22nd Jan 2009 07:00
22 January 2009
International Ferro Metals Limited
("IFL" or the "Company")
Report on Operations for the six months to 31 December 2008
Highlights:
Production for the six months to 31 December 2008 ("H1 FY2009") down 3% on the six months to 31 December 2007 ("H1 FY2008") despite plant shutdown and continued electricity cutbacks
Ferrochrome sales volumes down 20% in H1 FY2009 compared with H1 FY2008 and down 24% in the three months ended 31 December 2008 ("Q2 FY2009") compared with three months ended 30 September 2008 ("Q1 FY2009") due to the collapse of global demand for ferrochrome seen over the last quarter
Ferrochrome inventory of 42,523 tonnes as at 31 December 2008
Both furnaces were powered down to 60% capacity on 16 November 2008 and switched off on 25 November 2008 and put on care and maintenance
All major capital projects deferred
Cash balance R526m as at 31 December 2008
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Ferrochrome |
H1 FY2009 |
H1 FY2008 |
Q2 FY2009 |
Q2 FY2008 |
Q1 FY2009 |
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Production tonnes |
90,759 |
93,317 |
31,289 |
51,212 |
59,470 |
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Sales tonnes |
49,435 |
61,866 |
21,410 |
32,416 |
28,025 |
Commenting on the operational update, Chief Executive David Kovarsky said:
"While we are naturally disappointed by the dramatic collapse in ferrochrome demand resulting from the global economic crisis, the Board is pleased with the management's swift response both to the situation and the inherent operational challenges. The production figures for the first half of the year illustrate the high quality of IFL's ferrochrome operations and we are confident that when demand returns, low cost producers like IFL will be rewarded."
Ferrochrome Market Conditions
During the half year the global ferrochrome industry experienced an unprecedented sharp reduction of demand that led the South African industry to cut production by about 85% with the likelihood of further reductions. To date, global ferrochrome production has been cut by approximately 70%.
The dramatic drop in global ferrochrome demand was experienced in all markets, particularly in China. The reduction of demand was exacerbated by the South African power cuts in January 2008 that led to stainless steel producers building significant ferrochrome inventories over the first half of the calendar year in anticipation of supply shortages. Additionally because of the perceived shortage, large tonnages of chrome ore were imported into China for conversion to ferrochrome in domestic smelters. This has led to an overhang of material in that market. It is estimated that world stainless steel production is running at approximately 40% of capacity subject to monthly demand variations. Ferrochrome inventories are estimated to be approximately 1.5 million tonnes representing c.20% of 2008 global ferrochrome production. As demand has declined, so too has the ferrochrome industry's total costs on a delivered basis.
The Company and ferrochrome industry commentators have recently noticed a revival of demand from China and our observation is that the spot Chinese price has shown signs of firming. The increase in Chinese demand has been affected by the need to build up ferrochrome inventory ahead of the Chinese New Year and there is moderate optimism that this will carry through beyond the New Year. However, the abundance of chrome ore inventory and the availability of ferrochrome, particularly from Indian and Chinese producers, will continue to dampen prices and demand from non-Chinese sources.
The 2009 first quarter price negotiations have not been concluded but it is widely accepted that there will be a sharp drop from the 2008 fourth quarter price of US$1.85 per pound.
Production
It is pleasing to note that during the half year, monthly Company production records were broken twice - in August and September 2008 even after the impact of power cuts. These records underscore the Directors confidence in the operational excellence of the new management team put in place in July 2008. However, the Company responded quickly when it became clear that the global financial crisis would impact ferrochrome demand by reducing production levels to 60% (announced on 12 November 2008) followed by the decision on 25 November 2008 to shut down the furnaces completely. Thus, production over Q2 FY2009 (31,289 tonnes) was down by 47% when compared with Q1 FY2009 (59,470 tonnes).
Sales
Sales decreased from 32,416 tonnes in Q2 FY2008 to 21,410 tonnes in Q2 FY2009 and half year sales decreased from 61,866 tonnes in H1 FY2008 to 49,435 tonnes in H1 FY2009. Most of the sales drop was a result of the economic slowdown but some of the decrease, particularly in the 2008 third calendar quarter, was a distortion resulting from accelerated demand in the previous period.
