Merafe Resources Limited - Integrated Annual Report 2015

Chief executive officer's strategic review

	The excellent performance of the Company in challenging times is due to the significant competitive advantages which the Venture has.

The financial year to 31 December 2015 was characterised by a weaker global economy, especially the emerging markets economies, weaker commodity prices and weaker emerging market currencies. The Rand weakened on average by 17% against the US Dollar.

Despite the challenging market conditions, Merafe managed to produce solid operational and financial results.

Financial review

Profit after tax rose by 60% year-on-year, mainly as a result of higher revenues. The increase in revenue was as a result of record ferrochrome sales volumes and the weaker Rand exchange rate, partially offset by weaker ferrochrome net prices. Cash flows from operating activities were strong at R956m.

The balance sheet position remains strong as a result of focusing on debt reduction as part of our strategy. As a result, net debt position has improved from R1 251m to R660m at 31 December 2015. I refer you to the Financial Capital section of this report on Financial capital and our annual financial statements on our website.

Operational review

Production volumes were 13% higher than the previous year, mainly due to additional volumes from Lion Phase II, which is now in full production. The Wonderkop plant also contributed to the higher volumes by exceeding all previously recorded annual production volumes.

Electricity supply constraints continued to be a challenge and had some adverse impact on volumes and damages to equipment. As reported at half year, The National Energy Regulator (NERSA) declined Eskom’s request for a partial reopener of the Multi Year Price Determination (MYPD3) which would have resulted in an electricity increase of 25.5%. Although this provided a temporary reprieve, Eskom applied for an effective 16.6% tariff increase via the Regulatory Clearing Account (RCA). However, on 2 March 2016, NERSA granted a 9.49% tariff increase.

Wage negotiations in the Eastern and Western smelters were settled for a three-year period. As previously stated three-year agreements were reached with the employees of the Western mines in 2014.

There were various incidents of community unrest in the Steelpoort area during the year under review. This had a negative impact on the production volumes although the impact was not significant. We continue to engage all relevant stakeholders to resolve the issues.

The safety of our employees continues to be a priority. It is therefore pleasing that our total recordable injury frequency rate improved from 4.63 to 4.17. There were no fatalities during the year under review.

Market review

Global stainless steel production totalled 41.6m* tonnes in 2015, a 0.5%* year-on-year decrease. Of the major producing regions, China registered the largest absolute reduction in output of 306 000* tonnes equivalent to 1.4% decline*. A significant decline was also recorded in Japan, while the introduction of import tariffs on Asian stainless steel offered support to European producers. India increased output by 7%* year-on-year.

Global demand for ferrochrome decreased 2.2%* year-on-year, with Chinese ferrochrome consumption increasing 2.1%*. Declines were also recorded in the USA, Japan and EU. China’s imports of South African ferrochrome continued to increase, reaching a yearly total of 2.6m* tonnes a 24%* increase. Global ferrochrome production decreased 4.6%* to 10.7m* tonnes in 2015. The majority of this decrease came from China, which reduced its output by 371 000* tonnes. Comparatively, South Africa saw a year-on-year decrease in ferrochrome production from 3.75m* tonnes in 2014 to 3.71m* tonnes in 2015. Merafe has successfully increased market share in 2015 by 18%, despite decreased global demand.

Chinese chrome ore imports were 10.4m* tonnes in 2015, a 10.9%* increase compared to the previous year. Exports of chrome ore from South Africa rose by 31.8%* year-on-year, with the proportion of South African chrome ore imported into China increasing from 61%* in 2014 to 73%* in 2015. This increase in South African chrome ore exports was due in part to the end of the platinum strikes, whilst the depreciation of the Rand offered support to South African chrome ore producers throughout 2015, offsetting the recent fall in USD prices.

See the table at the end of this review for more details.

The average European benchmark ferrochrome price decreased by 10% year-on-year, whilst the average Rand/Dollar exchange rate weakened by 17% year-on-year. Net CIF prices reduced by 12%* year-on-year. The European benchmark ferrochrome price for the first quarter of 2016 was settled at 92 USc/lb.

Strategic focus

As I reported last year, the focus of the Company in the short to medium term is on its ferrochrome operations, maximising cash flows from the Venture and reducing costs. The restructuring process was completed in March 2015 and for the year under review corporate costs were reduced by 41%. The focus on maximising cash flows has also enabled us to reduce debt as set out earlier in my report and allowed for payment of an interim and final dividend to shareholders for the 2015 year.

We are always mindful that mining is a long-term business and that we need to show value to all stakeholders and be fully focused on our material issues which may impact our business and its future. In this regard I refer you to the Material issues of this report (material issues) as well as the sections on natural, human and social capital.

Outlook

With weaker stainless demand, weaker commodity prices and concerns about the global economy, we expect the coming year to be challenging. However, despite the challenges, Merafe is well positioned to withstand current and even lower prices. The Venture’s position in the first quartile of the cost curves enables us to navigate the headwinds.

Zanele Matlala
Chief Executive Officer

References: * Heinz H. Pariser / February 2016

© Heinz H. Pariser, Alloy Metals & Steel Market Research

© Heinz H. Pariser, Alloy Metals & Steel Market Research

© Heinz H. Pariser, Alloy Metals & Steel Market Research