Merafe earnings disappoint

Johannesburg - Merafe Resources, the country's largest ferrochrome producer, reported a sharp drop in first-half earnings on Tuesday, hit by lower output and higher costs, but said it expects better trading conditions in the fourth quarter.

Merafe, which operates a joint venture with London-listed Xstrata, said production of the metal used in steel-making fell 4% to 150 000 tonnes in the six months to the end of June due to furnace refurbishments.

The company reported a diluted headline earnings per share of 3.4 cents, compared with 7.2c in the comparison period.

Merafe issued a profit warning in July, saying headline EPS would drop to between 3c to 4c, sending its shares sharply lower.

First-half revenue rose to R1.32bn, from R1.19bn in the comparison period. Production costs rose by 16% in rand terms during the period, partly due to sharp increases in electricity tariffs.

Merafe said global stainless steel production was expected to rise by 6% this year, resulting in a 5% rise in the consumption of ferrochrome. Steel output is expected to rise by around 5% per year in the medium term, it added, driven by demand from China.

"We expect the destocking of ferrochrome by stainless steel producers to be completed during the third quarter of 2011. This is matched by South African ferrochrome producers' cut back of production during the winter months," the miner said in a statement.

Merafe said last month it would operate at around 50% of its capacity during the June-August winter months, due to market conditions and routine maintenance. Conditions are expected to improve in the last quarter of the year.

"We expect seasonal demand improvement, stainless steel restocking by distribution centres and ferrochrome restocking by stainless steel producers resulting in improved trading conditions during the fourth quarter of 2011 and into 2012," it added.

Shares in the company are down nearly 35% so far this year, compared with a 2.84% drop in Johannesburg's All Share [JSE:J203] index .