Financial capital

Overview

The South African chrome ore and ferrochrome industry experienced a dynamic 2024, characterised by a complex interplay of factors. Global demand, primarily driven by stainless steel production in Asia, remained robust, yet faced headwinds from economic slowdowns in some key markets, notably the European Union. While China's increasing dominance in ferrochrome production put pressure on global ferrochrome production and led to surplus product, it presented an opportunity for chrome ore producers. Market pressure on the ferrochrome industry led to the Venture putting the Rustenburg smelter on care and maintenance and initiating s189 of the Labour Relations Act of 1995. This process had been completed by year end and related obligations incurred/provided for. Consequently, three of the Venture's five smelters are now operational and two are on care and maintenance. The Chinese effect on the global ferrochrome market resulted in the Company's smelting business making losses. Fluctuating exchange rates and increased input costs, including those for electricity and labour, exerted pressure on margins. Despite these challenges, strategic investments in new technologies and improved operational efficiencies helped the Venture navigate the volatile market landscape. The Venture's conclusion of a power purchase agreement (PPA) in December 2024 closed a chapter of an initiative that has been in the making for some time. The next chapter will play out over the coming two years as the construction of the 100MW solar plant begins and other opportunities are explored. This initiative forms part of the Venture's carbon action plan which will not only help with decarbonisation but assist with managing our energy costs. Overall, while the year presented significant hurdles, the underlying strength of global demand, the resilience of the chrome ore business, the performance of our PGMs operations, the efficiency of our production processes and management of our costs were important contributor to this year's financial performance.

Merafe's 2024 basic earnings attributable to ordinary shareholders totalled R667 million (2023: R1 753 million), resulting in basic earnings per share of 26.7 cents (2023: 70.1 cents). Headline earnings per share was 42.9 cents (2023: 60.1 cents). The Company's weaker performance is primarily driven by a slightly stronger average ZAR:USD exchange rate, weaker ferrochrome prices, lower ferrochrome volumes sold and increasing costs.

Financial performance

Merafe reported revenue of R8 443 million for 2024 (2023: R9 244 million), a 9% year-on-year decrease. This decrease stems mainly from lower ferrochrome sales volumes of 298kt (2023: 327kt) and lower ferrochrome prices. Chrome ore revenue helped support total revenue as a result of the commodity's resilience. The ZAR:USD exchange rate however provided little support this year as the average rate strengthened compared to the previous reporting period.

Ferrochrome's average CIF price decreased by 6% to USc99/lb (2023: USc105/lb). This, coupled with the 9% drop in ferrochrome volumes sold resulted in ferrochrome revenue decreasing by 14% to R5 909 million (2023: R6 885 million). A 1% stronger average ZAR:USD exchange rate of R18.34 (2023: R18.45) did not help. Chrome ore sales volumes showed a marginal 1% increase to 475kt (2023: 470kt), with average CIF chrome ore prices also increasing by 1% to USD281/t (2023: USD277/t). This led to a 2% increase in chrome ore revenue to R2 262 million (2023: R2 222 million). The increase in PGM revenue reflects the inclusion of results from both Western and Eastern PGM operations, totalling R267 million (2023: R133 million). Although the average PGM basket price decreased by 16% to 1 079 USD/oz (2023: 1 284 USD/oz), higher sales volumes of 13 557oz (2023: 6 588oz) provided sufficient cushion for an increase in revenue.

Total operating expenses (excluding Merafe head office costs) decreased by 5% to R6 657 million (2023: R6 972 million). This was driven primarily by lower ferrochrome sales volumes. A key component of operating costs is the cost of ferrochrome production. Inflation and an increase in the network demand fee (fixed power charge) led to increased fixed costs. This, coupled with pricing pressure from chrome ore prices, increased production costs while reductions in reductant costs and variable power prices mitigated the overall impact, resulting in only a 2% year-on-year increase in production costs. Standing charges decreased to R287 million (2023: R346 million) due to operating smelters producing during the winter months in 2024. Additionally, operating expenses include an inventory write-down of R79 million (2023: R2 million) during the year arising from a net realisable value adjustment on ferrochrome stock. The expenses also include the Rustenburg smelter's retrenchments costs of R67 million (2023: Rnil). Out of a total of 448 remaining affected employees at the smelter, 241 employees were redeployed at other operations, while the remaining employees were retrenched (voluntarily or not). The unresolved diesel rebate matter with SARS resulted in a disallowed amount (net of income tax) of R30 million (2023: R20 million) and interest payable to SARS of R8 million (2023: R5 million), both fully provisioned for at year end.

