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 in the Venture and as a result no segment report has been presented.

Merafe's revenue from the Venture decreased by 16% from the prior period to R2 338 million (June 2019: R2 789 million).

Ferrochrome revenue decreased by 16% from the prior period to R2 005 million (June 2019: R2 391 million) primarily as a result of decrease in ferrochrome sales volumes to 151kt (June 2019: 189kt) and lower average realised prices.

Chrome ore revenue decreased by 16% from the prior period to R333 million (June 2019: R397 million), as a result of a 6% decrease in sales volumes to 138kt (June 2019: 147kt) as well as weaker chrome prices for the first half of the year.

Merafe's share of the Venture's EBITDA for the six months ended 30 June 2020 is R170.6 million (June 2019: R454.4 million). The EBITDA includes Merafe's attributable share of standing charges of R277.3 million (June 2019: R42.2 million) and a foreign exchange gain of R90.2 million (June 2019: foreign exchange loss of R6.4 million). The increase in standing charges is due to production stoppages in the Company’s operations necessitated primarily by the COVID-19 nationwide lockdown regulations as well as a difficult operating environment.

After accounting for corporate costs of R13.2 million (June 2019: R19.4 million), which include a cash settled share-based payment credit of R1.3 million (June 2019: expense of R227k), Merafe's EBITDA was R157.5 million (June 2019: R435.1 million).

The loss for the six months ended 30 June 2020 amounted to R961.1 million (June 2019: profit of R165.2 million), after taking into account depreciation of R100.8 million (June 2019: R205.9 million), impairment of assets of R1 340 million (June 2019: Rnil), net financing income of R4.1 million (June 2019: R8.0 million) and a net taxation income of R318.2 million (June 2019: taxation expense of R72.0 million). The taxation income includes an income taxation expense of R4.5 million (June 2019: R90.2 million) and a deferred tax credit of R322.8 million (June 2019: R18.1 million) which arose primarily as a result of temporary differences on property, plant and equipment as well as those relating to provisions and accruals. The unredeemed capital expenditure balance at 30 June 2020 was R9.2 million (June 2019: Rnil) given that taxable profits did not exceed capital expenditure. Depreciation decreased year on year primarily as a result of the property, plant and equipment impaired in the prior year. The impairment loss was incurred after a detailed review of the models and assumptions used to determine the carrying amount as at 30 June 2020. The impairment loss is included in the consolidated statement of comprehensive income.

A loss of R162 000, being Merafe’s proportionate share in the loss from an associate, was recorded for the period ended 30 June 2020. Reference is made to the Company’s announcement published on SENS on Friday, 29 May 2020 in which the acquisition of a shareholding interest in Unicorn Chrome (Pty) Ltd was communicated.

Sustaining capital expenditure decreased by 21% to R95.9 million (June 2019: R121 million). The decrease was as a result of cash preservation measures initiated in response to the COVID-19 pandemic and tough market conditions.

The R300 million committed three-year revolving credit facility with ABSA was unutilised for the period ended 30 June 2020.

As at 30 June 2020, Merafe had net cash and cash equivalents of R263.3 million (December 2019: R354.1 million) which is inclusive of a bank overdraft of R1.7 million (December 2019: Rnil).The balance comprises cash held by Merafe of R64.7 million (December 2019: R211.5 million), R197.6 million (December 2019: R142.6 million) being Merafe's share of the cash balance in the Venture as well as R1 million being Merafe's share of cash at Unicorn Chrome.

Trade and other receivables increased by 46% to R988.9 million (December 2019: R675.3 million). The increase is primarily as a result of the timing of sales and payment receipts. The Rand:US$ exchange rate which closed at R17.35 as at 30 June 2020 (June 2019: R14.16) also increased the receivables balance.

Ferrochrome finished goods volumes of 99kt (June 2019: 145kt) on hand represent approximately three to four months of sales. The closing inventory value was R1 641.1 million (December 2019: R2 008.8 million).

The Board has not declared an interim dividend (June 2019: Rnil).

No fatalities were registered for the first six months of 2020 (June 2019: 1). The safety of our employees remains our number one priority. Our total recordable injury frequency rate (TRIFR) increased by 39.5% to 3.57 (December 2019: 2.56) primarily driven by the effects of the stop/start of operations as a result of market uncertainty and the COVID-19 pandemic. These incidents were mainly due to a number of finger injuries and trip and slip incidents.

A continued effort is being made to ensure that the highest standard of safety is restored at all the Venture’s operations.

COVID-19 hit the South African shores in March 2020. All our operations immediately prepared to suppress the spread of the virus through the following: 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 were provided for: hand sanitisers, disinfectant schedules, information boards, social distancing demarcation, glass panes to protect people in high movement areas, screening of each individual who enters operations and thermal scanners to determine if any individual has signs of fever. The Venture closed all operations when the initial lockdown was implemented by the President. Once the lockdown levels were relaxed, the Venture started a staggered on boarding process.

