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Reviewed Interim Results For the six months ended 30 June 2012
Merafe Resources LIMITED
(incorporated in the Republic of South Africa)
Company Registration Number: 1987/003452/06
Share code: MRF
ISIN: ZAE000060000
(Merafe or the Company or the Group)
Reviewed Interim Results
For the six months ended 30 June 2012
The following individuals were responsible for the preparation of the reviewed interim report:
Kajal Bissessor CA(SA) Financial Manager
Zanele Matlala CA(SA) Chief Executive Officer
"I am delighted that in my first report as Chief Executive Officer I am able to advise you that despite the challenges in the
first half of 2012, we achieved a 57% increase in our basic earnings per share, period on period. Production costs were
contained at an overall increase of 4.5%, period on period, despite high mining inflation levels. We closed the period with
a cash balance of R80m and have undrawn debt facilities with ABSA of approximately R500m. I am also pleased to
report that project Tswelopele, our new pelletiser at the Rustenburg plant is on track and on budget and will be
commissioned in the second half of this year. Our flagship project, Lion II, is also within budget and on track to be
completed in the second half of 2013." Zanele Matlala, CEO
KEY FEATURES
- 7% decrease in revenue
- Profit of R138m, increase of 57% in basic EPS
- Cash flows from operations of R134m
- Total recordable injury frequency rate improved by 7%
Commentary
Basis of preparation
In compliance with the JSE Limited Listings Requirements, Merafe Resources Limited prepared its interim financial report
for the six months ended 30 June 2012 in accordance with International Financial Reporting Standards (IFRS), and
containing information required by IAS 34 Interim Financial Reporting, and the AC 500 standards issued by the
Accounting Practices Board or its successor. The accounting policies adopted are in line with IFRS and are consistent
with those applied in the annual financial statements for the year ended 31 December 2011.
Review of results
The condensed consolidated interim financial results of Merafe and its subsidiaries for the six months ended 30 June
2012 have been reviewed by the Company's auditor, KPMG Inc. In their review report dated 7 August 2012, which is
available for inspection at the Company's registered office, KPMG Inc state that their review was conducted in
accordance with the International Standard on Review Engagements 2410, Review of Interim Information Performed by
the Independent Auditor of the Entity, and have expressed an unmodified conclusion on the condensed consolidated
interim financial results.
Merafe's income is generated from the Xstrata-Merafe Chrome Venture (the Venture), the market leader in ferrochrome,
with a total managed capacity of 1,98m tonnes of ferrochrome production per annum. Merafe shares in 20,5% of the
earnings before interest, taxation, depreciation and amortisation (EBITDA) from the Venture.
Merafe's earnings from the Venture increased from the six-month comparative period primarily as a result of a weakening
of the Rand against the US Dollar and the compensation received from Eskom relating to the power buy-back
arrangement, which was offset by the decrease in ferrochrome sales tonnes and a decrease in the average European
benchmark ferrochrome price. The average Rand US Dollar exchange rate was R7,90 in the first half of 2012, compared
to R6,90 for the 2011 comparative period. The average European benchmark ferrochrome price decreased from
130USc/lb to 125USc/lb period on period and Merafe's share of ferrochrome sales tonnes decreased from 146 100
tonnes in the first half of 2011 to 123 900 tonnes in the first half of 2012. Chrome ore revenue as a percentage of total
revenue increased from 11% in the first half of 2011 to 14% in the first half of 2012 of which 65% related to chrome ore
exported to Asia during the first half of 2012.
Merafe's share of EBITDA from the Venture for the six months ended 30 June 2012 was R279,3m. The EBITDA includes
Merafe's attributable share of standing charges of R77,6m and a foreign exchange gain of R3,6m. After accounting for
corporate costs of R17,2m and share-based payment income of R0,8m, Merafe's EBITDA was R262,9m. Corporate costs
of R17,2m decreased period on period primarily as a result of transaction costs and expenses associated with indirect tax
liabilities that were incurred in the first half of 2011.
