| Thu 13 Mar 2003, 12:17 | | South African Chrome and Alloys Ltd - Proposed exp |
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South African Chrome and Alloys Ltd
(Incorporated in the Republic of South Africa)
(Registration number 1987/003452/06)
(ISIN code ZAE 000022943)
(JSE Share code SCE)
("SA Chrome" or "the Company")
* Proposed expansion of SA Chrome in partnership with Jiuquan Iron & Steel
(Group) Co. Limited of China for a 3rd and 4th furnace
* Acquisition of additional reserves
* Operations update
1. Proposed expansion of SA Chrome in partnership with Jiuquan Iron & Steel
(Group) Co. Limited
SA Chrome has signed a heads of agreement with Jiuquan Iron & Steel (Group) Co.
Limited ("JISCO") of China, to undertake a detailed feasibility study into the
expansion of SA Chrome"s ferrochrome facility. JISCO, a Chinese government
owned company and the largest iron and steel producer in North West China, has
resolved, subject to regulatory approvals and the conclusion of the appropriate
agreements, to construct a 500,000 tonne per annum stainless steel smelting
facility. JISCO wishes to secure a long-term supply of ferrochrome for the
stainless steel facility.
After a global search, JISCO has selected SA Chrome as its partner due to its
access to chrome ore reserves, advanced technology utilised in its current
operation, organisational strengths and its empowerment and environmental
credentials. China is currently the world"s second largest consumer of
stainless steel, and is widely predicted to be the largest consumer of stainless
steel by the end of 2003. Approximately 85% of all ferrochrome produced is
consumed in the production of stainless steel. A partnership with JISCO will
provide SA Chrome with access to China"s rapidly growing stainless steel
industry and would establish SA Chrome as the first South African ferrochrome
producer with a long-term off-take agreement with a Chinese partner. SA
Chrome"s share of the expanded production will be directed to China through an
off-take agreement with JISCO.
SA Chrome and JISCO (the "Parties") intend to form a joint venture, held 51% by
JISCO and 49% by SA Chrome, but managed and operated by SA Chrome, to construct
and own a ferrochrome facility consisting of two furnaces and a pelletising and
sintering plant with a capacity of 235,000 tons of ferrochrome per annum ("the
JV facility"). The JV facility, currently envisaged to have the same capacity
as SA Chrome"s existing facility at Boshoek, will be constructed on the same
site to reduce capital costs and provide economy of scale benefits. SA Chrome"s
existing ferrochrome facility and infrastructure has been designed to cater for
two additional furnaces.
The JV facility"s ferrochrome production will accrue to the Parties in
accordance with their JV interest. In addition, JISCO will sign a market-
related off-take agreement to purchase SA Chrome"s 49% share of the ferrochrome
production, being 115,150 tonnes per annum, which will be used directly by JISCO
in its new stainless steel facility.
In order to reduce operating costs and risks, the Parties have agreed that,
three months after the JV facility reaches full capacity, the existing
operations of SA Chrome and the JV facility will be operated as a single
operation under the management of SA Chrome.
The capital cost of the JV facility is estimated to be in the region of US$100
million. SA Chrome"s funding requirement for the JV facility will be
approximately R420 million (at an exchange rate of R8,50 to the dollar), and
will be funded by a combination of debt and equity. The funding requirements
will be finalised towards the end of 2003, once the detailed feasibility study
is complete.
JISCO will reimburse SA Chrome 25,5% of the cost of any existing infrastructure
and future capital expenditure by SA Chrome utilized by the JV facility, mining
and beneficiation infrastructure and chromite reserves. This will enable SA
Chrome to reduce its portion of its funding requirements by approximately R50
million.
The partnership and future co-operation with JISCO will provide SA Chrome with
the ability to grow its position in the supply of ferrochrome to the Chinese
Stainless Steel market, the opportunity to reduce its unit costs and secures the
receipt of up-front cash by SA Chrome in lieu of raising additional equity, as
detailed above, to part fund its portion of the expansion.
The construction of the JV facility will be subject to the:
* satisfactory completion of the feasibility study;
* conclusion of binding agreements between the Parties;
* raising the necessary funding; and
* obtaining all the necessary South African and Chinese shareholder,
statutory and regulatory approvals.
It is anticipated that the feasibility study will be completed at the end of
2003.
SA Chrome is also conducting a feasibility study in downstream product
development that will render added value ferrochrome products. This study will
include an investigation into the production of high chrome steel products such
as grinding media.
This study will be undertaken in parallel with the ferrochrome expansion
feasibility study announced above in order to derive maximum synergistic
benefits for both initiatives.
This study is sponsored in part by ThyssenKrupp Metallurgie.
2. Acquisition of the Royal Bafokeng Nation"s chromite resources
Shareholders are informed that the Company and the Royal Bafokeng Nation ("the
RBN") have signed a Memorandum of Understanding, in terms of which SA Chrome
will purchase all the rights to chromite held by the RBN in the Boshoek area
("the Acquisition"). The indicated and inferred resources are estimated to be
100 million tonnes in-situ.
