Directors' report for the year ended 31 December 2022

The directors' report for the year ended 31 December 2022 is set out on the annual financial statements and an abridged version is set out below.

Nature of business

Merafe was incorporated in South Africa with interests in the ferrochrome and chrome industry. The activities of the Group are undertaken through the Company and its principal subsidiaries and joint arrangements. The Group operates in South Africa. Merafe owns 100% of the share capital in Merafe Ferrochrome and Mining Proprietary Limited (Merafe Ferrochrome/ MFM) which through a pooling and sharing venture with Glencore Operations South Africa Proprietary Limited (GOSA), participates in chrome mining and the beneficiation of chrome ore into ferrochrome.

The Venture operates five ferrochrome smelters (including pelletising and sintering plants), 22 ferrochrome furnaces, six chrome ore mines, a PGM processing plant, and five UG2 plants, situated in the North West, Limpopo and Mpumalanga provinces of South Africa. The Venture is one of the largest ferrochrome producers in the world with an installed capacity of 2.3 metric tonnes per annum. Merafe Ferrochrome's share of the EBITDA is 20.5%. Merafe Ferrochrome shares in the revenue, expenses and liabilities at 20.5%.

The Venture comprises assets to which both GOSA and Merafe Ferrochrome have granted the right-of-use but own in different proportions. Listed below are the operations to which Merafe Ferrochrome has granted the right-of-use to the Venture:

Ferrochrome smelters   Chrome mines   UG2 plants/pelletisers/PGM plant  
Asset Merafe Ferrochrome’s
Asset Merafe Ferrochrome’s
Asset Merafe Ferrochrome’s
Wonderkop smelter (furnaces 5 and 6) 50% Boshoek Mine 100% Two Impala Kanana UG2 plants 100%
Boshoek smelter 100% Kroondal and Wonderkop Mine 50% Three Lonmin UG2 plants 20.5%
Lion I smelter 20.5% Helena Mine 20.5% Bokamoso pelletising plant 20.5%
Lion II smelter 20.5% Magareng Mine 20.5% Motswedi pelletising plant 100%
    Marikana 26% Tswelopele pelletising plant 20.5%
        Unicorn Chrome 20.5%
        Western PGMs plant 20.5%

There have been no material changes to the nature of the Group's business from the prior year.

Group financial results

The financial statements set out the financial results of the Group and Company and have been prepared using appropriate accounting policies, conforming to IFRS and the requirements of the Companies Act of South Africa, supported by reasonable and prudent judgements where required.

Revenue was R7 939m (2021: R8 063m) supported by high commodity prices and a weaker ZAR:USD exchange rate. Both chrome and ferrochrome volumes sold were lower than 2021. Merafe's portion of the Venture's EBITDA for the year ended 31 December 2022 is R 2 228m (2021: R2 498m). The EBITDA includes Merafe's attributable share of standing charges of R108m (2021: R109m) and a foreign exchange gain of R68m (2021: R104m). The Company wrote down inventory by R1m during the year (2021: R24m).

After accounting for corporate costs of R65m (2021: R66m), which include a cash settled share-based payment expense of R13m (2021: R9m), Merafe achieved EBITDA of R2 141m (2021: R2 432m). Corporate costs also include corporate social investment expenses of R3m (2021: R3m), and a bonus provision of R12m (2021: R11m).

Waterval mine and Lydenburg smelter are still under care and maintenance. Boshoek mine which was also on care and maintenance is in the process of being sold, and has been classified as held for sale in terms of IFRS 5.

In 2022, South Africa experienced the worst load shedding year to date. It is estimated that South Africa experienced in excess of 1 900 hours of power cuts. This has disrupted communities and businesses. Although our business was affected by the resultant load curtailments, the impact was not that severe on our operations. Periods of inactivity were used to attend to maintenance on our plants. Cost pressures in general but from Eskom and reductants in particular are a concern. These resulted in our ferrochrome unit production cost increasing by 30% year-on-year. Costs are carefully monitored and every effort is made to bring these under control. While logistical challenges continue, we were able to work around these in delivering products to our customers.

In 2022, the COVID-19 pandemic was not a key feature in our operation. The COVID-19 measures have now been operationalised and we treat all mitigation costs as normal operating expenses. COVID-19's impact on the Chinese economy has been more severe starting with their zero-COVID policy and resulting in a rise in infections after the policy was lifted. China relaxed its COVID-19 policy in the fourth quarter of 2022. There is an expectation of support from the Chinese government to expand domestic demand, prioritise consumption recovery, and achieve major economic targets in 2023. These initiatives are viewed as positive to markets and are likely to provide much needed support to a global economy that is gripped by recession fears.

