Commentary

On 28 February 2013, the Board of directors (the Board) of the Company approved the annual financial statements of the Group and the Company for the year ended 31 December 2012.

These abridged Group annual financial statements have been prepared in accordance with the framework concepts, the measurement and recognition requirements of International Financial Reporting Standards (IFRS ), the requirements of the Companies Act 71 of 2008, as amended, and the AC 500 standards issued by the Accounting Practices Board and contain the information required by IAS 34 Interim Financial Reporting. The accounting policies adopted are in terms of IFRS and are consistent with those adopted in the annual financial statements for the year ended 31 December 2011.

Review of results

The Group annual financial statements from which the abridged Group annual financial statements were derived have been audited by the Group`s auditors, KPMG Inc. Their unqualified audit report is available for inspection at the Company`s registered address.

Merafe`s revenue and operating income is primarily generated from the Xstrata-Merafe Chrome Venture (the Venture), the market leader in ferrochrome, with a total installed capacity of 1.98m tonnes of ferrochrome per annum. Merafe shares in 20.5% of the earnings before interest, taxation, depreciation and amortisation (EBITDA ) from the Venture.

Merafe’s 2012 share of ferrochrome sales tonnes from the Venture was 255 000 which was marginally above the prior year’s sales tonnes of 254 000. Chrome ore revenue as a percentage of total revenue decreased from 14% in 2011 to 13% in 2012. The average Rand:US Dollar exchange rate was R8.21 in 2012, compared to R7.26 for the 2011 year. The average European benchmark ferrochrome price decreased from 125US c/lb in 2011 to 121US c/lb in 2012.

Merafe’s share of EBITDA from the Venture for the 2012 year was R349.4m (2011:R464.4m). The EBITDA for 2012 includes a foreign exchange (forex) loss of R3.9m against a forex gain of R80.9m in 2011. The forex gain/loss captures all adjustments arising from translation/revaluation of foreign currency denominated balances/hedges to the local currency. This amount includes R5.5m relating to the re-measurement of the foreign currency hedging derivative. This arose as a result of implementation by the Venture of the hedging policy in the fourth quarter of 2012. The Board approved hedging policy requires Merafe to hedge its foreign currency exposure to the US $ ferrochrome margin in line with the quarterly European price of ferrochrome. The EBITDA from the Venture decreased from the prior year primarily as a result of the decrease in the average European benchmark ferrochrome price and an increase in costs which were partially offset by the weakening of the Rand compared to the US Dollar. The EBITDA includes Merafe’s attributable share of standing charges of R167.2m. After accounting for corporate costs of R33.6m and a share-based payment expense of R2.1m, Merafe’s EBITDA was R313.7m. Corporate costs of R33.6m decreased year on year primarily as a result of transaction costs and expenses associated with indirect tax liabilities that were incurred in 2011.

The profit and total comprehensive income for the year was R48.9m after taking into account depreciation of R140.1m, an impairment loss of R77.5m, net financing costs of R19.7m, current tax expense of R0.3m, deferred tax expense of R60.2m and R33.0m write-back arising from prior years’ overprovision of current tax. Depreciation increased year on year as a result of the re-assessment of useful lives and residual values in accordance with IAS 16, Property, Plant and Equipment as well as the accelerated depreciation recognised on assets scrapped during the year. The impairment loss was primarily as a result of the Venture considering the sale of some of its mining assets as part of its portfolio review. The R33.0m write-back of current tax and the increase in the effective rate of tax arose from the South African Revenue Services (SARS ) assessment of our returns during 2012. The balance of unredeemed capital expenditure is estimated to be R446m at 31 December 2012.

As per SENS announcement dated 7 August 2012, it was reported that SARS issued Merafe Ferrochrome and Mining Proprietary Limited with an audit letter of findings of R26m. SARS have since withdrawn the letter of findings of R26m. As previously reported, the Venture partners were in the process of engaging with SARS with a view to obtaining clarity on other areas where the structure of the Venture created anomalies with regard to VAT interpretation. We are pleased to report that this matter is now resolved.

Property, plant and equipment increased from 31 December 2011 as a result of R603m of capital expenditure of which R423m was expansionary and R180m was sustaining. Expansionary capital primarily comprised expenditure on Project Tswelopele and Project Lion II .

Merafe started the year with a cash balance of R221m, generated operating cash flows of R257m, invested R603m in capital expenditure, raised loans of R211m, incurred R3m foreign exchange fluctuations on cash held and closed with a cash balance of R83m at 31 December 2012. Cash in Merafe was R24m and Merafe’s share of cash in the Venture was R59m. At 31 December 2012, Merafe had long-term debt owing to ABSA Capital of R512m and approximately R288m unutilised ABSA long-term debt facilities.

The Merafe Board decided not to declare a dividend for the 2012 financial year, taking into account expansionary projects and the projected debt and cash levels of the Group.

Review of operations

During 2012, Merafe’s total ferrochrome production was 242 000 tonnes which was 8% lower than the comparative period primarily as a result of weaker demand and participation in Eskom’s power buy-back programme. The compensation received from Eskom for the electricity not consumed was adequate to cover the costs and lost profits on the associated volumes. Operating capacity utilisation for the 2012 year reduced to 66% compared to 72% for the prior year.