The resources are estimated to be 100 million tonnes in-situ.
The Acquisition should provide SA Chrome with sufficient resources in order to
expand its operations. The resources are located adjacent to SA Chrome"s current
ferrochrome facility.
The purchase price for the Acquisition will be settled by the issue of new SA
Chrome ordinary shares to the RBN, and a small portion in cash to purchase
existing RBN chromite mining assets.
The parties are in the process of preparing detailed agreements in regard to the
Acquisition. These agreements will be subject, inter alia, to:
* The completion of an independent competent person"s report by Steffen,
Robertson and Kirsten.
* Obtaining all the necessary statutory and regulatory approvals; and
* Approval by shareholders, other than the RBN, at a general meeting;
Shareholders will be advised of the terms of the acquisition as soon as the
appropriate agreements are concluded.
3. Operations update
It was announced on 9 December 2002 that the commissioning of the slag
granulation plant ("the SG plant") had been delayed and that, in order to
minimize the effect of this delay, a modified interim tapping arrangement would
be implemented to sustain operations at 18,000 tonnes of ferrochrome production
per month (90% of capacity) as from January 2003. However, as a result of
further delays relating to the commissioning of the SG plant, SA Chrome has
reverted to conventional tapping, which will enable the Company to produce
16,000 tonnes per month of ferrochrome to June 2003 (80% of capacity). The SG
plant has been assessed and SA Chrome has reserved its rights against the
turnkey contractor. The two furnaces and the sintering and pelletising plant
continue to operate successfully and in accordance with expectations taking the
above mentioned restrictions into consideration.
SA Chrome is investing R20 million in upgrading the material handling facilities
of the plant and is forecasting production of ferrochrome to reach 18,000 tonnes
per month by July 2003 (90% of capacity) and full capacity of 20,000 tonnes per
month from August 2003.
The adjacent Bafokeng Rasimone Platinum Mine ("BRPM") is in the process of
increasing the water supply to BRPM and the future Boshoek Township. SA Chrome
will require additional water supplies to cater for its expansion plans with
JISCO referred to in paragraph 1. above. SA Chrome therefore has an opportunity
to participate in this project with a view to its future expansion.
Due to the strengthening of the Rand against the US dollar by as much as 40%
over the past year, SA Chrome entered into hedging arrangements from mid-
December 2002 to May 2003 in respect of its US dollar denominated revenue. The
effect of the hedge is that the company will receive:
* an exchange rate of R8.80 to the dollar when the Rand is at or stronger
than this level;
* the market exchange rate when the Rand is weaker than R8.80 to the dollar.
This hedging strategy, which will be reviewed in mid-May 2003, has proved to be
advantageous to the company"s cash flow to date.
The low ferrochrome prices during 2001 and 2002 have forced some high-cost
overseas producers out of the industry. Supply and demand of ferrochrome are
now better balanced and this has resulted in a steady increase of ferrochrome
prices from their all time low of a year ago. SA Chrome believes that this
trend is likely to continue and it is widely reported that European ferrochrome
prices will increase by as much as 20% in the second quarter of 2003.
4. Working capital and capital expenditure
4.1 Working capital
As a result of the strengthening Rand, the late hand-over of the ferrochrome
facility by SA Chrome"s turnkey contractor and the problems with the SG plant,
there has been pressure on the cash flow of the company. SA Chrome has secured
a working capital facility to fund the shortfall in working capital.
4.2 Budgeted capital requirements
SA Chrome intends sourcing up to R120 million during the year to fund the JISCO
feasibility study, the expanded water supply, the acquisition of the RBN
chromite mining assets and other chromite reserves, the loan payments to its
lending banks and the upgrading of the existing plant. The company is in the
process of finalizing the various mechanisms to secure these funds.
5. Appointment of Directors
SA Chrome is pleased to announce that Mr Chris Molefe has been appointed the non
executive Chairman of SA Chrome, and Mr Steve Phiri, who has served the
Company as a non-executive director for the past two years, will be appointed
an executive director of SA Chrome with effect from 1 May 2003.
Chris Molefe (53, B Com) is the Operations Director of Royal Bafokeng Resources
(Pty) Limited and has substantial experience in merchant banking, business and
transformation strategies.
Steve Phiri (46, B. Juris LLB, H.Dip. Co Law) is a qualified attorney of
the High Court of South Africa, previously head of Corporate and Legal Affairs
of the Royal Bafokeng Nation and is a member of the Ministerial Delegation and
stakeholders task team on the Mining Charter.
The appointment of Mr Molefe and Mr Phiri demonstrates the long-term commitment
of the Royal Bafokeng Nation and Royal Bafokeng Resources towards SA Chrome.
Mr. Molefe replaces Mr. Jack Dorfan, who is retiring. The board of directors
wishes to express its thanks to Mr. Dorfan for the contribution he has made to
the Company over the years. Mr. Dorfan has agreed to stay on as the company
secretary.
Johannesburg
March 2003
Bowman Gilfillan
RMB - Sponsor
