Record Chinese demand signal a great opportunity
China imported a record amount of ferrochrome in 2015. And that’s after there were fears that it would cut imports.
This, coupled with the fact that the chrome price is soaring points to a clear bull market.
Don’t believe me yet?
How about the fact that 2016 is also set to be yet another record year for stainless steel production as well? And ferrochrome is a key input into stainless steel.
For ferrochrome you need look no further than home
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Southern Africa is home to the largest chrome reserves in the world. We hold around 84% of all the world’s known chrome reserves.
So, if China is looking to get its hands on more of the stuff it’s bound to look to South Africa.
And, the largest ferrochrome producer in the world is the Merafe/Glencore joint venture. So you need go no further than buy some Merafe shares to get in on it…
What I like about Merafe
is that it doesn’t have cost control problems like the gold and platinum miners.
In fact, Merafe has a world leading technology on its ferrochrome smelters that helps it produce with ultra-cheap costs.
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The technology lowers the amount of electricity a smelter needs to work by about a third. And with increasing electricity prices (not just locally but worldwide) this gives Merafe a massive advantage. And this isn’t a small advantage. We’re talking around 35% less electricity consumption from Merafe’s new smelters compared to other competitors.
Considering how electricity costs have gone up this gives Merafe a massive advantage over companies that use more juice…
The double booster behind Merafe’s coming profit growth
Merafe’s product is sold in US dollars.
And as we all know the rand’s gone to hell over the past year.
In fact, for the financial year ended 31 December 2015 Merafe had an average rand/dollar exchange rate of R12.80 to the dollar.
And the company made a 13.9cps profit on the back of this.
For 2016 so far the rand is averaging more in the range of R15.10. That’s a 17.9% difference in the rand compared to the dollar.
In the meantime Merafe’s also brought it’s newly built Lion II smelter to full production, so it will see slightly higher production come through in 2016.
With that in mind I expect Merafe could make at least 17cps profit in 2016.
Together with this the company has reduced debt
and plans to pay shareholders a much bigger dividend starting 2017.
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In short that means you get to buy Merafe at 95c today while it’s trading on a PE of 6.62.
It will grow profits in 2016 – putting it on a forward PE of 5.5. At at a target PE of 9 the share shows 61% upside from here!
And you can expect a dividend of as much as 10cps by end 2017 – which is a dividend yield of 10.5%.
If you’re a risk taker this is a great stock to buy right now – even though it is in an unloved sector it’s made great strides in the past year and profits are looking good.
Here’s to unleashing real
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