Directors' report

The directors have pleasure in submitting their report for the Group for the year ended 31 December 2022.

1. 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 holds 100% of the issued share capital in Merafe Ferrochrome and Mining (Pty) Ltd (Merafe Ferrochrome) 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 and associated minerals. The Venture operates five ferrochrome smelters (including pelletising and sintering plants), twenty-two ferrochrome furnaces, a PGM processing plant at Kroondal mine, six chrome ore mines 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 million tonnes per annum. Merafe Ferrochrome's share of the earnings before interest, taxation, depreciation and amortisation (EBITDA) is 20.5%. Merafe Ferrochrome shares in the revenue, expenses and liabilities at 20.5%. The Venture comprises of assets to which both GOSA and Merafe Ferrochrome have granted the right of use but own in different proportions. Merafe Ferrochrome through the Venture agreement has a 20.5% interest in Unicorn Chrome (Pty) Ltd (Unicorn Chrome).

Listed below are the operations to which Merafe Ferrochrome has granted the right of use to the Venture:

Ferrochrome smelters Chrome mines UG2 plants and pelletisers PGM Plant
Asset Merafe
Asset Merafe
Asset Merafe
Asset Merafe
Wonderkop smelter (furnaces 5 and 6) 50% Boshoek mine 100% 2 Impala Kanana UG2 plants 100% Western PGM plant 20.5%
Boshoek smelter 100% Kroondal and Wonderkop mine 50% 3 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%    

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

2. 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 logistics 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. 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 fear as a well as a high inflation, an on-going electricity crisis and interest rate environment. Accordingly, Merafe plans 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.

3. 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 remained 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.

4. Going concern

As stated above, the Group has a cash balance amounting to R1 269m and no debt at the reporting date and a cash balance of R1 533m 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 141m and made profit after tax of R1 410m 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. 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.

5. 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.

On 17 March 2023, the Board declared a final dividend of 13 cents (2021: 22 cents) per ordinary share. This follows an interim dividend of 12 cents (2021: 7 cents) per share thus bringing the total dividend for the year ended 31 December 2022 to 25 cents (2021: 29 cents) per share and amounts to 44% of headline earnings.

6 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. No shares were issued in 2022.

7. Directorate

Details of transactions with directors and key management are detailed in note 32.

The Board comprised of the following directors during the year and as at the date of this report:

Mr A Mngomezulu (Chairperson) Non-executive Independent
Ms M Vuso Non-executive Independent
Mr J Mclaughlan Non-executive Independent
Mr K Tlale Non-executive Independent
Ms N Mabusela - Aikhuere Non-executive Independent
Mr D McGluwa Non-executive
Mr D Green Non-executive
Ms Z Matlala Executive
Mr D Chocho Executive

There have been no changes to the directorate for the year under review.

8. 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%; and
  • Ninety One - 7.53%.

The analysis of the ordinary shareholding is given in Shareholder Information.

9. Directors' interests in Merafe Resources Limited

Refer to note 34 for the beneficial interests of directors in shares of the Company as well as note 33 for transactions with key management personnel and non-executive directors

10. 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 interest 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:

R '000
R '000
Subsidiaries and joint arrangements    
Total profits after income tax 1,422,541 1,688,555
Total share of income from equity accounted investments 3,944 614
  1,426,485 1,689,169

11.  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 R0.24m (2021: R6m) against the assets, refer to note 3 and note 37 to the annual financial statements.

12. Independent external auditor

Deloitte and Touche 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 Annual General Meeting (AGM) of shareholders.

13. Audit and Risk Committee

The Audit and Risk Committee's report is presented here.

14. Related party transactions

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

15. 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 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.

16. 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.

17. Events after the reporting period

On 17 March 2023, the Board resolved to declare a final dividend of 13 cents (2021: 22 cents) per share for the 2022 financial year. The total gross cash dividend for the year amounted to 25 cents per share. The dividend will be paid out of income reserves.

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.

18. 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.

19. 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.

20. Mining rights and mining operations

The directors are satisfied that there are no foreseeable 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) and the Listings Requirements.