Highlights:

 

Ferrochrome (“FeCr”) production of 48,216 tonnes (“t”) for the quarter, down 16% on the previous quarter due to planned annual maintenance

FeCr sales of 48,183t for the quarter, down 8% on the previous quarter and in line with production

Net borrowings increased in line with guidance to ZAR434 million at 30 September 2014 from ZAR338 million at 30 June 2014, due to higher working capital requirements and a seasonal increase in electricity tariffs

Lesedi underground mining operations successfully restarted

Co-generation plant scheduled to re-start in Q2 calendar 2015 following re-design

Post period:

 

European Benchmark Price decreased by 4¢ to US$1.15 per pound for the quarter ending 31 December 2014

Mining services and offtake agreement signed with Chrometco Limited

Due diligence on Pacific Carbon is being finalised outside the initial 30 day exclusivity period

 

 

Commenting on the operational update, Chief Executive Officer Chris Jordaan said:

 

“As guided at our full year results, the third calendar quarter is traditionally a weaker quarter for the Company, due to the planned annual maintenance of the furnaces and the impact of this on production volumes and associated costs. Despite this, we have made progress on a number of fronts, including the successful restarting of the Lesedi underground mine, the completion of the drill programme at Rooderand and the revival of UG2 supply from Anglo Platinum. Although costs have increased during the quarter due to higher winter power tariffs, we expect these to normalise again during the last three months of the calendar year.

 

The industry continues to be driven by the dynamics of the Chinese market and is characterised by uncertainty, particularly in the short-term.  However, as cost pressures continue to mount for the industry as a whole, we believe that most fundamentals point towards a price recovery either through short-term inflationary pressures, or a combination of low ore and alloy stock levels and limited supply of raw materials.”

 

Stainless steel and ferrochrome markets

 

The US and European economies experienced muted growth during the quarter whilst a growing negative sentiment dominated markets in China. The stainless steel market faced some challenges as the production overhang in Asia made some inroads into Western markets. The downward trend of the nickel price towards the latter part of the quarter was also delaying new orders, as stainless steel producers held out for lower prices, curbing forward looking production schedules.

 

Stainless steel production in China increased by an estimated 13% during the first three calendar quarters of 2014 compared to the same period in 2013. This called for approximately 390 000 additional tonnes of ferrochrome, of which the bulk was secured via imports that increased by 24% as local ferrochrome production only showed a marginal increase of 3% on the back of new capacity during the same period. Chrome ore imports were approximately 1.6 million tonnes lower during the same timeframe and resulted in a substantial stock drawdown. According to FerroAlloyNet, port stocks closed at 1.2 million tonnes at the end of September, which represents less than 1½ months’ consumption in China.

 

The internal ferrochrome price in China reduced on a month to month basis throughout 2014, which totals approximately RMB450 per tonne or U.S. 5.6 cents per pound over the period. On the other hand, chrome ore prices increased significantly due to the platinum industry strike, which at its peak added as much as U.S. 2.5 cents per pound to the cost of ferrochrome production in China. The aggravated squeeze on margins curbed production towards the latter part of Q3 regardless of the introduction of new capacity.

 

The depressed market conditions in China spilled over to other regions and both spot and the benchmark price was negatively impacted.

 

Health and Safety, and the Environment (“HSE”)

 

No fatalities were recorded during the quarter and the Company remains fatality free since inception, representing 27.9 million fatality free man-hours. This equates to 3.5 million fatality free shifts as at 30 September 2014. During the quarter, 3 lost time injuries occurred and the 12 month moving average lost time injury frequency rate increased from 1.24 at 30 September 2013 to 2.47 at 30 September 2014. The 12 month moving average total recordable injury rate increased from 26.43 at 30 September 2013 to 27.15 at 30 September 2014. The Company continues to focus on HSE initiatives and will be implementing behavioural based care, with the focus on improved training. Efforts to reduce the injury rates have had a positive impact and no lost time injuries were reported. No significant environmental or health incidents were reported in the quarter.

 

Mining

 

As previously announced, the Lesedi underground mine was restarted in July 2014 and work is progressing according to plan. Recruitment and training of mining teams are underway in preparation for a planned increase in production. The mining plan has been revised to increase the previously targeted production by up to 50% to further reduce the buy in of expensive sweeteners. This will be achieved by accessing the MG2 seam sooner than originally planned, and by converting the mining method to mechanised mining.

 

As announced at the Full Year results on 29 September 2014, and in line with our stated strategy of flexible and optimal ore sourcing, the Company has temporarily suspended the extraction of ore at Sky Chrome for the current financial year while continuing to process existing stockpiles. The decrease in recovery rate to 55% this quarter, compared with 57% in the previous quarter, was due to the increased feed of low grade recycled beneficiation plant waste, which helped to reduce costs.

 

The drilling programme at Chrometco’s Rooderand LG6 open pit mine was completed during the quarter. The Company has also signed a mining services and offtake agreement for the mining of the first 200kt open pit LG6 ore. The agreement is in line with the Company’s stated strategy to acquire higher-grade feed stock for our furnaces and allow for more flexibility and cost effectiveness in our operations. Post period the Company commenced site establishment and preparations for the first blast which is planned for early November, slightly ahead of schedule.

 

Chrome ore production	Three months to  30 September 2014 (tonnes)	Three months to  30 June2014 (tonnes)	Three months to  30 September 2013 (tonnes)
Lesedi	18,011	-	-
Sky Chrome	-	34,859	39,909
Total	18,011	34,859	39,909
Recovery rate (%)	55%	57%	59%

 

FeCr production for the quarter was 48,216t compared with 57,462t in the prior quarter, a decrease of 16%. As announced at Full Year results, the decrease was due to planned annual routine maintenance shutdowns in July and August, where each furnace was shut down for a period of one week. The shutdowns were completed successfully and both furnaces were restarted and ramped up as planned.

