Doubts cast on Merafe dividend ambition

[miningmx.com] – MERAFE Resources CEO, Zanele Matlala, said the ferrochrome company would soon start thinking of paying a dividend – a suggestion that was met with astonishment by analysts.

Members of the audience attending Merafe’s interim results presentation earlier this month, in which the firm posted a decline in share earnings to 3.8c, considered a dividend unlikely partly owing to Merafe’s debt burden.

They also wondered at Merafe’s command over its own finances which seemed to be at sixes and sevens. The concern was the company couldn’t seem to reconcile how it had increased ferrochrome production 23%, raised revenue 19% but reported a R53m decline in pretax earnings to R201m.

In truth, Merafe was bound to remain a slow-burner owing to the joint venture agreement in 2004 with Xstrata (now Glencore Xstrata) in which the two companies pooled their ferrochrome operations.

The consequence of the joint venture was that although Merafe secured its long-term future, it is very much the minority. Xstrata has a 79.5% stake in the joint venture and calls all the shots on the decision-making, especially the decision to build a new R5bn smelter complex known as Lion II.

As a R5bn project, Lion II is tough for Merafe Resources to finance even though it only shares 20.5% or R1bn of the burden. Net debt currently stands at R571m with R350m still to supply in project funding.

It has the credit lines – including some R240m of undrawn debt through Absa Capital – but based on current cash flow it will take about nine years to pay off its debt, hence the doubts about the dividend.

Matlala responded that Merafe intended to keep R400m in debt, in the form of a revolving credit facility, open on the balance sheet. “I think I used the word “think’ of paying dividends; I can’t say for certain,’ Matlala said.

“It’s a function of whether we have any expansionary projects. Since we don’t have any planned, it looks like we’ll be able to do that [pay a dividend],’ she said. It would take about four years to repay its debt, she said.

Merafe has long sought a means of diversifying its asset base and has spoken in the past of perhaps moving into the coal sector. The fact that Merafe is flagging a dividend suggests its ambitions of diversifying its wishful thinking. But so is a dividend, one suspects.

Repaying debt using cash flow from the ferrochrome industry is not cut and dried owing to the infamous volatility of the sector.

Ferrochrome has a lot of swing production that piles in when the price improves while the competition provided by China, which is fast gobbling up South African market share is also hard to ignore.

All Merafe can hope for is the on-budget, on-schedule commissioning of Lion II, and hope the ferrochrome market doesn’t take a turn for the worse.