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Executive summary

Share price – 76p
Shares in issue – 411m
Market cap – £312m
Debt – as at 31 December 2006, IFM had debt of ZAR700m and restricted cash deposits of circa ZAR235m. Using an exchange rate of ZAR14=£1, IFM had borrowings of £33m as at 31 December 2006.

The following is a summary of a lunch time presentation undertaken by Stephen Turner, IFM's CEO that took place yesterday, location: near to St Pauls.

IFM is switching from AiM to the Main Market next month. I hope this means (given I am a shareholder) that IFM's visibility improves. Fingers crossed that IFM presents at Minesite in June.

Confusingly – although International Ferro Metals' ticker is IFL, I will call the company IFM in this post.

Website

It is worth browsing through the many photographs on the website; IFM has a big market cap compared to many mining companies, but hey, look at the plant the company owns:

http://www.ifml.com/default.aspx

Note the answer to the most important question: what the hell does the logo represent? Answer – a buffalo. It is my guess that one of the directors is responsible.

Overview

IFM has completed the construction of its 'state of the art' integrated ferrochrome facility.

Production commenced in January – three months ahead of schedule.

Largest shareholder is Chinese state owned stainless steel producer JISCO (26%).

IFM owns and operates the Lesedi chromite mine which is situated on the western limb of the South African Bushveld Complex. IFM acquired 80% interest in the nearby Skychrome deposit to enable a doubling of initial ferrochrome production.

IFM completed construction of its 'state-of-the-art' ferrochrome production facility ahead of schedule and on budget.

Total capital cost, including mineral rights, was R2bn ($275m):

- Both FeCr furnaces commissioned in January 2007 and are operating at capacity.
- Beneficiation plant was commissioned during January 2007 and is operating at capacity.
- Pelletising and sintering plant construction was commissioned in May 2007 and is ramping up to capacity.
- Following construction, ramp up to full production in less than 6 months (per Admission Document 12 months).

In this initial stage, IFM will produce 300m lbs of Chrome units per annum, equating to approximate 3.4% of global ferrochrome production. Stage two would double production.

Comments

Amazing, a mining company that has actually delivered a project on time.

Although hardly involved in the most environmentally of friendly industries, IFM will earn carbon credits, this is because the company has commissioned a closed furnace as opposed to (surprise surprise) an open furnace. In pounds, shillings and pence carbon this benefit in terms of carbon credits is not substantial, €2-3m a year, but the good news from the viewpoint of IFM followers is that many (all?) of the existing ferrochrome furnaces in South Africa are open, so they will either need to close them down in time or enclose them. The costs of competitors will increase, oh dear.

For me, it was interesting to note the emphasis during the presentation on stage two, it is not a case of IF IFM will double production, but WHEN IFM double production.

And the answer to that question is that the environmental study on the impact of stage two should be complete in the second half of 2007, capital expenditure starting in earnest in first half of 2008. IFM will soon be looking at all the options on how to fund the second stage, Stephen Turner did say that the company is conservative, which is usually code for saying that the funding will be a mixture of debt and equity.

Naturally, Stephen Turner is excited about stage two:

- Already on site, with a 'state-of-the-art' ferrochrome production facility up and running.
- IFM already has the capacity.
- IFM already has the management.
- IFM already has the technology.
- IFM is at the bottom of the cost curve.

Evidence that shareholders/analysts are never happy, one analyst asked whether the cost will fall further when stage two is up and running, Stephen said no, there are few synergies with regard to having two plants up and running compared to one.

Enough of the future, what about today?

World chromite reserves

South Africa possesses the majority of the World's known reserves.

Chromite ore reserve

South Africa - 5,500 Mill t (72.4%)
Zimbabwe – 930 Mill t (12.2%)
Kazakhstan – 320 Mill t (4.2%)
Finland – 120 Mill t (1.6%)
India - 67 Mill t (0.9%)
Turkey – 20 Mill t (0.3%)
Brazil – 17 Mill t (0.2%)
Other – 626 Mill t (8.2%)

Total – 7,600 Mill t (100.0%)

Source – Mineral bulletin, own estimates

Chromite ore output 2005

South Africa – 7.2 Mill t (37.6%)
Zimbabwe – 0.8 Mill t (4.3%)
Kazakhstan – 3.6 Mill t (18.6%)
Finland – 0.6 Mill t (3.0%)
India – 3.3 Mill t (16.9%)
Turkey – 0.9 Mill t (4.5%)
Brazil – 0.7 Mill t (3.5%)
Other – 2.3 Mill t (11.7%)

Total – 19.3 Mill t (100.0%)

IFM's Integrated Production Facility

The technical bit.

