Steve Phiri, CEO, Merafe Resources
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Hobbled Merafe hunts for non-chrome projects
Allan Seccombe
Posted: Tue, 19 Sep 2006

[miningmx.com] -- MERAFE Resources, the empowerment partner on Xstrata’s South African ferrochrome business, wants to diversify its portfolio, but it is hobbled by its share price and the high cost of mineral projects in the current commodity cycle.

Merafe wants assets that are counter-cyclical to the ferrochrome business, which is intrinsically linked to stainless steel demand and production, said CEO Steve Phiri.

“Some of our investors love us being a single commodity company but we would prefer to take the diversified route,” Phiri told Miningmx.

prefer to take the diversified route
At the moment, Merafe is fully exposed to the cyclical nature of the stainless steel industry, it is vulnerable to the rand/dollar exchange rate and there are higher margins to be had in other commodities.

“Our shareholders say if you come to us to raise capital for another ferrochrome project you will have to work hard to convince us, but if you want money for a completely different asset we will have the money for you,” he said. “We’ll not abuse that.”

Two possible commodities Merafe is thought to be looking at are coal and manganese, used in steel making.

Not only does Merafe have gearing levels that are too high with debt of R600m, but all the cash that it is and will generate from its stake in Xstrata Merafe venture will go towards reducing that debt to a more tolerable R200m, said finance director Stuart Elliot.

Merafe’s debt should be reduced to that level within three years, he said, adding the company could begin paying dividends from that point.

“Our ultimate objective is to get our debt level to R200m and then use the cash flows from ferrochrome to buy businesses against that,” Elliot said.

Merafe is unwilling to take a stake in a listed venture, but would consider joint ventures with major mining groups, he said.

Merafe is currently looking for cheap projects that can be brought to account quickly. It’s focus is chiefly in South Africa, but it is also scanning for potential projects in sub-Saharan Africa.

Possible ventures in South Africa would exclude precious metals and diamonds as per an agreement with the Royal Bafokeng Resources, which owns 32% of Merafe’s shares.

Merafe is reluctant to issue shares because of where the share price currently is --it closed Tuesday's JSE session at R0.58 --and its gearing rules out raising much debt.

Elliot reckoned the share price could adjust upwards to reflect the contribution from Merafe’s 20.5% stake in the Xstrata ferrochrome venture for the second half of the year compared to 17% in the first half.

“Hopefully the Xstrata rating will rub off onto Merafe because that is who we mirror,” he said.

Merafe recorded a post-tax loss of R27.8m for the six months to end-June when the rand was around six to the dollar and the ferrochrome price was at $0.63/pound in the first quarter and $0.70 in the second.
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In the third quarter of 2006, the ferrochrome price rose to $0.75 and the rand has been trading above seven to the dollar for most of July and from about mid-August to date.

The market expects the price settlement in the next round of talks to set prices for the fourth quarter to not be lower than those for the third quarter if not higher. Stainless steel demand is seen as strong.

“In the next six months we will have good results and turn from a loss to a profit,” Elliot said.

Xstrata has increased its leverage over the steel industry with the acquisition of Falconbridge, making it a leading nickel producer. Xstrata is the world’s top ferrochrome producer, with capacity of 1.6 million tons in its venture with Merafe, rising to two million tons with Project Lion. The products are two key ingredients in stainless steel manufacturing.

Xstrata and Merafe hot commissioned their 360,000 tons/year Project Lion plant on Monday, bringing the plant into production on time and on budget, Phiri said. Production starts at 50% of capacity building up by 5% a month for the next 10 months to full output.