[Ferro-Alloys.com]JSE-listed Merafe Resources “remains excited” about the industry as its mix of energy efficient technology and the recent addition of Lion II allows the ferrochrome producer to capitalise on projected growth in ferrochrome demand.

 

CEO Zanele Matlala advised in a conference call on Tuesday that global stainless steel production was expected to grow in excess of 5% in 2015 and 2016, while the demand for ferrochrome could increase between 8% and 5% in 2015 and 2016, respectively.

 

She noted that with the Glencore Merafe Chrome Venture – which owned and operated a number of chromite mines and 22 ferrochrome furnaces with a combined installed capacity of 2.34-million tons of ferrochrome a year – positioned as the lowest cost producer in South Africa, Merafe was well placed to withstand difficult global market conditions.

 

Merafe explained that global ferrochrome demand continued to rise, reaching 11.3-million tonnes for the year, up from the 10.2-million tonnes in 2013.

 

Chinese ferrochrome consumption increased by 11% year-on-year, while global ferrochrome production increased by 9% to 11.3-million tonnes on 2013. 

 

“The majority of this increase came from China and South Africa, which expanded output by 10% and 13%, respectively,” the company said, adding that it was estimated that China accounted for 52% and 36% of the world’s stainless steel and ferrochrome production, respectively. Chinese production had increased by 12% year-on-year, while higher production levels were also achieved in India and the US.

 

“In time, products will always move back to their natural place. We have seen Japan producing ferrochrome, which doesn’t make sense because for every ton of ferrochrome produced they have to import 2.5 t to 3 t of chrome ore [and] should shipping rates increase it changes the game for them.”

 

The company reported a 3% increase in revenue from its Glencore joint venture (JV) for the year ended December compared with the prior financial year, primarily owing to the 13% weakening of the rand:dollar exchange rate and the ramp-up of the Lion II project, in Steelpoort, Limpopo.

 

The Lion II project had come in at 7% above budget after the settlement of all outstanding contractor time extension claims, which Matlala said was notable considering that the budget for Lion II was drawn up in 2011.

 

“This is a significant achievement by the project team especially when compared with projects of a similar size and complexity in South Africa and around the world,” she added, attributing the favourable outcome to an “experienced project team” and Lion II being a replica of Lion I.

 

There were challenges during the construction, highlighting community protests, but nonetheless, the project “still came in close to the time we had envisaged and the budget wasn’t way above what we had expected given that the exchange rate had deteriorated [impacting on the cost of capital items being procured in dollars]”.

 

The ferrochrome producer expected to spend R50-million in 2015 on Phase 2 of the Lion ferrochrome smelter, which was likely to use 37% less electricity than conventional ferrochrome processes to produce the equivalent volume of ferrochrome.

 

Lion II, which was commissioned in May 2014, would increase the smelter's capacity by 360 000 t/y to over 2.3-million tons a year and was expected to operate at 80% of capacity when fully ramped up in mid-2015. 

 

Merafe's attributable ferrochrome production from the Glencore Merafe Chrome Venture was 5% higher than the prior year, with production levels averaging 84% of operating capacity utilisation. The higher ferrochrome production was also attributable to the start-up of Lion II, but Merafe advised that this was partially offset by the rebuild of the furnaces at the Lydenburg plant, in Mpumalanga.

 

The company noted that it had used the slightly deflated market to conduct the extensive refurbishment of the furnaces.

 

Meanwhile, Merafe reported ferrochrome sales volumes for 2014 of 316 000 t, marginally higher than the prior year’s 314 000 t.

“The average European benchmark ferrochrome price increased from 116.1USc/lb in 2013 to 118.5USc/lb in 2014. Chrome ore revenue as a percentage of total revenue decreased from 14% in 2013 to 9% in 2014, largely as a result of the reduced availability of upper group two arising from the platinum industry strike as well as the ramp-up of Lion II,” explained the company. 

