Merafe Resources Integrated Annual Report 2018

MERAFE RESOURCES INTEGRATED ANNUAL REPORT 2018 15 Overview As outlined in the CEO’s report, the year was complicated by a number of factors that impacted our business at a macro level. These include trade wars primarily between the USA and China as well as the flight of capital from emerging markets to developed zones. The impact of these issues has generally been negative on the global economy and resulted in softer GDP growth particularly in markets we sell to. We refer you to Material Issues on page 8 of this report for a review of matters of a financial nature that impact the business and our responses to these. Merafe’s basic earnings from operations decreased from R914.1 million in 2017 to R683 million in 2018. This represents basic earnings per share of 27.2 cents (2017: 36.4 cents). The business had no discontinued operations or non-recurring events and therefore basic earnings equal headline earnings. Earnings were mostly adversely impacted by lower volumes of products sold and lower realised ferrochrome prices. Financial performance Revenue Revenue for the year decreased by 5% to R5 606 million (2017: R5 889 million). A breakdown of revenue is presented below. Ferrochrome – Both a softer achieved ferrochrome price as well as marginally lower volumes of ferrochrome sold of 372kt (2017: 375kt) impacted revenue negatively. The average ferrochrome CIF price reduced by 7% to US92 c/lb (2017: US99 c/lb). Ferrochrome revenue closed lower at R4 849 million (2017: R5 163 million). Chrome – Fewer tonnages of chrome ore sold of 248kt (2017: 322kt) weighed on revenue. However, higher product pricing more than countered this impact. This resulted in higher revenue of R747 million (2017: R726 million). Total operating expenses Operating expenses increased to R4 347 million (2017: R4 111 million). Key contributors to this increase were: • reductants and fluxes due to the scarcity of supply in the local market. Materials such as coke had to be imported to prevent production interruptions. This resulted in higher costs as we experienced above inflation increases; • the increased cost of electricity due to Eskom’s tariff adjustments; • increased transportation costs both for inland as well as ocean freight; and • higher staff costs in line with annual increases which include settlements reached with unions. Foreign exchange gain The volatility of the Rand against the US Dollar has resulted in a foreign exchange gain of R141.5 million compared to a loss of R73.4 million in 2017. EBITDA All the factors cited above have resulted in Merafe’s share of the Venture’s EBITDA for the year being R1 390 million (2017: R1 705 million). Merafe’s EBITDA is after accounting for its corporate costs which were higher at R44.4 million (2017: 40.4 million). Merafe’s EBITDA was R1 346 million (2017: R1 665 million). Merafe's revenue and operating income is primarily generated from the Glencore Merafe Chrome Venture (Venture) which is one of the global market leaders in ferrochrome production, with a total installed capacity of 2.3mt of ferrochrome per annum. Merafe shares in 20.5% of the earnings before interest, taxation, depreciation and amortisation (EBITDA) from the Venture. DITABE CHOCHO Financial Director Depreciation Depreciation for the year increased owing to capital expenditure made as well as a review of assets at year end. This review included a reassessment of the useful lives of permanent structures and furnances and resulted in accelerated depreciation at our smelters. Depreciation of R405.5 million (2017: R368.2 million) was expensed to the income statement with R14.5 million (2017: R7.4 million) of depreciation capitalised to inventory. Net financing costs Finance costs of R14.5 million were lower (2017: R28 million) due to the ABSA/Standard Bank debt being fully settled in 2017. The bulk of the current interest charge relates to the unwinding of the discount on the rehabilitation provision. Finance income increased to R18.6 million (2017: R8.6 million) due to higher cash balances held. Taxation The taxation expense includes deferred tax credit of R29.6 million (2017: R47.4 million), which arose as a result of temporary differences on property, plant and equipment, the embedded derivative and provisions. There is no unredeemed capital expenditure balance at 31 December 2018, given that taxable profits exceeded capital expenditure. Financial position The financial position was affected by working capital increases, particularly relating to inventory and trade and other receivables. Finished goods on hand at year end increased to approximately four to five months of sales due to lower sales of volumes produced. This has tied up cash and contributed to reduced cash balances at year end. The debtors discounting facility was fully settled, resulting in the business being ungeared at year end. Provisions increased from R287.5 million to R420.7 million mainly due to a reassessment of the closure and restoration costs of all smelters performed during the year. As a result of this reassessment, the provision for closure and restoration was increased to R210.4 million (Dec 2017: R157.1 million). Cash position The closing cash and cash equivalents balance was R281 million (2017: R671.7 million). This comprises Merafe’s share of cash in the Venture of R45 million (2017: R207.7 million) and Merafe’s own cash of R235.8 million (2017: R464 million). The reduction in the closing cash balance is mainly because of: • an outflow of cash from operating activities due to an increase in inventory by R530.3 million year on year; • an outflow in cash from investing activities due to: sustaining capital expenditure of R412 million (2017: R403 million), and full settlement of the outstanding R72.3 million of the debtors discounting facility; and • dividends of R426 million paid in the year. This amount includes a final 2017 dividend of R226 million and an interim dividend for 2018 of R200 million. Debt position Merafe has no interest bearing debt. The R200 million revolving credit facility with ABSA, whilst still in place, has not been utilised. This facility provides the Company with immediate access to funding if the need arises.