Merafe Resources

The results for the year ended 31 December 2018 have been prepared in accordance with International Financial Reporting Standards (IFRS).

Rounding of figures may result in minor computational discrepancies of the tabulations.

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 2.3 million 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 decreased by 5% from the prior year to R5 606 million (2017: R5 889 million). Ferrochrome revenue decreased by 6% year on year to R4 849 million (2017: R5 163 million) primarily as a result of a 7% decrease in net CIF prices and a 1% decrease in ferrochrome sales volumes to 372kt (2017: 375kt).

Chrome ore revenue increased by 3% year on year to R747 million (2017: R726 million), driven by a 16% average sales price increase. This was partially offset by a 23% decrease in sales volumes to 248kt (2017: 322kt).

Merafe's portion of the Venture's EBITDA for the year ended 31 December 2018 is R1 409.4 million (2017: R1 705.5 million). The EBITDA includes Merafe's attributable share of standing charges of R131.5 million (2017: R117.5 million) and a foreign exchange gain of R141.5 million (2017: foreign exchange loss R73.4 million).

After accounting for corporate costs of R44.4 million (2017: R40.4 million), which include a cash settled share-based payment expense of R3.1 million (2017: R5.6 million), Merafe's EBITDA reached R1 345.9 million (2017: R1 665.2 million). Corporate costs include Corporate Social Investment expenses of R3.3 million (2017: R3.5 million) following contributions to the Adopt-a-School Project. This project primarily relates to the Company’s intervention in the development and upgrade of infrastructure as well as social and academic skills of two schools within the areas we operate in.

Profit for the year ended 31 December 2018 amounted to R683.4 million (2017: R914.1 million), after taking into account depreciation of R405.5 million (2017: R368.2 million), net financing income of R4.0 million (2017: net financing expense R19.3 million) and taxation expense of R260.86 million (2017: R363.65 million). The taxation expense includes deferred tax credit of R29.6 million (2017: R47.4 million) which arose primarily as a result of temporary differences on property, plant and equipment as well as those relating to provisions and accruals. There is no unredeemed capital expenditure balance at 31 December 2018 given that taxable profits exceeded capital expenditure.

Depreciation increased year on year primarily as a result of capital expenditure for the year as well as a review of assets at year end that resulted in accelerated depreciation at our smelters. The assets review included a reassessment of the useful lives of permanent structures and furnaces. This led to accelerated depreciation of R38 million (2017: R30 million) on affected assets.

Sustaining capital expenditure increased by 2% to R412.0 million (2017: R403.0 million). This is necessary stay-in-business spending coupled with the Venture's ongoing efforts to improve safety, costs and efficiencies across all operations.

The R200 million unsecured, three-year revolving credit facility with ABSA remained unutilised for the year.

At 31 December 2018, Merafe had cash and cash equivalents of R280.6 million (2017: R671.7 million) which comprised of cash held by Merafe of R235.8 million (2017: R464.0 million) and R45.0 million (2017: R207.7 million) being Merafe's share of the cash balance in the Venture.

Trade and other receivables increased by 10% compared to the previous year primarily as a result of the weaker closing Rand:US$ exchange rate. The Rand:US$ exchange rate closed at R14.4 (2017: R12.4) as at 31 December 2018.

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 volumes on hand at year end represent approximately four to five months of sales.

The Board declared a final dividend of R151 million (2017: R226 million), which is 6 cents per share (2017: 9 cents per share). This amounts to a full year dividend of R351 million (14 cents per share) compared to R301 million (12 cents per share) for the previous financial year.

Safety remains the most important priority for the Venture. Our total recordable injury frequency rate (TRIFR) reduced by 10% to 3.39 from 3.74 at the end of 2017. We were saddened by the fatality at our Thorncliffe mine in August 2018. Due to a fall of ground incident, Mr Ntandazo Dlela (47), a team leader who worked for one of our mining contractors, was fatally wounded. In the same incident, his colleague Mr Mzubanzi Nkomo, was injured but has since fully recovered.

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. Continued focus on our catastrophic hazards and assurance verification of critical controls continue into 2019.

Merafe's attributable ferrochrome production from the Venture for the year ended 31 December 2018 increased to a new record high of 407kt (2017: 395kt) which is equivalent to installed capacity utilisation of 85%.

A number of annual production records were once again achieved during 2018 including ferrochrome production at the Lion smelter and the Wonderkop smelter as well as an annual pellet production record at the Bokamoso sintering plant at the Wonderkop smelter.

Total production cost per tonne of ferrochrome increased by 9% despite inflationary pressures. This was achieved as a result of:

• time in use management during the high electricity tariff winter months;
• increased production that diluted overheads;
• electricity tariff increases of only 5.2% effective 1 April 2018; and
• ongoing operational cost control initiatives.

The electricity situation in the country is concerning given the financial, structural and operational challenges that face Eskom. Eskom’s situation exposes the Venture, and indeed the entire country, to both tariff and electricity supply risks. The Venture continues to monitor the situation through involvement in various committees between the industry and Eskom. Additionally, the Venture continues to explore energy efficient means of producing our products. These various initiatives have contributed to the Venture remaining the lowest cost ferrochrome producer in South Africa.

The Venture has been able to conclude three-year agreements with our unions at all our operations except the eastern mines. This brings about welcome certainty for the business as well as for our employees.

In 2018, global stainless steel production is estimated to have increased by 6.1%^ year on year, on par with 2017’s increased production, despite increasing macroeconomic uncertainty in key producing regions.

Asia continued to be the major source of increase in production. Indonesian production reached 2.3 million^ tons in 2018 and was the primary driver of global growth, largely as a result of stainless steel projects 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 26.6 million^ 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, * GTA Global Trade International Services ^ CRU commodity market analysts as spot prices increased due to lower availability of domestically produced Chinese ferrochrome.

Global ferrochrome production in 2018 is estimated to have reached 13.4 million^ 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%^.

As a result of ferrochrome production growth in China, demand for South African chrome ore increased further in 2018. According to official customs statistics, China imported a total of 14.3 million* tons of chrome ore during the year, 3.1%* more than in 2017. The share of imported South African ore increased to 76.1%*, up from 72.3%* a year earlier, realising a 8.5%* growth rate year on year.

Global GDP and stainless steel production are both forecast to grow in 2019 with Indonesia’s contribution to the stainless steel industry continuing to become more meaningful. This will underpin projected growth in demand for ferrochrome. The Venture’s past and continued investment in the efficiency of its operations enables it to take advantage of expansion in the market. Locally, Eskom remains a key risk factor for the Venture in 2019.

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
11 March 2019

* GTA Global Trade International Services
^ CRU commodity market analysts