Merafe Resources (JSE: MRF) earnings rebound as new Eskom tariff opens path to smelter recovery

Merafe Resources Limited (JSE: MRF; A2X: MRF) expects first-half earnings to rise sharply even though attributable ferrochrome production fell 75% to 28,000 tonnes. Basic earnings per share are expected to increase by between 110% and 130%, while headline earnings per share could rise by between 55% and 75%. Merafe attributed the improvement primarily to higher commodity prices and higher sales volumes. The contrast matters because earnings have recovered while ferrochrome smelting remained heavily constrained. A newly agreed electricity tariff now puts the durability of that recovery under a much tougher operating test.

Merafe expects basic earnings per share of between 19.5 cents and 21.4 cents for the six months ended June 30, 2026, compared with 9.3 cents a year earlier. Headline earnings per share are expected between 19.5 cents and 22.0 cents, against 12.6 cents in the first half of 2025. At the midpoint, those ranges imply EPS growth of about 120% and HEPS growth of roughly 65%.

The operating numbers tell a very different story. Merafe’s attributable ferrochrome production from the Glencore-Merafe Chrome Venture fell to 28,000 tonnes from 112,000 tonnes. Chrome ore production declined more modestly to 425,000 tonnes from 443,000 tonnes, while platinum group metals concentrate production slipped to 6,700 ounces from 7,100 ounces. The sharp ferrochrome decline reflected suspended production at the Wonderkop and Boshoek smelters and a partial suspension at Lion during the reporting period.

That creates the central question for Merafe shareholders. Higher prices and sales volumes can support a strong reporting period even when current production is weak, but they do not by themselves prove that South African ferrochrome smelting has regained sustainable economics. The next phase depends on whether lower electricity costs can translate into profitable furnace utilisation and stronger cash generation.

How can Merafe Resources earnings more than double when ferrochrome production has fallen 75%?

Production and earnings do not necessarily move together over a six-month reporting period. Revenue depends on the volumes actually sold, realised commodity prices, product mix and currency movements rather than only material produced during the same period. Merafe specifically attributed its expected earnings improvement to higher commodity prices and higher sales volumes.

That distinction is particularly important after the severe disruption experienced during 2025. Merafe’s first-half 2025 revenue fell 47% to R2.52 billion, while EBITDA declined 56% to R500 million. Headline earnings dropped 55% to 12.6 cents per share and basic earnings fell 68% to 9.3 cents. First-half profit was R233 million.

The weakness carried into the full year. Merafe reported 2025 revenue of R5.84 billion, down 31%, while EBITDA fell to R533 million from R1.70 billion. Full-year profit declined to R143 million and headline earnings dropped to 12.2 cents per share. Ferrochrome sales volumes fell 58% to 124,000 tonnes, while chrome ore sales increased 44% to 683,000 tonnes.

Against that backdrop, the first-half 2026 earnings guidance represents a significant reversal. The midpoint of the expected basic EPS range, about 20.45 cents, is already more than three times Merafe’s 5.7 cents of basic EPS for the entire 2025 financial year. The comparison should not be treated as a full-year forecast, but it shows how dramatically the earnings environment improved during the opening six months of 2026.

The issue is sustainability. Merafe has demonstrated that better commodity pricing and sales can repair reported earnings quickly. It must now demonstrate that resumed ferrochrome production can generate acceptable margins after electricity, reductants, labour, maintenance and other conversion costs are included.

Why does the new 62c Eskom electricity tariff change the economics of Merafe’s smelters?

Electricity has been at the centre of Merafe’s ferrochrome problem. The company’s 2025 reporting said an interim tariff of 87.74 cents per kilowatt-hour allowed half of Lion’s operating capacity to return during February 2026, but was still insufficient for sustainable long-term operations. Merafe indicated that Lion, Boshoek and Wonderkop required a tariff of approximately 62 cents per kilowatt-hour to operate on a commercially viable long-term basis.

That threshold has now moved from negotiation to an agreed framework. The National Energy Regulator of South Africa approved the proposed 62c/kWh tariff for the ferrochrome industry, after which the Glencore-Merafe Chrome Venture concluded detailed Negotiated Pricing Agreements with Eskom Holdings SOC Limited. The agreements provide a stable three-year electricity pricing framework and enable the restart of the Boshoek and Wonderkop smelters.

The difference between 87.74c/kWh and 62c/kWh is 25.74 cents, equivalent to a reduction of about 29% against the interim tariff. That does not mean Merafe’s total ferrochrome production costs decline by 29%, because electricity is only one component of the cost base. It does mean that one of the largest constraints identified by management has been materially reduced.

