Merafe (MRF)

Previous Stock Tip These companies are all previous recommendations from the Red Hot Portfolio that I subsequently recommended and then sold from the portfolio at a later date. By no means are these companies intended to be buy recommendations for you to go out and invest money towards their shares. For the opportunity to start making serious money from the recommendations I am making now, just start your 1 month free trial! Initial Recommendation: RHPS Issue 97 / June 2009 Double your money in 12 months with this niche product supplier It seems there isn’t an industry left untouched by our current global recession and this includes the once thriving steel industry. Just think about the three largest industries that require steel: Construction, automotive and shipbuilding. All were hit very hard in the downturn. But how can we turn this to our advantage? Prior to the global financial crisis, China was one of the largest users of steel. And former chairman of the China Iron and Steel Association, Zhang Xiaogang, predicts it may take another six months before China’s steel demand starts to recover. This prediction was based on the fact that his government’s four trillion Yuan stimulus package will take that long before it starts taking effect. Down over 78.6% from it’s 2008 high – it’s clear this one’s a “must have” And steel isn’t the only commodity affected. Ferrochrome, a major component in the production of steel, has seen an even bigger drop in demand. During the first half of 2008, high stainless steel demand, especially from China, drove demand for ferrochrome. However, this started to fall in the third quarter of last year. And that’s when the price of ferrochrome fell out of bed! Part of this was a result of the decrease in Chinese steel production (once the Olympics were over, there was less demand for steel), the rest of the fall was of a direct affect of the financial crisis that followed. South Africa produces close to 80% of the global ferrochrome supply. Right now, production is down 80% and one small SA company has switched off 80% of its furnaces. The short-term outlook for steel demand is weak. And, on top of all this, the stronger rand reduces profits for companies that export their goods. The current steal slump spells “b-a-r-g-a-i-n” for you! “So why are we even looking at this sector?” I hear you ask. The answer is an easy one: We need to start investing in strong companies. And this is one that’s set to survive until global steel demand increases and prices begin to soar. You see, one ferrochrome market leader is a company called Xstrata-Merafe Chrome Venture. And it’s a subsidiary of Merafe Resources Limited (MRF). Thanks to the direct link with steel production, this mining sector has fallen on hard times. And this has seen Merafe’s share price collapse from over 400c a year ago to just 91c today. And that’s why if, like I do, you believe the global economy has seen the worst and is likely to stabilise over the next year, it’s definitely time to consider this share. Why? Because, as soon as demand picks up, this group will simply start turning on the furnaces again. And this, in turn, will send steel and ferrochrome prices shooting higher. Right now, ferrochrome prices are at very low levels and excess stock is almost used up. This means the price will increase very quickly as demand begins to pick up. Remember, the world didn’t end – China and India are still expanding, even if it’s at a slower pace. There’s never been a better time to jump into this market I’ve been watching this share for a while, but here’s the signal I’ve been waiting for: On the 20th of May, the CEO of International Ferro Metals (IFM), David Kovarsky, said that signs of firmer demand from China and Europe had emerged over the past three weeks and that prices may have bottomed. Add to this the almost inevitable weakening of the rand, and Merafe’s profit will zoom up like a rocket! Now I can’t predict when a strong recovery will take place, but it will happen. The best advice I can give is that you should start accumulating at what looks like the lowest price. When the share starts to move up, it’ll happen very fast and you’ll miss out on an absolute bargain! This dirty industry will see some MAJOR action this winter Established in 1987, Merafe Resources is a black economic empowerment company whose major shareholders include the Industrial Development Corporation and the Royal Bafokeng Nation. Over the years, the group embarked on a strategy to grow and diversify within the resources sector by using its empowerment credentials to access opportunities created by the change in South African mining legislation and the Mining Charter. And diversify it has… Although most of the group’s revenue comes from the Xstrata-Merafe Venture, Merafe also owns coal assets through a 50% partnership with Sentula Mining Ltd. It may be small (the Schoongezicht and Bankfontein coal deposits have coal resources of approximately ten million tones), but this resource should substantially diversify the company over the next few years. 2008 was a bumper year for Merafe – and 2009 should be even better In the past financial year, Merafe repaid its R458 million in debt and ended the year with a cash balance of R540 million at 31 December 2008! (The balance of its debt will be repaid by 2012.) Its net asset value is 100c, roughly 10% above the current price but, because it’s suspended 80% of its production, it’s pointless to look at last year’s earnings. What I can tell you is the share price has bottomed and is trending slowly upwards. Big investors are accumulating it in the belief that ferrochrome stocks will run out before long and Merafe will soon be back in business!
RHPS Verdict Although there’s no certainty as to when global steel prices will significantly increase, there’s no doubt it must happen. We also know that ferrochrome is an essential ingredient in stainless steel and that existing stock will be used up soon. This will lead to higher prices. My advice: Start with a small purchase at around 80c to 95c and, as the price moves up, buy more. Merafe could easily double over the next year. I vote this share a buy at current levels of 91c with a target of 170c in a year. Update 1: RHPS Issue 98 / July 2009 RHPS Recommendation: BUY Merafe: All set for the imminent recovery Merafe’s had a nice 9.9% upward bounce since being included in our portfolio last month. It tracks shares like Anglo American and its upward momentum will depend largely on global sentiment about the economic recovery. This one will rocket when things start to improve! Update 2: RHPS Issue 99 / August 2009 RHPS Recommendation: BUY Merafe: Ferrochrome demand sees production pick up Merafe’s advised shareholders that it’s increased production to 60% and has turned on some of the smelters it had shut down. Demand is picking up, even though prices remain low. As such, its next results will show a headline loss of between 3c and 4c per share. But don’t worry too much. The news is already priced in and the share’s moved higher. This is a good time to buy on any weakness in the market. Update 3: RHPS Issue 100 / September 2009 RHPS Recommendation: BUY Merafe: Up 75.82% in just 4 months Merafe’s rocketed and is now up 75.82% from the level it entered the portfolio in June. Expect the company to track drifting lower since paying out its dividend in June. If you don’t own either of the companies, Stefstock is the one to go for at the moment. Why? Because its dividend yield is higher and it PE ratio is lower than Esor’s. Update 4: RHPS Issue 101 / October 2009 RHPS Recommendation: HOLD Merafe: Production is back on track Merafe’s advised shareholders it’s increased production to 85% and has turned on some more of the smelters it shut down last year. Demand is picking up even though prices remain low. This is a great recovery bet! Update 5: RHPS Issue 102 / November 2009 RHPS Recommendation: SELL Merafe: Grab your profit Merafe’s been a great performer – rising over 61.54% in just four months. Although it could rise a lot further, it’s trading close to our target price and it can’t seem to get past the current level. So sell it – we can always look at it again at a later date.

The past is not a guide to future performance. Trades in stocks recommended by Red Hot Penny Shares are small company shares. By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances.