Merafe Resources, which has as its sole asset a 20.5% stake in a chrome joint venture with Glencore, came under fire for a "lazy" balance sheet despite paying a record dividend for 2017 as cash gushed into the company.
Standard Bank analyst Tim Clark did not hold back in quizzing CEO Zanele Matlala and financial director Kajal Bissessor during Merafe’s results presentation about why the dividend payment was not bigger, saying their explanations each year were proving to be a "moveable feast".
"You’ve spoken of being at the bottom of the cost curve, the second-lowest cost producer globally, you went through the cycle with net cash, you’ve been fairly optimistic on your outlook and I’ve not heard anything that says you’re going to spend money," Clark said.
Shareholders need some indication … on when they can tangibly think you’re going to return cash
Merafe reported net cash of R600m by the end of December from net debt of R409m at the end of the previous year. A final dividend of 9c a share was declared, bringing its total dividend payment to a record 12c per share, equivalent to R301m against R120m a year earlier.
"With a R1bn turnaround from net debt to net cash in the 2017 financial year, Merafe has never been in a stronger financial position," said Bissessor.
Matlala defended the dividend payment, saying the board had paid more than its stated policy of 30% of headline earnings, returning close to 33% to shareholders and could pay a special dividend, but Clark was having none of it. "To only return half the cash and leave a couple of hundred million rand in cash on your balance sheet when you’ve got more cash in the venture and more cash rolling in the door from current production levels. Frankly, you use the word ‘strong’ and I use the word ‘lazy’," he said. "At what point in time have you got enough safety net … now you’re keeping cash at the Merafe corporate level and this is a moving feast and I think shareholders need some indication from the board on when they can tangibly think you’re going to return cash," Clark said, pointing out the changes in the board’s debt and cash targets in recent years.
Bissessor said in deciding the 2017 dividend the board had looked at the pending amount of stay-in-business capital and had considered the volatile markets for chrome ore and ferrochrome pricing, leading to a decision to have cash to fund six months of working and sustaining capital.
The amount of money Merafe reported on sustaining capital was high, particularly in the second half of the year when it reached R261m, Clark said.
Merafe defended the expenditure on stay-in-business capital, arguing it was spending on its assets to keep its position as the second-lowest cost producer of the stainless steel ingredient and to meet environment and emission standards in SA, with average annual expenditure pegged at R400m-R450m a year from now, Bissessor said.
Merafe’s shares added 5% to R1.65 each, giving the company a market capitalisation of R4bn.
Merafe’s share of the revenue generated in the Glencore joint venture in its chrome business came to a record R5.889bn, a 3% rise from the previous year.
Revenue was primarily driven by the increased price for ferrochrome.
The company reported an annual profit of R914m compared with R532m the year before.