Yes, We Will Get That Power, Says International Ferro Metals Chief David Kovarsky
By Our Man in the City
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Strategic decisions are being made across the South African mining industry, all as a result of Eskom’s ongoing power problems. The energy crisis has been well documented and companies are facing major set-backs to their development plans. For International Ferro Metals (IFM), it’s a headache, but not the end of the world. The company hopes to start a furnace expansion programme in a few months time, having been promised extra electricity by the state-owned energy company. But unfortunately, Eskom has put a stop to all major construction projects until 2012 because of the energy shortage.
IFM wants final reassurance from Eskom that it can press ahead with their three new furnaces. The chrome producer originally asked for extra power just after it listed in London in September 2005. “We told Eskom about our expansion plans immediately after the first furnace came on. We paid for the infrastructure and Eskom committed the supply,” says managing director David Kovarsky. “If they go back on their word and we don’t get the extra power then the project is pushed back 18 months.”
IFM is targeting expansion from January 2010. The worst case scenario will be that the furnaces are brought on in stages and commissioned in July 2011. However, the mine expansion will crack on, as planned. “In the unlikely event of the furnace expansion not happening on time, we will export ore”. The company won’t struggle to find a customer for the untreated ore. Indeed Chinese group and 29 per cent shareholder Jisco already has an offtake agreement for half of IFM’s production. However, there is much greater value to be derived by smelting the ore before selling.
Mr Kovarsky is a man who comes into a conversation armed with facts and figures about the ferrochrome industry. He reckons that there is no way that IFM can lose, despite the potential operational set-backs. “The world produces seven million tones of ferrochrome a year. There has been a five per cent increase in stainless steel consumption, so 350-400,000 tonnes of additional ferrochrome capacity are needed,” he says. Indeed, John Meyer, head of resources at investment bank Fairfax, says IFM’s share price should rise whether it gets the support from Eskom or not, simply as a reflection of the ferrochrome price increase. That said, Mr Meyer made the comment before last week’s 13 per cent drop in the share price. Nevertheless, new projects can be large in size and not easy to bring into production quickly, so even with delays, IFM would be sitting pretty as one of the few companies with developments in motion to meet the rising demand for ferrochrome.
In August construction should begin on a new ore beneficiation plant costing R320 million and capable of producing 1.8 million tonnes of ore per year. Meanwhile, the Lesedi mine will be expanded underground to produce 1.3 million tonnes per year by April 2012. Sky Chrome isn’t yet in production but open pit mining will start there in June, and an underground decline will follow in two years’ time. IFM is targeting open pit production at Sky Chrome of 720,000 tonnes per year by the first quarter of 2010.
Expect a decision within the next six months on whether IFM will exploit platinum in its assets, as a by-product of chrome. “We will need a plant to process it. This project is early stage thinking,” says Mr Kovarsky. “It would make sense for the plant to also treat third party ore, but we’d need to look at the economics of transportation.” He places a potential US$50 million valuation on platinum by-products at current production levels, a figure which makes his media adviser’s eyes shoot open. “Don’t print that!” she says. “It’s fine to mention,” replies David. “Just bear in mind that it is only blue sky at the moment”. He goes on to explain that the analysts don’t have it in their forecasts, which is why the PR is anxious to gloss over the valuation.
IFM’s total expansion plans are budgeted at R4.58 billion. It may need to borrow some more money to complete these tasks, but a tidy cash flow means it can keep looking for further opportunities. While there’s nothing in the pipeline yet, Mr Kovarsky is scouting around for mature ore bodies that lack funding but are near-term production. “We won’t stop at five furnaces, so we need to secure future ore supplies,” he says. “And yes, we will get that power.” |