See manufactured capital of this report for a table on the Venture's plants, technology and mines and abridged mineral resources and mineral reserves statement for further information on the reserves and resources of the Venture.

We therefore expect the China developments to be supportive of both chrome demand and pricing.

While the 2022 financial performance is lower than the prior year's, this performance is remarkable in light of the headwinds that our business faced during the year. 2023 is expected to be a difficult year for various reasons including recession fears as a well as a high inflation, an on-going electricity crisis and interest rate environment. Accordingly, Merafe has and will continue to approach the year with caution while ensuring that cash is preserved and key risks that have been identified are well managed for sustainability of its business.

Full details of the financial position and cash flows of the Group and Company are set out in these consolidated and separate annual financial statements.

Loans and borrowings

The Group had a cash balance of R1 269m at 31 December 2022 (31 December 2021: R972m). The Group's Revolving Credit Facility (RCF) to the value of R300m remains unutilised for the year. Refer to note 27 for the disclosure on the Group's facilities and for covenants associated to these facilities, which includes the facilities to the Venture.

Going concern

As stated above, the Group has a cash balance amounting to R1.269bn and no debt at the reporting date and a cash balance of R1.53bn and no debt as of the 28th of February 2023.

The Group has the benefit of unutilised debt facilities through its 20.5% share of the Venture, which the board considers sufficient to sustain the business for at least the next 12 months in the event that need arose. The Group's forecasts and projections of its short- to medium-term profitability, taking account of likely changes in production and performance, show that the Group will be able to operate within the level of its cash resources and facilities for at least 12 months from the approval date of the annual financial statements.

The Group generated EBITDA of R2.140bn and made profit after tax of R1.410bn in the current year. Merafe Group and the Company maintain healthy cash balances as per note 13 with access to banking and other lending facilities. The Group and Company's credit and liquidity risks have been assessed in note 27.1 and 27.2 of the AFS. Having considered the Group and Company's key risks, current financial position, solvency and liquidity, debt levels, lending facilities available through the Venture, impairment review as well as the Group and Company's financial budgets with their underlying business plans, the directors believe that the Group and Company have sufficient resources and cash flows to be able to continue as a going concern at least for the year ahead. The Group and Company's lending facilities are referenced in note 27.2 of the AFS.

See our annual financial statements.

Dividend policy and ordinary cash dividend

The Company has a hybrid dividend policy that has features of a stable dividend policy and a residual dividend policy. The Company intends to pay a dividend of at least 30% of headline earnings at least once a year taking into account, inter alia, the annual financial performance, expansionary projects and economic circumstances prevailing at the time. In addition, in any given year, the directors may consider an additional distribution in the form of special dividends and share buy-backs dependent on the Company's financial position, future cash requirements, future earnings prospects, availability of distributable reserves and other factors. Dividends are recognised when they are declared by the Board of the Company.

For the year under review for dividends paid see under "events after the reporting period" on this report and the financial capital section.

Share capital

The full details of the authorised and issued share capital of the Company are set out in note 14 to the annual financial statements. Merafe did not issue any shares for cash.


Details of transactions with directors and key management are detailed in note 33 of the annual financial statements. The composition of the Board during the year under review is set out in directors' Report of the annual financial statements and in non-executive directors, executive directors and our approach to governance of this report.

Major shareholders

The following shareholders were the registered holders of 5% or more of the issued ordinary shares in the Company at 31 December 2022:

  • Glencore Netherlands B.V. – 28.82%;
  • Industrial Development Corporation of South Africa Limited – 21.88%;
  • Ninety One – 7.53%.

The analysis of the ordinary shareholding is given in shareholder Information of the annual financial statements.

Directors' interests in Merafe Resources Limited

Refer to note 34 of the annual financial statements and remuneration report for the beneficial interests of directors in shares of the Company as well as note 33 for transactions with key management personnel and nonexecutive directors.

Details of investments in subsidiaries, associates and structured entities

Details of material interests in subsidiary companies, associates and structured entities are presented in the annual financial statements in notes 5 and 6.

The interests of the Group in the profits and losses of its subsidiaries, associates and joint arrangements for the year ended 31 December 2022 are as follows:

Total profits after income tax   1 422 541   1 688 555
Total share of income from equity        
accounted investments   3 944   614
Total   1 426 485   1 689 169

Property, plant and equipment

There was no change in the nature of the property, plant and equipment of the Group or in the policy regarding their use during the year.

During the current year the Group recognised an impairment loss of R0.2m (2021: R5.8m) against a specific asset with nil economic value, refer to note 3 and note 37 to the annual financial statements.

