| Fri 3 Jun 2011, 8:30 | | MRF - Merafe Resources Limited - Merafe`s participation in the second phase |
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MRF
MRF
MRF - Merafe Resources Limited - Merafe`s participation in the second phase
of the Lion Smelter Complex expansion
MERAFE RESOURCES LIMITED
(Incorporated in the Republic of South Africa)
(Registration Number 1987/003452/06)
Share code: MRF
ISIN: ZAE000060000
("Merafe")
MERAFE`S PARTICIPATION IN THE SECOND PHASE OF THE LION SMELTER COMPLEX
EXPANSION
1. Introduction
Merafe shareholders are referred to the SENS announcements dated 20 October
2010, 22 December 2010 and 1 March 2011 in which Merafe indicated that it was
in discussions with Xstrata South Africa (Proprietary) Limited ("Xstrata")
regarding its participation in the second phase of the Lion smelter complex
expansion ("Lion II") in Steelpoort, Limpopo Province. Lion II will involve
the construction and commissioning of a 360 000 tonne per annum ferrochrome
capacity smelter and will increase the Xstrata-Merafe Chrome Pooling and
Sharing Venture`s ("Venture") total ferrochrome capacity to over 2,3 million
tonnes per annum. The capital cost of Lion II is budgeted at R4,9 billion,
which includes R700 million for the concurrent development of the Venture`s
1,2 million ROM tonne per annum Magareng mine within its Thorncliffe mine
complex. Merafe`s portion at 20.5% is budgeted at R1 billion.
Merafe has a right to participate in Lion II in accordance with its current
participation interest of 20.5% in the Venture. In addition, Merafe has the
right to simultaneously increase its interest above 20.5% in Lion II and the
Venture up to 26%.
The Merafe Board of Directors is pleased to announce that it has approved,
subject to the conclusion of the relevant legal agreements, the participation
by Merafe in Lion II, in accordance with its 20.5% participation interest.
2. Lion II
2.1 Investment rationale
The long-term fundamentals of ferrochrome remain strong, with stainless steel
melt production historically growing at a compound annual growth rate of 5%
and forecasted to grow at approximately 6% per annum for the foreseeable
future. Long-term demand is underpinned by strong industrial production
growth globally, with particularly strong demand from China and India.
From a supply perspective, there are increasing barriers to entry including
securing electricity supply, high capital costs, increasing costs of
production, access to funding and shortage of quality ore reserves.
In response to these changing fundamentals, the investment case was premised
on bringing Lion II into production in a supply-constrained market, whilst
expanding the Venture`s cost leadership position in South Africa and growing
its market share.
2.2 Technical description
Lion II will be developed on the same footprint as Lion I and will leverage
lessons learnt from Lion I. It will involve the construction of a smelter
comprising two closed electric arc furnaces, two pelletisers and two drying
and roasting kilns.
Lion II will be constructed using Premus technology that is proprietary and
currently employed by the Venture`s Lydenburg and Lion I smelters.
The benefits of Premus include:
1. lowest production cost relative to other smelting technologies;
2. lowest energy consumption (less than 2.2 MWh/tonne alloy relative to
other technologies of 3.5 MWh/tonne alloy to 4.8 MWh/tonne alloy) thus
allowing the Venture to enjoy a slower increase in electricity cost per
tonne relative to other producers;
3. minimum reliance on expensive metallurgical coke;
4. superior chrome recovery;
5. premium product quality (low silicon and sizing); and
6. 30% less solid waste (slag and slimes).
2.3 Project implementation
The Lion II project management team comprises the same members of the team
used by the Venture for the project management of Lion I. First production of
ferrochrome is expected in the first half of 2013.
2.4 Availability of electricity
The Venture has received and accepted an approved budget committing ESKOM to
allocate electricity to Lion II.
2.5 Key sustainability considerations
Lion II is aligned with the key principles contained in the South African
Government`s published draft Integrated Resource Plan 2010 and South Africa`s
Industrial Policy Action Plan. Lion II echoes some of the key pillars of the
Mining Charter which strives to create maximum benefit for South Africa
through fixed investment, new and sustainable job creation, beneficiation,
increased export earnings, increased procurement from Black Economic
Empowerment enterprises, supporting the growth of new local enterprises and
developing technical skills of South Africans.
3. Financing
Merafe`s funding requirement for its 20.5% interest in the Venture, is
estimated to be R1 billion. Financing will be sourced from a combination of:
- Merafe`s existing cash balances;
- Merafe`s share of future cash flows from the Venture; and
- debt.
4. Merafe`s right to simultaneously increase its interest above 20.5% in
Lion II and the Venture up to 26%.
As a portion of the funding required by Merafe to increase its stake in the
Venture to 26% would have been in the form of new equity, due to current
equity market conditions, Merafe has decided not to exercise its right to
increase its interest from 20.5% to 26% in the Venture.
Commenting on the decision, Merafe Chief Executive, Stuart Elliot said:
`Building on the investment that has already been made through Lion I in
South Africa, Lion II will create over 1 000 permanent jobs and a further 1
800 jobs will be created through the construction phase thus aiding one of
South Africa`s key challenges regarding employment creation. Lion II is
aligned with Merafe`s strategy of organic growth in the ferrochrome industry
and demonstrates Merafe`s continued commitment to beneficiation in South
Africa. We look forward to taking the Xstrata-Merafe Chrome Venture to new
heights in technology and cost leadership, together with our long standing
partner, Xstrata`.
Sandton
3 June 2011
Sponsor
Deutsche Securities SA (Pty) Ltd
Date: 03/06/2011 08:30:01 Produced by the JSE SENS Department.
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