IFL.L Regulatory News (IFL)

International Ferro Metals Limited - Production Report for the 3 months to 30 June 2015

PR Newswire

London, August 13

13 August 2015

International Ferro Metals Limited

(“IFL” or the “Company”)

Production Report for the three months to 30 June 2015

Highlights

Financial and operational highlights

Post period

Chris Jordaan, Chief Executive Officer of IFL commented:

“I am pleased with the increase of alloy production amidst the reduction in power input during June, which was due to the winter tariff period starting in June. Although mining at Lesedi showed a decline, post period results are improving as the investments in the underground mobile equipment and conveyor systems reaches completion. The ferrochrome market remains weak with prices expected to edge downwards, albeit the Company’s marketing strategy allows it to place its production effectively despite the challenging global market conditions.”

Stainless steel and ferrochrome markets

Stainless steel production in the USA and China maintained a healthy momentum throughout 2014 whereas output in Europe and Asia contracted during the second half of 2014. Global output reached a record level of 41.7 million tonnes in 2014, which represented a YoY growth of 8%. However, the significant economic slowdown in China during the first half 2015 has resulted in a market overhang of stainless steel with a resultant negative impact on demand and prices of input commodities.

Ferrochrome supply in China increased as domestic production levels showed a recovery during Q1 2015. This prompted a decrease of RMB50/t for internal ferrochrome tender prices in May on the back of a gradual stock build since the beginning of 2015. This signalled the first ferrochrome price decrease in China since the beginning of 2015 and the market remains sluggish as is evidenced by a further decline of approximately 1US$c/lb in the Chinese tender price.

The European Benchmark Price of US$1.08, which is on a five year low, was rolled over into calendar Q3 2015 for the third consecutive quarter as there were no signals of improving market conditions.

The weakening of the Rand against the U.S. dollar has partially offset the impact of the decline in US$ revenues of South African based producers. However, the significant increase in electricity winter tariffs in South Africa has more than eradicated any benefit. As producers seek to contain costs this has also resulted in lower production. The global ferrochrome market is sufficiently stocked and although production levels are lower in South Africa, slower demand and higher output in China balances the market in favour of consumers.

Health and Safety, and the Environment (“HSE”)

The Company had no fatalities during the quarter and remains fatality free since inception, representing 30.1 million fatality free man-hours which equate to 3.8 million fatality free shifts as at 30 June 2015.

During the quarter, 2 lost time injuries (LTI's) occurred and the 12 month moving average lost time injury frequency increased from 1.30 at 30 June 2014 to 4.25 at 30 June 2015. The number of LTI’s remained relatively unchanged in the current quarter compared to the previous two quarters where 4 and 3 LTI’s were reported during Q2 and Q3 respectively.

The Company continues to focus on improving safety performance which is evident in the total recordable injury rate. The 12 month moving average total recordable injury rate improved from 27.72 at 30 June 2014 to 27.30 at 30 June 2015. Total recordable injury rate reduced by 1.5% year on year, despite the restart of Lesedi underground mine. In addition to current initiatives Behavioural Based Care is being introduced as a key initiative to improve personal and colleague to colleague safe operations.

No significant environmental or health incidents were reported in the quarter.

Mining

The Lesedi underground mine ramp-up was below expectations. The mine produced 34,390 tonnes of run-of-mine ore (RoM) for the quarter, a decrease of 25% compared to the previous quarter. The targeted production level of approximately 25kt/m RoM by the financial year end was not achieved due to low availabilities of mobile equipment and a DMR related stoppage during April 2015. The stoppage was for 10 days and mainly related to control system deficiencies which have been corrected and measures have been put in place to prevent re-occurrence.

The introduction of a drill rig and roof bolter machines in the quarter has improved productivity in the MG2 areas significantly. It is a further step in the mechanisation of the MG2 reef which is expected to improve productivity as the mine ramps up further.

