Despite Merafe Resources’ share price declining by about 30% over the past three years, long-term investors have enjoyed robust returns thanks to the company’s generous dividend payouts. With cumulative distributions of 109c a share over the period — a total that matches its share price at the time of writing — this raises a crucial question: how sustainable are these dividends ?
The answer depends largely on the performance of Merafe’s core asset, the Glencore-Merafe Chrome Venture. Merafe owns 20.5% of this joint venture, while Glencore, a global commodities giant, holds the remaining 79.5% and is responsible for operational management. The venture operates several ferrochrome smelters in South Africa and exports chrome ore, a key raw material.
As the junior partner in the joint venture, Merafe is guided by the operational expertise of a global mining powerhouse, while its own lean management team focuses on corporate administration. This streamlined structure also means that any corporate action will be relatively straightforward.
Ferrochrome, the primary product of the joint venture, is an essential ingredient in stainless steel production. The venture’s business model involves processing chrome ore into ferrochrome at its South African smelting facilities and selling any excess chrome ore directly into the market.
Ferrochrome demand is heavily tied to global stainless steel production, with China being the dominant consumer. Over the past year demand for stainless steel, and consequently ferrochrome, has been weak due to China’s subdued economic performance. Additionally, increased ferrochrome output from China has placed more pressure on global ferrochrome prices.
Chrome ore pricing has been more resilient, aside from a brief pullback at the end of 2024. South Africa is the leading global supplier of chrome ore, controlling 70%-80% of the world’s known reserves, which provides some price support. As chrome ore is often a by-product of platinum group metals (PGMs), many PGM operations have ramped up chrome output to offset shrinking profits in a weak PGM price environment.
In cases where chrome ore alone can’t prop up marginal mines, chrome production may eventually face cuts if PGM prices do not improve.
The price of electricity accounts for about 20% of ferrochrome production costs and has risen 108% over the past five years
One of the biggest challenges facing Merafe’s ferrochrome operations is the dramatic rise in electricity costs. The price of electricity accounts for about 20% of ferrochrome production costs and has risen 108% over the past five years. Having negotiated a special tariff deal with Eskom, aimed at supporting energy-intensive industries, hasn’t been enough to insulate Merafe from mounting cost pressures.
The company is considering shutting down at least 50% of its operational ferrochrome furnaces by May 2025 unless it can secure lower Eskom pricing. If a price reduction can’t be achieved, Merafe will increase exports of unutilised chrome ore instead.
Merafe isn’t alone in this struggle. ArcelorMittal South Africa recently cited surging electricity costs as a key factor in its decision to close its long steel business. This broader industrial trend could ironically lead to some lessening of South Africa’s persistent electricity shortages, as the closure of energy-intensive operations reduces overall power demand. However, it will come at a significant economic cost for the country, including lower industrial output and job losses.
Despite the challenging market environment, Merafe remains profitable. According to a recent trading statement, the company expects headline earnings per share of about 43c for 2024. While this represents a roughly 30% decline from the prior year, it still places the company on an extremely low earnings multiple of just 2.5. Additionally, Merafe boasts a healthy net cash position of R1.8bn, providing a solid foundation for continuing to pay attractive dividends in the short term.
The key question is whether shifting 50% of ferrochrome production to chrome ore exports will generate comparable cash flows. The market appears uncertain, as the reduction in the share price by a quarter since the announcement shows, but this drop may also reflect the broader effect of lower ferrochrome and chrome ore prices on profitability. One silver lining is that Eskom’s 2025 price increase is limited to 12.7%, far lower than the initially feared 36%, offering some relief of cost pressures. The price hikes for 2026 and 2027 are set at a restrained 5.36% and 6.19% respectively, which is also a welcome relief for the sector.
What is not in doubt, however, is the severe economic effect a shift will have on South Africa. Ferrochrome exports generate roughly four times as much revenue per ton as unrefined chrome ore does. A move away from ferrochrome production will not only reduce the country’s foreign exchange earnings, it will also lead to significant job losses across the industry.
Though 2025 has seen an uptick in the ferrochrome market, and even more so in chrome ore, the sustainability of this recovery remains uncertain. A stronger Chinese economy, bolstered by expanded stimulus measures, could provide a much-needed boost.
Eskom’s moderate electricity price hikes for the next two years are a welcome relief, but Merafe shareholders and South Africa as a whole can only hope that the damage hasn’t already been done.
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