Platinum and gold may be sexier, but ferrochrome is a commodity the modern world cannot do without. During the past five years, Merafe has come from nowhere to be a substantial player in this business.
Ferrochrome is a beneficiated form of chrome ore. Ferrochrome and nickel when combined with iron put the "stainless" into stainless steel. SA is the world's largest supplier of ferrochrome and Merafe now owns 20,5% of the world's largest ferrochrome company through a joint venture with London-listed resource giant Xstrata.
The major shareholder in Merafe is the Royal Bafokeng Nation (RBN), which owns 32% and exercises joint control with the Industrial Development Corp, which owns another 24%. Merafe CEO Steve Phiri was the corporate and legal adviser to the RBN before he was appointed in 2003.
Interviewed by the FM on his appointment (Focus September 26 2003), Phiri said: "I want to see SA Chrome grow and we are working on plans for expansion. But I also would like to be part of a move towards greater co-operation within the SA ferrochrome industry, which is fragmented.
"SA produces 60% of the world's ferrochrome but we do not set the price. The customers set the price. We should have more control over that without talking market collusion."
In the past two years Merafe has carried out a series of deals that have delivered on the strategy that Phiri laid out. He has played his cards well, albeit with a large helping hand in the form of the equity requirements of the mining charter.
The downside of the ferrochrome business is that it is cyclical and there are considerable technical risks because it involves smelting technology, which is sometimes called a "black art".
Merafe - formerly known as SA Chrome - made a good start with its initial project to build two ferrochrome smelters. By end 2003, however, it was in trouble after delays in commissioning caused a revenue squeeze. It then teamed up with ferrochrome producer Xstrata.
Xstrata, of course, had to do a deal because of the black economic empowerment (BEE) equity requirements of the mining charter. Finding a suitable BEE partner that brought with it real assets in the same business must have made the negotiations a lot easier.
The first deal gave Merafe a 17,5% stake in what was now SA's largest ferrochrome producer, churning out 1,4 Mt/year, of which 245 000 t was attributable to Merafe. That dug Merafe out of its financial and technical hole because the company immediately turned cash-positive.
Phiri followed up by buying out the stakes owned by Samancor in other joint ventures with Xstrata. That will push Merafe's share to 20,5% of an operation able to produce 1,6 Mt of ferro-chrome annually, meaning it has raised its attributable production 33% to 325 745 t.
Merafe will also get a 20,5% share in Project Lion, a R1,7bn ferrochrome expansion project in Mpumalanga which will ultimately produce another 1 Mt/year of ferrochrome.
So Merafe is growing its business and helping consolidate the overall SA ferrochrome industry in line with Phiri's predictions. In November, Merafe raised R554m through a rights issue at 55c/share to help pay for its enlarged stake in Project Lion and partly fund the acquisition of the ferrochrome operations from Samancor.
