Our opinion on the current state of MRF

The operation in question, a joint venture between Glencore and Merafe, represents a significant presence in the ferrochrome industry, with the capacity to produce up to 2.3 million tons of ferrochrome annually. Merafe's stake in this venture entitles it to 20.5% of the proceeds, with the remainder accruing to Glencore. This collaboration underscores the strategic importance of ferrochrome in the global steel manufacturing process, particularly in the production of stainless steel.

One of the primary challenges facing this operation is the supply of electricity. Ferrochrome smelters consume substantial amounts of electricity, making the venture particularly sensitive to fluctuations in energy costs. The 15.6% increase in Eskom tariffs in the previous year, followed by an additional increase of just under 10% from 1st April 2022, has significantly impacted operational costs. Concerns over Eskom's capacity to meet the power demands for future expansions have led to the suspension of the Lion 3 expansion project, highlighting the critical nature of reliable energy supply in maintaining and growing ferrochrome production capabilities.

Despite these challenges, all smelters, with the exception of Lydenburg, remained operational. However, logistical issues, particularly the availability of trains from Transnet for product transportation, present additional operational hurdles. These logistical challenges compound the difficulties faced by the venture in optimizing production and distribution processes.

For the six-month period ending 30th June 2023, a decrease in ferrochrome production by 9% was reported, although revenue saw an 11% increase. This financial period also saw a slight improvement in headline earnings per share (HEPS), moving from 37c to 42c, and a notable 22% increase in the company's net asset value (NAV). However, subsequent production reports indicated a continued decline in ferrochrome production, attributed to planned pull-backs and adverse market conditions, with a 21% reduction in the nine months to 30th September 2023 and a further 22% decrease in the three months to 31st December 2023.

Looking forward, the trading statement for the year ending 31st December 2023 provides a cautiously optimistic outlook, with an estimated increase in HEPS between 4% and 24%. This anticipated improvement is attributed to favorable currency exchange rates, high chrome ore sales volumes, and higher realized prices, driven by market dynamics. This scenario reflects the inherent volatility of commodity shares, influenced by global market conditions and economic trends. While the demand for stainless steel increased during the economic boom in America, indications of this boom coming to an end could impact future demand for ferrochrome.

From a technical perspective, the share price reached a peak of 192c on 4th April 2022, followed by a downward trend that was interrupted by a rally in September 2022. The share has since found some support at 104c, suggesting potential for an upward move. However, the volatile nature of commodity shares, coupled with operational challenges and market sensitivities, requires cautious consideration by investors.