JOHANNESBURG (miningweekly.com) – Ferrochrome company Merafe, which generates revenue and operating income primarily from its chrome venture with mining and marketing major Glencore, shot the proverbial lights out in 2015, when its cash generation went through the roof and every box was ticked, from upped production to improved safety.

China’s imports of 2.6-million tonnes of South African ferrochrome last year was 24% higher than in 2014.

The Glencore proxy’s weak-rand-boosted operating activities generated 212% more cash to R956-million on a 13%-higher 377 000 t despite the 12% net decline in the ferrochrome price.

JSE-listed Merafe’s headline earnings soared 65% to 13.9c a share on 23%-higher R4.4-billion revenue.

The 4.17 total recordable injury frequency rate was an improvement on the previous 4.63.

The company, headed by CEO Zanele Matlala, declared a final 1.19c-a-share dividend worth R30-million, taking the total for the year to R55-million.

Merafe shares in 20.5% of the chrome venture’s earnings before interest, taxation, depreciation and amortisation (Ebitda).

After a decade of ongoing investment in a suite of projects, Merafe is in harvest mode within the Glencore-Merafe Chrome Venture, which owns and operates several chromite mines and 22 ferrochrome furnaces with a combined installed capacity of 2.34-million tons of ferrochrome a year.

In addition to the large low-energy Lion smelter complex, projects have included the Bokamoso and Tswelopele pelletising and sintering plants, upper group two plants and the Wonderkop acquisition.

South Africa’s State-owned Industrial Development Corporation remains a major shareholder in Merafe, which last year put its diversification plans on hold for two to four years.

Merafe’s revenue rose primarily on 18%-higher ferrochrome sales to 372 000 t and the 17% weaker average rand/dollar exchange rate that a 12% decline in net ferrochrome prices partially offset.

The average European benchmark ferrochrome price decreased from 118.5c/lb in 2014 to 107c/lb in 2015.

As a percentage of total revenue, chrome ore revenue rose to 11%, 2% up on 2014.

Merafe’s 31%-higher R851.9-million Ebitda share was boosted by a foreign exchange gain of R83.4-million.

Merafe’s portion of ferrochrome stock as at December 31, 2015, was 120.7 kt (2014: 115.8 kt), which is approximately four months of sales.

Three-year wage agreements are in place at the venture’s eastern and western smelters with no material changes to the mineral reserves, mineral resources and mining rights of the venture.

STAINLESS PRODUCTION

Global stainless steel production, which consumes the ferrochrome, totalled 41.6-million tonnes last year, a 0.5% year-on-year decrease.

While stainless steel production in China was 1.4% lower at 306 000 t and a significant decline was also recorded in Japan, India increased output by 7% and the introduction of import tariffs on Asian stainless steel supported European producers.

While global demand for ferrochrome fell 2.2%, Chinese ferrochrome consumption increased 2.1%.

Global ferrochrome production decreased by 4.6% to 10.7-million tonnes in 2015, the biggest decline coming from China, which reduced output by 9% to 3.7-million tonnes.

Comparatively, South Africa saw a marginal year-on-year decrease in ferrochrome production from 3.75-million tonnes in 2014 to 3.71-million tonnes in 2015.

Chinese chrome ore imports rose 10.9% to 10.4-million tonnes in 2015 and exports of chrome ore from South Africa rose 31.8% year-on-year, with the proportion of South African chrome ore imported into China increasing from 61% in 2014 to 73% in 2015.

This increase in South African chrome ore exports was due in part to the end of the platinum strikes, while the depreciation of the rand offered support to South African chrome-ore producers throughout 2015, offsetting the recent fall in dollar prices, Merafe said.

DIRECTORSHIP CHANGE

The board has appointed independent nonexecutive director Abiel Mngomezulu as chairperson and member of the remuneration and nominations committee following the decision of independent nonexecutive director Zed van der Walt to step down as remuneration committee chair and resign from the board from March 7.

MARKET OUTLOOK

Merafe said it expected the short-term to be challenging with weaker commodity prices and concerns about Chinese economic growth levels. But despite these global challenges, the company reported that the venture was well positioned to withstand current and even lower prices as the lowest cost ferrochrome producer in South Africa and one of the lowest cost producers in the world.

Global stainless steel production was expected to recover to growth rates of between 3% to 3.5% a year in the medium- to long-term, which would improve the demand for ferrochrome.

Merafe said its partnership with Glencore would continue to cement its place in the global market as supplier of chrome products.

With no major expansionary projects planned, free cash flow would be returned to shareholders.

The association with Glencore gives Merafe the benefit of access to knife-edge shipping rates.