Notes to the summarised consolidated financial statements
1. Basis of preparation
These summarised consolidated interim results for the six months ended 30 June 2019 have been prepared under the supervision of Ditabe Chocho CA(SA) (Financial Director), in accordance with and containing the information required by IAS 34: Interim Financial Reporting, as well as the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee, and the Financial Pronouncements as issued by Financial Reporting Standards Council, the requirements of the Companies Act of South Africa No.71 of 2008 and the JSE Limited Listings Requirements.
1.1 Going concern
In determining the appropriate basis of preparation of the interim results, the directors are required to consider whether the Group can continue to be in operational existence for the foreseeable future. The financial performance of the Group is dependent upon the wider economic environment in which the Group operates.
These interim results are prepared on a going concern basis. The Board is satisfied that the Group is sufficiently liquid and solvent to be able to support the operations for the next twelve months.
1.2 Accounting policies
The accounting policies applied in the preparation of these interim results are in terms of International Financial Reporting Standards (“IFRS”) and are consistent with those applied in the previous consolidated annual financial statements, except for the adoption of various revised and/or new standards.
The Group has adopted IFRS 16 Leases which became effective on 1 January 2019. IFRS 16 Leases sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer (‘lessee’) and the supplier (‘lessor’). IFRS 16 replaces the previous leases Standard, IAS 17 Leases, and related Interpretations. IFRS 16 has one model for lessees which will result in almost all leases being included on the statement of financial position.
1.3 Critical accounting judgements and key sources of estimation uncertainty
The preparation of the summarised consolidated interim results requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates are reviewed on an ongoing basis. Underlying assumptions are also reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised.
In particular, information about significant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the summarised consolidated interim results are as follows:
- Measurement of depreciation and impairment, useful lives and residual values of property, plant and equipment
- Inputs used in the determination of the fair value of the share-based payment transactions
- Assumptions used in calculation of the life of the mines/smelters, estimation of the closure and restoration costs and inputs used in the calculation of the present value of the provision for closure and restoration costs
- Recognition of deferred tax asset and projection of future taxable income to recover the deferred tax asset
- Consolidation: control assessment
- Fair value measurement of embedded derivative
2. Determination of fair values
A number of the accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities.
Fair values have been determined for measurement and/or disclosure purposes based on the methods as indicated below.
2.1 Embedded derivatives
The embedded derivative is included in trade and other receivables at fair value. The fair value of the embedded derivative is based on the latest available ferrochrome prices and closing foreign exchange rate. The embedded derivative at 30 June 2019 was R32.9m liability (Dec 2018: R48.7m liability) and is based on level 2 hierarchy per IFRS 13. The valuation is based on observable market inputs of prices and exchange rates.
2.2 Share-based payment transactions
The fair value of employee share options and share grants is measured using the Black-Scholes Merton model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends, and the risk-free interest rate (based on Government bonds). The total balance of the share-based payment liability at 30 June 2019 was R3.4m (Dec 2018: R6.7m).
3. Headline earnings per share (cents)
| For the six months ended | ||||
| 30 June 2019 Unaudited R’000 |
30 June 2018 Unaudited R’000 |
|||
|---|---|---|---|---|
| Headline earnings per share (cents) | 6.6 | 16.9 | ||
| Diluted headline earnings per share (cents) | 6.6 | 16.9 | ||
| Profit, total comprehensive income for the period and headline earnings | 165 241 | 425 105 | ||
4. Capital Commitments
| For the six months ended | ||||
| 30 June 2019 Unaudited R’000 |
30 June 2018 Unaudited R’000 |
|||
|---|---|---|---|---|
| Capital Commitments | 425 699 | 348 822 | ||
| Contracted but not provided for | 132 100 | 138 725 | ||
| Authorised but not contracted for | 293 599 | 210 097 | ||
5. Related parties
5.1 Related party transactions and balances
During the current reporting period, management performed a reassessment of its Related Party relationships in accordance with IAS 24, Related Party Disclosures. The Glencore Plc group is a related party taking into consideration the shareholding and related significant influence coupled with the substance of the relationship. Significant transactions and balances with all entities within the Glencore Plc group are therefore disclosed together with the comparative figures.
All related party transactions were concluded on an arms-length basis and relate to Merafe’s attributable 20.5% interest in the Venture. There were no outstanding commitments at period end.
