Rand shields Merafe from ferrochrome woes

[miningmx.com] — THE weaker rand is giving Merafe Resources some
respite from the distressed ferrochrome market, analysts say, while the company is
seemingly also succeeding in keeping costs down despite challenging conditions.

The company released a trading statement on Wednesday, saying it expected
headline earnings for the 2011 financial year to amount to between 6 cents and 7
cents per share; well below the 11 cents in 2010. Basic earnings would probably
amount to between 5 cents and 6 cents.

Merafe, like all ferrochrome producers, have had a torrid 2011. European benchmark
prices have lost around 11% in value, while subdued demand forced most producers
to operate well below full capacity.

Two analysts told Miningmx, however, they thought Merafe did well given the

“On our model we expected HEPS of 5 cents,’ said Prescient Securities’ Willem
Venter, adding that his calculations were based on a stronger exchange rate for the
“These guys are at the mercy of the market and the rand, and given that they’ve
performed well.’

Imara SP Reid’s Percy Takunda said in a note to clients the consensus forecast for
HEPS was 5.3 cents.

“This could be due to better cost control, higher production than expected or the
weaker rand, which averaged around R8/$ for most of the fourth quarter as against
our assumption of R7.50/$,’ he said.

“More to the point, however, is the reduction in the ferrochrome price for the first
quarter . to 115 US cents per pound, which is disappointing. With the commitment
to Lion II [the expansion project at Merafe’s joint venture with Xstrata] it is
imperative that the JV obtains better prices, even with a weaker rand.’

Merafe also said it has secured a debt facility to finance at least half of its
contribution towards the expansion of the Lion smelter complex.

Merafe has to contribute R1bn towards the expansion of Lion, in which it owns a
20.5% stake.

“Merafe signed agreements with Absa Capital during December 2011 to secure a
long-term debt facility of R800m, which includes the refinancing of its existing R300m
long-term debt and funding for Project Lion II,’ read a company statement.

Merafe and joint-venture partner Xstrata said in June the expansion of Lion would
cost R4.9bn. The project involves the construction of a 360,000-tonnes-per-year
ferrochrome smelter, which would increase the venture’s total ferrochrome capacity
to over 2.3 million tonnes per year.

With R500m of the new debt facility available for the construction of the smelter,
Merafe could add to that its current cash balance of R220m, while income from
operations could contribute to the balance of the R1bn capex requirement, Venter

Merafe will release full results on March 6.