Merafe swings into a loss

• Ferrochrome firm battles weak demand, unrest and load-shedding

Merafe Resources, the junior partner in one of the world’s leading ferrochrome businesses, has reported disappointing annual results, with a R1.8bn impairment recorded in a weakening market. Merafe, which holds 20.5% of the Glencore-Merafe Chrome Venture in SA, derives all its revenue from the partnership. The company is 21.8% owned by the state-backed Industrial Development Corporation and is Glencore’s empowerment partner in chrome.

Merafe Resources, the junior partner in one of the world’s leading ferrochrome businesses, has reported disappointing annual results, with a R1.8bn impairment recorded in a weakening market.

Merafe, which holds 20.5% of the Glencore-Merafe Chrome Venture in SA, derives all its revenue from the partnership.

The company is 21.8% owned by the state-backed Industrial Development Corporation and is Glencore’s empowerment partner in chrome.

“With a challenging operational environment and uncertainty fuelled by year-long trade wars, which have affected both the global demand for and pricing of our products, Merafe has produced an underwhelming set of financial results for the 2019 financial year,” said CEO Zanele Matlala.

No mention was made in the report of the consequences of the Covid-19 outbreak in China.

Merafe reported a post-tax loss of R1.4bn for the year to end-December compared with R683m profit the year before.

Revenue of R5.4bn was recorded for the year compared with R5.6bn the year before.

Despite the loss, Merafe declared an annual dividend of R100m or 4c per share, down 72% from the year before.

The dividend was a positive development for the firm after a difficult year, said analysts.

The biggest factor in the loss was the R1.85bn impairment.

The weak global market for ferrochrome, the main ingredient in stainless steel production that China dominates, resulted in lower prices and an oversupply of the material, Matlala said.

Auditors Deloitte & Touche labelled the impairment a “main audit matter” in the results due to the “significance of the directors’ judgment” in setting out the forecasts of commodity prices and rand-dollar exchange rates on which the impairment was made.

FUTURE SALES

Deloitte noted Merafe’s market capitalisation at end-December, the end of the company’s financial year, was R2.16bn, which was less than its net asset value of R4.7bn.

Feeding into the impairment decision, the directors considered future ferrochrome production, sales values, ferrochrome prices and exchange rates.

“In aggregate, the assumptions applied appeared to be reasonable. The valuation yielded a negative headroom of R1.8bn lower than the net asset value of the group,” Deloitte said.

The venture has installed capacity of 2.3-million tonnes of ferrochrome a year. Of the group’s revenue, the income from ferrochrome fell 8% year on year to R4.5bn, with a 14% decrease in global prices.

“The contributing factors to the decrease were power supply disruptions, community unrest and scaled-down production levels in the fourth quarter of 2019 in response to weaker demand for ferrochrome,” said Matlala.

“Load curtailment by Eskom had an impact on production volumes and costs. This remains a main risk for our business and the broader ferroalloy sector.”

The venture is restructuring its Rustenburg chrome smelter, one of SA’s largest, due to the state of the global market as well as power interruptions and price hikes from state-owned electricity monopoly Eskom.

The smelter restructuring is being carefully handled in case the market turns around and prices rise, and the management is instituting a range of measures to keep it running, with closure a last resort.

Chrome ore revenue from exports jumped 22% to R910m.

“Our ferrochrome production decreased in 2019 and we ended up with excess ore, which was exported,” said financial director Ditabe Chocho.

THE CONTRIBUTING FACTORS WERE POWER SUPPLY DISRUPTIONS, COMMUNITY UNREST AND SCALED-DOWN PRODUCTION LEVELS

R1.4bn was the post-tax loss Merafe Resources reported for the year to end December

R683m was the profit the company made the previous year