Merafe beats expectations
WHEN I WROTE ABOUT Merafe in mid-March, I suggested that if the ferrochrome price held around US$1,50/lb it could earn up to 40c (SA) this year. A friendly stockbroker told me that his firm’s model suggested that was too conservative: 45c to 50c was in reach.
Well, ferrochrome actually averaged 156c for the first half, peaking at 192c. With attributable production up 8% to 151 000t and a remarkable 11% decline in real unit costs – and despite the power cuts – six-month headline earnings per share actually came out at 25c. Against the general trend of commodity prices, ferrochrome has remained firm, with third-quarter contracts signed at 205c.
Net six-month profit was R603m, of which R400m went to repay debt. Another R519m is still owed. However, with Merafe predicting a further advance in second-half earnings, it shouldn’t take too long to clear that.
The one negative is that its power supply has been cut to 90% of normal and all expansion plans have been postponed until it can be assured; but, paradoxically, that could be a positive over the short term. It will allow the balance sheet to be strengthened and possibly – who knows? – the payment of a dividend.
Meanwhile, its coal joint venture with Sentula is going well and, in his presentation CEO Steve Phiri says production should start in second half 2009.
When I wrote in March, its price was 265c/share. It peaked on 30 June at 425c and has since plunged to 242c, with those results having little impact. If second-half earnings are, say, 30c/share the forward multiple is exactly 4,4. It can be dangerous betting against the market, but can this be anything but cheap once current uncertainties are out of the way?