| Name of related party | Description of relationship | Transactions and balance# |
| Merafe Chrome and Alloys (Pty) Ltd (“Merafe Chrome”) |
Merafe Chrome is a wholly owned subsidiary of the Company | Dividends of Rnil (June 2018: R200m) were declared to the Company by Merafe Chrome. |
| Merafe Ferrochrome and Mining (Pty) Ltd (“Merafe Ferrochrome”) | Merafe Ferrochrome is a wholly owned subsidiary of Merafe Chrome. | Dividends of Rnil (June 2018: R200m) were declared to Merafe Chrome by Merafe Ferrochrome. At period end, a loan of R465.6m (June 2018: R200m) is owing by the Merafe Ferrochrome to the Company. The loan account is of a short-term nature, is interest free, unsecured and does not have fixed repayment terms. |
| Merafe Kroondal Rehabilitation Trust (SE) (the “Trust”) | The Trust, which was registered on 31 May 2006, was established to provide funds for the rehabilitation of land involved in any prospecting or mining operations of Merafe Ferrochrome of the Kroondal mine and to discharge any liability which might arise in terms of the Atmospheric Pollution Prevention Act of 1965, the Environment Conservation Act, No 50 of 1991, the Water Act, No 54 of 1956 and any such other legislation as may be enacted in the future. The environmental obligations and corresponding liability remain the sole responsibility of the Venture. | There is a loan of R108k (June 2018: R97k) with the Company which relates to the payment of audit fees. The loan account is of a long-term nature, is interest free, unsecured and does not have fixed repayment terms. |
| Industrial Development Corporation of South Africa Limited (“IDC”) | The IDC holds 21.8% of the issued share capital of the Company and has the ability to exercise significant influence over the Company as a result of its shareholding. | The IDC received the non-executive directors’ fees for Ms M Mosweu. IDC received dividends declared and paid by the Company, in respect of the 2018 financial year. At period end there are no amounts due to the IDC. |
| Glencore (Nederland) B.V. (“GN”) | GN holds 28.7% of the issued share capital of the Company and has the ability to exercise significant influence over the Company as a result of its shareholding. | GN received the non–executive directors’ fees for Mr S Blankfield. GN received dividends declared and paid by the Company, in respect of the 2018 financial year. At period end there are no amounts due to GN. |
| Glencore Limited (Stamford) (“GLS”) | GLS acts as the Venture’s exclusive marketing agent to sell ferrochrome on its behalf and acts as distributor in the USA and Canada. | Sale of ferrochrome of R228m (June 2018: R237m). Commission expense of R5m (June 2018: R5m). Interest expense of R3m (June 2018: R5m). Receivable at the end of June 2019 R152m (Dec 2018: R131m) which is reduced as and when GLS receives funds from customers. |
| Glencore International AG | Glencore International AG acts as the Venture’s exclusive marketing agent to sell ferrochrome and chrome ore on its behalf. The Venture purchases various raw materials from Glencore International AG on an ongoing basis. The Venture sells chrome ore to Glencore International AG on an ad hoc basis. |
Commission expense on sale of ferrochrome and chrome ore of R109m (June 2018: R104m). Marketing fee expense of R1m (June 2018: R1m). Interest income of R0.5m (June 2018: R1m). Purchase of raw materials of R138m (June 2018: R180m). Balance owing at the end of the period R25m (Dec 2018: R42m) payable on confirmation of final sales. |
| African Carbon Manufacturers (Pty) Ltd | African Carbon Manufacturers (Pty) Ltd sells raw materials to the Venture. | Purchase of raw materials of R12m (June 2018: R10m). Balance owing at the end of the period of R4m (Dec 2018: R2m) payable 30 days from statement date. |
| African Fine Carbon (Pty) Ltd | African Fine Carbon (Pty) Ltd sells raw materials to the Venture. | Purchase of raw materials of R26m (June 2018: R16m). Balance owing at the end of the period of R6m (Dec 2018: R5m) payable 30 days from statement date. |
| Chartech Technology (Pty) Ltd | Chartech Technology (Pty) Ltd sells raw materials to the Venture. | Purchase of raw materials of R20m (June 2018: R16m). Balance owing at the end of the period of R2m (Dec 2018: R4m) payable 30 days from statement date. |
| Glencore Operations South Africa (Pty) Ltd (“GOSA”) | GOSA is Merafe Ferrochrome and Mining (Pty) Ltd’s partner in the Venture. | Employee costs of R63m (June 2018: R56m). Head-office costs of R12m (June 2018: R9m). Training costs of R4m (June 2018: R3m). Lion housing costs of R8m (June 2018: R7m). Shared services costs of R4.6m (June 2018: R4m). Balance owing at the end of the period of R18m (Dec 2018: R7m) payable 10 days after month end. |
| Access world (South Africa) Pty Ltd | Access World (South Africa) (Pty) Ltd is a warehousing company that provides storage facilities of ferrochrome and chrome ore to the Venture. | Storage of ferrochrome and chrome ore of R5m (June 2018: R6m). Outstanding balance owing at the end of the period of R1m (Dec 2018: R1m) payable 30 days after statement date. |
6. Taxation
The Group’s effective tax rate is 30% (June 2018: 28%) for the six months ended 30 June 2019.
7. Events after the reporting period
There have been no material events subsequent to the six months ended 30 June 2019.
8. Contingent liabilities
No contingent liabilities as at 30 June 2019.
9. Directors
Ms Hlokammoni Grathel Motau was appointed as an independent non-executive director and as a member of the company’s audit and risk committee effective 1 January 2019.
Mr Jeffery Mclaughlan was appointed as an independent non-executive director effective 1 May 2019 as well as a member of the remuneration and nomination committee and chairman of the remuneration committee, effective 24 May 2019.
Mr Chris Molefe retired as Chairman of the Board effective 15 May 2019.
Mr Abiel Mngomezulu replaced Mr Molefe and was appointed as the chairman of the Board and nomination committee and stepped down as chairman of the remuneration committee (but remained a member thereof) and as a member of the audit and risk committee, with effect from 15 May 2019. Mr Mngomezulu was further appointed as a member of the social, ethics and transformation committee, with effect from 24 May 2019.
10. Review by independent auditors
These condensed consolidated unaudited interim financial statements of Merafe Resources Limited for the six months ended 30 June 2019 have not been reviewed by the Company’s independent auditor, Deloitte & Touche.