Commentary

Review of results

Merafe’s revenue and operating income are primarily generated from the Glencore-Merafe Chrome Venture (“Venture”) which is one of the global market leaders in ferrochrome production, with a total installed capacity of 2.3m tonnes of ferrochrome per annum. Merafe shares in 20.5% of the earnings before interest, taxation, depreciation and amortisation (“EBITDA”) from the Venture. Merafe has one reportable segment being the mining and beneficiation of chrome ore into ferrochrome and as a result no segment report has been presented.

Total revenue increased by 5.5% to R2.721bn (June 2017: R2.580bn).

Ferrochrome revenue increased by 2.6% period on period to R2.342bn (June 2017: R2.282bn) mainly due to higher sales volumes of 181kt (June 2017: 157kt) partly off set by the stronger average Rand/US Dollar exchange rate of R12.31 (June 2017: R13.21) and lower net CIF prices.

Chrome ore revenue increased by 27.1% period on period to R378.5m (June 2017: R297.8m) mainly due to higher realised chrome ore sales prices partly set off by lower sales volumes of 132kt (June 2017: 146kt) and a stronger average Rand/US Dollar exchange rate. The higher chrome ore realised prices were impacted by lower local sales volumes period on period.

Merafe’s portion of the Venture’s EBITDA for the six months ended 30 June 2018 is R814.4m (June 2017: R887.1m). The EBITDA includes Merafe’s attributable share of standing charges of R38.2m (June 2017: R32.7m) and a foreign exchange gain of R102.6m (June 2017: R50.1m foreign exchange loss).

After accounting for corporate costs of R18.1m (June 2017: R21.7m), which includes a cash settled sharebased payment expense of R1.4m (June 2017: R2.8m), Merafe’s EBITDA reached R796.3m (June 2017: R865.4m).

Profit for the six months ended 30 June 2018 amounted to R425.1m (June 2017: R486.5m), after taking into account depreciation of R203.6m (June 2017: R164.9m), net financing costs of R2.8m (June 2017: R23.8m) and an income tax expense of R164.7m (June 2017: R190.2m). The taxation expense includes deferred tax income of R19.2m (June 2017: R91.5m) which arose as a result of temporary and timing differences on property, plant and equipment, the embedded derivative and provisions. There is no unredeemed capital expenditure balance at 30 June 2018 given the taxable profits exceeded capital expenditure.

Depreciation increased to R203.6m (June 2017: R164.9m) for the six months ended 30 June 2018 as a result of the accelerated depreciation arising from the scrapping of assets and the reassessment of residual values to zero in the second half of 2017. Net financing costs include R13.2m (June 2017: R11.9m) relating to the unwinding of discount on the provision for rehabilitation. The significant reduction in net financing costs is as a result of the reduction in borrowings and higher finance income which is a function of higher average bank balances.

Sustaining capital expenditure incurred for the period was R174.0m (June 2017: R141.3m) and expansionary capital expenditure incurred for the period was R0.2m (June 2017: R0.8m).

At 30 June 2018, Merafe had cash and cash equivalents of R331.0m3 (Dec 2017: R671.7m)3 which comprised of cash held by Merafe of R255.5m (Dec 2017: R464.0m) and R75.5m (Dec 2017: R207.7m) being Merafe’s share of the cash balance in the Venture. At 30 June 2018, the net cash balance, which includes cash and cash equivalents, bank overdraft and working capital loan was R331.0m (Dec 2017: R600.0m).

The group has a R200m three-year revolving credit facility which was secured during 2017 as previously reported. At the reporting date, this facility was unutilised.

Inventories increased to R1.881bn (Dec 2017: R1.498bn) as a result of higher finished goods on hand at period end, which amounts to approximately four to five months of sales. The increase is a function of higher production volumes compared to sales volumes as well as higher production costs.

A reassessment of the closure and restoration costs of all smelters was performed during the period. As a result of this reassessment, the provision for closure and restoration was increased to R185.8m (Dec 2017: R157.1m).

Trade and other receivables increased by 32.2% to R1.167bn (Dec 2017: R0.883bn) mainly due to a weaker closing Rand/US Dollar of R13.71 (Dec 2017: R12.39) as well as earlier than expected receipts from debtors in December 2017 compared to June 2018.

The Board of directors of Merafe (“Board”) declared an interim cash dividend of R200.0m.

3Includes cash and cash equivalents and bank overdraft.

Review of Operations and Safety

Review of operations

Merafe’s attributable ferrochrome production from the Venture for the first six months of 2018 decreased by 2.3% to 211kt (June 2017: 216kt). The production for the period is equivalent to an installed capacity utilisation of 88% (June 2017: 90%).

Total production costs per tonne of ferrochrome increased by 4.8% compared to 31 December 2017, mainly as a result of an increase in electricity prices of 5.3% effective 1 April 2018 as well as an increase in reductant costs, arising from a change in mix due to availability.

The Venture’s operations were not significantly impacted by electricity supply constraints in the first half of 2018.

Wage settlements have been concluded and implemented at the Venture’s eastern operations whilst wage negotiations are currently ongoing at its western operations.

Safety

Safety remains a priority and a critical focus area of the Venture. Our TRIFR reduced by 2.4% to 3.65 compared to 31 December 2017. All efforts continue to be made to ensure that the highest standards of safety remain in place at our operations.

Mineral Reserves, Mineral Resources and Mining Rights

There were no material changes to mineral reserves, mineral resources and mining rights of the participants in the Venture from those reported in the Integrated Annual Report for the year ended 31 December 2017.

Market Review (source: CRU)

Global stainless steel production increased by 10% period on period. For the first time in years, Chinese output was not the leading factor behind this rise. Although China’s stainless steel production rose by 7% period on period, the ex-China market, notably Indonesia, increased its stainless steel output by 13%, period on period. European and North American stainless steel production increased by 2.5% and 1% period on period, respectively.

Due to strong growth in Indonesia, where stainless steel production is almost entirely dependent on primary chrome units, global demand for ferrochrome increased by 11%, period on period. Growth in ferrochrome supply has not matched the rise in demand so far this year with global ferrochrome production rising by 8%, period on period. Chinese ferrochrome smelters made the largest contribution to this increase, their output rose by more than 11% period on period to about 2.4m tonnes. More modest supply increases took place in South Africa and India.

The Chinese market has been periodically in slight deficit in recent months, particularly when environmental inspections forced the closure of furnace capacity.

Movements in the European benchmark ferrochrome price have largely mirrored the relative balance of the Chinese market this year. Following a period of tightness in the Chinese market in the first quarter of 2018, the benchmark rose 20% to reach $1.42/lb for deliveries in the second quarter. Supply disruptions in China, coincided with the settlement period for deliveries in the third quarter, with the result that the benchmark dropped by 4USc/lb to $1.38/lb.

A 13% period on period increase in China’s chrome ore imports between January and May helped to maintain UG2 concentrate transaction levels within a range between $170-$250/t CIF China, with continuing volatility, albeit a narrower range than that recorded for the same period last year.

At 30 June 2018, chrome ore stocks in Chinese ports rose to 3.2m tonnes (source: ICDA) or about 15 weeks of consumption over the period.

Outlook

Total 2018 stainless steel production is currently forecast to be 50.8m tonnes (CRU), an increase of 4.9% over 2017. Price and exchange rate volatility are expected to continue, especially given uncertainties driven by trade wars and the global economic environment.

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.

Chris Molefe
Independent Non-executive Chairman
Zanele Matlala
Chief Executive Officer

Sandton
6 August 2018