Merafe Resources

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. Merafe has one reportable segment being the mining and beneficiation of chrome ore into ferrochrome and as a result no segment report has been presented.

Merafe’s share of revenue from the Venture increased by 3% from the prior year to a record R5 889m (2016: R5 702m). Ferrochrome revenue increased by 5% year on year to R5 163m (2016: R4 923m) primarily as a result of a 37.3% increase in net CIF prices which was partially offset by a 14% decrease in ferrochrome sales volumes to 375kt (2016: 437kt) and a 9.5% strengthening of the average Rand: US Dollar exchange rate to R13.3 (2016: R14.7).

Chrome ore revenue decreased by 7% year on year to R726m (2016: R778m), driven by a 13% decrease in sales volumes to 322kt (2016: 372kt), a strengthening of the average Rand: US Dollar exchange rate and a higher proportion of local and lower grade material, which was partially offset by 12.2% higher sales prices.

Merafe’s portion of the Venture’s EBITDA for the year ended 31 December 2017 is R1 705.5m (2016: R1 176.2m). The EBITDA includes Merafe’s attributable share of standing charges of R117.5m (2016: R96.7m) and a foreign exchange loss of R73.4m (2016: R78.2m).

After accounting for corporate costs of R40.4m (2016: R43.0m), which includes a cash settled share-based payment expense of R5.6m (2016: R12.8m), Merafe’s EBITDA reached R1 665.2m (2016: R1 133.2m). Corporate costs include Corporate Social Investment expenses of R3.5m (2016: R10k) following contributions to the Adopt-a-School Project. This project primarily relates to the renovations of science laboratories at two schools within the areas we operate in.

Profit for the year ended 31 December 2017 amounted to R914.1m (2016: R532.4m), after taking into account depreciation of R368.2m (2016: R329.9m), net financing costs of R19.3m (2016: R59.4m) and taxation expense of R363.6m (2016: R211.5m). The taxation expense includes deferred tax income of R47.4m (2016: deferred tax expense of R64.5m) which arose primarily as a result of temporary differences on property, plant and equipment as well as timing differences relating to provisions and accruals. There is no unredeemed capital expenditure balance at 31 December 2017 given that taxable profits exceeded capital expenditure.

Depreciation increased year on year primarily as a result of the R30m impact arising from the re-assessment of residual values. Net financing costs reduced as a result of the reduction in borrowings.

Sustaining capital expenditure increased from R276.0m in 2016 to R403.0m in 2017. This is as a result of inflation, required refurbishments to older plants coupled with the Venture’s ongoing efforts to improve costs and efficiencies across all operations.

During the reporting period, Merafe repaid in full the head-office debt owing to ABSA and Standard Bank. Total Merafe head-office debt repayments amounted to R364.8m in 2017 (2016: R197.0m). Total net cash at Merafe Group level amounted to R600m* at year end (2016: net debt of R409m*).

In the second half of 2017, management negotiated and concluded new debt facilities with ABSA that comprises a R200m unsecured, three-year revolving credit facility, which will replace the previous facility.

At 31 December 2017, Merafe had cash and cash equivalents of R671.7m (2016: R263.3m) which comprised of cash held by Merafe of R464.0m (2016: R208.7m) and R207.7m (2016 :R54.6m) being Merafe’s share of the cash balance in the Venture.

Trade and other receivables reduced significantly compared to the previous year which is primarily as a result of the stronger Rand:Dollar exchange rate of R13.7 at 31 December 2016 compared to R12.4 at 31 December 2017, earlier than expected cash receipts and lower ferrochrome sales volumes in the last quarter of 2017 compared to the last quarter of 2016.

The increase in inventories is a function of higher raw materials and finished goods. The increase in raw materials is mainly due to higher chrome ore stock levels at a higher average cost as well as an increase in the reductant cost per tonne. The increase in finished goods is a function of higher production volumes compared to sales volumes as well as higher production costs. Finished goods on hand at year end is approximately four to five months of sales.

The working capital loan at 31 December 2017 of R72.3m (2016: R309.1m) was classified as a current liability to more accurately reflect the nature of this item. The balance at 31 December 2016 was reclassified as it was previously recognised as a reduction in trade and other receivables and is now recognised as a current liability.

