Financial capital

MATERIAL
ISSUES


  • Global economic environment
  • Ferrochrome demand and prices
  • Energy supply and prices
  • Rand/US Dollar exchange rate
  • Costs


Financial capital makes it possible for the other types of capital to be owned and traded. It is also representative of how successful we have been at achieving the sustainable development of our natural, human, social and manufactured capital.

Sustainable organisations need a clear understanding of how financial value is created, in particular dependence on other forms of capital. We enhance our financial capital by:

  • effective management of risk;
  • corporate governance structures;
  • ensuring equitable use of wealth created; and
  • assessing the wider economic impact of our activities on society.

Kajal Bissessor

Merafe's financial results for 2017 were outstanding with new records set for revenue and EBITDA. During the year we focused on debt reduction and balance sheet strengthening and are pleased to report that the debt at Merafe level was fully settled by year-end. The Merafe Group reported a net cash balance of R600m at the end of 2017 which is a significant turnaround from the net debt balance of R409m at the end of 2016. We delivered on our stable dividend policy and are pleased to report record dividends declared of R301 million for the year ended 31 December 2017.

Kajal Bissessor
Financial Director

KEY POINTS – 2017

  Revenue
R5.9 billion
(2016: R5.7 billion)
     
  EBITDA
R1.7 billion
(2016: R1.1 billion)
     
  Net profit
R914 million
(2016: R532 million)
     
  Net cash balance of
R600 million
(2016: R409 million net debt)
     
  Dividends
declared of
R301 million
(2016: R120 million)
Financial performance

Detailed below are the key contributors to the exceptional results:

  • Revenue increased by 3% which is a function of the significant increase in both ferrochrome and chrome ore prices partially offset by lower ferrochrome and chrome ore sales volumes and a strengthening of the average Rand/US Dollar exchange rate;
  • Production cost increases of 9% per tonne of ferrochrome were well managed and controlled despite significant pricing pressures for both chrome ore input costs and reductants. In this regard, I refer you to the Manufactured capital section of the report;
  • Corporate costs of R40.4 million (2016: R43.0 million) includes a cash settled share-based payment expense of R5.6 million (2016: R12.8 million) and CSI expenses of R3.5 million (2016: R10 000) contributed to Adopt-a-School;
  • Depreciation increased by 12% year on year as a result of the re-assessment of useful lives and residual values coupled with the scrapping of assets;
  • Net financing costs reduced by 68% as a result of the repayment of borrowings;
  • Merafe's EBITDA margin increased significantly from 20% in 2016 to 28% in 2017; and
  • The effective tax rate increased marginally from 28.4% in 2016 to 28.5% in 2017.
Financial position and cash flows
  • Property, plant and equipment increased from the prior year as a result of capital expenditure of which R403.0 million (2016: R276.0 million) relates to sustaining and R823 000 (2016: R11.6 million) relates to expansionary. The increase in sustaining capital expenditure is as a result of inflation, required refurbishments to older plants in the group coupled with the Venture's ongoing efforts to improve costs and efficiencies across all operations;
  • The increase in inventories is a function of higher raw materials and finished goods. The increase in raw materials is mainly due to higher chrome ore stock levels at a higher average cost as well as an increase in the reductant cost per tonne. The increase in finished goods is a function of higher production volumes compared to sales volumes as well as higher production costs. Finished goods on hand at year end is approximately four to five months of sales;
  • Trade and other receivables reduced significantly compared to the previous year which was primarily as a result of the following:
    • A stronger Rand/US Dollar exchange rate of R13.7 at the end of 2016 compared to R12.4 at the end of 2017;
    • Earlier than expected receipts from customers; and
    • Lower ferrochrome sales volumes in the last quarter of 2017 compared to the last quarter of 2016.
  • Utilisation of the Venture's debtors discounting facility reduced from R309 million in 2016 to R72 million in 2017;
  • At 31 December 2017, we had nil debt at Merafe level and unutilised debt facilities of R200 million;
  • The net debt** position improved significantly from R409 million net debt in 2016 to R600 million net cash in 2017; and
  • At 31 December 2017, Merafe had cash and cash equivalents of R671.7 million (2016: R263.3 million) which comprised cash held by Merafe of R464.0 million (2016: R208.7 million) and R207.7 million (2016: R54.6 million) being Merafe's share of the cash balance in the Venture.
Dividend payments
  • The interim dividend paid was R75.3 million (2016: R20 million) and a final dividend of R226 million(2016: R100.4 million) was declared by the Board.

**Includes cash and cash equivalents, Merafe's 20.5% of the Glencore Merafe Venture's debtors facility and Merafe's head-office debt.

