Be ready to reload
ferrochrome producer Merafe’s attractiveness resides in its strong cashflow generation, secure long-term supply of ore reserves, and the fact that it is one of the lowest-cost producers in the world. With no major expansionary projects in the pipeline, the company expects that from 2018 onwards free cash flow will be applied mainly to returning cash to shareholders in the form of dividends and/or share buy-backs. Its strategy of reducing debt and paying “stable to increasing” dividends is appealing, making any pull-back a good opportunity to go long, or reload. Merafe’s interim results are expected on 7 August. On the charts:
The company regained massive upside momentum towards its 2010 highs after retaining strong support at 55c/share. It peaked at 200c/share in January 2017 and pulled back sharply from a mega-overbought position on the monthly chart. Also, the rand strengthened significantly against the dollar, which is a key factor as most of Merafe’s product is sold in dollars. Recently bouncing on its major trendline (dated back to 2014), and still in its short-term bear trend, support retained above 108c/share would be a positive sign.
How to trade it:
Go long: Upside through 145c/ share would end the short-term bear trend and encourage further gains towards 201c/ share. Breaching that level could see Merafe retest the 250c/share mark in the short to medium term. Maintain a fair stop-loss.
Go short: Merafe would enter medium-term bearishness on downside through the blue bold trendline dated back to 2014 – signalled below 108c/share. Go short through that level as downside back to 83c/share could then ensue. ■