Chief Executive Officer's strategic review

Zanele Matlala

The focus of the Company in 2017 continued to be on safety, ferrochrome production, maximising cash flows from the Venture and reducing debt and costs.

Zanele Matlala
Chief Executive Officer

Introduction

For the 2017 financial year new records were set for ferrochrome and chrome ore production, revenue and EBITDA. We have delivered excellent returns to shareholders, with a record total dividend of R301m for the 2017 year, underpinning our stable dividend policy.

The exceptional results were achieved despite the year under review being characterised by volatility in both ferrochrome prices and Rand/US Dollar exchange rate. Ferrochrome and chrome prices saw a marked pull back from multi-year highs reached towards the end of 2016. The European Benchmark ferrochrome price was set at 165 US cents/lb for the first quarter of 2017 only to decline to 139 US cents for the fourth quarter of 2017 due to macro-economic factors. The average Rand/US Dollar exchange rate strengthened by 9.5% during the year under review.

Financial review

Profit after tax rose by 72% as a result of higher revenue. The increase in revenue was driven by significantly higher prices, which were offset by lower volumes and a stronger Rand:US Dollar exchange rate.

The balance sheet strengthened even further as a result of our focus on debt reduction as part of our strategy. The net cash position improved significantly from net debt of R409 million in 2016 to R600 million net cash at the end of 2017 financial year.

I refer you to the Financial Capital section of this report as well as to our annual financial statements which are on our website for further information.

Operational review

Production volumes rose to a new record high of 395kt which is equivalent to 82% of installed capacity.

There were no major electricity supply constraints during the year. The NERSA approved tariff hike of 2,2% became effective on 1 April 2017. Post year-end NERSA approved a 5.23% increase effective 1 April 2018 despite Eskom applying for a double digit increase of 19.9%.

Sadly we had a fatality at our Lion Smelter on 21 March 2017 when Mr Tshepo Braine Makola sustained fatal injuries. Our deepest condolences go to his family, friends and colleagues.

The safety of our employees continues to be a key priority. For this reason we are pleased with the downward trend in Total Recordable Frequency Injury Rate which reduced from 4.15 to 3.74.

Once again there were sporadic incidents of community unrest in the Steelpoort area. However this did not have a significant impact on our operations. We continue to engage all relevant stakeholders to find lasting solutions to the issues.

Market review

Global stainless steel growth stalled in early 2017 when a number of Chinese mills announced widespread environmental and pricing-linked shutdowns. Despite the slow start to the year, the commissioning of a large Indonesian stainless steel project, increasing US output, and a second-half recovery in Chinese production resulted in global stainless steel output achieving growth of 5.9%^. Global output for the year is estimated to have been 48.3^ million tonnes, of which Chinese mills accounted for 25.7m^ tonnes.

Ferrochrome pricing remained volatile throughout 2017, as both market fundamentals and macroeconomic factors contributed to large swings. The year began with near-term record chrome prices as Metal Bulletin's quotes for imported charge chrome (CIF China) and imported UG2 chrome ore (CIF China) reached 135.00 US c/lb and 395.00 USD/t respectively. This followed a Q1 2017 European Benchmark ferrochrome price of 165.00 US c/lb, which increased 50% from the prior quarter.

The strong pricing environment incentivised additional supply which, in conjunction with the temporary slowdown in the Chinese stainless industry, caused a rapid pricing decrease in early Q2 2017. Metal Bulletin's quotes for UG2 chrome ore and imported charge ferrochrome reached floors in June, when they were announced as 138.00 USD/t and 70.00 c/lb respectively.

Corporate governance

The second half of the year was characterised by a rebalancing of the industry's supply-demand structure, and multiple price fluctuations continued to cause disruption. Under these conditions, Chinese ferrochrome producers were able to increase their 2017 annual output to 4.9m^ tonnes, up from 4.1m^ tonnes a year earlier. Global ferrochrome output is estimated to have increased to 12.3m^ tonnes in 2017, up 11.3%^ year on year.

China's increase in ferrochrome production resulted in a large rise in seaborne chrome ore trade. During 2017, China imported 13.9m** tonnes of chrome ore, marking a year on year increase of 31.1%**. South African producers maintained their position as China's largest supplier, accounting for 72.3%** of these imports by volume.

** Chinese trade information

^ CRU

Mining Charter review

The industry and ourselves await the outcome of the review of the Revised Mining Charter by the Chamber of Mines. The Revised Mining Charter was published on 15 June 2017 by the Minister of Mineral Resources and subsequently suspended by the Minister until judgement has been handed down in the matter. At the time of writing, the matter has been postponed to allow for further discussions and engagement. However, the Company is committed to meaningful transformation and is strongly of the view that transformation is critical to the sustainability of the Company in the long term.

Strategic focus

The focus of the Company in 2017 continued to be on safety, ferrochrome production, maximising cash flows from the Venture and reducing debt and costs.

As a result of this focus, we managed to settle all debt at Merafe level and pay record dividends to our shareholders.

We remain mindful that mining is a long-term business and we need to show value to all our stakeholders and be fully focused on material issues which may impact the business in the future. In this regard I refer you to Material Issues section as well as the sections on Natural, Human and Social capital in this report.

Outlook

Global stainless production is projected to grow by 4.1%^ in 2018 and an average of 3%^ for the three years thereafter, as additional Indonesian capacity is brought online and demand remains robust. This will bolster demand for ferrochrome, particularly from non-Chinese sources. Merafe remains well-positioned to take advantage of the healthy market outlook.

In accordance with our strategy, we remain committed to maximising return to our shareholders in the near term in the form of dividends and will continue to assess opportunities to deliver shareholder value.

Zanele Matlala

Chief Executive Officer

KEY MARKET INDICATOR'S

Global Stainless Steel Production
Global Ferrochrome Demand
Global Stainless Steel Production Global Ferrochrome Demand
   
Global Ferrochrome Production
Chrome Ore Imports into China
Global Ferrochrome Production Chrome Ore Imports into China