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Merafe seeking coal acquisitions
David McKay
Posted: Wed, 04 May 2005
[miningmx.com] -- MERAFE Resources, the South African firm that shares Xstrata’s ferrochrome operations, said it was seeking coal, manganese and iron ore assets in which to invest.
“We’ll only seek investment in commodities where investors can’t get exposure,” said Stuart Elliot, Merafe’s executive director. The JSE Securities Exchange (JSE) does not have many ‘pure play’ options in coal and manganese following the delisting of Ingwe Coal, Duiker Coal and Anglo Coal in the 1990s. Assmang, jointly held by African Rainbow Minerals and Assore, is expected to delist.
Elliot’s comments come after Merafe today entrenched its exposure to ferrochrome by agreeing to the R332m purchase of Samancor’s 50% stake in the Wonderkop ferrochrome facility.
Xstrata owns the balance of Wonderkop, a facility that produces 190,000 tons/year of ferrochrome. Merafe said it would finance the
acquisition through a combination of debt and either a private placement or rights issue.
Merafe’s major shareholders, Royal Bafokeng Resources (RBR), a private company representing the interests of a community in South Africa’s North West province, and which owns 32% of Merafe, and the Industrial Development Corporation (24%), supported the transaction, said Steve Phiri, Merafe CEO.
“We’re definitely not looking at gold, platinum or any of the precious metals,” Elliot said on the company's diversification plans. “But where can you get coal exposure? And we’re being told that the market loves pure plays,” Elliot said. Asset diversification would also be helpful to Merafe’s risk profile, he said.
Chinese demand for stainless steel, which uses ferrochrome in its manufacture, is expected to continue a supply deficit notwithstanding output growth. There were further increases in the ferrochrome price to $0.79c/lb during the second quarter, for instance. But
the sustained health of the normally volatile ferrochrome market will be crucial given Merafe’s debt load and plans to diversify into other assets which will further stretch the balance sheet.
Including working capital needs, the Wonderkop acquisition, and a further R350m investment in the Lion Project, an expansion of Xstrata’s ferrochrome output, Merafe has debt of R850m, about R100m more than the company’s market value. The risk is Merafe’s exposure to a single market while it carries such high debt. Elliot said this was one of the reasons why the company was considering other deals.
Merafe is also betting on rand weakness. Although ferrochrome prices had increased 150% since 2000, the comparative increase in rands was only 30%, the company said.
Merafe said Wonderkop would be consolidated into Merafe’s joint venture with Xstrata lifting its ultimate stake in the company to just over 20%. The combined Xstrata-Merafe unit will control about a third of
the world’s ferrochrome market.
Last year, Xstrata and Merafe agreed to merge their ferrochrome assets governed by a voting pool arrangement in terms of which Merafe had a 17.5% stake. By adding its stake in Wonderkop to the Merafe-Xstrata Venture, Merafe increases its stake to 20.5%.
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