Merafe Resources Integrated Annual Report 2018

MERAFE RESOURCES INTEGRATED ANNUAL REPORT 2018 10 CHIEF EXECUTIVE OFFICER’S STRATEGIC REVIEW The focus of the Company in 2018 continued to be on safety, ferrochrome production, maximising cash flows from the Venture, reducing costs and distributing cash to shareholders. ZANELE MATLALA Chief Executive Officer Wage negotiations were concluded successfully culminating in 3-year agreements for the Western and Eastern smelters as well as Western Mines. Despite the challenges faced by Eskom, there were no major supply constraints during 2018. However, post year end Eskom has had to resort to load shedding due to reduced availability arising from unplanned breakdowns of several generating units. Electricity supply and pricing remain key risks which we monitor closely. The NERSA approved tariff of 5,23% became effective on 1 April 2018. The approved tariff increase which is effective 1 April 2019 is 4.4%. Market review In 2018 global stainless steel production is estimated to have increased by 6.1%^ year on year, on par with 2017's production growth, despite increasing macroeconomic uncertainty in key producing regions. Asia continued to be the major source of growth. Indonesian production reached 2.3mil^ tons in 2018 and was the primary driver of global growth, largely as a result of stainless steel mills commissioned during 2017 recording their first full year of production. India’s year on year production growth rate is estimated to have reached 9.2%^ in 2018, a significant increase from the growth rate seen in 2017. Total annual production in China is estimated to have reached 26.6mil^ tons in 2018, with all time high production having occurred during Q4. China’s full year melt accounted for an estimated 51.7%^ of global output. Production in the rest of the world mostly held firm year on year. Total US production is estimated to have increased by 1.3%^ from 2017, while Europe’s production is estimated to have remained largely flat year on year. Growth in stainless steel melt rates translated into healthy demand for ferrochrome throughout most of the year. During Q1 and Q2 of 2018, power supply issues coupled with environmental inspections intermittently disrupted Chinese ferrochrome production, particularly in Inner Mongolia. During these periods, China’s role as swing producer of ferrochrome was reinforced, as spot prices increased due to lower availability of domestically produced Chinese ferrochrome. Global ferrochrome production in 2018 is estimated to have reached 13.4mil^ tons, matching the stainless steel growth rate of 6.1%^ year on year. China’s domestic production is estimated to have increased by 8.5%^ year on year, exceeding South Africa’s growth of 5.3%^. Introduction I am pleased to report that despite a challenging operational environment, Merafe produced a pleasing set of financial results. The uncertainty created by geopolitical events such as Brexit and trade wars resulted in lower ferrochrome prices and a volatile Rand:US Dollar exchange rates. Realised ferrochrome prices were relatively stable but decreased by 7% compared to prior year. The average Rand:US Dollar exchange rate was marginally stronger at R13.25 compared to R13.30 for the prior year. Financial review Profit after tax decreased by 25% mainly as a result of lower revenue and higher cost of sales. Revenue was impacted by lower ferrochrome sales volumes, lower average net CIF ferrochrome price and a marginally stronger average Rand:US Dollar exchange rate. The balance sheet remained strong with net cash balance of R247 million after paying dividends of R426 million. I refer you to the Financial Capital section of this report on pages 14 and 17 as well as our Financial Statements which are on our website for more detailed information. Safety Disappointingly, during the year under review, there was a fatality at the Venture’s Thorncliff mine. Mr Ntandazo Dlela was fatally injured on 27 August 2018. Post year end, regrettably a fall of ground incident occured at Magareng mine. This resulted in the death of Mr Magashane Mafolo on 14 February 2019. Our sincere condolences are extended to their families, friends and colleagues. The safety of all our employees remains a critical focus area and for this reason we are pleased with the downward trend in the Total Recordable Injury Frequency Rate which reduced from 3.74 to 3.39. Operational review Production volumes rose to a new record of 407kt which is equivalent to 85% of installed capacity. Once again, a number of production records were achieved during 2018 at the Lion and Wonderkop smelters as well as an annual pellet production record at the Bokamoso pelletising and sintering plant. See the table on page 12 for details of China’s chrome ore imports. ^ CRU commodity market analysts