Commentary

The unaudited condensed consolidated financial results for the six months ended 30 June 2024 are presented below.

Rounding of figures may result in minor computational discrepancies of the tabulations.

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 2.3 million tonnes of ferrochrome per annum. Merafe shares 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 the extraction of associated minerals. As a result, no segment report has been presented.

Merafe’s share of the revenue from the Venture, which includes a management fee, decreased by 0.4% from the prior period to R4 744 million (June 2023: R4 764 million).

Ferrochrome revenue decreased by 10% from the prior period to R3 397 million (June 2023: R3 792 million). Key contributors to the reduced revenue were a 6% decrease in the average net cost, insurance and freight (CIF) prices and a 6% decrease in ferrochrome sales volumes to 167kt (June 2023: 177kt). A 3% weakening of the average ZAR:USD exchange rate over the period provided some cushion. Chrome ore revenue increased by 30% from the prior period to R1 213 million (June 2023: R936 million), driven by a 25% increase in chrome ore sales volumes to 251kt (June 2023: 201kt) and a weaker ZAR:USD exchange rate. This performance was further enhanced by a 1% increase in average sales prices over the period. Platinum Group Metals (“PGMs”) concentrate sold over the period generated revenue of R131 million (June 2023: R35 million), driven by a 76% increase in sales volumes from 1 555oz to 6 536oz and the weakening in the average basket price of PGMs. Higher sales volumes result from the contribution of the Eastern PGMs operation to the Venture.

Operating and other expenses increased by 7% to R3 600 million (June 2023: R3 364 million). This increase was influenced by higher chrome ore sales volumes and inflationary pressures, as evidenced by our unit production cost, which increased by 10% period-on-period. Inflationary pressures on our unit production cost came from higher chrome ore prices, increased costs of electricity and general inflation. A higher fixed costs absorption rate due to lower production further contributed to this increase. Operating and other expenses include Merafe’s attributable share of standing charges of R124 million (June 2023: R82 million). Additionally, included in these expenses is a nominal write down of inventory of R1 million (June 2023: R1 million) during the six months ended 30 June 2024.

Operating and other expenses also include corporate costs of R45 million (June 2023: R33 million). Corporate costs include a cash-settled share‑based payment expense of R12 million (June 2023: R3 million) and a bonus provision of R6 million (June 2023: R5 million).

Merafe achieved EBITDA of R1 131 million (June 2023: R1 548 million). This represents a 27% decrease in earnings and a key driver of the variance is the foreign exchange adjustment which has swung to a loss of R13 million (June 2023: R148 million gain).

Earnings for the six months ended 30 June 2024 amounted to R720 million (June 2023: R1 049 million), after taking into account depreciation and amortisation of R169 million (June 2023: R116 million), net financing income of R30 million (June 2023: R21 million) and taxation expense of R284 million (June 2023: R414 million). The increase in depreciation is due to depreciation on new assets procured during the reporting period. An impairment assessment on property, plant and equipment was performed at period end, resulting in no cash-generating unit impairment adjustments for the period. Additionally, there was no specific asset impairment loss for the period (June 2023: Rnil). Taxation includes a deferred tax expense of R71 million (June 2023: R125 million), which arose primarily as a result of temporary differences on property, plant and equipment as well as those relating to provisions and accruals. There is no unredeemed capital expenditure balance as of 30 June 2024 (June 2023: Rnil) as taxable profits exceeded capital expenditure.

Income of R11 million (June 2023: R9 million), being Merafe’s proportionate share of the income from an associate of Unicorn Chrome Proprietary Limited (“Unicorn Chrome”), was recorded for the period.

Sustaining capital expenditure increased by 1% to R226 million (June 2023: R222 million) as a result of capital expenditure rolled over from the previous year and price increases. Expansionary capital expenditure of R27 million (June 2023: R5 million) includes R21 million spent on the PGMs processing plant. Construction of the PGMX plant is in progress and this should come into production in H2 2024.

The unsecured credit facility with ABSA of R300 million remained unutilised at period end.

At 30 June 2024, Merafe had cash and cash equivalents of R1 717 million (December 2023: R1 656 million), which comprised cash held by Merafe of R550 million (December 2023: R697 million) and R1 167 million (December 2023: R959 million), being Merafe’s share of the cash balance in the Venture and Unicorn Chrome. The cash held by the Venture for rehabilitation is not restricted cash but has been set aside to fund future environmental rehabilitation obligations. Merafe’s share of this cash is R344 million (December 2023: R315 million) and is included in its share of the cash in the Venture of R1 167 million (December 2023: R959 million) referred to above. The restricted cash of R7 million is not available for general use by the Group and is held in a trust bank account for the rehabilitation of the Kroondal mine.

Trade and other receivables increased by 19% compared to the 31 December 2023 balance primarily as a result of higher revenue generated over Q2 2024.

At period end, the 68kt (June 2023: 116kt) of ferrochrome finished goods on hand represented two to three months of sales. The closing inventory value decreased to R1 667 million (December 2023: R1 916 million) as a result of inventory drawn down over the reporting period.

The board of directors (“Board”) has declared an interim gross cash dividend of 20 cents per share (June 2023: 20 cents per share).

