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IFM achieves record output, cost pressures bite

IFM achieves record output, cost pressures bite

Photo by Duane Daws

17th July 2014

By: Creamer Media Reporter

  

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JOHANNESBURG (miningweekly.com) – Despite a low ferrochrome pricing environment and rising cost pressures, International Ferro Metals (IFM) CEO Chris Jordaan is confident that the company will achieve another year of improved financial performance.

The ferrochrome producer on Wednesday reported record production of 228 260 t from its South African operations for the year ended June 30, exceeding its 2008 production record by 13%.

Production for the last quarter of the fiscal period increased 6% to 57 462 t, compared with the 54 329 t produced in the March quarter. This also represented a 45.6% increase on the 39 454 t produced in the quarter ended June 2013.

“This is an exceptional performance, given that June is affected by voluntary energy cut-backs owing to high power prices during peak tariff hours. The furnaces remain stable and are achieving improved power efficiencies and this, together with improved availability and utilisation, has augmented the achieved production,” commented Jordaan.

However, despite the higher production, the London-listed producer experienced several “setbacks” during the quarter under review, describing the performance of its cogeneration (cogen) plant as “disappointing”.

COGEN UNDERPERFORMANCE
The plant generated 8.2 GWh of electricity for the quarter, supplying 3.7% of the company’s total electricity requirement, compared with 4.8% in the previous quarter.

Having appointed Clarke Energy to conduct a full review and analysis of the plant, IFM noted that it had experienced several component failures, with Clarke advising that the main contributing factor to the failures was saturation of the gas.

“[A] R10-million chiller system has been designed and an order placed [for] the chiller unit that will reduce the moisture level of the inlet gas to the engines. This is a long-term solution, which should reduce the load on the engine components,” Jordaan explained.

In the meantime, IFM had decided to switch off the cogen plant until such time that the review and repairs had been completed, which was expected towards the end of the fourth quarter.

“At full and stable furnace production, the plant is expected to generate around 10% of the company’s total electricity requirements. Subject to the successful review and repairs, this is expected to be effective from the first quarter of 2015,” it advised.

HIGHER COSTS
IFM further pointed out that the plant’s inability to provide its operations with the required energy, coupled with an 8% increase in the price of Eskom-supplied electricity on April 1, pushed up the group’s quarterly operating costs to R7.59/lb, up 8% on the previous quarter’s R7.03/lb.

Production costs for the full financial year amounted to R6.87/lb, up 7.5% on the prior year.

“We expect the 2015 full-year production cost to be lower than that achieved in the fourth quarter of 2014, as the benefits of [upper group two (UG2)} consumption are realised and as underground production ramps up at the Lesedi operation. 

“However, in the short term, we expect production costs to rise over the next quarter, owing to the impact of higher winter electricity tariffs and not receiving a full quarter of UG2 material from Anglo American Platinum (Amplats),” said the company.

Despite having a supply agreement with Amplats to provide 15 000 t/m of UG2 chrome concentrate until 2020, no ore was received over the quarter owing to a protracted strike that stalled Amplats’ operations.

“The strike was resolved in June and the plant was restarted and is expected to ramp-up to full production in September, with the first supplies of UG2 expected this month, albeit at levels below those provided for in the supply agreement. The full monthly contractual commitment is expected from September,” IFM noted.

The backlog of UG2 ore as at June 30 was around 98 000 t and, under the agreement, Amplats was obliged to make up any shortfalls from future production, at a rate of at least 5 000 t/m.

Meanwhile, as costs were expected to rise during the quarter to September 30, IFM expected its net borrowings to increase to R410-million at the end of the quarter, before steadily declining for the remainder of the 2015 financial year.

IFM had reduced its net borrowings to R338-million during the quarter under review, compared with R347-million at the end of the March quarter.

Further, IFM highlighted that the cost pressures facing South African and Chinese ferrochrome producers had “changed the landscape” for the global ferrochrome industry and would likely place upward pressure on global prices in future.

“In this challenging and changing environment, the key to the success of IFM is to remain low down the cost curve and cash generative. The company’s smelting operations are working at full load and are stable, we have flexibility in the way in which we source feed and we tightly control costs and cash flow.

“Against this backdrop, the company expects another year of improved financial performance as the smelting operations continue to work at full load, UG2 ore supplies resume from Amplats, and as we continue to tightly control costs and cash flow,” it stated.

Analysts at SP Angel commented that IFM had “made good progress” with containing costs and increasing production. “The team continue to work on the cost base and are well placed to take advantage of [an] expected rise in ferrochrome demand and prices later this year. 

“News from China is positive and we expect the Chinese authorities to make further progress in closing polluting ferrochrome smelters within China,” the analysts added.

LESEDI RESTART
IFM was, meanwhile, progressing “according to plan” with the restart of the Lesedi underground mine, with the recruitment and training of the first mining team concluded successfully and on time.

The underground infrastructure, machinery and equipment were all fully operational and the process to prepare the underground working spaces for mining was currently under way.

Hoisting of the first tons and the first blast at the underground mine occurred on schedule in the first week of July.

IFM advised that only the MG1 seam, a higher-grade ore seam in the MG seams, would be mined for the first few years.

This was expected to reduce the need for high-grade ore currently bought in from external sources. After five years, the MG2 seam would be mined together with the MG1 seam.

CHROME OPERATIONS
Looking to the group’s chrome operations, production at IFM’s Sky Chrome operation reached 35 000 t for the quarter under review, compared with 33 000 t in the March quarter.

However, in line with IFM’s strategy of flexible and optimal ore sourcing, the company announced on Thursday that it had temporarily suspended the extraction of new ore at Sky Chrome for the 2015 financial year, while continuing other operational activities.

“This is to reduce costs by sourcing cheaper ore externally, and focusing on processing low-grade stockpiles, which have gradually accumulated over the past three years,” it noted.

The reduction in the recovery rate to 57% this quarter, compared with 61% in the previous quarter, was owing to the increased feed of low-grade recycled beneficiation plant waste, which yielded positive results on costs.

Moreover, the drill programme at chrome explorer Chrometco’s Rooderand mine, in the North West, had progressed to plan and was reaching finalisation.

This after the companies signed an agreement, in May, to conduct exploratory drilling of LG6 chrome ore at the mine.

Subject to the company being satisfied with the complete results, which were expected in August, Chrometco and IFM would enter into an agreement to mine 200 000 t of LG6 ore on an outsourced basis.

“This agreement is in line with IFM’s stated strategy of obtaining higher-grade feedstock for our furnaces and allow for more flexibility and cost effectiveness in our operations,” it said.

LOWER SALES
Meanwhile, ferrochrome sales of 52 175 t for the quarter ended June 30, were down 14% on the 60 521 t sold in the March quarter, as IFM continued to manage its inventory and working capital in line with its needs, the company stated.

Sales had been made primarily to Europe, with some contractual sales going to the US. India was now also recognized as a repeat customer, with sales to that country having started during the March quarter.

The company’s ferrochrome inventory stood at 15 288 t at June 30, up from 9 984 t at March 31, owing to lower sales. IFM would maintain its inventories at an average of between 10 000 t and 15 000 t going forward to “allow for flexibility and room to react to short-term demand and price opportunities”.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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