The firm that has achieved the top ranking in the resources sector of Top Empowerment Companies for two years running is in for a rough ride for the rest of the year.
A period of scintillating profits came to a sudden end for Merafe Resources at the end of 2008. The global crisis has caused demand for the company's products to vanish almost overnight.
Merafe's share price has dropped by more than 50% compared with a year ago and now is at the 70c level. Such harsh punishment is new to Merafe, whose share price rocketed by 212% the previous year.
With a total empowerment score of 71,8%, Merafe is way ahead of its peers. Last year, it was named SA's second-most empowered company. The firms accompanying Merafe in the resources Top 10 empowered companies include Eskom's biggest coal supplier Exxaro Resources, anthracite producer Petmin, petrochemicals producer Sasol and Trans Hex, which produces alluvial diamonds in the Northern Cape and Angola.
Merafe has a joint venture with Swiss-based diversified miner Xstrata, which is the world's top ferrochrome producer, generating about a fifth of the global supply. The joint venture, called Xstrata-Merafe Chrome Venture, has operations in Mpumalanga and the North West.
Since November, the venture has temporarily closed 80% of its ferrochrome smelting capacity because of a lack of demand. Other producers have also effected huge production cuts. These include Samancor Chrome, Hernic Ferrochrome and ASA Metals. Samancor, the second-biggest producer, said in December it would close all of its ferrochrome furnaces for at least two months.
ASA said in January that it had delayed first-quarter price negotiations because of a complete lack of demand. The ferrochrome spot price for the first quarter of 2009 more than halved compared with the previous three months, as stainless steel producers destocked.
In November, Merafe warned that the destocking process has historically taken six to nine months to work its way through the system, but that the swift response from major producers in cutting production would help the market normalise quicker.
And Merafe says when the market does turn, it will be rapid.
The company also has coal interests, through the joint venture it entered into with Sentula Mining (formerly Scharrig Mining) in 2007. The 50/50 joint venture, called Merafe Coal, has two coal properties it is prospecting. Both of these are opencast projects and will supply coal to Eskom as well as export markets. Merafe Coal is planning on starting production in the second half of this year.
Having listed almost 10 years ago, Merafe, previously named SA Chrome, has undergone several changes and made serious strides on the black economic empowerment (BEE) front. Royal Bafokeng Resources is the biggest shareholder, owning 29% of the company, while government's Industrial Development Corp holds 22% of Merafe's shares.
With an economic interest of 51,2%, Merafe is black controlled - black women own 15,4% of the company.
The company is headed by CEO Steve Phiri, who previously headed corporate & legal affairs for the Royal Bafokeng Nation. Chris Molefe is Merafe's nonexecutive chairman - 67% of the ferrochrome producer's board is black.
Merafe reported an operating income of R865m for the half year to June 2008. Earnings per share for the period were 25c - a whopping 525% rise on the previous six months.
However, given the current state of the ferrochrome market, and the fact that four-fifths of Merafe's capacity has been shut, the company will not come near repeating these results for the first half of this year.
The market has taken this into account by driving Merafe's stock down to under 75c/share - levels last seen at the beginning of 2006. That's a far cry from the highs of R4,18/share it scaled in late July.
