US Edition International Ferro Metals
56½p +1½
Questor says BUY
Ferrochrome demand has slumped by so much over the last year that producers have slashed output by a staggering 90pc.
However, as destocking is coming to an end and with demand likely to start rising, now is a good time to get long-term exposure to the alloy.
Between 80pc to 90pc of ferrochrome is used in the production of stainless steel, which is used for many purposes – from making cutlery to constructing skyscrapers. About 18pc of stainless steel is made up of the ferrochrome alloy.
International Ferro Metals (IFM) is listed in London, but its operations are located in the North West province of South Africa, where the majority of global ferrochrome supplies are found. Indicating the global business of the mining industry, its head office is based in Sydney. It is main-market listed and a member of the FTSE 250 index.
International Ferro Metals aims to be one of the world's low-cost ferrochrome producers and the group eventually plans to increase annual production by 150pc to 665,000 tonnes.
This week, David Kovarsky, chief executive of IFM, said that the destocking cycle was coming to an end. "We're either there, or we're almost there," he said. Analysts have calculated that June ferrochrome inventories were now down to eight-week supply from 12 weeks in May. In December, inventories stood at a 24-week supply.
There is no doubt, however, that the company's full-year results, released on September 13, will be absolutely awful. Most of the results from the mining sector have been appalling so far – and things will be no different at IFM.
However, if you take a look at the earnings forecasts in the graphic, demand should increase significantly over the next few years as the global economy recovers – and IFM will take a large chunk of this increase in demand.
Investors are looking beyond the current set of numbers in the mining industry and through to the recovery. You should be doing this too.
The group announced a share placing this week, which increased its number of shares by 10pc and raised more than £22m. The funds are earmarked to build a new power station at its mining operation, which should be up and running by September 2010.
This is a sensible move. South Africa is structurally deficient in power-generation capacity. Eskom, the country's major power generator, has been limiting supplies to mines and they have been running on limited capacity. The new power plant should provide 11pc of the group's total energy needs.
Building its own power generation will allow the group to get capacity utilisation back up to 100pc from its current 90pc.
Industry capacity was slashed by around 90pc over the last year, but it looks like restocking is about to begin in earnest – and this will be positive for ferrochrome prices.
Merafe Resources, a South African miner that runs a ferrochrome joint venture with Swiss group Xstrata, said this week that if sales continued at current trend, without the start up of additional production capacity, the stockpile levels would become "far below" the normalised levels.
IFM has been cutting costs and raising production capacity, which should put it in a strong position when the upturn moves into top gear. Its product is an essential component in stainless steel production and the market is close to a bottom.
The shares are trading on a June 2010 earnings multiple of 48 times, but this falls to just 6.7 in the following year.
The share pays no dividend, so it is not suitable for investors focusing on income, but it offers great long-term growth prospects. This is one share to buy and tuck away.
Hilton Food Group
184p -¾
Questor says BUY
Questor remains bullish on all aspects of food production and distribution – and things are going as planned at Hilton Foods Group.
The company produces steaks, lamb and beef roasting joints and value ranges such as steak mince meat.
The company supplies some of Europe's premier supermarket chains, including Tesco in the UK, as well as Ahold and Albert Heijn in the Netherlands.
In its recent trading update, the company said that it was trading in line with management expectations, despite the challenging backdrop. This is good news. Based on current forecasts, analysts are expecting earnings per share to increase 12pc this year and next, which would represent a stunning performance.
Hilton sources meat locally and then processes and packs it in large-scale, modern, central meat-packing plants for onward distribution by third-party hauliers.
These plants operate at high volumes and the company has made significant investment in its packing capacity over the last few years.
The company has a strong balance sheet, with no refinancing needed until 2013, good growth prospects, and it is a cash-generative business. Its interim figures will be published on September 10 and, following this upbeat update, Questor expects no surprises.
The shares are trading on a December 2009 earnings multiple of 9.7 and yielding 4.9pc. The stance on the shares, which are up 13pc since their recommendation on April 4, remains buy.