Foreign exchange volatility resulted in a foreign exchange gain of R29 million (2023: R99 million).

EBITDA

The factors mentioned above decreased Merafe's share of the Venture's EBITDA to R1 798 million (2023: R2 358 million). Previous years' PPE impairment adjustments decreased the depreciation charge to inventory by R16 million (2023: R13 million). After deducting corporate costs of R84 million (2023: R76 million), which include R15 million in cash-settled share‑based payments (2023: R11 million), R3 million in corporate social investment (2023: R2 million), and R13 million in bonus provisions (2023: R11 million), Merafe achieved EBITDA of R1 731 million (2023: R2 545 million).

Depreciation and impairment

Merafe's year-end share price traded at a discount to its net asset value per share, raising the possibility of impairment. Consequently, a recoverable amount calculation (per IAS 36) was performed, primarily based on Merafe's share of the Venture's value-in-use (as the cash-generating unit (CGU)), including the valuation of Unicorn Chrome (Pty) Ltd. No CGU impairment adjustment was recognised in the current reporting period.

While there was no CGU impairment at year end, there were grounds pointing to the likely impairment of some of our smelting operations. After considering several critical factors which included the state of the ferrochrome market and the level of our operating costs, management concluded that the Boshoek smelter should be fully impaired resulting in an impairment write off of R574 million relating thereto at year end. This brings the total impairment loss for the year to R575 million.

Capital expenditures over the years have gradually increased the depreciation expense, totalling R354 million for 2024 (2023: R249 million).

Income from Equity-Accounted Investments

Sustained chrome ore prices supported Impala Chrome (Pty) Ltd's (Unicorn Chrome's only investment) financial performance in 2024. This resulted in an increased share of income from the equity-accounted investment of R20 million (2023: R19 million).

Net finance income

Finance costs totalled R1 million (2023: R3 million), primarily due to commitment fees. Interest income from cash reserves amounted to R66 million (2023: R41 million) due to higher cash balances.

Taxation

The taxation expense included a deferred tax credit of R85 million (2023: R147 million expense) due to temporary differences relating to property, plant and equipment; receivables; provisions; and accruals.

Taxable profits exceeded capital expenditure; thus, there was no unredeemed capital expenditure at year end (2023: Rnil). The current tax expense of R304 million (2023: R453 million) is expectedly lower primarily due to lower earnings for the year.

Profit for the year

Consequently, Merafe reported profit after tax of R667 million (2023: R1 753 million) for the year ended 31 December 2024.

Financial position

Ferrochrome production at Merafe's operations was 0.3% higher than the previous year. Ferrochrome finished goods inventory at year end was 83kt (2023: 81kt) – representing three to four months (2023: two to three months) of sales. The closing inventory balance was R1 794 million (2023: R1 916 million). The significantly lower closing balance of trade and other receivables of R1 175 million (2023: R1 545 million) was due to lower sales of ferrochrome volumes and prices in the last quarter of 2024. The trade and other payables balance decreased to R894 million (2023: R946 million) at year end. Maintaining optimal working capital remains a key focus for the business. The Venture's debt facilities remain unutilised, and the business remains ungeared at the end of the financial year. The provision for environmental rehabilitation increased to R160 million (2023: R142 million) partly due to the unwinding of the discount.

Cash position

Merafe's year-end cash balance was R1 795 million (2023: R1 656 million), comprising its share of cash in the Venture and Unicorn Chrome of R1 192 million (2023: R959 million) and Merafe's own cash of R603 million (2023: R697 million). Net cash inflow from working capital resulted from decreases in trade and other receivables and inventories partially offset by a decrease in trade and other payables. Outflows from investing activities included: sustaining capital expenditure of R608 million (2023: R618 million); expansionary capital expenditure of R54 million (2023: R54 million); and dividend payments of R1 049 million (2023: R825 million). Expansionary capital included R43 million (2023: R47 million) spent on PGM processing plants. The Venture has ring-fenced cash for future environmental rehabilitation obligations. This cash is unrestricted and available to support Eskom and the Department of Minerals Resources and Energy bank guarantees. Merafe's share of this cash is R361 million (2023: R328 million), included in the total of R1 192 million.

