Our opinion on the current state of MERAFE(MRF)

The Glencore-Merafe joint venture, a significant player in the ferrochrome industry, operates mines, furnaces, and smelters predominantly in Mpumalanga and Limpopo, South Africa. This joint venture is one of the largest ferrochrome producers globally, with the capacity to produce up to 2.3 million tons of ferrochrome annually. Merafe Resources, as part of this partnership, receives 20.5% of the proceeds, with the majority stake held by Glencore.

One of the critical challenges facing the operation is the electricity supply. Ferrochrome smelting is energy-intensive, and the recent increases in electricity tariffs by Eskom—15.6% last year and an additional increase of just under 10% from 1st April 2022—have significantly impacted operational costs. Furthermore, concerns about Eskom's ability to provide sufficient power have led to the suspension of their Lion 3 expansion project, indicating the severity of the energy challenges.

Operational difficulties extend beyond energy, with issues also arising in logistics, specifically the availability of Transnet trains to transport their products, which is another bottleneck affecting the venture's efficiency.

Despite these challenges, the financial performance for the year ending 31st December 2023 showed a revenue increase of 16% and a slight improvement in headline earnings per share (HEPS), rising from 56.4c to 60.1c. Merafe reported a record profit of R1.753 billion during a tough economic period, supported by high demand and supply constraints in the chrome market, although ferrochrome itself saw weaker demand and lower sales volumes.

Looking ahead to the first quarter of 2024, the company noted a significant reduction in chrome production, approximately 26%, primarily due to the non-operation of the Rustenburg smelter in response to market conditions. This adjustment reflects the broader challenges within the ferrochrome market and the impact of global economic shifts.

In terms of stock performance, the share price of the joint venture peaked at 192c on 4th April 2022 but has experienced a general downward trend since, with a brief rally in September 2022. Recently, the share found some support at 104c, showing a slight upward trend, though the recovery was short-lived, underscoring the share's volatility.

Overall, while the Glencore-Merafe joint venture operates in a sector with robust potential, given the global demand for stainless steel, it faces significant operational and market challenges. These include not only energy and logistical issues but also the broader economic conditions affecting commodity prices and demand. As such, it remains a volatile commodity share, susceptible to both external market forces and internal operational challenges. Investors interested in this sector should be mindful of these risks and consider the broader economic indicators that influence commodity markets.