The JISCO offtake agreement contains an obligation to acquire 120,000 tonnes in a calendar year, spread evenly over that year. JISCO has the right to sell material in China, Korea, Japan and Taiwan. If sales in any given quarter to non JISCO customers are below 12,000 tonnes, JISCO'S commitment is to buy tonnage at an agreed price. If no agreement is reached, then JISCO's commitment in respect of that quarter falls away. IFL and JISCO are working closely to ensure that maximum tonnages are sold into China at the most advantageous prices.
The Cometals offtake agreement allows Cometals to acquire up to 120,000 tonnes in a fiscal year and contains an obligation to acquire 50,000 tonnes per annum of which 20,000 tonnes are fines. Cometals has the rights to sell material to all countries except for the JISCO territories and South Africa.
To date, JISCO and Cometals have honoured their contractual commitments. Both Cometals and JISCO have continued to purchase ferrochrome since the calendar year end.
Inventory
Inventory levels as at 31 December 2008 were 42,523 tonnes of ferrochrome against an inventory level of 33,265 tonnes at 30 September 2008.
Capital expenditure
On 12 November 2008 IFL announced that all major capital expenditure had been deferred. The Company is using the plant shutdown period to undertake maintenance of the plant and an upgrade of certain elements to expand the operational performance of the plant when production is resumed. The total capital spend, including furnace maintenance for the remainder of FY2009 will be approximately R100m. The furnace maintenance will be completed by 31 March 2009. The capacity improvements include the expansion of the feed bins to provide greater input flexibility, a redesign of the feed chutes to reduce maintenance, and a modification to the pressure rings to allow greater energy input into the furnaces.
Cost control
Management have successfully reduced fixed costs during the period. Contracts relating to contractors and contract staff have been terminated including, from 1 January 2009, those relating to open cast and underground mining contracts. Over the next quarter the Company will be hiring 100 mining staff to develop the mine so that the underground operations will have greater flexibility when full operations are resumed. IFL has suspended the purchase of coke which is the Company's second biggest cost input after electricity. The Company is in regular contact with the coke supplier to ensure that the future availability of coke will be intact when it is required. The steps taken have reduced monthly expenditure to approximately R35m per month.
Cash Balance
The Company's actions have been designed to conserve cash whilst retaining the ability to start production efficiently when demand for ferrochrome returns. As at 31 December 2008, IFL's cash balance was R526m, most of which is denominated in Euros, against the cash balance of R871m on 30 September 2008. The 40% reduction in the cash balance was primarily the result of the increase in inventory, the decrease in payables and cash utilised in dividend payment & share repurchase. Steps have been taken, as outlined above, to reduce the erosion of the cash balance.
Outlook
Since 31 December 2008, IFL has noticed a revival of demand from China resulting from the inventory build ahead of the Chinese New Year. IFL has received enquiries for material from Chinese stainless steel producers with a much smaller number coming from Europe and the United States.
IFL is a low cost producer, has a cash balance of R526m most of which is held in Euros, has taken steps to reduce costs and has a world class ferrochrome operation on care and maintenance. The restart of operations is a relatively straightforward process and management would expect a furnace to be capable of running at full capacity within one month of start-up. All staff are in place to achieve this.
While recent macro circumstances are beyond the Company's control, the Directors consider that management have responded quickly and have taken every available action to place the Company in a position to survive the current global economic crisis and to be ready for an upturn in demand.
The Company's interim financial statements for the six months ended 31 December 2008 will be released on 23 February 2009.
For further information please visit www.ifml.com or contact:
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International Ferro Metals Limited |
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David Kovarsky, Chief Executive Officer |
+27 82 650 1192 |
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Brunswick Group |
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Patrick Handley / Carole Cable |
+44 (0) 20 7404 5959 |
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Numis Securities Limited |
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John Harrison / Stuart Skinner |
+44 (0) 20 7260 1000 |
About International Ferro Metals:
International Ferro Metals produces ferrochrome, the essential ingredient in stainless steel, from its integrated chromite mine and ferrochrome processing operations in South Africa. International Ferro Metals is listed on the London Stock Exchange under the symbol IFL.
Forward Looking Statements
This announcement contains certain forward looking statements which by nature, contain risk and uncertainty because they relate to future events and depend on circumstances that occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements.
Related Shares:
IFL.L