The significance extends beyond a cheaper electricity bill. Smelters carry substantial fixed costs whether furnaces are operating efficiently or sitting idle. Merafe reported R633 million of standing charges during 2025, compared with R287 million a year earlier, largely because of suspended smelting operations. Restarting capacity can therefore improve fixed-cost absorption if sufficient production is achieved at commercially viable margins.

That is where the new tariff becomes a genuine operating catalyst rather than merely a regulatory event. Merafe now has a clearer electricity-cost framework for three years. The next test is whether Boshoek and Wonderkop can restart safely, raise utilisation and rebuild ferrochrome volumes without introducing new cost pressure elsewhere.

Can Boshoek and Wonderkop rebuild Merafe production without sacrificing the earnings recovery?

The scale of the production decline leaves substantial room for recovery. Attributable ferrochrome output of 28,000 tonnes in the first half of 2026 compares with 112,000 tonnes a year earlier and 301,000 tonnes for the full 2024 financial year. The starting point is therefore unusually low.

A restart could lift volumes rapidly in percentage terms, but percentage growth from a depressed base is not the important measure. The more meaningful question is how much cash each incremental tonne produces after power and conversion costs. Returning furnaces to service only creates value if the contribution margin exceeds the additional operating and working-capital requirements.

Merafe’s 2025 experience shows why this distinction matters. Ferrochrome production costs per tonne rose 14% during the year as lower utilisation increased fixed-cost allocation, while the business also absorbed retrenchment and rehabilitation costs. Lower production therefore affected more than sales volumes; it weakened the economics of the remaining output.

Higher utilisation under the new tariff offers a route to reverse part of that effect. More tonnes flowing through an existing smelting network can spread fixed costs across a larger production base. However, the benefit will depend on furnace reliability, commodity prices, reductant costs and the pace at which restarted operations stabilise.

The first production figures after the Boshoek and Wonderkop restart will consequently matter more than the headline announcement that the furnaces can restart. Sustainable utilisation, production cost per tonne and cash conversion will show whether cheaper power has genuinely restored competitiveness.

What does Merafe’s R1.59 billion cash position say about its ability to fund the restart?

Merafe entered the next phase with considerably more liquidity than a year earlier. The company expected cash and cash equivalents plus its share of balances held with Central Treasury to total approximately R1.59 billion at June 30, 2026, compared with a restated R1.16 billion in June 2025. That represents an increase of about 38%.

The R1.59 billion comprised approximately R871 million held directly by Merafe and R721 million representing its share of Central Treasury balances. A separate R410 million attributable share of a 120-day notice deposit reserved for future environmental rehabilitation obligations was excluded from the figure.

The improvement matters because restarting smelting operations can consume working capital before the resulting sales convert into cash. Furnaces require feedstock, power, labour and other operating inputs, while finished material must move through logistics and customer payment cycles. A stronger liquidity position provides more room to manage that transition.

The cash figure should not, however, be interpreted as R1.59 billion of unrestricted surplus capital available for dividends or acquisitions. Part of the balance sits within the Venture’s Central Treasury arrangements, while the business is entering a period of operational rebuilding. The more useful conclusion is that Merafe appears to have materially more financial flexibility than it did at the comparable 2025 reporting date.

That distinction becomes important when assessing future distributions. Merafe has historically returned substantial cash to shareholders, but the restart programme creates competing demands for capital. Strong earnings will matter less if they are accompanied by a large working-capital build or materially higher sustaining expenditure.

Why is South Africa’s shrinking ferrochrome share the bigger strategic issue behind the Merafe recovery?

Merafe’s own industry data shows how quickly South Africa’s position in ferrochrome has weakened. Global ferrochrome production declined from 17.1 million tonnes in 2024 to 15.9 million tonnes in 2025, while South African production fell from 3.3 million tonnes to 1.6 million tonnes. At the same time, China’s imports of South African chrome ore increased to approximately 19.6 million tonnes from 17.0 million tonnes.

Those figures produce a striking comparison. South Africa accounted for roughly 19.3% of global ferrochrome output in 2024 but only about 10.1% in 2025. In one year, its implied global share almost halved even as more South African chrome ore was shipped to China.

That helps explain why electricity pricing became an industrial-policy issue rather than merely a Merafe cost negotiation. South Africa possesses major chrome resources, but high domestic conversion costs can encourage the economic value chain to migrate toward exporting ore and producing more ferrochrome elsewhere. Merafe itself has repeatedly identified high energy costs and increasing Chinese competition as central challenges facing domestic smelters.

