JOHANNESBURG (miningweekly.com) − JSE-listed Merafe Resources said on Tuesday that rising costs were making it increasingly difficult for South African ferrochrome producers to stay competitive.

CEO Stuart Elliot told Mining Weekly Online at the company’s results presentation in Johannesburg, that the South African mining industry was being pressured from “all sides”. Labour has been demanding wage increases above inflation for the past five years, while electricity prices also grew by 75% over the past three years.

The mining industry also had to bear an additional royalty tax, and a potential carbon tax could be the “last blow” for energy-intensive companies, such as ferrochrome producers.

For the six months ended June 30, Merafe’s costs climbed by 16% to R82/lb, of which, electricity made up about 17%.

But, Elliot said that the company would implement a number of projects over the next three years to mitigate certain cost pressures.

Some of the projects even got special mention in Mineral Resources Minister Susan Shabangu’s draft paper on South Africa’s future beneficiation strategy.

The first of these was Tswelopele, a 600 000-t/y pelletising and sintering plant project, which would cut costs at Merafe’s highest-cost operation, Rustenburg. The project was expected to be completed by 2013.

Merafe would also construct a replica of its Lion 1 smelter complex, Lion 2, with a capacity of 360 000 t of ferrochrome. This project would also see completion in 2013.

Elliot noted that the Lion site in Steelpoort also made provision for a third Lion plant, but added that plans were still some way off.

The total capital expenditure for these two projects would amount to about R3-billion, of which Merafe would pay R1.2-billion, while the balance would be covered by its joint venture partner Xstrata.

Elliot said that the projects would mainly be funded through cash generated by the company’s operations, and debt. “We will not be going to the markets for a rights issue.”

Further, Elliot noted that the beneficiation paper also spoke to one of the major challenges facing South African ferrochrome producers, which was the export of raw chrome ore to especially China.

Of the eight-million tons of chrome ore imported by China last year, 3.1-million was sourced from South Africa.

This meant that China, which does not have any of its own chrome ore sources, was positioning itself as one of the lower-cost ferrochrome producers through the import of cheap ore from South Africa.

“Ultimately, South Africa, who produces about 45% of the world’s ferrochrome, will lose its position in the world market, which will inevitably lead to job losses and less investment in the country.

“If it was up to me I would ban the export of chrome ore, but that is of course not feasible, so we have contracted a team of independent consultants to put together a study on chrome ore exports. Findings and proposals will then be taken to the Department of Mineral Resources,” said Elliot.

FINANCIALS

During the period ended June 30, 2011, Merafe’s profit dropped from R189-million to R86-million, mainly owing to increased production costs and the strengthening of the rand, said CFO Zanele Matlala.

Earnings a share for the period was 3.5c a share, compared with 7.7c a share achieved during the same period last year.

Merafe said that stainless steel production was expected to grow by 6% during 2011, equating to an increase of 5% in the world consumption of ferrochrome, including a 14% increase in demand for ferrochrome from China.

Stainless steel production was expected to continue to grow at around 5% a year in the medium term, driven mainly by demand from China.

“We expect seasonal demand improvement, stainless steel restocking by distribution centres and ferrochrome restocking by stainless steel producers resulting in improved trading conditions during the fourth quarter of 2011 and into 2012,” said Elliot.