Merafe Resources Deep Dive: About the Business and Industry [Part 1]

Gain an insight into the business and the industry

Merafe Resources through its wholly owned subsidiary Merafe Ferrochrome and Mining (Pty) Ltd own a 20.5% stake in the Glencore-Merafe Chrome venture which was formed on 1 July 2004. Merafe and Glencore pooled together resources in 2004 to become the largest ferrochrome producer in the world.

Merafe derives its revenue and profits through the joint venture with Glencore. The joint venture derives revenue through the mining and beneficiation of chrome ore into ferrochrome. Beneficiation is essentially a process that removes unwanted minerals from ore to improve the quality and economic value of the product.

The aim of the entitys business model and strategy is to ensure that its ferrochrome interests are profitable and sustainable and that they add value to stakeholders. Merafe aim to achieve this by:

extracting chrome ore from the Ventures mines and beneficiating it in their smelters in a safe and cost-efficient manner

investing in projects that improve the energy and cost efficiency of the Ventures ferrochrome operations

employing the Ventures proprietary Premus technology to ensure that it is the lowest cost producer of ferrochrome in South Africa and, despite rising energy costs in South Africa, remains in the lowest quartile of the global ferrochrome production cost curve

using the flexibility provided by the Ventures variety of technologies to meet changing operating circumstances and customer requirements and

focusing on reducing costs at the operations and head office.

So now we know that the business model of Merafe revolves around the production of Ferrochrome, but what is Ferrochrome and what is it used for?

Ferrochrome or ferrochromium (FeCr) is a type of ferroalloy, that is, an alloy of chromium and iron, generally containing 50% to 70% chromium by weight. Ferrochrome is produced by electric arc carbothermic reduction of chromite. Most of the global output is produced in South Africa, Kazakhstan and India, which have large domestic chromite resources. Increasing amounts are coming from Russia and China. The conflict between Russia and Ukraine would have severely hampered the export of Russian ferrochrome as many companies have placed trade restrictions on Russian exports. So, while the spoils of war are horrific and have caused devastating humanitarian and economic consequences, this will have a direct benefit on Merafe as certain countries which had previously imported Russian ferrochrome may now be looking for a replacement.

Over 80% of the world's ferrochrome is utilised in the production of stainless steel. Global stainless-steel production rose 10.6% year on year in 2021 to 56.3 million metric tones according to the International Stainless-Steel Forum. Global stainless-steel production has been rising steadily since 2005 due to the rising demand.

Stainless steel depends on chromium for its appearance and resistance to corrosion. The average chrome content in stainless steel is approximately 18%. Ferrochrome is also used to add chromium to carbon steel. Ferrochrome from South Africa is known as "charge chrome" and is produced from chromium-containing ore with low carbon content. This type of Ferrochrome is most commonly used in stainless steel production.

Merafes revenue and profits are highly sensitive to movement in Ferrochrome prices as well as movements in the exchange rate as the majority of the entity's chrome is exported to China. Ferrochrome prices have come under pressure in the second quarter of 2022, and this would have hindered Merafes revenue. The rand, on the other hand, has weakened against the Chinese Yuan in the second quarter of 2022 which would benefit Merafe as sales when converted back to rand will be higher.

In the next part of this deep dive, we will take a look at the financials of Merafe and how it performed historically.