The 62c/kWh tariff therefore creates a test with implications beyond one listed company. If domestic smelting volumes recover and plants operate sustainably, the arrangement could demonstrate that targeted electricity pricing can preserve more mineral beneficiation inside South Africa. If smelters remain marginal even at the lower tariff, it would suggest that electricity was only one part of a broader competitiveness problem.

For Merafe, the strategic benefit is straightforward. A functioning domestic ferrochrome platform provides another route to monetise chrome ore rather than relying increasingly on raw-material sales. The commercial benefit still depends on global ferrochrome pricing and demand, but the new electricity structure removes one of the obstacles management had repeatedly identified.

What does Merafe Resources’ share-price performance suggest about the recovery expectations?

Merafe’s share price had already strengthened before the full financial effect of the new tariff became visible. Delayed market data showed the shares at 134 cents on July 30, 2026, up about 22% from the start of the year and 10.8% over 12 months. The price sat just below the reported 52-week high of 135 cents and well above the 94-cent low.

The timing is notable because the July 30 price came after both the June electricity agreement and the July 27 earnings guidance. It would be too strong to attribute the entire share-price performance to those developments, but the valuation backdrop suggests that investors had already assigned greater value to Merafe than during the period of maximum uncertainty around smelter closures.

At 134 cents and roughly 2.5 billion shares in issue, Merafe’s equity value was about R3.35 billion on that dated reference price. The expected R1.59 billion of cash and Central Treasury balances represented approximately 48% of that amount. This is not equivalent to saying that almost half the market capitalisation consists of excess cash, but it highlights the financial buffer relative to the company’s equity value.

The stronger share price also raises the standard of evidence required for another rerating. Merafe is no longer being valued against the same degree of closure risk that existed earlier in the smelter negotiations. Further upside would increasingly need to be supported by evidence that the 62c tariff translates into sustainable production, margins and cash generation.

That shifts investor attention from regulatory relief to execution. The electricity agreement solved a major uncertainty. It did not solve ferrochrome pricing, operational reliability or the competitive challenge from overseas producers.

What will prove that Merafe Resources’ earnings rebound is more than a commodity-price windfall?

Several parts of the Merafe investment case have improved simultaneously. Expected earnings are substantially higher, liquidity has increased and the Venture has secured the lower electricity price it said was needed to support sustainable smelting. Boshoek and Wonderkop also have a defined route back into production.

The unresolved issue is whether these developments can be connected into a durable operating recovery. First-half 2026 earnings benefited from higher commodity prices and higher sales volumes at a time when attributable ferrochrome production was only 28,000 tonnes. That makes the reporting period financially encouraging but operationally unusual.

The next proof point should come from production rather than another policy announcement. A meaningful increase in ferrochrome output from Boshoek and Wonderkop, accompanied by controlled unit costs and positive cash generation, would provide stronger evidence that the 62c electricity framework has changed the underlying economics.

A recovery driven by both production and margins would strengthen the case materially. A rise in tonnes accompanied by weak cash conversion, renewed cost inflation or dependence on unusually high commodity prices would make the improvement less convincing.

Merafe has therefore moved from an electricity-survival story into an execution story. The 75% production decline explains how severe the operating disruption became. The sharp earnings rebound shows how quickly financial outcomes can improve when pricing and sales conditions move favourably. The real test is whether cheaper power can now reconnect those two sides of the business.

Key takeaways from Merafe Resources’ 2026 ferrochrome production and earnings outlook

• Merafe Resources expects basic EPS to increase by 110% to 130% for the six months ended June 30, 2026.
• Headline EPS is expected to rise by 55% to 75%, with higher commodity prices and higher sales volumes identified as the main drivers.
• Attributable ferrochrome production fell 75% to 28,000 tonnes after suspensions at Wonderkop, Boshoek and part of Lion.
• The midpoint of Merafe’s EPS guidance is about 20.45 cents, more than three times the 5.7 cents reported for the entire 2025 financial year.
• Eskom and the Glencore-Merafe Chrome Venture have concluded agreements giving effect to a 62c/kWh electricity tariff for three years.
• The tariff enables the restart of Boshoek and Wonderkop and is about 29% below the previous 87.74c/kWh interim tariff.
• Cash and Central Treasury balances are expected to reach approximately R1.59 billion, around 38% higher than the comparable 2025 balance.
• South Africa’s implied share of global ferrochrome production fell from about 19.3% in 2024 to roughly 10.1% in 2025.
• Merafe shares were trading close to their 52-week high by late July, meaning future valuation gains increasingly require operating evidence rather than tariff expectations alone.
• Sustainable production, unit costs and cash generation following the smelter restarts will provide the clearest test of whether the recovery can endure.