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 attributable revenue from the Venture increased by 60% from the prior period to R3 746m (June 2020: R2 338m).

Ferrochrome revenue increased by 61% from the prior period to R3 229m (June 2020: R2 005m) primarily as a result of higher average realised prices and an increase of 39% in ferrochrome sales volumes to 210kt (June 2020: 151kt).

Chrome ore revenue increased by 55% from the prior period to R517m (June 2020: R333m), as a result of higher chrome prices as well a 51% increase in sales volumes to 208kt (June 2020: 138kt).

Merafe's attributable share of the Venture's EBITDA for the six months ended 30 June 2021 is R839.2m (June 2020: R170.6m). The EBITDA includes Merafe's attributable share of standing charges of R31.1m (June 2020: R277.3m) and a foreign exchange loss of R47.1m (June 2020: foreign exchange gain of R90.2m). The reason behind the decrease in standing charges is because, in the current reporting period, there were no production stoppages due to COVID-19 lockdowns.

After accounting for corporate costs of R20.5m (June 2020: R13.2m), which include a cash settled share-based payment expense of R2.5m (June 2020: credit of R1.3m), Merafe's EBITDA was R818.8m (June 2020: R157.5m).

The profit for the six months ended 30 June 2021 amounted to R576.3m (June 2020: loss of R961.1m), after taking into account depreciation and amortisation of R12.9m (June 2020: R100.8m), a specific asset impairment loss of R5.8m (June 2020: R1 340m), net financing income of R2.8m (June 2020: R4.1m) and a net taxation expense of R227.2m (June 2020: taxation credit of R318.2m). While the June 2020 loss related to the impairment of the cash generating unit ("CGU"), the June 2021 impairment was specific to an asset that was written off. An impairment assessment was performed at June 2021 which resulted in no further CGU impairment adjustment for the period. The taxation expense includes a current income tax expense of R99.6m (June 2020: R4.5m) and a deferred tax charge of R127.6m (June 2020: R322.8m deferred tax credit) which arose primarily as a result of temporary differences on property, plant and equipment as well as those relating to provisions and accruals. There was no unredeemed capital expenditure at 30 June 2021 (June 2020: R9.2m) given that taxable profits exceeded capital expenditure. Depreciation was lower period on period primarily as a result of the impairment loss recognised in the last two financial years.

A profit of R719k (June 2020: loss of R162k), being Merafe’s proportionate share in the profit from an associate of Unicorn Chrome (Pty) Ltd, was recorded for the period.

Sustaining capital expenditure increased by 84% to R176m (June 2020: R95.9m). The increase was to catch up on stay-in-business capital expenditure that was postponed due to cash preservation measures initiated in response to the COVID-19 pandemic and tough market conditions in 2020.

The R300m committed three-year revolving credit facility with ABSA was unutilised for the period.

As at 30 June 2021, Merafe had net cash and cash equivalents of R797.5m (December 2020: R277.6m) which consists of cash held by Merafe of R322.5m (December 2020: R151.9m) and R475m (December 2020: R125.7m) being Merafe's share of the cash balance in the Venture.

Trade and other receivables increased by 38% to R1 219.1m (December 2020: R880.9m). The increase is primarily as a result of the timing of sales.

Ferrochrome finished goods volumes of 79kt (June 2020: 99kt) on hand represent approximately two to three months of sales. The value of closing inventory was R1 424.9m (December 2020: R1 433.6m).

The board of directors ("Board") has declared an interim dividend of 7 cents per share (June 2020: Rnil).

The safety of our employees remains our number one priority. For the first six months of 2021, the Venture was fatality free. Our total recordable injury frequency rate decreased by 17.14% to 3.24 (December 2020: 3.91§).

A safety culture is encouraged as evidenced by a concerted effort by everyone to ensure not only their own safety but that of their co-workers as well. The SafeWork programme is another illustration of our focus on safety. The SafeWork programme framework is risk-based, focusing on eliminating fatalities and serious injuries by identifying the hazards that can result in fatal incidents and developing life-saving behaviours and protocols to target them. This programme was finalised and will be rolled out across all the Venture’s operations. The dedicated task team that was established to identify any barriers to success have completed their tasks and these will now be used as part of SafeWork 2.0 programme to introduce improvements to our safety management systems.

