US Edition International Ferro Metals
58¾p -¾
Questor says BUY
Between 80pc to 90pc of ferrochrome is used in the production of stainless steel, which is used for a wide variety of purposes – from making cutlery to constructing skyscrapers. About 18pc of stainless steel is made up of the ferrochrome alloy.
The group's full-year results were generally in line with consensus. In the 12-month period to June 30, pre-tax losses came in at 456m rand (£37m) compared with pre-tax profits of 630m rand in the prior year. In the fourth quarter, the ferrochrome price averaged 69 cents per pound, down 64pc from the fourth quarter of 2008.
The ferrochrome market is improving. IFM said that there has been a strong revival in stainless steel production in China – and it thinks we are now at the end of the destocking part of the cycle. So, demand is recovering and prices are starting to rise on tight supply. These are both positive factors. The only real negative for IFM is future costs.
Electricity prices in South Africa have jumped more than 40pc, as the country feels the full brunt of an energy crunch. The rand is also continuing to strength against the dollar which is negative for costs.
However, 45pc of the world's ferrochrome comes from South Africa and these factors are common for all producers in the nation.
South African ferrochrome manufacturers are a "price maker" rather than a "price taker", according to IFM's management, so these costs should easily be passed on to customers.
The shares are trading on a June 2010 earnings multiple of 40 times but this falls to just 6.7 in 2011. The company does not pay a dividend.
The shares are just a notch above Questor's initial 56½p recommendation price, having been as high as 67¼p.
It is clear that the ferrochrome cycle is near the bottom, so investors should buy IFM and wait for the eventual upturn.