Merafe Resources

The summarised consolidated financial results for the year ended 31 December 2020 are presented below.

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, which includes a management fee, decreased by 11% from the prior year to R4 780 million (2019: R5 379 million). Ferrochrome revenue decreased by 10% year-on-year to R4 002 million (2019: R4 455 million) primarily as a result of an 8% decrease in average net CIF prices and a 17% decrease in ferrochrome sales volumes to 305kt (2019: 368kt). Chrome ore revenue decreased by 15% year-on-year to R777 million (2019:
R910 million), driven by an 8% decrease in sales volumes to 332kt (2019: 359kt) and a 15% average sales price decrease for the year.

Merafe's portion of the Venture's EBITDA for the year ended 31 December 2020 is R197.8 million (2019: R472.5 million). The EBITDA includes Merafe's attributable share of standing charges of R474.2 million (2019: R203.3 million), retrenchment costs of R97 million (2019: Rnil) and a foreign exchange loss of R59.7 million (2019: R14.4 million). The Company wrote down inventory by R13.6 million during the year (2019: R133.2 million). Merafe also reversed the disallowed diesel rebate of R0.3 million (2019: R11.0 million) by the South African Revenue Services. Arising from tax and legal opinions obtained, Merafe recognised a credit of R179 million relating to a reversal of a mining royalty tax provision.

After accounting for corporate costs of R29.9 million (2019: R36.3 million), which include a cash settled share-based payment income of R0.7 million (2019: R0.2 million expense), Merafe achieved EBITDA of R167.9 million (2019: R379.3 million). Corporate costs include Corporate Social Investment expenses of R0.5 million (2019: R3.2 million).

The loss for the year ended 31 December 2020 amounted to R1 003.0 million (2019: loss of R1 361.8 million), after taking into account depreciation of R153.4 million (2019: R467.2 million), an impairment of assets of R1 365 million (2019: R1 789.3 million) as the carrying amount of the net assets of an entity was higher than its market capitalisation thus an impairment indicator, net financing income of R4.8 million (2019: R10.4 million) and taxation credit of R342.7 million (2019: R505.1 million). Taxation includes deferred tax credit of R344.2 million (2019: R507.8 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 R274.6 million (2019: R141.0 million) unredeemed capital expenditure balance at 31 December 2020 as taxable profits did not exceed capital expenditure. Depreciation decreased year-on-year primarily as a result of impairments processed in the prior year.

Sustaining capital expenditure decreased by 33% to R333.7 million (2019: R469.6 million) due to cash preservation initiatives embarked on.

The unsecured, credit facility with ABSA of R300 million remained unutilised for the year.

At 31 December 2020, Merafe had cash and cash equivalents of R277.6 million (2019: R354.2 million) which comprised cash held by Merafe of R151.9 million (2019: R211.5 million) and R125.7 million (2019: R142.7 million), being Merafe's share of the cash balance in the Venture.

Trade and other receivables increased by 30% compared to the previous year primarily as a result of a weaker closing Rand:US$ exchange rate and higher volumes sold in the last quarter of the year. The Rand:US$ exchange rate closed at R14.65 (2019: R13.98) as at 31 December 2020.

Ferrochrome finished goods volumes of 90kt (2019: 131kt) on hand at year end represent approximately three to four months of sales. The closing inventory value reduced to R1 433.7 million (2019: R2 008.8 million) post the write down of inventory to its net realisable value with an amount of R13.6 million (2019: R133 million).

The Board has decided not to declare a dividend for the current year (2019: R100 million: 4 cents per share).

The safety of our employees remains our number one priority. Regrettably, a fatality occurred at our Magareng mine on 20 October 2020. Our total recordable injury frequency rate (“TRIFR”) increased by 52% to 3.89 (2019: 2.56). Factors that contributed to the regression of our safety statistics were directly related to the COVID-19 pandemic, Section 189 of the Labour Relations Act consultation process (“Process”) at all our operations and uncertainty of the viability of our operations due to market conditions.

A continued effort is being made to ensure that the highest standard of safety is restored at all the Venture’s operations. A dedicated task team was established and is visiting the operations to identify any barriers to success and ensure action plans are implemented.

COVID-19 hit South Africa in March 2020. All our operations immediately prepared to suppress the spread of the virus by taking the following measures: creating awareness, training, educational videos, as well as the provision of: face masks, personal thermometers, and information to all employees and contractors. At each operation and office, the following initiatives were implemented: hand sanitisers, disinfectant schedules, information boards, social distancing demarcation, glass panels to protect people in high movement areas, screening of each individual who enters operations, and thermal scanners to determine if an individual has signs of fever.

