[miningmx.com] — INTERNATIONAL Ferro Metals (IFM) might soon join
South Africa’s other ferro alloy producers by shutting down furnaces in an allocation
buy-back agreement with Eskom, saying such a deal could be of “significant value’
to shareholders.
Should this materialise, IFM would join the Xstrata/Merafe joint venture which
announced a similar deal on Friday, while Samancor and Ruukki have reportedly also
agreed to cutbacks.
“Eskom recently approached the company and other South African energy intensive
users to acquire electricity allocation in return for attractive compensation,’ read
commentary accompanying IFM’s interim results on Monday.
“The company is currently engaging with Eskom and is considering the financial
implications of the offer, which may be of significant value to shareholders.’
Eskom spokesperson Hillary Joffe said the power utility has already secured 400 MW
in savings from heavy users under similar arrangements. Eskom said in January it was
looking for savings of 3,000 MW across the economy as the state-owned enterprise
tackled maintenance backlogs ahead of the winter months.
“The principle here is that we want some load to be reduced over a constrained
period,’ she said.
An industry source told Miningmx that Eskom was buying allocation at a higher
rate than what heavy user customers would’ve paid for supply, but less than the
cost of generating electricity using gas turbines.
“That is one factor,’ Joffe said.
Merafe and Xstrata said on Friday its joint venture would shut five of its furnaces
until May 31, but that this wouldn’t have any impact on the contractual supply of
ferrochrome to customers in the second quarter.
As a result, the company would move forward scheduled maintenance usually
reserved for the winter months.
IFM CEO Chris Jordaan told Miningmx that the company would make a more
detailed announcement once it made up its mind over whether to pursue a similar
strategy. He said the company’s ability to meet existing customer agreements from
inventory would be a key factor to such a decision.
Asked whether he thought widespread production delays would help lift the
ferrochrome price from its recent lows, Jordaan said given that the production
pipeline for ferrochrome was relatively low at this stage, and that “some buyers are
faced with important decisions’ in the near term.
The view was echoed by Numis Securities’ Andy Davidson, although he said the
upside should be limited to the near term.
“There might be less flexibility in the second quarter, but over the year it should be
neutral,’ he said, pointing to the fact that producers’ output would be higher over
the winter months.
RECOVERY PATH
IFM’s interim figures confirmed the progress that the company has made since it
announced a turnaround strategy last year, by realising 27% of its overall savings
target during the interim period. Jordaan said the company should be cash generative
by the end of 2012’s first quarter, depending on prices and the exchange rate.
“Whatever is under our control is on track,’ he said. “At this stage we’re very
pleased with the outcome of our initiatives.’
Davidson has a target price of 40p on the group’s LSE-listed shares, almost double
the existing 20.75p per share.
He said the market would start recognising IFM’s efforts as soon as the company
started to deliver on its positive cash-flow promises, reached nameplate capacity
and realised the savings it set out to do.
“They’ve done very well with the issues under their control,’ he said. “Chris
[Jordaan] has shown he’s a safe pair of hands and the market will eventually reward
them.’