 

During the year under review, Merafe had also built up an inventory base of 115-million tons of ferrochrome, an estimated 14-week stock, also owing to the ramp-up Lion II, which the company believed boded it well in meeting client demand should it experience further labour or electricity challenges.

 

At all Glencore Merafe Chrome Venture operations wage negotiations were settled without industrial action, noted Matlala, except at the western mines where workers embarked on a 47-day strike, which resulted in a three-year wage deal. At the eastern mines and smelters a one-year agreement had been reached.

 

“The country’s electricity supply continued to be constrained in 2014, reaching crisis point in the latter half of the year with the implementation of load-shedding and curtailment. The impact of the constrained electricity supply on our production volumes in 2014 was minimal as a result of our participation in [State-owned power utility] Eskom’s demand response programme and rescheduling of maintenance,” Merafe explained.

 

Electricity prices were expected to increase by 13% with effect from April 1, contributing to the increase in the Glencore Merafe Chrome Venture’s production costs. Finance Minister Nhlanhla Nene also announced an increase in the electricity levy of 2c/kWh during his 2015 Budget speech in February, taking it to 5.5c/kWh.

 

FINANCES

Merafe’s share of earnings before interest, taxes, depreciation and amortisation (Ebitda) from the venture for 2014 was 11% higher at R650.9-million compared with the prior year. The Ebitda for 2014 included a foreign exchange loss of R1.3-million compared with R21.3-million in 2013. This loss was lower than in the prior year primarily owing to the loss on the venture’s foreign exchange contract hedge being included in the first half of 2013.

The Ebitda included Merafe’s attributable share of standing charges of R115.2-million, increasing from the prior year’s R63.9-million – essentially as a result of the strikes in the platinum industry and the western mines, namely Waterval and Kroondal, both near in Rustenburg.

After accounting for corporate costs of R50.4-million, which were R19.7-million in 2013, and a share-based payment expense of R11.2-million, previously R6.2-million, Merafe’s Ebitda was R589.3-million compared with the R561.2-million reported for the 2013 financial year.

The profit and total comprehensive income for the year was R214.1-million compared with the R210.6-million of 2013 after taking into account depreciation of R237.3-million, an impairment loss of nil on net financing costs, post capitalisation of R51.3-million, current tax expense of R40 million, deferred tax expense of R47.6-million and a R1-million write-back arising from the prior year’s overprovision of current tax.

Post-balance sheet events included the conclusion of a new debt facility with Absa and Standard Bank, which replaced the previous R800-million facility with Absa. The new debt comprised a R500-million term loan and R300-million revolving credit facility.

 

RESTRUCTURING

Merafe had also completed its head-office restructuring, which was done to support its new strategic direction.

“All the employees earmarked for departure – save for commercial director Bruce McBride who leaves this month – have now left the company’s employ,” Merafe announced, noting that the size of its board had also been reduced to seven nonexecutive directors, following the resignation of two directors and the death of one.

“It was the first year-end we had to go without certain people and I think we managed well. It was challenging in that everyone had to put in extra time but this is something we can handle going forward,” Matala commented.

Further, Kajal Bissessor, formerly finance and investor relations manager, had taken over as Merafe’s CFO.

“With the completion of this restructuring, the company is now well positioned to focus on opportunities in ferrochrome operations and the need to increase cash flows from the JV and return more cash to shareholders in line with our dividend policy,” said Matlala.

Merafe declared a final dividend of R20-million, as promised in its interim results, bringing the total dividend to R48-million for the year.

The company said this was in line with its commitment to return cash to shareholders after changing strategic focus from diversification, while Bissessor noted as no further expansionary capital was required, Merafe would have more cash to return to shareholders.

Matlala added that 2015 would be a year of consolidation. “Lion is on stream now so we need to up our production, which will be followed by increased sales. [However], seeing that, at the moment, pricing isn’t that great, you will probably end up with higher volumes and [earning] less for those. We don’t have any project in the pipeline, so we will be focusing on the current business and generating as much cash from the [Glencore Merafe Chrome Venture] and returning as much as possible to the shareholders.”