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[Ferro-Alloys.com] MERAFE Resources’ share price jumped 10% to R1.42 on Tuesday after it declared an interim dividend of 1.12c per share.
In its interim results presentation, Merafe said that it would cut back on management and staff as it curtails its growth ambitions to focus on harvesting the results of a decade-long capital investment programme in the chrome sector.
Merafe, the 20.5% holder in a chrome and ferrochrome joint venture with miner and trader Glencore, has decided to suspend its diversification plans for the next five years to instead focus on reducing its debt and to return cash to shareholders.
Over the past decade Merafe has spent about R2bn as its share towards growing the joint venture and investing in energy-efficient technology to ensure the ferrochrome business is competitive, said CEO Zanele Matlala.
"We had to decide whether to maximise the cash we have and reduce the debt that we acquired for the expansion and pay dividends, or did we take that cash and invest in something else that may only give us cash later, diluting the cash coming from our investment," she said.
The strategy to diversify will be revisited in the future.
"What we’ll do after three to five years is a different story. We are in a rising interest rate environment. It’s probably a good time to focus on reducing debt."
An analyst said the decision reduced the risk associated with mergers and acquisitions and raised the prospects for improved dividend flows.
Merafe’s stay-in-business capital over the past three years had averaged R190m but would "tick up" with Lion II ramping up to full production, chief financial officer Ditabe Chocho said.
Its project spend, which peaked at R208m last year, was tapering off, leaving cash free to service debt and pay dividends.
Merafe had cash inflows of R265m, which was consumed by R151m of expansionary spending and R95m on stay-in-business capital in the first half.
It paid a R28m dividend for the six months to end-June, translating to 1.12c per share.
Merafe would try to cut its debt to R300m-R400m under its new strategy, Ms Matlala said.
It had net debt of R587m by the end of June from R606m at the end of December. Cash stood at R65m, down from R86m.
Merafe was under no pressure to grow its stake in the joint venture. "It’s something we could consider at a later stage," Ms Matlala said.
Merafe cannot grow its presence in the Southern African chrome sector without the participation of Glencore.
The change in strategy marked the departure in coming months of Mr Chocho and commercial director Bruce McBride. The eight nonexecutive directors on the board will be whittled down.
Investor relations and finance head Kajal Bissessor will take over as chief financial officer.
The five-month platinum strike around Rustenburg pushed up chrome-ore prices. Chrome is a by-product for platinum miners.
Merafe had to use more of its own chrome ore to feed its plants. Its own ore was more expensive than the ore coming from the platinum firms, Ms Matlala said.
The partners sold less chrome ore during the six months. Chrome ore made up 10% of Merafe’s total revenue. Chrome-ore revenue fell 13% to R204m.
A 25% rise in sales of ferrochrome to 171,000 tonnes drove revenue from the stainless steel feedstock up 39% to R1.8bn. Ferrochrome sales contribute 90% of group revenues. The higher tonnages were available because the joint venture used 90% of available furnace capacity, which Ms Matlala said was a record.
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- [Editor:Yueleilei]
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