Directors' report for the year ended 31 December 2019

The directors present their report for the Group for the year ended 31 December 2019.

Nature of business

Merafe Resources Limited (the Company), through its wholly-owned subsidiary, Merafe Chrome and Alloys Proprietary Limited (Merafe Chrome), holds 100% share capital of its ultimate subsidiary, Merafe Ferrochrome and Mining Proprietary Limited (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. The Glencore-Merafe Chrome Venture (Venture) operates five ferrochrome smelters (including pelletising and sintering plants), twenty-two ferrochrome furnaces, six operating 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 2.3mt 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 assets to which both Glencore and Merafe Ferrochrome have granted the right of use but own in different proportions.

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

Ferrochrome smelters   Chrome mines   UG2 plants and pelletisers
Asset Merafe
  Asset Merafe
  Asset Merafe
Wonderkop smelter (furnaces five and six)   50%   Boshoek Mine   100%   Two Impala Kanana UG2 plants   100%
Boshoek smelter 100%   Kroondal and Wonderkop Mine 50%   Three 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%

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 International Financial Reporting Standards and the requirements of the Companies Act of South Africa, supported by reasonable and prudent judgements where required.

Merafe Ferrochrome’s share of EBITDA from the Venture is accounted for at 20.5%. In addition to Merafe Ferrochrome’s share of EBITDA from the Venture, corporate expenses, interest on debt, depreciation and interest received are accounted for in order to determine earnings before taxation of the Group. Refer to note 1.3.2, Basis of consolidation of the 2019 annual financial statements – Transactions with the Venture, for further information regarding the accounting policy for Merafe Ferrochrome’s interest in the Venture.

Loans and borrowings

The Group had a net cash balance of R354 million¹ at 31 December 2019 (31 December 2018: R281 million1). The unsecured three year Revolving Credit Facility (RCF) to the value of R300 million has been increased from R200 million from the prior year and remains unutilised for the year. Refer to note 21.2 and 9.2 of the 2019 annual financial statements disclosure on the Group’s facilities and covenants.

Going concern

Although the Group made a loss after tax in the current year, a positive EBITDA of R392m was generated. The loss is in large part due to significant impairment adjustments. The Group and Company maintain healthy cash balances as per note 20.1 with access to other banking facilities. The financial position of the Group and Company, credit and liquidity risk have been assessed in notes 21.1 and 21.2 of the 2019 annual financial statements. Having considered the Group and Company’s key risks, current financial position, assessment of solvency and liquidity, debt levels, facilities, impairment review as well as the Group and Company’s financial budgets with their underlying business plans, the directors believe that the Group has sufficient resources and expected cash flows to be able to continue as a going concern for the year ahead.

1 Net cash (debt) balance includes cash and cash equivalents, working capital loan and Merafe head office debt.

Dividend policy

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 earning prospects, availability of distributable reserves and other factors. Dividends are recognised when they are declared by the Board of the Company.

Ordinary cash dividends

No interim cash dividend was declared and paid in August 2019 (2018: R200 million, 8 cents per share). A final cash dividend of R100 million at 4 cents per share (2018: R151 million, 6 cents per share) was declared by the Board on 6 March 2020. The Board is satisfied that the capital remaining after the payment of the final dividend is sufficient to support the current operations and to facilitate future development of the business.

Share capital

The full details of the authorised and issued share capital of the Company are set out in note 7 to the annual financial statements. Merafe did not issue any shares for cash or effect any share repurchases under a general or specific authority in the current year.


At 31 December 2019 the Board consisted of the following directors: Abiel Mngomezulu (Chairperson), Belese Majova, Mpho Mosweu, Matsotso Vuso, Shaun Blankfield, Grathel Motau, Jeff Mclaughlan, Zanele Matlala, Ditabe Chocho.

On 1 May 2019, Jeff Mclaughlan joined the Board.

On 15 May 2019, Chris Molefe retired as Chairperson.

On 15 May 2019, Abiel Mngomezulu was appointed as Chairperson.

During the period under review, no contracts were entered into in which directors and officers of the Company had an interest and which could affect the business of the Group.

Non-executive directors are remunerated periodically for their contribution to the Board. Executive directors do not receive Board fees in addition to their remuneration. Refer to note 22.1 of the annual financial statements for a detailed report on directors’ remuneration prepared in accordance with the JSE Limited Listings Requirements and Companies Act.

