Shares of JSE-listed ferrochrome producer Merafe Resources soared by 6.2% at R1.12 after the announcement that its first-half earnings and production have more than doubled.
Reviewing its interim results for the six months ended 30 June 2014, Merafe said headline earnings per share, the primary measure of profit in South Africa, rose 134% to 8.9 cents while production climbed 16% in the period, while yielding a R28-million interim dividend.
Review of the results
Merafe’s revenue and operating income is primarily generated from the Glencore Merafe Chrome Venture which is one of the global market leaders in ferrochrome production, with a total installed capacity of 2.3m tonnes of ferrochrome per annum. Merafe shares in 20.5% of the earnings before interest, taxation, depreciation and amortisation (EBITDA) from the Venture.
Revenue increased 35% from the prior year mainly due to a 25% increase in ferrochrome sales to 171 kt and a 16% weaker Rand/Dollar exchange rate. Chrome ore revenue as a percentage of total revenue decreased to 10% in the first half of 2014. Profit for the six months was R224.7 million.
Property, plant and equipment increased as a result of capital expenditure of which R94.6 million was sustaining and R152.5 million was expansionary.
As at 30 June 2014, Merafe had a net cash balance of R19 million which comprised cash held by Merafe of R30 million and R11 million relating to Merafe’s share of the overdraft balance in the Venture. Merafe had total debt owing to Absa Capital of R592 million at 30 June 2014.
Change in strategic focus
Since the formation of the Venture 10 years ago, Merafe and its Venture partners have focused on growing the Venture’s ferrochrome operations and reducing costs. These initiatives included the acquisition of the Wonderkop assets and various expansionary projects including the Bokamoso and Tswelopele pelletising and sintering plants, the Lion smelter complex as well as UG2 plants and chrome ore reserves.
As a result of the implementation of these initiatives, Merafe and the Venture have developed and enjoyed significant competitive advantages and the Venture is well positioned for the future.
Merafe’s diversification aspirations had previously been constrained by the above initiatives which were funded from internal cash flows and debt. It was envisaged that there would be a renewed focus on diversification upon completion of Lion II.
However, the board has decided that in the short to medium term, the focus of the company should be on its ferrochrome operations and maximising cash flows from the Venture. Accordingly, the fact that diversification will no longer be a key focus has necessitated a rethink of the head-office structure and its composition.
Consequently, Merafe has decided to reduce its staff complement, management team and the Board’s size and skills set going forward.
Owing solely to the change in focus, Merafe and the executives have reached agreement that Ditabe Chocho will leave the company’s employ in December 2014 and Bruce McBride will be leaving the company in March 2015. Kajal Bissessor, a qualified Chartered Accountant and currently the manager responsible for finance and investor relations, will succeed Ditabe Chocho as executive Financial Director.
The company Secretary, Ami Mahendranath will also be leaving the company on 30 September 2014. The company’s secretarial functions will be outsourced and further details on the appointment will be announced in due course. In addition, the number of non-executive board members will be reduced post 2014 year end.
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