The accelerated mine ramp up plan is in line with the overall Company strategy of becoming self-sufficient in terms of ore supply. Significant infrastructure developments have been completed to support the accelerated ramp up with particular focus on ore reserve development to ensure sustainability of ore supply. In addition, the tip points on both reef horizons have been extended and the load haul dumper (LHD) rebuild programme has delivered 4 of the 8 machines which have been rebuilt and are now back in operation. These two key initiatives are designed to decrease downtime and tram distances to enable increased production levels of 40kt/m by the end of calendar 2016.

The Company previously announced it had signed agreements with Chrometco Limited (Chrometco) to mine at its LG6 open pit mine (Rooderand Mine) and to purchase the ore mined. Chrometco’s Rooderand Mine was started in November 2014. The difficulties related to the ore body exhibiting a higher degree of geological faulting, steeper dips and a higher degree of weathering resulted in mining operations being suspended in May 2015. The latest information has been reviewed and the Company is finalising its decision on alternatives in this regard. It is expected that the final decision will be taken in the 3rd quarter of 2015. In the meantime the Company has been successful in securing high grade ore supply for a year at market prices, below the cost of Rooderand Mine production.

As previously announced, mining at Sky Chrome remains suspended.

The material split fed to the beneficiation plant during the last quarter changed significantly from the previous quarter. MG1 dropped its contribution from 42% in FY Q3 to 32% during FY Q4 with MG2 increasing from 58% during FY Q3 to 68% in FY Q4. It is planned that the material split will normalise to a 60%:40% split between MG2 and MG1. MG2 experienced an average grade drop of 2.5% during FY Q4, mainly as a result of mining faces advancing through several unexpected geological structures. It is expected that the MG2 grade should normalise in line with the expected block grades in Q3 of 2015.

Smelting

FeCr production for the quarter was 51,030t compared with 57,462t in the comparative quarter and 49,085t in the previous quarter. Output from the furnaces was negatively impacted as a result of two separate incidents on the furnaces. The first incident resulted from an arc that occurred on one of the electrode columns which damaged some of the electrode column components. This was due to these components reaching end of life. A planned schedule will now commence during which time these parts will be replaced in the next 12 months. The second incident was the result of an electrode break that resulted in limited damage to the electrode column components, but nonetheless downtime was required to replace components.

Although not as severe as in previous quarters, the furnace operations were still affected by tip losses on the electrodes. Continued work on eliminating these tip losses has resulted in an alternative electrode paste being identified and introduced to the furnaces by the end of the quarter. The aim of this paste is to produce an electrode that has better resistance to thermal shock that occurs during downtimes on the furnaces, which is believed to be the main cause of the tip losses on the electrodes.

Co-generation plant

The co-generation plant remains shut down. Although some of the equipment required for the project has been delivered to site, the project remains on hold until the cash position of the company improves sufficiently to be able to fund the remaining estimated ZAR34 million capital required for completion.

UG2 supply agreement

The Company has a supply agreement with Anglo Platinum under which they are required to provide the Company 15,000t per month of UG2 chrome concentrate until 2020. This beneficial agreement delivers UG2 at a cost significantly below the Company’s in-house cost of concentrate production.

The supply of UG2 amounted to 56kt for the quarter, compared with the contractual 45kt. Due to the protracted strike action at Anglo Platinum from February to June 2014, a backlog of UG2 ore was created, which at 30 June 2015 was approximately 71kt. Anglo Platinum is obliged under the agreement to make up any shortfalls from future production, and the Company will benefit from a higher supply of UG2 ore, which is a direct contributor to profitability.

Sales and inventory

FeCr sales for the quarter to 30 June 2015 were in line with the previous quarter at 51,618t, compared with 51,412t in the previous quarter. The distribution of sales remained balanced between Asia/Far East and Europe/USA. Sales into previously reported new markets have been sustained. A forward sale of 15,000t FeCr was concluded in May for delivery of 3,000tpm commencing in June 2015.