 

Production cost was negatively impacted by the restarting and re-heating of the furnaces as electricity consumption increases significantly and a greater amount of expensive coke is required during ramp up.

 

DC furnace

 

A bankable feasibility study (“BFS”) for a 60MW DC furnace was commissioned in April 2014 and is expected to be completed in the first half of 2015. As previously announced the DC furnace is expected to increase total ferrochrome capacity by about 42%, and at an incremental cost 12% below to the current cost of production.

 

Co-generation plant

 

As announced at Full Year results in September 2014, the performance of the Co-generation (“Cogen”) plant has been disappointing. The plant has now been shut down due to failures caused by moisture in the off gas feed to the engines. An order has been placed for a chiller system, which has been designed to rectify the problem. This is a long-term solution which should reduce the load on the engine components. Expected cost for the chiller is ZAR18 million.

 

The chiller is expected to arrive in January 2015, with anticipated restarting of the Cogen plant in Q2 of calendar 2015.

 

At full and stable furnace production, the Cogen plant is expected to generate approximately 10% of the Company’s total electricity requirements.

 

UG2 supply agreement

 

Under the supply agreement with Anglo Platinum, the Company received 47,500t of UG2 chrome concentrate during the quarter. The agreement is for Anglo Platinum to provide 15,000t per month of UG2 chrome concentrate. Due to the protracted strike action at Anglo Platinum from February to June, no UG2 ore was received during the second calendar quarter of 2014 and the backlog at 30 September 2014 was approximately 95,000t.

 

Anglo Platinum is obliged to make up any shortfalls from future production, at a rate of at least 5,000 tonnes per month. As Anglo Platinum starts making up for the shortfall, the Company will benefit from a higher supply of UG2 ore, which is a direct contributor to profitability.

 

Pacific Carbon acquisition

 

After the close of the period, on 1 October 2014, the Company made an offer to acquire the assets of Pacific Carbon and Modderriver Minerals subject to certain conditions. The offer was made in conjunction with Portnex International to acquire assists consisting of 6 retorts located on Kooragang Island in Newcastle, Australia. The retorts are used to produce intermediate or retort coke which is used in ferroalloy and steel production. The initial period of exclusivity was granted for 30 days to 31 October 2014 and the due diligence is being finalised outside this period.

 

Sales and inventory

 

FeCr sales for the quarter to 30 September 2014 were down 8% to 48,183t, compared with 52,175t for the previous quarter and in line with reduced production during the period. Sales have been primarily to Europe with some contractual sales going to the USA. Sales to India, which commenced in the previous quarter, continued with India now firmly established as a repeat customer.

 

FeCr inventory was unchanged at 15,289t at 30 September 2014 from the levels at 30 June 2014. Stocks are expected to average between 10,000t and 15,000t going forward to allow for flexibility and room to react to short term demand and price opportunities.

 

No chrome ore was sold during the quarter but the Company expects to sell approximately 60,000t during the quarter ending 31 December, to reduce working capital levels.

 

Costs

 

FeCr production cost for the quarter was ZAR8.50 per pound, up 11.9% on the previous quarter’s ZAR7.59 per pound. The increase was expected and is due to the lack of lower cost UG2 during July, the higher winter tariffs during July and August, and the annual maintenance shut downs of the furnaces. Increased cost drivers include:

 

An increase in the cost of reductants due to a 5% increase in coke prices and higher coke and lower anthracite consumption during the furnace ramp ups

Increased cost of ore due to higher historical low grade ores processed from Sky Chrome

Higher electricity costs as the quarter had two winter tariff months compared with only one in the prior quarter. Electricity consumption also increased during the furnace ramp ups. Average Eskom electricity prices were 16.4% higher than the previous quarter.

Lower production volumes which increased fixed cost per unit

FeCr production cost is expected to decrease as the winter electricity tariffs are behind us and the full benefit of UG2 consumption is realised.

 

Cash

 

Net borrowings increased to ZAR434 million at 30 September 2014 from net borrowings of ZAR338 million at 30 June 2014. This is in line with guidance given in the previous quarter and mainly due to increased working capital levels and higher winter electricity tariffs. Net borrowings are expected to be at approximately ZAR450 million until February 2015, as logistics during December and January are affected by the South African holiday season and sales volumes are typically lower.

 

The ZAR500 million Bank of China working capital facility was extended for a further 12 months to 16 September 2015.

 

Outlook

 

The outlook for the ferrochrome industry is largely dependent on stainless steel demand. Although there is a great level of uncertainty in the short term, there are some underlying fundamentals that support the ferrochrome industry. The impact of prices in China has a big influence on price trends outside China.

 

Approximately 70% of China’s ferrochrome requirements are normally supplied from internal production. However, it would be difficult to sustain this ratio unless the profitability for local producers is restored. Ferrochrome production is expected to be curtailed in the Southern part of China due to higher power costs. This should have a significant impact on the availability of tender quantities in the short term and should confine the influence that consumers will have on tender prices.

 

The availability of chrome ore will be challenged in the medium to longer term as producers in China will have to compete globally for a non-expanding ore basket to meet their expansion targets. The cost pressures are mounting in the ferrochrome industry and current output will be hampered unless there is some price relief.

 

Most fundamentals point to a price recovery on the back of either short term inflationary requirements or raw material supply limitations.