Debt position

Merafe's credit facilities with Absa remained unutilised at year end.

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 judgment is required to determine the Group's provisions for income taxes. The income tax and annual assessments are subject to examination within prescribed periods by the South African Revenue Service (SARS).

SARS finalised the audit of the previously reported transfer pricing matter on 30 October 2024. Pursuant to the finalisation of the audit, SARS issued additional assessments on 30 October 2024 levying additional income tax, dividends tax, understatement penalties and interest in the aggregate amount of R406 million against the Group for the 2016 and 2017 tax years.

The Group disagrees with the additional assessments and will lodge an objection. The Group had applied for a full suspension of payment of the disputed tax debt, pending its objection and Tax Court appeal process.

Post year-end, SARS partially suspended payment. R232 million was not suspended and therefore is payable. Pursuant to section 9 of the Tax Administration Act, the Group has requested SARS to reconsider its decision to partially decline the request for suspension of payment.

Management continues to rely on opinions obtained from external legal and tax advisers to inform and support the significant judgment required in interpreting relevant tax legislation. The matter has been disclosed as a contingent liability as its outcome, due to the dispute, remains uncertain, and any potential tax exposure cannot be reliably estimated. Accordingly, the consolidated financial statements have made no adjustment for any effects on the Group.

Share buy-back

The Board concluded that a dividend was preferable to a share buy-back programme at this time.

Dividend

The Board declared a final cash dividend of R200 million (2023: R500 million), equivalent to 8 cents per share (2023: 22 cents). This, combined with the interim dividend, brings the total dividend for the year to R700 million (2023: R1 050 million).

Outlook

As we look forward to FY2025, we expect market volatility to persist influenced by several risk factors that include geopolitical tensions that might further be strained by any protectionist policies that may emanate from the United States. Regional wars remain a concern and any escalation could further destabilise markets. China is a key region for our industry and a slowdown in their industrial production would likely send shockwaves to markets. The West, particularly Europe, has its fair share of challenges and cannot be relied on entirely to fill any void that China may leave. Although declines in global interest rates could inject some market recovery, inflationary concerns remain. The ZAR:USD exchange rate is forecast to remain volatile and this poses some risk to our financial performance for the year.

Demand from the stainless steel sector is expected to remain strong in FY2025, driven by ongoing infrastructure development and robust manufacturing activities in key markets, particularly in Asia. This growth underpins demand for chrome ore and ferrochrome. South Africa's pivotal role as a leading chrome ore supplier places us advantageously to meet this demand, though we are cognisant of the potential impacts of market volatility driven by geopolitical dynamics and economic fluctuations. A key concern for our business is China's increased ferrochrome production capacity and its impact on our ferrochrome operations. The pressure on pricing arising from surplus ferrochrome production has rendered many ferrochrome operations marginal or operating at a loss. Accordingly, the Venture has, post year end, initiated a process to review its smelting operations with a view to finding interventions that will help sustain its business. The Venture is also exploring and will leverage technologies to optimise our production processes and reduce operational costs. Environmental sustainability is a critical focus for us, and we are proactively exploring and, when appropriate, adopting cleaner production methods to align with emerging regulatory frameworks that emphasise reduced emissions and efficient resource utilisation. This is evidenced by, inter alia, the aforementioned 100MW solar plant PPA concluded in December 2024. Furthermore, we are advancing our commitment to ESG principles by enhancing community engagement, safeguarding worker rights and ensuring rigorous governance practices. By embracing these measures, we aim to deliver long-term value to our stakeholders and secure our position in a rapidly evolving industry landscape. We expect 2025 to be a demanding year but will invest in strategies to help us navigate the challenges that lie on the horizon.

DITABE CHOCHO

Financial Director

7 March 2025

The full set of audited consolidated financial statements from which these summarised consolidated financial statements have been derived, were prepared under the supervision of Ditabe Chocho CA(SA), Financial Director. The directors take full responsibility for the preparation of the summarised consolidated financial statements.