Total cost increases were contained at 9.2%. We continue to benefit from cost savings as a result of investments in improving efficiencies in our operations.

Safety and environment

Although there were no fatalities for the 2012 year, we are saddended to report the loss of one of our contractor employees, Mr Segopotje Johannes Ramontja, who passed away on 14 February 2013. Our deepest sympathies go out to his family, colleagues and friends.

The safety of our employees remains a key focus area as evidenced by the Venture’s total recordable injury frequency rate of 4.05 for the 2012 year which was at similar levels to prior years. There were no significant adverse environmental incidents in the Venture during the reporting period.

Mineral Reserves, Mineral Resources and Mining Rights

During 2012, there were no material changes to the mineral reserves, mineral resources and mining rights of the Venture.

Employment equity and empowerment

Both Merafe and the Venture exceeded the employment equity targets as per the Mining Charter scorecard for the year under review. We are pleased to report that in the Financial Mail Top Empowerment Companies Survey of JSE Listed Companies published in 2012, Merafe was named number one in the Resources sector.

Market review

Growth in stainless steel production in 2012 was primarily driven by the increased production of stainless steel in China. This resulted in a new record production of stainless steel in 2012 of 35.2m* tonnes compared with the 34.1m* tonnes in 2011. Global demand for ferrochrome was up year on year, to 9.7m* tonnes in 2012, exceeding the previous high of 9.5m* tonnes in 2011.

The increased demand and reduced supply of ferrochrome resulted in the drawing down of global ferrochrome stocks. A number of issues, including the continuation of concerns for the Eurozone due to the ongoing debt crisis, economic woes in the United States and other geopolitical events, such as the change of leadership in the Communist Party of China, resulted in weaker market conditions which affected ferrochrome demand in the second half of 2012.

Global ferrochrome production increased to 9.3m* tonnes in 2012 compared to 9.2m* tonnes in 2011. South African production declined during 2012 on the back of the agreements that South African producers had with Eskom to sell back electricity to the grid. South African ferrochrome production declined by 9% year on year. In response to the resulting increased demand for domestically produced ferrochrome and an increased availability of chrome ore, Chinese ferrochrome production increased by 9%*, from the production levels achieved in 2011. Despite producing around 3.3m* tonnes of ferrochrome in 2012, China remains a net ferrochrome importer with 1.5m* tonnes imported in 2012, a year on year decrease of 15%*.

Chrome ore imports into China reduced from 9.4m tonnes* in 2011 to 9.3m* tonnes in 2012, however, Chinese demand for chrome ore increased year on year with the excess coming from a draw down of Chinese port stocks of chrome ore to feed the increased production of ferrochrome in China. South Africa supplied around 48%* of the chrome ore imported into China, a 2%* decrease from 2011’s record volumes. These exports of chrome ore continue to advance the development of the ferrochrome industry in China, displacing capacity in South Africa and undermining South African sales of beneficiated chrome ore in the form of ferrochrome. The South African ferrochrome industry has brought this situation to the attention of the Government of South Africa and is engaging with the Department of Minerals and Resources (DMR). The DMR has initiated a process with major ferrochrome, chrome ore and platinum producers to find a solution aimed at improving the current plight of the South African chrome value chain.

* Source: Heinz Pariser/February 2013

Developments

Project Lion II

The commissioning of Lion II is expected during the second half of 2013 and about 50% of the budgeted cost of R1bn was incurred to 31 December 2012. In spite of heavy rainfalls and community unrest, the expected commissioning date is still envisaged in the second half of 2013 and the project remains within budget. Once this plant is fully operational, additional consumption efficiency improvements and cost savings are expected to materialise.

Project Tswelopele

We are pleased to report that Project Tswelopele, our new pelletising and sintering plant, was completed on schedule and within budget during 2012. The plant was hot commissioned on 7 October 2012 and reached design production capacity within the first two months of operation. We are proud to report that more than 1.6m hours were worked on this project, without any lost time injuries.

Outlook

Stainless steel production is expected to increase by 4%* in 2013 and by 5%* in the long term which would lead to increased growth in demand for ferrochrome globally. Given the reduced supply of ferrochrome resulting from the Eskom buy-back agreements in South Africa, coupled with improved market sentiments, we expect increased pricing going forward. Our low cost base leaves us well positioned to take advantage of the increased demand for ferrochrome. We look forward to a further strengthening of our position as the lowest cost producers in South Africa when our flagship and world class project, Lion II , comes on stream. We continue to recognise the importance of diversification and this will be a focus of the management team once project Lion II is completed.

* Source: Heinz Pariser/February 2013

Changes to Directorate

Mr Stuart Elliot resigned as Chief Executive Officer (CEO ) with effect from 31 May 2012.

Ms Zanele Matlala, who was previously Chief Financial Officer (CFO ) was appointed as CEO with effect from 1 June 2012 and also fulfilled the CFO role until the effective date of appointment of the new CFO.

Mr Ditabe Chocho was appointed CFO with effect from 2 January 2013.