Polymerase Chain Reaction (“PCR”) equipment was donated to Ndlovu laboratories to increase the testing capabilities of the region. Occupational health practitioners were trained to take samples and ensure that they are sent to the laboratories for analysis. A software application was developed whereby all employees had to complete screening on a daily basis. If any issue of concern was identified, the clock card would be blocked and the employee referred to his general practitioner or operational clinic for additional monitoring and assistance.

During the second wave, additional measures were included at the operations where all employees had to have an antigen test on return to work. This practice assisted in identifying potential COVID-19 cases and was followed up by a full PCR test if the antigen test was positive.

During 2020, we sadly lost five of our employees and contractors due to the COVID-19 pandemic. Regrettably during 2021 to date, this number has increased to 15.

Attributable ferrochrome production volumes decreased by 29% to 265kt (2019: 371kt) in the current financial year. The drastic reduction in production was as a result of the national lockdown implemented to curb the spread of COVID-19, weaker demand and to a lesser extent electricity supply load curtailment.

The significant reduction was mainly in the second and third quarters of the financial year. During this period, the Venture only operated the Lion smelter, Eastern Chrome mines and the UG2 Chrome Recovery Plants due to subdued demand and winter shut-downs for maintenance.

After winter, the Venture resumed production at all other operations except for the Lydenburg smelter and Rustenburg furnace 5, which have been placed under care and maintenance.

The Process which commenced in the second quarter of 2020 across all operations, has been concluded. It has resulted in 976 employees being retrenched at a cost of R474.2 million.

The Process was triggered by deteriorating operating and market conditions across the South African ferrochrome industry, including unsustainable electricity tariffs and interruptions, cross subsidies and real cost inflation.

Electricity supply and pricing remain key risks for our business and the broader ferro alloy sectors. The electricity tariff increased by 8.8% effective 1 April 2020. For 2021, the National Electricity Regulator of South Africa (“NERSA”) has agreed to increase the tariff by 15.6%, following Eskom’s High Court victory, where it challenged the inclusion of the government bailout of R69 billion in the calculation determining tariff increases. These increases add to cost pressures of the Venture’s smelters and further reduce the cost competitiveness of the South African ferrochrome industry.

South African ferrochrome production decreased by 25%^ year-on-year in 2020. Production was most heavily impacted in the second quarter due to COVID-19 related shut downs, while higher winter power tariffs and other cost pressures resulted in sustained lower production levels for the remainder of the year. Global ferrochrome production decreased 11.2% year-on-year^ to 12.5 million tonnes^ in 2020.

Global stainless steel production was also heavily impacted by COVID-19 during the first and second quarter of 2020 and quarterly production reduced by 12%^. Although production recovered in the third quarter of 2020 and hit a record volume of 14.2 million tonnes^ during the fourth quarter of 2020, full year production declined by 5.0%^. Global ferrochrome demand decreased by 5%^ year-on-year. South African chrome ore exports decreased by 8.7%* year-on-year to 13.5 million tonnes*.

Despite a recovery in demand, ferrochrome and chrome ore remained in surplus during the second half of 2020 and prices were subdued over the period. Market prices have notably improved in early 2021 due to ferrochrome supply restrictions in China and further increases in global chrome unit demand.

The average European Benchmark ferrochrome price was US cents 111 per pound in 2020, 1.1% higher than the 2019 average.

The recovery of stainless steel production and ferrochrome demand will depend on developments on the COVID-19 pandemic. The availability of vaccines and their distribution would be supportive of global economic recovery. Although there was negative growth of 5.0%^ in 2020, global stainless steel production is expected to recover with growth of 12.5%^ projected in 2021.

The supply restrictions in China, as well as the expected increase in demand could have a positive impact on ferrochrome prices.

We will continue to manage factors within our control by continuing to focus on cost management, efficient and safe operations, cash preservation and efficient capital allocation. This is even more critical due to the ongoing uncertain future impact of COVID-19 and its impact on the markets going forward. Our balance sheet remains strong and ungeared which positions us to withstand the challenging times ahead.

The auditors did not report on the projected forecasts and outlook contained in this announcement.

Sandton

8 March 2021

^ CRU commodity market analysts.

* Global trade atlas.