COVID-19 is still a risk that we deal with on a daily basis. Our operations continue to manage the spread of the virus through ensuring adherence to all approved COVID-19 protocols.

The implementation of antigen testing across all operations since January 2021 assisted greatly in curbing super spreader events by preventing asymptomatic positive people from entering the workplace. On average a total of 47 500 antigen tests were conducted in the first six months of 2021. To confirm the reliability of the antigen test, all COVID-19 positive results were followed up with a PCR test which demonstrated an effectiveness rate of 99%.

With the emergence of the Delta variant, we have seen a substantial increase in positive cases throughout South Africa and across our operations. 1 150 of our workforce tested positive in the first six months of 2021 compared to 694 positive cases during 2020. It is with great sadness that we report that from 1 January to 30 June 2021, we have lost 15 (December 2020: 5) of our colleagues due to COVID-19. The impact of the virus on our people only reinforces our determination to ensure the safety and health of our workers.

In partnership with Ndlovu laboratories, we have embarked on a vaccination campaign in support of the vaccination drive by government. We are confident that by providing this service to our employees and contractors it brings us one step closer to a safe and healthy working environment.

Merafe’s attributable ferrochrome production from the Venture for the six months ended 30 June 2021 increased by 66% to 199kt (June 2020:120kt). The increase was a result of production in the current period being less impacted by COVID-19 restrictions, while improved plant efficiencies in all our smelters were achieved.

The Lydenburg smelter remains on care and maintenance for the foreseeable future, however Rustenburg furnace 5 will resume operations in the third quarter of 2021.

The total cost of production per tonne decreased by 11.4%. The decrease was mainly due to increased production volumes and lower chrome ore costs, which were somewhat offset by double digit increases in Eskom electricity tariffs and higher cost of reductants.

The National Energy Regulator approved tariff increases of 15.6% effective 1 April 2021. These increases continue to add to cost pressures on the Venture’s smelters and further reduce the cost competitiveness of the South African Ferrochrome industry.

Local procurement of reductants was challenging due to inadequate availability of coke and anthracite, which necessitated the Venture importing these reductants at a higher cost. The stronger ZAR against the US$ did assist to cushion the impact.

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 2020.

Growth in global stainless steel melt rates reached a decade high in the first half of 2021 (“H1 2021”) as output increased 28%^ year-on-year (“YoY”) to 30 million tons^. Strong growth has been observed in all producing regions, particularly in China, as output increased 26%^ to 17 million tons^. Indonesia also increased production significantly on the back of capacity increases and will become the second largest stainless steel producing country in the world, as annual output is expected to increase to 5.2 million tons^, up from 2.7 million tons^ in 2020. Strong demand coupled with significant raw material input cost increases have supported high stainless steel pricing in H1 2021.

Primary ferrochrome consumption globally increased 23%^ in H1 2021 YoY to 7.4 million tons^, while ferrochrome production increased 20%^ to 7.1 million tons^. Domestic ferrochrome production in China has been constrained due to power reform policy, leading to a 10%* increase in imports in the first 5 months of 2021. South African ferrochrome exports increased 37%* year-to-date ("YTD") May 2021 to 1.7 million tons*. Global ferrochrome stocks in weeks of consumption have almost halved YoY to 10.3 weeks^ at the end of H1 2021.

Chrome ore exports from South Africa increased 25%* YTD May 2021 to 6 million tons*. Higher ocean freight rates and a stronger ZAR:US$ exchange rate negatively impacted South African chrome ore miners as port stocks in China remain unchanged at 3.65 million tons@ compared to a year before. The European ferrochrome benchmark for H1 2021 averaged 135.5 UScents per pound~, an increase of 26% from the H1 2020 average of 107.5 UScents per pound~.

Global economic growth has been rapid to date. The sustainability of this growth depends on several factors including the success of the COVID-19 vaccine rollout programs. While in several parts of the world, the COVID-19 vaccination drive is starting to pay off and normality is gradually being restored, there are several parts of the world, including South Africa, where the COVID-19 pandemic is still wreaking havoc on communities and businesses. The recent unrest adds to the uncertainty faced by the country. The strong growth in stainless steel demand is a positive development and has been key to the buoyancy in the ferrochrome market. Our operations are ready to respond to this demand should it be sustained for the rest of the year. We however remain cautious in our approach to the year and will continue to focus on efficient operations, cash preservation, cost control and efficient capital allocation.

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

10 August 2021