FeCr inventory was 7,582t at 30 June 2015, down 1,076t from the previous quarter’s 8,658t. This is in line with the company’s strategy to reduce working capital. FeCr stocks are expected to remain at these levels over the next quarter.

The Company is focussed on reducing working capital to optimal levels. As part of this strategy, ore sales amounted to 9,804t during the quarter.

Production cost

Ferrochrome production cost for the quarter was ZAR8.70/lb, up 3% from the previous quarter’s ZAR8.43/lb. The increase in production cost was mainly due to higher power and ore input costs.

Electricity prices increased by 12.69% on 1 April 2015, which was 4.49% higher than the original increase approved by the National Energy Regulator of South Africa (NERSA). June being a winter tariff month where electricity prices are almost 60% higher than in summer, resulted in further cost pressure.

The Company achieved its target to increase the use of UG2 ore to 100% of its normal contractual allocation of 15,000tpm in the furnaces, but this cost advantage was offset by higher than expected cost of own ore due to the lower than planned production from the Lesedi underground mine. This should improve once the ramp-up reaches a higher output level, which is expected by January 2016.

The Company is actively implementing a number of cost reduction initiatives as previously reported, specifically to further reduce corporate overheads, and to reduce internal transport cost by 25%. These cost savings, which are under management’s control, are however outweighed by the above-inflation electricity price increases.

Eskom

The Company was not required by Eskom to shut down or reduce any capacity during the quarter. The first month of the winter load shedding period went past without any additional request from Eskom for supplementary load shedding above the Company’s own voluntary load reductions during peak winter tariff hours.

During July the supply of electricity was constrained and the Company lost more than 10% of its ferrochrome production because of load shedding and power trips. The system has stabilised subsequently.

NERSA rejected Eskom’s recent application for an additional increase of 9.58% over and above the 12.69% increase of 1 April 2015. The Eskom financial year commencing 1 April 2016 marks year 4 of 5 of Eskom’s Multi-Year Price Determination 3 (MYPD-3). NERSA had initially approved an 8% p.a. increase for MYPD-3, but the Company expects the increase on 1 April 2016 to again be above 8%. The system is also expected to be constrained over the next year which is expected to result in continued requests for load reductions.

Cash

The Company’s net borrowings decreased by ZAR35 million to ZAR450 million at 30 June 2015 from net borrowings of ZAR485 million at 31 March 2015. The improvement in liquidity was as a result of the forward sale of 15,000t FeCr during May resulting in an upfront payment of ZAR116 million.

Cash from operations (before working capital changes) utilised ZAR22 million, working capital generated ZAR96 million as a result of the forward sale of FeCr, investing activities utilised ZAR35 million and financing activities utilised ZAR4 million.

Net borrowings are expected to range between ZAR480 million to ZAR500 million in the near term, as a result of the lower FeCr pricing environment and the higher Eskom winter tariffs. Management is focussed on managing the liquidity of the Company to ensure the Company remains within the limits of its ZAR500 million banking facility.

The ZAR500 million working capital facility with Bank of China expires on 16 September 2015. The annual renewal process has commenced and the Company is confident that the facility can be extended.

The Company continue to investigate additional forward sales contracts as a way of strengthening the liquidity over the short term.

Outlook

Stainless steel demand is driven by economic growth. China, as the fastest growing economy of the past decade, has been a key ingredient for global economic growth and commodity demand and pricing. However, the growth rate in China slowed from 7.8% in 2013 to 7.4% in 2014 according to recent data released by the International Monetary Fund (IMF). In addition the latest IMF forecast suggests that China’s growth will drop below 7% this year with a continued decline to 6.0% in 2017.

China has been leading the growth in stainless steel demand and capacity and is currently producing in excess of 50% of the world’s stainless steel. Although stainless steel output in China grew by 14.3% in 2014, preliminary indications are that production reduced in Q1 2015 in response to the slower economic activity. Stainless steel production outside China is anticipated to remain stagnant and therefore the industry dynamics in China will have a significant influence on the outcome of global market trends in the near future. It should take some time for demand to catch up with the capacity overhang in China, which is expected to keep a lid on FeCr prices into 2016.