Sadly, as previously reported with our 2023 year end results, the Venture had a fatality in the first month of 2024. Our total recordable injury frequency rate increased by 8% to 2.52 (December 2023: 2.34).

The safety of our employees is our number one priority, and we therefore remain focused on the continuous improvement of our safety performance. We have crafted a safety turnaround strategy which focuses on four key areas, namely – risk management, effective supervision, safety culture and contractor management.

We continue monitoring pandemics and other related disease for any concerning trends that might have an impact on our workforce to ensure that necessary controls can be implemented.

We remain committed to creating a healthy work environment and will review all our health risk assessments. We also have our pre-, annual and exit medical surveillance to continue monitoring the occupational health of our workforce. The implementation of our Health Standards and Health Hazards Exposure Limits remains a core strategic focus.

Environmental, Social and Governance (“ESG”) compliance remains an important pillar in how we conduct business. Our Health, Safety, Environmental, Community and Human Rights Standards were introduced in 2021 and rolled out in 2022, enabling us to be a responsible producer. All our sites have completed the first line of defence assurance on compliance with the standards. Management’s plans have been developed to address identified gaps and propel efforts towards continuous improvement. We are a member of the International Council on Mining and Metals (“ICMM”), and we subscribe to the mining principles, comprising ten sustainable development principles and eight position statements that include specific commitments on issues ranging from biodiversity to water management, public reporting on performance and obtaining independent assurance that members meet the ICMM commitments. We have developed catchment context local water targets and biodiversity targets at each site to support our sustainability commitments. The conducted biodiversity footprint assessment provides a solid base from which we will improve our biodiversity performance to achieve the set targets.

The Venture’s decarbonisation objectives are aligned with those of the Glencore plc Group. Our portfolio profile provides the flexibility to decarbonise our footprint. We aim to achieve a 50% reduction in our total CO₂ emissions by 2035 compared to our 2019 Baseline. Some of our strategic elements towards achieving our target include managing our operational footprint and taking advantage of opportunities to reduce our scope three emissions.

Merafe’s attributable ferrochrome production decreased by 17% from 185kt to 158kt for the period ended 30 June 2024. The reduction in production was as a result of Rustenburg smelter being idled for the period in review.

Saleable PGMs production increased from 1 455oz to 6 738oz as a result of the inclusion of the Eastern PGM plant and improved yields.

Total unit cost of production increased by 10%. The increase was mainly due to higher ore market cost, electricity tariff and fixed costs. Fixed cost per unit were higher due to lower production volumes.

The Negotiated Pricing Agreements between the Venture and Eskom have been finalised and implemented with effect from 1 January 2024.

The Venture has commenced a S189 consultation process at Rustenburg smelter. The smelter was idled from September 2023 in response to deteriorating market conditions. During this period, various options were evaluated, however none could be implemented without eroding value.

There were no material changes to the 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 2023.

In the first half of 2024 (“H1 2024”), ferrochrome production in China increased by 28%¹ period-on-period. This surge was fuelled by the introduction of new low-cost production capacity, which has exerted considerable pressure on ferrochrome production margins globally, leading to the idling or shutdown of higher-cost producers. Ferrochrome production outside of China decreased by 7%¹ over the same period.

Global stainless steel melt rates increased by 7%¹ H1 period-on-period, driven by robust growth in China, India and Indonesia. This was partially offset by a decline in production in Europe, the United States and South Korea.

Chrome ore prices remained elevated and rose by 4%¹ period-on-period in H1 2024 due to constrained global supply growth and strong demand from China.

¹ CRU commodity market analysts

Our outlook has not changed much from year end. As articulated then, some key trends that are shaping the environment in which we operate are:

• Economic uncertainty that is characterised by rising inflation, interest rates and trade tensions. This uncertainty is making it difficult for businesses to make long-term plans, and it also leads to volatility in the markets.
• The shift to a more sustainable economy. The global market is increasingly focused on sustainability and businesses are under pressure to reduce their environmental impact. The Venture has embraced this initiative and incorporated sustainability initiatives into strategic plans. Our green energy initiatives are a key part of these plans.
• Technological innovation. Technological innovation is having a major impact on the global market, as new technologies are being developed that are changing the way we do business. For our business, the key benefits of innovation are efficiencies and the safety of our employees.

Our business is not immune to the impact of these trends which are firmly on management’s radar.

Local challenges which include power shortages, energy costs and logistics constraints continue to be monitored by the Venture and mitigated in the best ways possible.

We expect the second half of 2024 (“H2 2024”) to be softer given a weaker market outlook. Downward pressure on chrome ore prices which have started coming down is expected to translate to lower ferrochrome prices. Given the forecast inflationary pressures, our margins are at risk of being squeezed in H2 2024.

Given the conclusion of the Negotiated Pricing Agreement with Eskom, the Venture plans on producing ferrochrome at all its smelters. The only smelters that will not be operational are Lydenburg, which is still on care and maintenance, and Rustenburg, which has been idle since June 2023.

We remain cautious in our approach to the remaining six months of the financial year and will continue to focus on efficient operations, cash preservation, cost control and efficient capital allocation.

We are committed to creating shared value for our stakeholders.

Sandton
8 August 2024