Merafe Resources CEO Zanele Matlala. Picture: MARTIN RHODES
Merafe Resources CEO Zanele Matlala. Picture: MARTIN RHODES

Merafe Resources withheld its interim dividend after profit fell by nearly two-thirds due to weak chrome prices.

The mining company, whose primary source of revenue is a 20.5% stake in a chrome joint venture with globally diversified miner and commodity trader Glencore, reported profit of R165m for the six months to end-June, compared with profit of R425m the year before.

CEO Zanele Matlala described the interim performance as “subdued”.

Defending the decision to not pay a dividend, despite the market expecting a return, she said there was a lack of clarity about the near-term direction of ferrochrome and chrome ore demand and prices.

By the end of the year there would be greater clarity and there was a likelihood a dividend would be declared then.

Merafe’s cash holdings fell to R205m from R281m at the end of December 2018. A year earlier, Merafe had R330m in cash.

Analysts said the level of cash and its dividend policy had suggested there should be a return of 2c a share but weak market conditions meant the board had decided against the payment.

Revenue was R2.79bn, little changed from R2.72bn the year before, when Merafe returned R200m to shareholders.

The European benchmark price for ferrochrome, a key ingredient in the manufacture of stainless steel, fell 9% during the period to $1.16 a pound from $1.27 a year earlier. A weak rand versus the dollar offset this decline.

Merafe’s share of ferrochrome production for the interim period dipped 2.3% to 206,000 tons as the joint venture used 87% of its 2.3-million tons of installed ferrochrome-making capacity in SA.

Sales of Merafe’s share of ferrochrome were 189,000 tons, marginally up from the 181,000 tons sold in the previous year.

Revenue from the sale of chrome ore, used to make ferrochrome, increased to R397m from R379m a year before, pushed up by an 11% jump in sales to 147,000 tons.

Merafe is one of the ferrochrome producers in SA that has approached the government to curtail exports of chrome ore, particularly to China, which has become a major source of ferrochrome despite having limited internal supply.

“China makes up 42% of ferrochrome production with virtually no chrome supply, meaning SA chrome producers are integral to the Chinese, yet the SA ferrochrome market has shrunk from over 50% of ferrochrome supply to below 30%,” said Kagiso Asset Management portfolio manager Mandi Dungwa.

“It is a tough operating environment for Merafe as they work through an oversupplied chrome market, and they are hoping the industry will respond favourably to their call for supply discipline as they have initiated production cuts,” she said.

The Glencore/Merafe partnership has four to five months’ worth of chrome as inventory, which analysts expect to be sold before the end of the year.

The partnership was also holding prepared chrome for the winter months in SA between June and end-August when state-owned power utility Eskom charges a winter tariff for its large industrial users, which try to curtail consumption of electricity.