In addition, we supplied medical equipment to community clinics around our operations, hand sanitisers, water tanks at schools (with constant replenishment), free WiFi around schools and hospitals to assist the community with health and education. Food parcels are coordinated with other mining houses and government provincial offices to ensure that the intervention in communities around our operations is appropriate and impactful. To strengthen the capacity for testing, the Venture donated a gold standard PCR machine and sample extraction unit to Ndlovu Laboratories increasing the capacity from 700 to 2000 a day. All operational Occupational Health practitioners were trained to take the samples which are then couriered to the laboratory for analysis.

Post 30 June 2020, regrettably four of our employees succumbed to COVID-19.

Merafe’s attributable ferrochrome production from the Venture for the six months ended 30 June 2020 decreased by 42% to 120kt (June 2019: 206kt). The decrease in production was as a result of the lockdown implemented to curb the spread of COVID-19, weaker demand and to a lesser extent load-curtailment. As previously announced on SENS on Friday, 8 May 2020, with the easing of lockdown restrictions from level 5 to the current level 2, the Venture resumed operations at Lion smelter, Eastern Chrome mines and UG2 plants.

Post the winter period, the Boshoek and Wonderkop smelters as well as Kroondal mine have resumed operations. Lydenburg smelter will remain on care and maintenance indefinitely.

The National Energy Regulator of South Africa (“NERSA”) had approved an increase of 8.76% for Eskom direct standard tariff customers which became effective on 1 April 2020. The July 2020 court ruling that NERSA unlawfully included a R69 billion equity injection from the government in its calculation of Eskom’s allowable revenue for 2019 to 2022 will result in further increased cost for our energy intensive business. These cost pressures threaten the sustainability of our smelting business as well as employment in our sector.

As previously announced on SENS on Friday, 19 June 2020, the Venture has commenced a consultation process with employee representatives from recognised trade unions. All the smelters and mines will be impacted by the process. This decision was a result of deteriorating operating and market conditions across the South African ferrochrome industry, including unsustainable electricity tariffs and interruptions, cross subsidies and real cost inflation. These factors have also led to the displacement of significant  volumes of ferrochrome production to lower-cost competitors overseas. Despite significant investments in an attempt to make the operations more competitive, the Venture has continued to come under substantial operational and financial pressures.

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 2019. 

COVID-19 related government-imposed lockdowns in key global stainless steel producing regions during the first half of the year (“H1 2020”), resulted in production curtailment of stainless steel of 11%^ year on year. While Chinese stainless steel production in the first quarter of the year 2020 (“Q1 2020”) plummeted to levels last seen in early 2016, it recovered strongly during the second quarter of the year 2020 (“Q2 2020”), backed by government infrastructure spending. As a result, Chinese stainless steel production is expected to end the H1 2020 down 8%^ compared to the first half of 2019. Non-Asian stainless steel production remained mostly stable during Q1 2020 due to the delayed onset of COVID-19. However, as national lockdowns took effect and demand rapidly reduced, the rest of world stainless production dropped quickly during Q2 2020, with European production down 18%^ and US production down 12%^ on H1 2020, yearon- year. Weak demand and inflated stainless steel stocks outside of China continue to weigh on global stainless steel pricing.

Global ferrochrome consumption fell 8%^ year on year during H1 2020 with global supply experiencing a more severe 20%^ drop during the same period. Production in South Africa was particularly impacted, falling 50%^ in Q2 2020, not only because of COVID-19 cutbacks, but also due to the ongoing cost pressure including unsustainably high electricity pricing.

Chrome ore exports from South Africa were down 16%* year to date (YTD) compared to 2019 as of May 2020, at 4.8 million tonnes*. Pricing remained subdued during Q1 2020 given an oversupply, with Q2 2020 seeing higher prices due to concerns relating to SA export volumes as a result of COVID-19 related supply interruptions. Reduced shipments ex South Africa caused Chinese chrome ore port stocks to fall from a peak of 4.3Mt @ during the period to 3.6Mt @ at the end of June.

The European benchmark ferrochrome price for H1 2020 averaged USD107.50 cents per pound~, down 7% from the June 2019 average of USD116 cents per pound~.

While the impact of the COVID-19 pandemic remains a key concern, we have had to review our business to ensure that our operations continue with minimal unplanned disruptions and our growth strategy remains pursued. We will continue to closely monitor the impact of the COVID-19 pandemic as well as market developments and respond accordingly. 

In accordance with our strategy, we remain committed to maximising return to our shareholders in the near term and we will continue to assess opportunities to deliver shareholder value. 

Sandton

8 September 2020

^  CRU commodity market analysts

@ Ferroalloynet

* Global Trade Atlas

~ Fast Market (Metal Bulletin) – Ferro-chrome index 50% Cr import, cif Shanghai, $/lb contained C