Merafe Resources

Merafe’s revenue and operating income are 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 period to R2 789m (June 2018: R2 721m).

Ferrochrome revenue increased by 2% from the prior period to R2 391m (June 2018: R2 342m) primarily as a result of a weaker average exchange rate and a marginal increase in ferrochrome sales volumes to 189kt (June 2018: 181kt). This is in spite of lower average realised prices.

Chrome ore revenue increased by 5% from the prior period to R397m (June 2018: R379m), driven by an 11% increase in sales volumes to 147kt (June 2018: 132kt) as well as a weaker average exchange rate. As with ferrochrome, lower average prices of chrome ore stunted the revenue growth.

Merafe’s portion of the Venture’s EBITDA for the six months ended 30 June 2019 is R454.4m (June 2018: R814.4m). The EBITDA includes Merafe’s attributable share of standing charges of R42.2m (June 2018: R38.2m) and a foreign exchange loss of R6.4m (June 2018: foreign exchange gain of R102.6m).

After accounting for corporate costs of R19.4m (June 2018: R18.1m), which include a cash settled share-based payment expense of R227k (June 2018: R1.4m), Merafe’s EBITDA was R435.1m (June 2018: R796.3m).

Profit for the six months ended 30 June 2019 amounted to R165.2m (June 2018: R425.1m), after taking into account depreciation of R205.9m (June 2018: R203.6m), net financing income of R8m (June 2018: net financing expense of R2.8m) and taxation expense of R72.0m (June 2018: R164.7m). The taxation expense includes deferred tax credit of R18.1m (June 2018: R19.2m). There is no unredeemed capital expenditure balance as at 30 June 2019 given that taxable profits exceeded capital expenditure.

Sustaining capital expenditure decreased by 30% to R121m (June 2018: R174m). This decrease was due to the timing of spending as well as cut back in response to uncertainty in the market and the need to preserve cash.

The R200m unsecured, three-year revolving credit facility with ABSA remained unutilised for the period.

As at 30 June 2019, Merafe had net cash and cash equivalents of R204.8m (Dec 2018: R280.6m) which comprised of cash held by Merafe of R145m (Dec 2018: R235.8m) and R59.8m (Dec 2018: R45.0m) being Merafe’s share of the cash balance in the Venture.

Trade and other receivables increased by 7% to R987m (Dec 2018: R920m) The increase is primarily as a result of the timing of sales as well as higher revenue.

The increase in inventories is a function of higher raw materials and finished goods at a higher average 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 period end represent approximately four to five months of sales.

The Board of directors of the Company (“Board”) has decided not to declare an interim dividend (June 2018: R200m) due to prevailing market conditions.

It is with sadness that we have to report that on 14 February 2019 one of our employees died in a fall of ground incident, at our Magareng Mine. Despite the accident, the safety of our employees remains our number one priority as demonstrated by the 30% improvement of the total recordable injury frequency rate (“TRIFR”) to 2.36 (December 2018: 3.39).

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 first six months ended 30 June 2019 decreased by 2.3% to 206kt (June 2018: 211kt). The production for the period is equivalent to an installed capacity utilisation of 87% (June 2018: 88%).

Total production costs per tonne of ferrochrome increased by 7.2% compared to 31 December 2018, mainly as a result of the increase in reductants and other input costs.

Despite curtailment implemented by Eskom during February and March 2019, the Venture’s operations were not significantly impacted by electricity supply constraints in the first half of 2019 (“H1 2019”).

Multiple-year wage agreements have been signed with the different unions in 2018 and, therefore there will be no wage negotiations during 2019.

There were no material changes to mineral reserves, mineral resources and mining rights of the participants in the Venture from those reported in the Integrated Annual Report for the year ended 31 December 2018.

Global stainless steel production growth remained positive during the H1 2019, with Chinese H1 2019 melt rates reaching all-time highs of 13.6Mt^. Although positive, global growth was lower than in the prior period. Chinese and Indonesian stainless steel production now accounts for approximately 57%^ of global production, with this share expected to increase as a result of increasing output from Chinese owned stainless steel projects in Indonesia. Stainless steel production growth occurred against a backdrop of macroeconomic uncertainty, driven mainly by the US China trade war and slowing GDP growth within China.

Ferrochrome demand during the period increased by only 2.6%^ period on period as a result of softer growth in stainless steel production. This increase however was driven by significant demand from Chinese and Indonesian mills. This ferrochrome demand growth was more than offset by global ferrochrome production, which increased by 7.9%^ period on period to 7.1Mt^. The majority of this growth occurred in China where overall H1 2019 production increased by 22%^ to 2.96Mt^. Furthermore, ferrochrome exports from key producing regions, South Africa and India, increased during the period.

Ample availability of chrome ore – particularly from South Africa – underpinned the strong growth in Chinese ferrochrome production, with Chinese chrome ore imports totalling 7.4Mt* during the H1 2019. Having peaked at 3.1Mt^ in March 2019, Chinese chrome ore stocks have remained stable at 2.9Mt^ over the past months due to strong consumption from Chinese ferrochrome smelters. These strong ferrochrome production rates have not been equalled by demand within China, leading to an implied increase of Chinese ferrochrome stocks over the past months. Having increased to USD182/Mt** during March 2019 on the back of positive sentiment in the market, UG2 prices ended the period at USD143/Mt** due to weakness in the Chinese ferrochrome market.

The European benchmark ferrochrome price for H1 2019 averaged US116 cents per pound~, down 9% from the June 2018 average of US127 cents per pound~.

Price and exchange rate volatility are expected to continue. Global uncertainty remains a concern and will continue to have a negative impact on economies. Given the state of the market, there are likely to be ferrochrome production cuts across key markets. Surpluses are expected to narrow as a result with some improvement in prices expected.

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 August 2019