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Merafe edging to R240m funding
David McKay
Posted: Thu, 30 Jun 2005
[miningmx.com] -- MERAFE Resources has secured the balance of funding to buy chrome resources from Samancor, and a 50% stake in Wonderkop, a smelter owned jointly between Xstrata and Samancor. “We are talking to an institution to underwrite at least half of the outstanding R240m for the transaction and the discussions are progressing well,” said Steve Phiri, CEO of Merafe.
Phiri declined to name the institution but it’s envisaged it will also mop up the interests of minority shareholders unable to maintain their shareholding.
The acquisition of Samancor’s stake in Wonderkop, and the purchase of the chrome resources - 50% of Kroondal and 26% of Marikana – was unveiled in May. The deal had a target date of end August but is subject to a number of conditions precedent including regulatory requirements such as a Competent Persons’ Report and the Competition Commission’s approval.
It’s hoped that the conditions precedent will be met before the said date.
To be cautious, Phiri said that institutions are being approached for appetite in anticipation of the approval by regulatory authorities. This would give comfort to Samancor, and Merafe’s shareholders, which include Royal Bafokeng Resources (32.1%), and the Industrial Development Corporation (24.4%).
Merafe is a company punching well above its weight. Following a deal in 2004 to pool and share its ferrochrome resources and smelting capacity with Xstrata, a London listed firm, Merafe has been shouldering significant funding. Including the deal with Samancor, valued at R331.7m, Merafe has total funding of R850m which includes R550m in equity. This is in excess of the company’s market value currently at about R700m.
Merafe is well positioned in a bull market for ferrochrome, a metal subject to highly cyclical trading activity. But there’s understandable frustration the Samancor deal
has taken so long to conclude.
The price of stainless steel, the product into which ferrochrome is an ingredient, has deteriorated since the announcement of Merafe’s deal. According to Metal Bulletin, the cold rolled coil spot price for stainless steel has fallen by 6.7% in 2005 and has averaged $2,621/5t. It is currently trading at $2,450/t. The average spot price last year for stainless steel cold rolled coil was $2,221/t after peaking at $2625/t.
“There’s naturally a concern of an overhang of shares in the market,” says Phiri. This concern isn’t yet removed by a recent trading update by Merafe in which it said net profit to June end would increase by up to 450%. The share gained 2c/share on June 24, the day of the trading update to trade at 57cents.
In terms of its agreement to pool and share resources with Xstrata, encapsulated in the Xstrata-Merafe Chrome Venture, Merafe is also exposed to a stepped increase in earnings from 11% to June to 17.5% in
July 2006. Eventually, Merafe will benefit from a 20.5% share of earnings.
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