Mining – 861,501 tpa
Beneficiation – 900,000 tpa
Pelletising & sintering – 400,000 tpa

- Two closed 66MVA submerged arc furnaces operating since January 2007.
- 32% of feed is lumpy ore, remainder will be pellets.
- “Proven low risk, high recovery technology” – SRK
- Negligible evolution of hexavalent chromium (I have no idea what this means).

267,400 tonnes per annum from existing facility.

Heinz Pariser knows a lot about Ferrochrome

Heinz Pariser, an independent consultant, produces a 60-page report each week on the stainless steel business.

From the web:

“Mr Pariser is editor and owner of “HHP Alloy Metals & Steel Market Research and Publications”. He founded a market research company in 1981 to share his wealth of experience in metal trading which he gained during more than 20 years in the metals industry. The company specialised in market research and market development for stainless steel, nickel based alloys and alloying elements (nickel, chrome, molybdenum, stainless steel scrap), with a client base representing around 70 % of the western world's stainless steel production.”

http://www.bir.org/publications/news/detailednewspage.asp?Ne...

The following are predictions/comments by Heinz:

Stainless steel production:

- historical growth rate 5.7% per annum
- forecast growth rate 5.9% per annum

Ferrochrome demand expected to increase at a growth rate of 5.2% per annum.

Growth in FeCr supply to 2020 – on average a growth rate of 4.5% is predicted

South Africa is expected to increase production by 6% per annum
Kazakhstan is expected to increase production by 5% per annum

MBR sees the potential to increase FeCr by 4.055 Mill tonnes, but it should be noted that Sweden and Russia are likely to reduce FeCr production by as much as 1.0 Mill tonnes.

Based on expected world demand, ideally FeCr production should increase by 6.0 Mill t.

Recent changes in the FeCr market

- Consolidation in the industry
- Market leadership by financially strong suppliers (Xstrata and Kazchrome)
- Suppliers culture more disciplined with control shifting to larger or listed companies (Xstrata/African Rainbow/Mitsubishi/Tata/Sino Steel)
- Technological advancements (pelletisers, closed furnaces)

FeCr prices forecast by Heinz to be in the US$0.70-0.90/lb for the next 14 years.

Observations

- Positive outlook for stainless steel
- Current price US$0.88/lb
- Heinz Pariser ten-year price forecast of an average US$0.79/lb
- IFM production costs at full capacity US$0.40/lb
- A depreciating ZAR.

IFM's chromite resource is sufficient to produce 540,000 tones of ferrochrome per year (twice the current capacity) for 50 years.

South African production cost structure – the falling ZAR should keep RSA at the bottom of the cost curve, IFM is the cheapest producer of FeCr in RSA.

Comments

Variables when considering of the price of ferrochrome in the future include:

- Demand (will the Chinese economy keep growing?)
- Supply (will new deposits be found?)
- Supply (the cost of new ferrochrome plants)
- Supply (the cost of converting/closing open furnaces)

Key variable for IFM – the weakness or the strength of the Rand against key currencies. 'Everyone' believes that the ZAR will depreciate, inflation is likely to remain high as the economy booms.

Cash

Now I may be about to make an awful howler, this is because the arithmetic is incredibly simple. The engineering may be incredibly complex, and that is on top of the skills involved to link all the key elements together, such as ferrochrome, plant, and customers, but the arithmetic equates to a simple equation.

Currently, stage one:

- IFM can currently produce 267,400 tonnes of ferrochrome per annum.
- Multiply that figure to switch into lbs and then 51% for the Cr content in charge chrome, this equates to 300 million of chrome units.
- IFM have always been excellent when it comes to highlighting in RNS announcements the selling price and the cost of production. Currently the sale price is US$0.88/lb, IFM's production costs at full capacity is US$0.40/lb.
- I calculate the net operating profit in a full year to be US$144m. Using an exchange rate of US$2=£1, this equates to £72m.
- But what about tax? Looking at the admission document, http://www.ifml.com/Files/pdf/IFM_prospectus.pdf, page 152, it would IFM has a five year tax holiday, so I will ignore tax.
- Summary, IFM generates £72m of free cash per annum, it currently has a market cap of circa £345m. Wow.
- Hold on, what happens if the sale price falls to the expected average of US$0.79/lb? Net differential is US$0.39/lb. This equates to US$117m, assuming no tax payable, this equates to £58m per annum, still a healthy figure compared to the market cap.

Remember that:

- IFM has no issues concerning supply.
- Stage two (see below) is on the horizon.

Warning, wild assumption coming up. The total capital cost, including mineral costs, of stage one was ZAR2bn ($275m). Wild assumption, assuming that the cost of the second set of furnaces, beneficiation, pelletising and sintering plant is $400m, circa £200m. I cannot emphasis enough that this is a guess

IFM's market cap increases to £545m, free cash flow increases to £116m if we use a sale price of US$0.79/lb.

