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Fairfax ups International Ferro Metals target, says company has expansion and takeover potential

Broker Fairfax issued a note on International Ferro Metals (AIM: IFL) today, projecting the surging ferrochrome prices to push the company back into profit and giving it a 'buy' rating. It also increased the price target to 61 pence compared to the previous target of 59 pence and a market value of around 33.75 pence.

The report said that the market seems to be turning in IFM’s favour as ferrochrome prices are projected to settle between US$1.25-1.30/lb in the March quarter this year as production issues constrain the supply of premium quality chromite ore from Eti Chrome in Turkey to smelters, chopping a significant quantity of production capacity out of the market.

Fairfax has made adjustments in its modelling as the tightening of the supply chain through restocking lost inventory levels is likely to distort prices received for production and has led producers to set higher benchmark prices for this year.

Meanwhile, stainless steel producers are recovering lost demand with up to 80% capacity forecast for the sector this year and new production capacity is likely to be brought in as producers compete for market share.

The broker expects IFM to post its first uninterrupted period of ferrochrome production in the second half of 2010, while cash costs are projected to be maintained at US$0.80/lb despite a 25% rise in power costs in South Africa, which will be offset by a recovery in production and a weaker rand. IFM has received assurances from South African power utility Eskom that it should have sufficient power to maintain normal operation during the football World Cup in South Africa this year and for its planned expansion of furnaces, both of which are beyond current market expectations, said Fairfax.

Apart from the potential expansion beyond the current capacity of two furnaces, Fairfax noted the company’s takeover potential as some of the key industry players will likely look into acquiring the company as prices and demand climb.

Fairfax projects the company to achieve sales of US$206.5 million, which is more than double last year’s US$100.4 million, which will then increase to US$357.6 million, US$381.5 million and US$392.8 million in 2011, 2012 and 2013 respectively before hitting US$404.6 million in 2014. EBITDA (earnings before interest, taxes, depreciation and amortisation are expected to climb to US$78 million next year form this year’s projected US$2 million before increasing to over US$90 million for the following three years through 2014.

The report concluded that IFM will gain value this year, being highly leveraged to the SA rand and to ferrochrome prices, which it said were both moving in “helpful directions,” putting the stock in a position to benefit from the recovery in demand. Fairfax continued to recommend the company for its leverage and forecast revaluation.

Disclosure: The author holds no positions in the company