Merafe Resources suffers R1bn loss in joint venture with Glencore

MERAFE Resources yesterday fell 8.57 percent on the JSE to close at 32 cents after the group flagged that it swung from a profit last year to a near R1 billion loss during the halfyear ended June on its joint venture with Glencore.

The world’s largest ferrochrome producer said that it incurred a significant impairment loss on property, plant and equipment.

The group said its losses for the year came to R961.1 million from a R165.2m profit a year earlier.

It said its impairments rose to R1.34 billion, although the weaker average rand dollar exchange rate provided some cushion to the loss.

The group said its headline earnings per share plummeted to 1.1c from 6.6c a year earlier.

Revenue from the joint venture shrunk 16 percent to R2.3bn from R2.78bn a year earlier, and ferrochrome revenue also decreased by 16 percent to R2bn, primarily as a result of a decline in ferrochrome sales volumes to 151 000 tons from 189 000 tons on lower average realised prices.

Chrome ore revenue decreased 16 percent to R333m as a result of a 6 percent decrease in sales volumes to 138 000 tons compared with 147 000 tons a year earlier as well as weaker chrome prices for the first half of the year.

Merafe withheld the interim dividend due to the company’s key focus areas being working capital management and cash preservation, especially over these challenging times.

“In spite of current challenges, the board of directors remains positive about future prospects of the business supported by industry fundamentals that are still in place,” Merafe said.

The group said that the country’s hard national lockdown weighed heavily on its production performance.

“Production in South Africa was particularly impacted, falling 50 percent in the second quarter of 2020, not only because of Covid-19 cutbacks, but also due to the ongoing cost pressure, including unsustainably high electricity pricing,” said the group.

The Merafe-Glencore Venture is currently leading a Section 189 consultation process with organised labour amid plans to restructure its smelters as a result of deteriorating operating and market conditions across the South African ferrochrome industry, including high electricity tariffs and interruptions, cross-subsidies and real cost inflation.

“These factors have also led to the displacement of significant volumes of ferrochrome production to lower-cost competitors overseas. Despite significant investments in an attempt to make the operations more competitive, the Venture has continued to come under substantial operational and financial pressures,” said the group.

Covid-19 related government-imposed lockdowns in key global stainless steel producing regions during the first half of the year resulted in production curtailment of stainless steel of 11 percent year on year.

“While Chinese stainless steel production in the first quarter of the year 2020 plummeted to levels last seen in early 2016, it recovered strongly during the second quarter of the year 2020, backed by government infrastructure spending,” said the group.