Further information on whether IFM will need to pay tax in the first five years of production - “the answer is not straight forward, involving South Africa's 100% write-off for tax of all costs for mining projects up front (which can be carried forward) + a structure in place where by IFML has loaned 70% of its capital to its subsidiary at 12% pa interest. So in the first few years tax is not a cash drain.” From then on IFM will be paying tax at 30%.

Further points on cash:

- IFM receives 90% of the sell price of the chrome at the time of loading.
- Definition of loading now being refined (pardon the pun), loading no longer will mean loading onto a ship but loading onto trucks to take the chrome to the harbour. Nice change.
- IFM paid by agents.
- Circa 64% of production is sold through offtake agreements. It is my understanding that the offtake prices equates to market prices, there are no special discounts for chrome sold via the offtake mechanism.

IFM – Expansion Plan

Potential to expand production facilities (commencing from 2008):

- Existing plant layout designed for incremental expansion.
- IFM has planned and scoped the doubling of the plant's output from 270,000 tpa to 540,000 tpa.
- IFM's chromite resource is sufficient to produce 540,000 tons of ferrochrome per year for over 50 years.

Eskom providing 400 MVA electricity supply (current production requires less than 200 MVA).

Existing EMPR and infrastructure allows for fast tracking of environmental approval for expansion.

Significant infrastructure savings in expansion.

Comments

Someone at the meeting asked about power cuts in RSA. Stephen Turner answered that Eskom was having problems supplying electricity to the national grid, but IFM has a guaranteed supply, so retailers suffer before business. The mantra of the RSA government is to keep industry ticking along in order to keep the economy ticking along.

Stephen also mentioned that the ferrochrome is delivered from the mine by conveyor belt to the arc furnaces. Competitors are having to load ferrochrome onto trucks to get their mineral to the furnaces. Yet another reason why IFM is a low cost producer compared to competitors in RSA.

The existing funding of ZAR600m will be renegotiated in 2008, 1% break fee if the funding is paid back before March 2008. IFM may consider borrowing in US dollars, which will certainly bring the cost of finance down, note also the current loan requires ZAR200m to be held on deposit with the lenders, so given the differential between borrowing and savings rates is high (remember, banks have to make a profit), that is painful. Roll on March 2008.

As for the mix between equity and debt going forward, as mentioned above, IFM is a conservative company.

IFM have already had quotes for the new plant, in the region of 90% higher than the first plant. Not a done deal that the contractors who worked on the first plant will be working on the second plant.

Possible Issues

Costs – electricity costs are likely to increase at some stage, but if the ZAR depreciates against world currencies in the meantime, costs should remain close to the current US$/lb cost.

Black economic empowerment (BEE) – “BEE is intended to transform the economy to be representative of the demographic make-up of the country”. Many implications for RSA companies, one of which is that ownership should begin to reflect the demographic make-up of the country. It is my understanding that by 2009, 15% of IFM's South African operation should be owned by previously disadvantaged groups, the percentage to increase by 26% by 2014. Now I am unclear on the mechanics, I believe ownership changes will be by transferring shares at market value.

Windfall tax – very much a rumour, commodity prices have increased substantially, so why not a windfall tax? Gordon Brown would approve. The RSA government is keen to keep unemployment as low as possible, so is probably going to act cautiously given if companies are frightened to invest, unemployment will rise.

Share price

The SP ticked up nicely yesterday. It is my understanding that Fidelity, who once had a large stake, has been selling. I have no idea why. They finally stopped selling yesterday, the anecdotal information being that the shares were picked up first thing.

Communications

IFM is an Australian company working in South Africa, listed in the UK. When I first looked at the company several months ago, the website was okay but the email address did not work. I managed to obtain the email address of Stephen Turner, for which many thanks to Parkgreen Communications. Since then I have been impressed with Stephen's willingness to answer emails promptly, and having met him yesterday I am impressed with his energy and honesty. I am hopeful that the profile of IFM will improve substantially in the next few months.

Conclusion

If an investor is looking for an exposure to commodities, but does not fancy investing in a hole in the ground where revenues may occur at sometime in the future, they should have a look at IFM, the arithmetic looks appealing.

Also IFM is just coming onto the radar screens of investors as the company switches to the Full List.

Observations

A trip down memory lane observing a director doing the rounds of the City, making the same presentation four, five, ten times during one day, possibly to be repeated the following day.

One thing I noticed was that many people attend, a few ask questions, and the questions can be reasonably searching, but because of the time constraints a detailed Q&A session does not take place. Also analysts are only switched onto the story for an hour max, then it is off to the next presentation, or a pile of broker notes. Not ideal, but the way a lot of the City operates.

Regards.

Colin