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PERFORMANCE

FINANCIAL CAPITAL*
   

MATERIAL ISSUES

  • Global economic environment
  • Ferrochrome demand and prices
  • Energy supply and prices
  • Rand:US Dollar exchange rate
  • Costs
Financial capital makes it possible for other types of capital to be owned and traded. Financial capital is also representative of how successful we have been at achieving the sustainable development of our natural, human, social and manufactured capital.

Sustainable organisations need a clear understanding of how financial value is created, in particular, dependence on other forms of capital. We enhance our financial capital by:

The Venture enhances its human capital by:

  • effective risk management;
  • corporate governance structures;
  • ensuring the equitable use of wealth created; and
  • assessing the wider economic impact of our activities on society.

KEY POINTS – 2019

   

Revenue

R5.38 billion

(2018: R5.6 billion)

Net cash balance of

R354 million

(2018: R281 million)
       

EBITDA of

R392 million

(2018: R1.35 billion)

Dividend declared of

R100 million

(2018: R351 million)
       

Net loss

R1.36 billion

(2018: R683 million net profit)
   
* For a complete appreciation of the financial results, this Financial Capital section must be read in conjunction with the complete set of audited consolidated annual financial statements available on the website www.meraferesources.co.za. The Board has used its discretion in determining the material matters to be reported in this section.

Our annual financial statements form part of our online Integrated Annual Report for 2019. They are also available from our Company Secretary.

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 2.3m tonnes 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

Overview

2019 was a difficult year for the chrome industry. Generally, continued uncertainty from the USA. and China trade war as well as from Brexit negatively impacted global economic sentiment and growth. Chrome and ferrochrome prices came under enormous pressure brought on by supply/demand imbalances. Locally, challenges such as policy uncertainty and ailing state-owned enterprises, continue to put pressure on the economy and stretch the already limited resources. All these factors impact negatively on brand SA. Inflationary pressures on our cost of production remain unabated, in spite of business’ initiatives to curb these. Eskom has not only contributed to increased costs but to production interruptions as well due to power curtailments. The net outcome of these factors has been a disappointing financial performance for the year. We refer you to Material Issues of this report for a review of matters of a financial nature that impact the business and our responses.

For the 2019 financial year, Merafe recorded a basic loss from operations of R1.362 billion, a significant decrease from a gain of R683.4 million in the prior year. This represents a basic loss per share of 54.2 cents (2018: 27.2 cents basic gain per share). As a result of a non-recurring event arising from the significant impairment of property, plant and equipment, headline loss per share of 1.8 cents exceeds basic earnings by 52.4 cents (2018: nil). The headline loss was largely adversely impacted by lower prices realised both for ferrochrome and chrome ore.

Financial performance

Revenue was R5.379 billion (2018: R5.606 billion) amounting to a year- on-year decrease of 4%. With regard to ferrochrome, a softer realised ferrochrome price as well as marginally lower volumes of ferrochrome sales of 368kt (2018: 372kt) impacted revenue negatively. The average ferrochrome CIF price reduced by 14% to US$79 c/lb (2018: US$92 c/lb). Ferrochrome revenue closed lower at R4.455 billion (2018: R4.849 billion). Chrome ore sales for the year increased to 359kt (2018: 248kt). Lower market prices however negated most of this benefit. The resultant revenue was R910 million (2018: R747 million). The average ZAR/US$ exchange rate for the year was approximately 9% weaker and this helped offset the pressure on both sources of revenue. This impact is captured in the revenue amounts above.

Total operating (excluding Merafe head-office costs) expenses

Operating expenses increased by 13% to R4.937 billion (2018: R4.357 billion). Key contributors were an increase in standing charges by 55% to R203.3 million as a result of production cut-backs and interruptions; an inventory impairment of R133.2 million (2018: R8.3 million) due to depressed commodity prices; higher reductants and fluxes costs (although local supplies improved in the second half of the year, materials such as coke still had to be imported for parts of the year); the impact of the ZAR/US$ exchange rate contributed to above inflation increases;increased cost of electricity due to Eskom’s tariff adjustments; higher staff costs in line with annual increases which include settlements reached with unions and an increase in transportation costs.

In the current year, SARS disallowed all diesel rebates claimed by the Venture since 2013 and refunded by SARS. Merafe’s portion of the disallowed rebates is R11 million. This amount (net of income tax), as well as interest payable to SARS of R5 million, has been fully provided for at year-end. While legal opinion to defend this matter is being sought, a request to suspend payment has been lodged with SARS.

Foreign Exchange Losses

The volatility and strengthening of the Rand against the US Dollar have resulted in a foreign exchange loss of R14.4 million compared to a foreign exchange gain of R141.5 million in 2018.

EBITDA

All the above factors have resulted in Merafe’s share of the Venture’s EBITDA for the year being R428.1 million (2018: R1.390 billion). Merafe’s EBITDA was R391.9 million (2018: R1.346 billion) after accounting for its corporate costs which were R36.3 million (2018: R44.4 million).

Depreciation and Impairment

Depreciation for the year increased owing mainly to capital expenditure made. Depreciation of R467.2 million (2018: R405.5 million) was expensed to the income statement with R4 million (2018: R14.5 million) of depreciation capitalised to inventory. Due to Merafe’s share price at year end trading at a discount to its net asset value per share thereby indicating possible impairment, a calculation of the recoverable amount had to be made as per IAS 36 – Impairment of Assets. The recoverable amount was based on the value in use of the Venture as the cash generating unit (“CGU”). This resulted in an impairment loss of R1.846 billion (2018: Rnil) representing the excess of the net carrying amount of the CGU over their recoverable amount.

Net financing costs

Finance costs amounted to R1.6 million (2018: R14.5 million). The prior year figure included a cost relating to the unwinding of the discount on the rehabilitation provision. In the current year, due primarily to lower inflation assumptions, that unwinding resulted in finance income of R44.3 million. This and a revision of the discount rate increased the total income to R56 million (2018: R18.5 million) for the year. Interest on cash reserves decreased due to lower balances held.

Income taxation

The taxation expense includes deferred tax credit of R507.8 million (2018: R29.6 million) which arose as a result of temporary differences on property, plant and equipment, the embedded derivative and provisions. Due to its capital expenditure exceeding its taxable profits as at 31 December 2019, Merafe had an unredeemed capital expenditure balance of R141 million.

Loss for the year

Merafe reported a loss of R1.362 billion (2018: R683.4 million profit) for the year ended 31 December 2019.

Financial position

Working capital remains a key part of our financial position and we continue to focus on optimising its levels. Finished goods on hand at year end was approximately four to five months of sales. This level remained despite production cut-backs due to lower sales as a result of pricing and demand. The NRV adjustment discussed earlier was the key reason for the reduction in the inventory balance to R2.01 billion at year-end (2018: R2.04 billion). Lower sales in the last quarter of 2019 led to a lower trade and other receivables balance. The working capital movement helped free up cash at year-end and contributed to the improved closing cash and cash equivalents balance. The Venture’s debt facilities are unutilised, and the business remains ungeared at year end.

Provisions decreased from R371.9 million to R337.7 million. This increase is due to a R44.3 million credit from the unwinding of the closure and restoration costs as well as an R18 million charge relating to additional provision for an uncertain obligation.

Cash position

The closing cash and cash equivalents balance improved to R354 million (2018: R281 million). This comprises Merafe’s share of cash in the Venture of R143 million (2018: R45 million) and Merafe’s own cash of R211 million (2018: R235.8 million). This was due to cash inflow from working capital movements, largely influenced by trade receivable, of R239.9 million (year on year movement), an outflow of cash from investing activities due to sustaining capital expenditure of R531 million (2018: R412 million) and a dividend of R151 million paid in the year. This amount relates to the 2018 final dividend.

Debt position

Merafe has no interest-bearing debt. On 5 September 2019, the R200 million revolving credit facility with ABSA was refinanced and increased to R300 million. Favourable terms were also negotiated with ABSA resulting in a lower interest rate and commitment fee. This facility had not been utilised by year end. The facility provides the Company with immediate access to funding if the need arises.

Dividend

As such, on 6 March 2020, the Board declared a final cash dividend of 4 cps (11 March 2019: 6 cps). The dividend applies to all shareholders on the register on 27 March 2020 and is payable on 30 March 2020.

Outlook

There are no major expansionary projects planned for 2020 with all budgeted spend earmarked for sustaining capex to maintain asset integrity and meet compliance requirements. Merafe’s balance sheet remains ungeared. There is a conscious intention to preserve cash in anticipation of a tough year that is predicted. Capital therefore will continue to be allocated to the most beneficial projects. Management’s focus will be on enforcing cost control measures and maintaining safe and efficient operations in order to enhance margins and sustainable cash flows. We remain of the view that our financial position should assist us to ride out the forecasted difficult period.

Ditabe Chocho

Financial Director

6 March 2020

Summarised consolidated statements of comprehensive income


   For the year ended 
   31 December 
2019 
Audited 
R'000
 
   31 December
2018
Audited
R'000 
  
Revenue  5 379 329     5 606 324    
EBITDA  391 886     1 345 941    
Depreciation and amortisation  (467 261)    (405 548)   
Impairment  (1 846 343)    –    
Net financing income  54 802     4 082    
(Loss)/profit before taxation  (1 866 916)    944 475    
Taxation  505 097     (261 059)   
(Loss)/profit and total comprehensive (loss)/income for the year  (1 361 819)    683 416    
Basic (loss)/earnings per share (cents) (54.2)    27.2    
Headline (loss)/earnings per share (cents) (1.8)    27.2    
Ordinary shares in issue  2 510 704 248     2 510 704 248    
Weighted average number of shares for the year  2 510 704 248     2 510 704 248    
Diluted weighted average number of shares for the year  2 510 704 248     2 510 704 248    

Summarised consolidated statements of cash flow

   For the year ended 
  31 December 
2019 
Audited 
R'000 
   31 December 
2018 
Audited 
R'000 
  
(Loss)/profit before tax  (1 866 916)    944 475    
Depreciation and Impairment  2 313 604     405 548    
Finance income  (56 396)    (18 595)   
Finance expense  1 594     14 512    
Share-based payment expense  156     3 097    
Share grants exercised  (3 588)    (5 077)   
Embedded derivative expense  40 677     34 570    
Provisions  34 188     84 386    
Movement in long term receivables  (3 617)    869    
Profit on sale of assets  (17 087)    –    
Effect of exchange rate fluctuations on cash held during the year  4 410     30 042    
Non-cash movements  3 054     –    
Adjusted for working capital changes  296 496     (706 200)   
Cash generated from operating activities  746 574     787 627    
Interest paid  (1 524)    (968)   
Interest received  10 952     17 253    
Taxation paid  (5 040)    (325 417)   
Net cash generated from operating activities  761 042     478 496    
Proceeds from sales of property, plant and equipment  3 037     –    
Sustaining capital expenditure  (531 473)    (412 074)   
Expansionary capital expenditure  –     (190)   
Net cash utilised in investing activities  (528 436)    (412 264)   
Dividends paid  (150 642)    (425 963)   
Loans (repaid)/raised during the year  (4 228)    (1 026)   
Net cash utilised in financing activities  (154 870)    (426 989)   
Net increase/(decrease) in cash and cash equivalents  77 736     (360 758)   
Cash and cash equivalents at 1 January  280 855     671 656    
Effect of foreign exchange rate changes  (4 410)    (30 042)   
Cash and cash equivalents as at 31 December  354 181     280 856    

Summarised consolidated statements of financial position

    As at     
   31 December 
2019 
Audited 
R'000
 
   31 December 
2018 
Audited 
R'000 
(Restated)
   31 December 
2017^
Audited 
R'000 
(Restated)
  
ASSETS              
Property, plant and equipment  1 435 080     3 226 212     3 215 223    
Intangible assets*  49 268     51 376     55 932    
Investment in subsidiaries**       –     –    
Long term receivables  16 612     12 995     13 864    
Deferred tax asset  1 374     17 945     17 726    
Total non-current assets  1 502 334     3 308 528     3 302 745    
Inventories****  2 008 799     2 042 621     1 497 798    
Current tax asset  18 635     26 368     –    
Trade and other receivables***  675 344     968 997     883 249    
Cash and cash equivalents  354 181     282 037     671 655    
Total current assets  3 056 959     3 320 024     3 052 702    
Total assets  4 559 293     6 628 552     6 355 447    
EQUITY              
Share capital  25 107     25 107     25 107    
Share premium  1 269 575     1 269 575     1 269 575    
Retained earnings  2 085 835     3 598 296     3 340 843    
Total equity attributable to equity holders  3 380 517     4 892 978     4 635 525    
LIABILITIES              
Loans and borrowings non-current  19 972     9 879     11 094    
Share-based payment liability  1 004     3 518     5 379    
Provisions  337 716     371 904     287 518    
Deferred tax liability  226 065     751 103     780 485    
Total non-current liabilities  584 757     1 136 404     1 084 476    
Loans and borrowings current  4 460     1 233     1 044    
Trade and other payables  579 131     544 730     550 556    
Derivative***  8 090     48 767     72 272    
Share-based payment liability  2 338     3 257     3 376    
Bank overdraft       1 182     –    
Current tax liability       –     8 198    
Total current liabilities  594 019     599 170     635 446    
Total liabilities  1 178 776     1 735 574     1 719 922    
Total equity and liabilities  4 559 293     6 628 552     6 355 447    
* Intangible assets has been separately disclosed from Property, plant and equipment with a restatement of the 2018 financial figures.
** Less than one thousand.
*** Trade and other receivables has been restated due to a prior period error in the 2018 financial year. Derivative financial liability was netted off in the trade and other receivables balance and has been separately disclosed in the current year.
**** Inventory of R133.2 million (2018: R8.3 million) was written down for the year ended 31 December 2019.
^ In line with the restatement noted, a third balance sheet has been included for comparative purposes.

Statements of changes in equity

  For the year ended 
  31 December
2019
Audited
R'000 
   31 December
2018
Audited
R'000 
  
Issued share capital – ordinary shares  25 107     25 107    
Balance at the beginning and end of the year  25 107     25 107    
Share premium – ordinary shares  1 269 575     1 269 575    
Balance at beginning and end of the year  1 269 575     1 269 575    
Retained earnings  2 085 835     3 598 296    
Balance at beginning of the year  3 598 296     3 340 843    
Total comprehensive (loss)/income for the year  (1 361 819)    683 416    
Dividends paid  (150 642)    (425 963)   
Total equity for the end of the year  3 380 517     4 892 978