The Board declared a final dividend of R226m which is 9 cents per share. This amounts to a full year dividend of R301m (12 cents per share) compared to R120m (4.8 cents per share) for the previous financial year.

Safety remains a priority of the Venture. Our total recordable injury frequency rate (TRIFR) reduced by 10% to 3.74 compared to 31 December 2016. As previously reported in our August 2017 results announcement, we were saddened by a fatality at our Lion Plant on 21 March 2017.

The safety of all our employees remains a critical focus area and all efforts continue to be made to ensure that the highest standards of safety remain in place at all the Venture’s operations.

Merafe’s attributable ferrochrome production from the Venture for the year ended 31 December 2017 increased to a new record of 395kt (2016: 393kt) which is equivalent to installed capacity utilisation of 82%.

A number of annual production records were achieved during 2017 including ferrochrome production at the Lion smelter and the Wonderkop smelter as well as annual pellet production records at the Tswelopele and Bokamoso pelletising and sintering plants at the Rustenburg and Wonderkop smelters, respectively. The record at the Tswelopele plant was remarkable since it is the first plant of its type in the world to achieve in excess of its design capacity over a full year period.

Total production costs per tonne of ferrochrome increased by 9%, in spite of significant increases in ore and reductant consumption prices of 15% and 31% respectively. This outstanding achievement was as a result of:

• carefully managed production during the high electricity tariff winter months;
• annual production records as detailed above;
• electricity tariff increases of 2.2% effective 1 April 2017; and
• ongoing operational cost control initiatives.

There were no material changes to the mineral reserves, mineral resources and mining rights of the participants in the Venture during 2017.

Global stainless steel growth stalled in early 2017 when a number of Chinese mills announced widespread environmental and pricing-linked shutdowns. Despite the slow start to the year, the commissioning of a large Indonesian stainless steel project, increased United States (US) output, and a second-half recovery in Chinese production resulted in global stainless steel output achieving growth of 5.9%^. Global stainless steel output for the year is estimated to have been 48.3^ million tonnes, of which Chinese mills accounted for 25.7m^ tonnes.

Ferrochrome pricing remained volatile throughout 2017, with both market fundamentals and macroeconomic factors contributing to large swings. Q1 of the 2017 year began with near-term record chrome prices as Metal Bulletin’s quotes for imported charge chrome (CIF China) and imported UG2 chrome ore (CIF China) reached 135.00 c/lb and 395.00 USD/t, respectively. This pricing followed a Q1 2017 European Benchmark ferrochrome price of 165.00 US c/lb, which increased 50% from the prior quarter.

The strong pricing environment incentivised additional supply which, in conjunction with the temporary slowdown in the Chinese stainless steel industry, caused a rapid pricing decrease in early Q2 2017. Metal Bulletin’s quotes for imported charge ferrochrome and UG2 chrome ore reached floors in June, when they were quoted as 70.00 c/lb and 138.00 USD/t, respectively.

The second half of the year was characterised by a rebalancing of the industry’s supply-demand structure, and multiple price fluctuations continued to cause disruption. Under these conditions, Chinese ferrochrome producers were able to increase their 2017 annual output to 4.9m^ tonnes, up from 4.1m^ tonnes a year earlier. Global ferrochrome output is estimated to have increased to 12.3m^ tonnes in 2017, up 11.3%^ year on year.

China’s increase in ferrochrome production resulted in a large rise in seaborne chrome ore trade. During 2017, China imported 13.9m** tonnes of chrome ore, marking a year on year increase of 31.1%**. South African producers maintained their position as China’s largest supplier, accounting for 72.3%** of these imports by volume

Global stainless steel production is projected to grow by 4.1%^ in 2018 and at an average of 3%^ for the three years thereafter, as additional Indonesian capacity is brought online and demand remains robust. This will in turn bolster demand for ferrochrome, particularly from non-Chinese sources. The Venture remains well-positioned to take advantage of the healthy market outlook.

In accordance with our strategy, we remain committed to maximising return to our shareholders in the near term in the form of dividends and will continue to assess opportunities to deliver shareholder value.

Sandton

5 March 2018