financing costs of R19.3-million and tax of R363.6-million.
Sustaining capital expenditure increased from R276-million in 2016 to R403-million last year.
Merafe's cash flow from operating activities rocketed 179% to R1 400-million and shareholders, which include the State-owned Industrial Development Corporation with 22%, stand to benefit from Merafe's record R301-million total dividend declaration.