The FeCr industry in China developed as a result of the growth in domestic stainless steel production and overtook South Africa as the leading producer in 2012 with a production capacity in excess of 5 million tonnes per annum. The current output level in China is approximately 4 million tonnes per annum compared to approximately 3.6 million tonnes per annum in South Africa. Although Chinese FeCr output dropped by some 20% during Q4 2014 due to power costs pressures, it showed a recovery to normal levels in Q1 2015 as the availability of hydro power improved post winter. However, the de-stocking of FeCr in Q4 2014 was followed with re-stocking in the first half of this year and the market currently is believed to be adequately stocked due to the decrease in demand. Stocks, therefore, are expected to remain at these levels for at least the balance of this calendar year.

Chinese ferrochrome production accounts for about 75% of its internal demand and is priced competitively on a tender based mechanism, which is aligned with the requirements of the major consumers. The internal Chinese ferrochrome tender price also serves as a gauge for imported and ultimately global prices. The impact of slower stainless steel output in Q1 2015 caused internal ferrochrome prices to decrease in May 2015. However, the European Benchmark Price was rolled over into Q3 2015 and hence remained on the same level for the third consecutive quarter.

The cost of ferrochrome production in South Africa during winter is anticipated to curb production during Q3 2015, but with adequate industry stocks, a recovery in Chinese production and stagnant demand, should continue to constrain the potential for prices to improve for at least the remainder of this calendar year. Furthermore, a slowdown in economic growth in China as forecast by the IMF, could limit the potential for industry prices to recover in 2016.

China is experiencing a reduction in power costs as South China benefits from hydro-power during the wet season. This is evident as FeCr imports dropped significantly in July as reported by Ryan’s Notes whilst internal production increased significantly to balance supply to the Chinese stainless steel mills. This resulted in the recent drop in FeCr tender prices.

Chinese stainless steel mills will procure alloy at the lowest cost possible whether from China or South Africa, which together with the recent devaluation of the RMB, puts a lid on any significant increase in FeCr prices. The only variable that may influence the price will be increased ore prices to China. This is expected to play out as sources of low cost ore are limited and higher cost virgin ore will be the main supply to any increased demand as the global stainless steel market is expected to continue to grow at above 4% per annum.

The operating environment within South Africa remains very challenging especially with power supply hampering production and above-inflation cost increases. These challenges are particularly testing when set against a depressed ferrochrome pricing environment. The recent increase in Chinese production, reduced ferrochrome imports and lacklustre market fundamentals have resulted in prices edging down from 78-79U$c/lb to 76-77U$c/lb. Against this backdrop, the Company is making every effort to implement cost reductions and cash controls throughout the business, so that it can continue to operate within our existing banking facility. In addition to this, the Company continues to consider various financing options, with a view to finding the optimal way forward for shareholders. In the meantime, the Company's financial performance and cash flows of the business will continue to be under pressure unless there is a sustained improvement in the ferrochrome price.

Analyst / investor Conference call

Management will discuss these results in a conference call with the investment community today, Thursday 13 August July 2015, at 08.30am (UK). Dial in details are below:

Dial in: +44 (0) 1452 555566

Conference ID: 12362512

- ENDS-

For further information please visit www.ifml.com or contact:

International Ferro Metals Limited Tel: +27 14 574 6302

Chris Jordaan, Chief Executive Officer

Numis Securities Limited Tel: +44 (0) 20 7260 1000

James Black / Stuart Skinner / John Prior

About International Ferro Metals:

International Ferro Metals produces ferrochrome, the essential ingredient in stainless steel, from its integrated chromite mine and ferrochrome processing operations in South Africa. International Ferro Metals is listed on the London Stock Exchange under the symbol IFL.

Forward Looking Statements

This announcement contains certain forward looking statements which by nature, contain risk and uncertainty because they relate to future events and depend on circumstances that occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements.