Mer­afe beats ex­pec­ta­tions

Finweek English Edition - - Thecompanyyoukeep -

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?

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