Merafe Resources

The summarised consolidated financial results for the year ended 31 December 2019 have been prepared in accordance with International Financial Reporting Standards.

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 (“the 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 4% from the prior year to R5 379 million (2018: R5 606 million). Ferrochrome revenue decreased by 8% year on year to R4 455 million (2018: R4 849 million), primarily as a result of a 14% decrease in average net CIF prices and a 1% decrease in ferrochrome sales volumes to 368kt (2018: 372kt). Chrome ore revenue increased by 22% year on year to R910 million (2018: R747 million), driven by a 45% increase in sales volumes to 359 000 (2018: 248 000). This was partially offset by a 24% average sales price decrease for the year.

Merafe’s portion of the Venture’s EBITDA for the year ended 31 December 2019 is R428.1 million (2018: R1 390.3 million). The EBITDA includes Merafe’s attributable share of standing charges of R203.3 million (2018: R131.5 million) and a foreign exchange loss of R14.4 million (2018: foreign exchange gain of R141.5 million). This figure also includes an impairment loss on inventory of R133.2 million (2018: R8.3 million) as well as a reversal of SARS disallowed diesel rebate of R11.0 million (2018: Rnil).

After accounting for corporate costs of R36.3 million (2018: R44.4 million), which include a cash settled share-based payment expense of R0.16 million (2018: R3.1 million), Merafe’s EBITDA reached R391.9 million (2018: R1 345.9 million). Corporate costs include corporate social investment expenses of R3.2 million (2018: R3.3 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.

Loss for the year ended 31 December 2019 amounted to R1 361.8 million (2018: profit of R683.4 million), after taking into account depreciation of R467.2 million (2018: R405.5 million), an impairment of assets of R1 846 million (2018: Rnil), net financing income of R54.8 million (2018: R4.0 million) and taxation credit of R505.1 million (2018: expense R261.1 million). Taxation includes deferred tax credit of R507.7 million (2018: R29.6 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 a balance of R141.0 million (2018: Rnil) unredeemed capital expenditure balance at 31 December 2019 as taxable profits did not exceed capital expenditure. Depreciation increased year on year primarily as a result of capital expenditure for the year as well as the prior year.

Sustaining capital expenditure increased by 29% to R531 million (2018: R412 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 unsecured, three-year revolving credit facility was increased to R300 million from R200 million and remained unutilised for the year.

At 31 December 2019, Merafe had cash and cash equivalents of R354.1 million (2018: R280.6 million) which comprised cash held by Merafe of R211.5 million (2018: R235.8 million) and R142.6 million (2018: R45.0 million), being Merafe’s share of the cash balance in the Venture.

Trade and other receivables decreased by 31% compared to the previous year primarily as a result of lower sales. The Rand:US$ exchange rate closed at R13.98 (2018: R14.39) as at 31 December 2019.

Ferrochrome finished goods volumes of 131kt (2018: 128kt) on hand at year end represent approximately four to five months of sales. Although closing inventory volumes increased marginally (1.8%) from the volumes at the beginning of the year, the total value of inventory dropped by R64 million to R2 008 million as a result of the impairment loss recognised.

The Board declared a final cash dividend of R100 million (2018: R151 million), which is 4 cents per share (2018: 6 cents per share). As there was no interim dividend, this amount represents the full year dividend of R100 million (4 cents per share) compared to R351 million (14 cents per share) for the previous financial year.

As reported in our interim results for the half-year ended 30 June 2019, there was unfortunately a fatality at the Venture’s Magareng mine as a result of a fall of ground incident.

We continue to place maximum focus on safety. We have a number of safety campaigns in our efforts to improve our safety performance. This is evidenced by the improved total recordable = injury frequency rate (“TRIFR”) of 2.56 compared to 3.39 for the year ended 31 December 2019.

Ferrochrome production volumes decreased by 9% from 407kt in 2018 to 371kt in the current financial year. The contributing factors to the decrease were power supply disruptions, community unrest and scaled-down production levels in the fourth quarter of 2019 in response to weaker demand for ferrochrome.

Load curtailment by Eskom had an impact on production volumes and costs. This remains a key risk for our business and the broader ferroalloy sector. In addition, electricity tariff increases are contributing to cost pressures in the business. The National Energy Regulator of South Africa approved a 13.87% tariff increase effective 1 April 2019 and an 8.1% tariff increase effective 1 April 2020. While the tariff increases are less than amounts Eskom had applied for, the above-inflation increases will have an impact on cost structures and margins.

As announced on 20 January 2020, the Venture has commenced consultation processes in terms of Section 189 and 189A of the Labour Relations Act, No 66 of 1995 at the Rustenburg smelter. The consultation process is a result of deteriorating market and operating conditions across the South African ferrochrome industry, including unsustainable electricity tariff and power supply disruptions. These factors have also led to displacement of South African ferrochrome volumes.

The increasing and unrestricted exports of chrome ore from South Africa is also contributing to displacement of ferrochrome volumes from South Africa.

Global stainless steel production increased by 1.5%^ in 2019 to an estimated 51.9 million^ tonnes. Stainless steel production in China and Indonesia exceeded 30mt^, an all-time high and approximately 8%^ higher than the prior year, while European and North American production declined around 7%^ year on year. Although Chinese stainless steel producers remain competitive on a global scale, they face headwinds due to an increase in global trade restrictions.

Global ferrochrome production increased 3.2%^ to an estimated 14.1 million^ tonnes in 2019, this is lower than the growth of 8.1%^ in 2018. Ferrochrome production in China increased 13%^ year on year, linked to a 15.4%^ increase in chrome ore exports from South Africa. Despite the increase in Chinese ferrochrome demand, South African ferrochrome production declined 8.4%^ during 2019 to 3.6mt^, owing to lower prices and weak rest-of-world demand. These cutbacks were exacerbated by power shortages in H2 2019. The environment for ferrochrome producers in South Africa is expected to remain challenging, while further capacity additions are expected in China.

Chinese chrome ore imports from countries other than South Africa reduced by 1.6%^ during 2019, owing to weak market conditions. This has increased China’s reliance on South African chrome ore imports from 76%^ to 79%^. Despite an increase in demand from Chinese ferrochrome smelters, chrome ore port stocks rose 20%* to approximately 3.5mt* by year end, owing to continued ore oversupply.

^ CRU commodity market analysts
* Ferroalloy Net

Stainless steel production is expected to grow by 3.2% in 2020, however, both chrome and ferrochrome prices are expected to remain under pressure in the short term due to oversupply. The growth forecasted does not factor in the possible impact of COVID-19 (Coronavirus) and load shedding which is expected to last for 18 to 24 months.

We will continue to manage factors within our control. Cost management, efficient and safe operations, cash preservation and efficient capital allocation will continue to be management’s key areas for 2020.

The financial position of our business, which is ungeared at year end remains strong and we are of the view that this positions us to withstand the difficult times ahead.

Sandton

9 March 2020