Major shareholders

The following shareholders were the registered holders of 5% or more of the issued ordinary shares in the Company at 31 December 2019:

  • Glencore Netherlands B.V. – 28.68%;
  • Industrial Development Corporation of South Africa Limited – 21.78%; and
  • PSG Konsult – 6.64%.

The analysis of the ordinary shareholding is given in the 2019 annual financial statements.

Directors’ interests in Merafe Resources Limited

According to information available after reasonable enquiry, the interests of the directors and prescribed officers and their families in the shares of the Company at 31 December 2019 are set out in note 23.1 and 23.3 of the annual financial statements and were as follows:

  2019   2018  
ZJ Matlala 2 695 000   2 492 305  
B Majova 62 610   62 610  
D Chocho 258 565   258 565  
Total 2 953 565 62 610   2 750 870 62 610  

There have been no changes to the directors' interests since the end of the financial year and the date of this report and the release of the annual financial statements.

Details of investments in subsidiaries and structured entities

Refer to note 3 of the 2019 annual financial statements for details of investments in subsidiaries and structured entities.

Property, plant and equipment

There were no changes in the nature of property, plant and equipment or in the policy regarding their use during the year. During the current year the Group recognised an impairment loss of R1 846bn against the assets, refer to note 30 and note 2 of the 2019 annual financial statements.

Events after the reporting date

A final dividend of R100 million at 4 cents per share (2018: R151m, 6 cents per share) was declared on 9 March 2020. No other material facts or circumstances occurred after the reporting date that may require adjustment or disclosure in these annual financial statements.

Post year end (as per the SENS announcement), the Venture issued a Notice in terms of Section 189A of the Labour Relations Act: Rustenburg Smelter North West Province South Africa (“Rustenburg Smelter”). This decision was a result of deteriorating operating and market conditions across the South African Ferrochrome industry, including unsustainable electricity tariffs and interruptions, cross subsidies and real cost inflation. These factors have also led to the displacement of significant volumes of Ferrochrome production to lower-cost competitors overseas. Despite significant investment to make the operation more competitive, the Rustenburg Smelter has suffered material financial losses which are expected to continue for the foreseeable future. Prior to commencement of the Section 189A process, the Company engaged in extensive consultations with stakeholders, including employee representatives, local and regional government. This consultation process will continue to attempt to secure the future of the operation.

The Board of directors resolved to simplify the structure of the Group through a restructure in terms of which the Company would directly hold a 100% interest in Merafe Ferrochrome. Both Merafe Chrome and Merafe Ferrochrome are 100% subsidiaries of the Company. There are no tax or other financial impacts that arise from this unbundling. This change was effected on 24 January 2020.

Special resolutions

The following special resolutions were passed by the shareholders at the 2019 Annual General Meeting:

  • Approval of non-executive directors’ fees;
  • Loans or other financial assistance to related or inter-related companies; and
  • General authority to repurchase Company shares.

Environmental and decommissioning provision

New legislation and financial provisioning regulations relating to asset retirement obligations were enacted i.e. The National Environmental Management Act (NEMA). The legislation which is effective from June 2021 will have an impact on the manner in which the environmental rehabilitation costs are determined. Current provisions of the Company are already inclusive of the impact of NEMA although it is not yet effective.

Management has completed the assessments of closure costs for all mines in 2017 and has completed the assessment of closure costs for all smelters in 2018.

Mining rights and mining operations

The directors are satisfied that there are no foreseen 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 has been signed off by a competent person in accordance with the South African Mineral Reporting Codes (SAMREC).

Restatement of financial statements

The JSE requires that information disseminated into the market be of the highest standard. In doing so, the Company has proactively restated comparative figures to improve disclosure and usefulness of the financial statements.

The 2018 financial year has been restated with the change in the derivative financial liability disclosure. In an effort to improve disclosure, the Group has also disaggregated the property, plant and equipment note which was inclusive of intangible assets to separately disclose these intangible assets. The inter-company loans of the Company have been reclassified as current as these are payable on demand with less than a years notice. Appropriate deficiencies in disclosure have been noted in note 31 of the 2019 annual financial statements.

A third balance sheet for the Group and the Company has not been disclosed restating the 2017 financial position of the Company as there has been no change to the numbers to materially affect the decision of the shareholders.

Approval of the consolidated and separate annual financial statements of Merafe Resources Limited

The consolidated and separate financial statements of Merafe Resources Limited were approved by the Board on 6 March 2020 and signed by:

Abiel Mngomezulu Zanele Matlala
Chairperson Chief Executive Officer
6 March 2020