Independent external auditor

Deloitte were re-elected as the Company's independent external auditor on 18 May 2022 in accordance with section 90 of the Companies Act and will again be proposed for re-election in respect of the 2023 financial year at the forthcoming AGM of shareholders.

Audit and Risk Committee

The audit and risk committee's report is presented on the annual financial statements.

Related party transactions

Details of related party transactions are set out in note 32 to the annual financial statements.

Electricity challenges

Electricity supply and pricing are serious concerns not only for our operations but for the country in general. Management is pursuing different avenues of dealing with the electricity challenge which include representation in the Minerals Council which has regular engagements with Eskom and government on challenges affecting the mining sector, engagements with Eskom on the Negotiated Pricing Agreement to mitigate against escalating costs as well as consideration of renewable energy sources.

Events after the reporting period

The Board has declared a final cash dividend of R325m (2021: R550m). This amounts to 13 cents (2021: 22 cents) per share and brings the total dividend for the year to R625m (2021: R725m).

The directors are not aware of any other material event which occurred after the reporting date and up to the date of this report is authorised that may require adjustment or disclosure in these annual financial statements.

Contingent liability

The Group is subject to direct and indirect tax in the South African jurisdiction. The Group's subsidiary undertakes various cross-border transactions within the Venture, subject to the Group's transfer pricing policies. As a result, significant judgement is required in determining the Group's provision for income taxes. The income tax and annual assessments are subject to examination within prescribed periods by the South African Revenue Services (SARS).

On 16 August 2022, the tax authority issued a letter of findings against the Group's operating entity, Merafe Ferrochrome. The matter relates to transfer pricing audit findings for the 2016 and 2017 years of assessment which the Group is contesting with SARS. At 31 December 2022, the tax matter was still ongoing and management obtained opinions from external legal and tax advisers to inform and support the significant judgement required in interpreting relevant tax legislation. The matter has been disclosed as a contingent liability as the matter is in the early stages, its outcome remains uncertain and any potential tax exposure cannot be reliably estimated. Accordingly, no adjustment for any effects on the Group has been made in the consolidated financial statements.

Special resolutions

All special resolutions were passed by the shareholders at the 2021 AGM held on 18 May 2022.

The next AGM of the shareholders of the Company will be held (subject to any adjournment or postponement) on Wednesday 17 May 2023.

Environmental and decommissioning provision

The Group's environmental rehabilitation costs are in accordance with the National Environmental Management Act (NEMA) No. 107 of 1998, Regulations No. 1147 of 20 November 2015. There are proposed amendments to the 2015 financial provisioning regulations of the same Act which were gazetted on 27 August 2021. These had not yet come into effect at the reporting date.

Mining rights and mining operations

The directors are satisfied that there are no legal proceedings or foreseen material risks relating to the resources and reserves of the Venture and the ability of the Venture to conduct its mining operations. The abridged Mineral Resources and Reserves Statement and the detailed Resources and Reserves Statement have been signed off by a Competent Person in accordance with the South African Mineral Reporting Codes (SAMREC Code) and the JSE Listings Requirements.

CEO's and FD's responsibility statement

Each of the directors, whose names are stated below hereby confirm that:

(a) the annual financial statements, fairly present in all material respects the financial position, financial performance and cash flows of Merafe Resources Limited in terms of IFRS;
(b) to the best of our knowledge and belief, no facts have been omitted or untrue statements made that would make the annual financial statements false or misleading;
(c) internal financial controls have been put in place to ensure that material information relating to Merafe Resources Limited and its consolidated subsidiaries have been provided to effectively prepare the annual financial statements of Merafe Resources Limited;
(d) the internal financial controls are adequate and effective and can be relied upon in compiling the annual financial statements, having fulfilled our role and function as executive directors with primary responsibility for implementation and execution of controls;
(e) where we are not satisfied, we have disclosed to the Audit and Risk Committee and the auditors any deficiencies in design and operational effectiveness of the internal financial controls and have taken steps to remedy the deficiencies; and
(f) we are not aware of any fraud involving directors.

Zanele Matlala
Chief Executive Officer
17 March 2023

Ditabe Chocho
Financial Director
17 March 2023

Approval of the consolidated and separate annual financial statements of Merafe Resources Limited

The consolidated and separate financial statements of Merafe Resources Limited were approved by the Board on 17 March 2023 and signed by:

Abiel Mngomezulu
17 March 2023

Zanele Matlala
Chief Executive Officer
17 March 2023

The CEO's and FD's responsibility statement as required by paragraph 3.84(k) of the JSE Listings Requirements is set out in full in the annual financial statements which forms part of our online Integrated Annual Report for 2022.