Merafe Resources (JSE:MRF)

June 19, 2024

Is Merafe a buy, watchlist, or sell?



Merafe and Glencore pooled together their resources in 2004 with the objective of becoming the largest ferrochrome producer in the world. 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. The company currently operates five ferrochrome smelters, twenty-two ferrochrome furnaces, six chrome ore mines, and five UG2 plants. 

The Merafe-Glencore joint venture generates 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 entitys business model and strategy aim to ensure that the ferrochrome interests are profitable and sustainable and that they add value to stakeholders.

Over 80% of the world's ferrochrome is utilised in the production of stainless steel. Stainless steel depends on chromium for its appearance and resistance to corrosion. The average chrome content in stainless steel is approximately 18%. 

Technical Analysis

The share price has seen strong upside momentum for the last year. It has, however, retracted from its high of just under 200c to its current price at 161c. Coincidently, the RSI is nearing its historically overbought levels, at between the 30 to 50 levels. 

As can be seen from the graph, the share price is testing its established support level, as was formed in the last year. It has tested this support 10 times, indicating that this level is of high significance, and we can with reasonable certainty conclude that it will once again bounce off this level.


In the last four half-year statements, Merafe has reported revenues of R2.3 billion, R2.5 billion, R3.7 billion, and R4.3 billion. Its clear that revenues are growing at a rapid pace, with the latest year-on-year growth rate at 69%. While sales volumes of Ferrochrome increased between 2020 and 2021, the main driver of the increase in revenue for Merafe was a 50% increase in the Ferrochrome price.

The beauty here is that the companys operating expenses have remained mostly unchanged, whilst revenues have increased significantly. The result? Strong earnings growth. EBITDA saw a substantial increase from R168 million to a whopping R2.4 billion in 2021. 

The 2021 figures put Merafe at a price to sales ratio of 0.5, price to EBITDA of 1.66 and price to net income of 2.42 based on the current market capitalisation of R4.05 billion. Merafe was able to convert roughly 8% of its revenue and roughly 40% of its net income into free cash flow in 2021. Total free cash flow for 2021 was R665.7 million placing the stock on a price to free cash flow multiple of just over 6 based on the current market cap.

The overall balance sheet shows a strong financial position. Perhaps the most important metric for a smaller cap company is its level of debt. In Merafes case, it has very little debt compared to its assets and equities.  

Analyst opinion

Product/Industry: Ferrochromes main use case is its inclusion in stainless steel. Stainless steel isnt going anywhere, which means that were in the right place. China is currently the biggest producer of stainless steel in the world, accounting for roughly 57% of world production. 

Exposure: Merafes revenues depend heavily on the price of chrome and stainless steel. Commodity prices worldwide have skyrocketed in recent times due to Covid and the Russian-Ukraine war which led to sanctions and supply chain issues. Prices will eventually cool down which will negatively affect revenues.

Industry: Most resources companies are cyclical companies, which means stock price cycles move in short-term cycles. We have massive recent momentum in the price, all the way from 60c to 160 in the scope of a year. Of course, this doesnt mean we cant see more upside potential, especially now that the price has decreased from its 200c high, but one must always be wary to enter a position after a soar in price. 

Technical analysis: Technically, the stage is set. Price is at its support level and the RSI is at relatively oversold levels.  

Financials: Financials looks good: Operating expenses remain constant, super-strong EBITDA (even if revenues cool down), low debt levels, and a P/E ratio of only 2.47. We believe Merafe is either on the watchlist or a short-term investment opportunity. FinMeUp took a small position in Merafe at 164c per share on our demo account. 


***Disclaimer: Just a friendly reminder - This is not financial advice. Always do your own research before taking a position. Content is for informational and educational purposes only***




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