Kajal Bissessor

Financial Director



Summarised consolidated statement of comprehensive income

For the year ended  
31 December 
2017 
Audited*
R'000 
  31 December 
2016 
Audited*
R'000 
 
Revenue  5 888 945     5 701 567    
EBITDA  1 665 259     1 133 197    
Depreciation  (368 212)    (329 893)   
Net financing costs  (19 325)    (59 356)   
Profit before taxation  1 277 722     743 948    
Taxation  (363 604)    (211 518)   
Profit and total comprehensive income for the year  914 118     532 430    
Basic earnings per share (cents) 36.4     21.2    
Diluted earnings per share (cents) 36.4     21.2    
Ordinary shares in issue  2 510 704 248     2 510 704 248    
Weighted average number of shares for the year  2 510 704 248     2 510 704 248    
Diluted weighted average number of shares for the year  2 510 704 248     2 510 704 248   


Summarised consolidated statement of financial position

As at  
31 December 
2017 
Audited*
R'000 
  31 December 
2016 
Audited*
R'000 
 
ASSETS
Property, plant and equipment 3 271 155   3 235 204  
Deferred tax asset 17 726   19 340  
Long-term receivable 13 864    
Total non-current assets 3 302 745   3 254 544  
Inventories 1 497 798   1 105 437  
Current tax assets   36 395  
Trade and other receivables 883 249   1 587 280  
Cash and cash equivalents 671 655   287 880  
Total current assets 3 052 702   3 016 992  
Total assets 6 355 447   6 271 536  
EQUITY
Share capital 25 107   25 107  
Share premium 1 269 575   1 269 575  
Retained earnings 3 340 843   2 602 474  
Total equity attributable to equity holders 4 635 525   3 897 156  
LIABILITIES
Loans and borrowings 11 094   189 102  
Share based payment liability 5 379   5 012  
Provisions 287 518   151 747  
Deferred tax liabilities 780 485   829 528  
Total non-current liabilities 1 084 476   1 175 389  
Loans and borrowings 1 044   187 839  
Trade and other payables 550 556   668 235  
Working capital loan** 72 272   309 133  
Share based payment liability 3 376   9 208  
Bank overdraft   24 576  
Current tax liability 8 198    
Total current liabilities 635 446   1 198 991  
Total liabilities 1 719 922   2 374 380  
Total equity and liabilities 6 355 447   6 271 536  

* These summarised financial statements were not audited, however, the information has been extracted from the audited consolidated annual financial statements.

** The working capital loan was reclassified from trade and other receivables to a current liability.


Statement of changes in equity

For the year ended  
31 December 
2017 
Audited*
R'000 
  31 December 
2016 
Audited*
R'000 
 
Issued share capital - ordinary shares 25 107     25 107    
Balance at beginning and end of year  25 107     25 107    
Share premium - ordinary shares  1 269 575     1 269 575    
Balance at beginning and end of year  1 269 575     1 269 575    
Retained earnings  3 340 843     2 602 474    
Balance at beginning of year  2 602 474     2 120 007    
Profit and total comprehensive income for the year  914 118     532 430    
Dividends paid  (175 749)    (49 963)   
Total equity at end of year  4 635 525     3 897 156    


Summarised consolidated statement of cash flow

For the year ended  
31 December 
2017 
Audited*
R'000 
  31 December 
2016 
Audited*
R'000 
 
Profit before taxation  1 277 722     743 948    
Finance expense  27 958     63 400    
Finance income  (8 633)    (4 044)   
Depreciation  368 212     329 893    
Adjusted for non-cash items  5 588     12 805    
Share grants vested  (11 053)    (4 624)   
Embedded derivative expense  155 852     (134 549)   
Provisions  135 771     12 396    
Effect of exchange rate fluctuation on cash held during the year  47 175     13 239    
Adjusted for working capital changes  (219 666)    (310 745)   
Cash flows from operations  1 778 926     721 719    
Interest paid  (21 125)    (50 745)   
Interest received  8 514     2 727    
Tax paid  (366 441)    (172 193)   
Cash flows from operating activities  1 399 874     501 508    
Cash flows from investing activities  (403 796)    (287 582)   
Acquisition of property, plant and equipment – sustaining  (402 973)    (275 995)   
Acquisition of property, plant and equipment – expansionary  (823)    (11 587)   
Cash flows from financing activities  (540 552)    (246 953)   
Dividends paid  (175 749)    (49 963)   
Loans repaid  (364 803)    (196 990)   
Net increase/(decrease) in cash and cash equivalents  455 526     (33 027)   
Net cash and cash equivalents at the beginning of the year  263 304     309 570    
Effect of exchange rate fluctuations on cash held  (47 175)    (13 239)   
Net cash and cash equivalents at the end of the year  671 655     263 304   

* These summarised financial statements were not audited, however, the information has been extracted from the audited consolidated annual financial statements.


Our annual financial statements form part of our online integrated annual report for 2017. They are also available from our Company Secretary.