Life Is Tough For International Ferro Metals, And Any Upturn In Stainless Steel Demand Would Be A Welcome Boon
By Charles Wyatt
minesite.com
International Ferro Metals is going through a bad time and there is no way to sugar that particular pill. The latest bit of bad news is that charge chrome contract prices have been settled at US69 cents/lb, which is a further drop of US10 cents from prices in the first quarter of this year. Just to make it even worse South African producers, of which International Ferro Metals is one, tend to achieve 5 to 10 per cent below the contract price. This means that furnaces are operating at a loss, even for the lowest cost producers such as IFM, and will remain offline until spot demand surges. Even so, some small drop of encouragement can be wrung from the fact that IFM’s share price has doubled to 36p since a trading update was announced in January, and it is not that far south of the 43p per share at which it raised £85.2 million prior to moving its listing from AIM to the London Stock Exchange in August 2007.
At that time International Ferro Metals had recently commenced shipments from its integrated chromite mine and ferrochrome processing operations in South Africa for use in the world’s stainless steel industry. Stephen Turner, who was then chief executive, said, “Within the next twenty five months IFM plans to be operating up to five ferrochrome furnaces having a combined design capacity of 665,000 tonnes/year of ferrochrome subject to completion of a feasibility study and securing debt funding for the expansion. The company's chromite reserves and resources, its experienced management team and the support provided to it by JISCO and CMC CoMetals through increased guaranteed off-take agreements post expansion has well positioned International Ferro Metals for its future.”
Then followed the glory days for the company as it took full advantage of the high price of ferrochrome. Its’ shares topped out above 150p in May 2008. Six months later, however, things were not looking so good and the results for the quarter to end September, which were published in early November, presented a snapshot of the transition from feast to famine. Production was still strong with at 59,470 tonnes of ferrochrome in the period, but sales at 28,025 tonnes were already feeling the pinch from lower stainless steel demand. Stephen Turner was still chief executive at that stage and he decided to cut production and costs and defer capital expenditure as he did not expect the ferrochrome price, which averaged US$2.05/lb over the period, to maintain that level much longer.
In those same results International Ferro Metals also announced that David Kovarsky would be taking over as chief executive as from the end of December. Asked if this promotion felt a bit like a “hospital pass” – for followers of oikball, a hospital pass is one received when two huge forwards are just about to launch tackles – there was a quiet chuckle from David down in South Africa. “Not really”, he said, “I had been with the company as managing director since the beginning of the year so knew all about it and I have been involved in the ferrochrome industry for quite a few years”. What this modest and quietly spoken man did not explain is that before he joined International Ferro Metals, he was chief executive of South Africa’s largest submerged arc furnace supplier, Pyromet, which designed and constructed the company’s two ferrochrome furnaces and its beneficiation plant. And before that he was an executive director of JCI, responsible for Consolidated Metallurgical Industries, at that time the world’s second largest ferrochrome producer.
So David speaks wit the voice of experience, therefore, when he says that International Ferro Metals is in a better position than most of its rivals to get through these difficult times. “Money in the bank; no debt; even the current price of ferrochrome is not far below breakeven; and we have guaranteed off-take agreements for 170,000 tonnes per annum of ferrochrome with JISCIO and CMC Cometals” is how he explains it. When told that Our Man in Oz had reported some reasonably bullish noises from metals traders while in Hong Kong recently, David said he was not surprised. “The Chinese must be running through any stockpiles they had last year and I would expect demand to pick up again towards the end of the year. Volume, in fact, will give me more confidence than just an uptick in price, so that is what we want to see first”.
In January of this year David gave his first update on trading as chief executive, and some company directors, who think they are so dreadfully important that they will not allow their switchboards to release their mobile numbers – Duncan McBain of IMX Resources in Oz comes to mind - should note that David puts his at the end of every press release. That is how to keep journalists on board even when the news is not great. In this case he had to admit that the last few weeks of 2008 had been a horror story. The ferrochrome pricing mechanism virtually collapsed, and lower prices had to be negotiated when buyers reneged on previous agreements. In the twinkle of an eye the average price of US$1.85/lb, which pertained in the last quarter of 2008, had fallen to US79 cents in January. As a result a hit of US$4.2 million had to be taken on ferrochrome inventory and a loss was forecast for the last half of 2008 and for the first half of 2009.
The loss duly materialised, but investors were offered a small note of optimism in the news that two furnaces which had been switched off in November were expected to be available to restart production as from the beginning of this month, and that full ramp-up would be possible within four weeks. In fact one has now been switched on for an initial period of three months and David Kovarsky explains that this is to convert its raw material inventory which consists of coke and chromite ore to ferrochrome to generate some cash flow. If things look a bit brighter three months hence, International Ferro Metals will be in pole position to take advantage, but in the meantime a strong signal has been sent that there is plenty of life in this young company. The last question to David was whether there was any sign of stake building to account for the relative strength in share price. Jioquan Iron & Steel is known to have a major holding so any additions would have to be reported. His answer to that would be best described as elliptical, so an occasional check on the price could prove worthwhile. |