The profit and total comprehensive income for the period is R138,1m after taking into account depreciation of R67,8m,
net financing costs of R10,4m, current tax expense of R0,5m, deferred tax expense of R79,1m and a R33,0m write-back
arising from prior years overprovision of current tax. Depreciation increased period on period as a result of the re-
assessment of useful lives and residual values in accordance with IAS16, Property, Plant and Equipment as well as the
accelerated depreciation recognised on assets scrapped during the year. Net financing costs decreased period on period
as a result of the recognition of R8,1m of interest associated with indirect tax liabilities recognised in the prior year. The
R33,0m write-back of current tax arose as a result of the completion of income tax returns and assessments received
from the South African Revenue Services (SARS) during the first half of 2012. The balance of unredeemed capital
expenditure is estimated to be R145m at 30 June 2012.
As per the SENS announcement dated 6 March 2012, it was reported that SARS issued an assessment letter to the value
of R112m relating to the disallowance of input VAT claimed on Project Bokamoso and Project Lion I. The assessment
letter of R112m was withdrawn by SARS during March 2012 and was replaced with an audit letter of findings with a
revised value of R26m. Management are of the view that there are sufficient and valid grounds to object to the audit letter
of findings, have responded as such and are in discussions with SARS on this matter. As previously reported, the process
of engaging with SARS head-office on other areas whereby the structure of the Venture creates anomalies with regard to
VAT interpretation is ongoing.
Property, plant and equipment increased from 31 December 2011 as a result of R242m of capital expenditure of which
R164m is expansionary and R78m is sustaining. Expansionary capital comprises expenditure on Project Tswelopele,
Project Lion II, which includes the Magareng mine, and the development of the Horizon mine.
Merafe started the year with a cash balance of R221m, generated R101m in cashflows and invested R242m in
expansionary and sustaining capex, closing with a cash balance of R80m at 30 June 2012. Cash in Merafe is R72m and
Merafe's share of cash in the Venture is R8m. At 30 June 2012, Merafe had long-term debt of R300m and approximately
R500m unutilised ABSA debt facility.
Review of operations
Ferrochrome production volume in the first half of 2012 was 21% lower than the comparative period in 2011, mainly due
to the re-scheduling of maintenance programmes and power buy-back deals with Eskom, the South African national
electricity supplier, in a rather soft market. As per the SENS announcement dated 30 March 2012, a total of seven
furnaces were impacted by Eskom's requirements for consumption reductions to support their maintenance programmes.
Production costs per tonne increased by 4.5% compared to the previous period. Despite the significant mining inflation,
the increase in variable costs was restricted to only 4.3% through cost saving and efficiency initiatives and the operation
of more efficient furnaces.
Safety, health and environment
The Venture improved its total recordable injury frequency rate (TRIFR) by 7% in the first half of 2012, compared to the
year ended 31 December 2011 and there were no fatalities during this period. We are also pleased to report that there
were no cases of occupational diseases resulting from current working conditions in the Venture and no material adverse
environmental impacts in the Venture during the reporting period.
Mineral reserves, resources and mining rights
In the first half of 2012, there were no material changes to the mineral reserves, mineral resources and mining rights of
the Venture as fully reported on in the 2011 Integrated Annual Report.
Financial Mail empowerment survey
We are pleased to report that in a Financial Mail empowerment survey of JSE Listed Companies published in April 2012,
Merafe was named number one in the resources sector.
Market review
Global stainless steel production was 17.6m(a) tonnes in the first half of 2012 which was 1%(a) higher than the 2011
comparative period. Global consumption of ferrochrome reached 5.0m(a) tonnes in the first half of 2012, driven by strong
stainless steel production. Despite a strong start to the year, stainless steel production growth slowed towards the end of
the first half of 2012. This was as a result of renewed concerns over European sovereign debt, lower growth rates in
China, arising from softening global demand for goods, combined with domestic counter-inflationary policies and general
weakness across the global economy.
Global ferrochrome production was 4.8m(a) tonnes in first half of 2012 which was 2%(a) higher than the comparative 2011
period. China remains the determining factor in the industry producing more than 40%(a) of the world's stainless steel and
accounting for 33%(a) of the world's total ferrochrome production in the first half of 2012. The continuous growth in Chinese
ferrochrome production now positions China as the largest producer in the world, ahead of South Africa who produced
32%(a).
South African ferrochrome exports to China continue to be displaced by domestic Chinese ferrochrome production on the
back of unbeneficiated chrome ore exports from South Africa. It is estimated that 2.1m tonnes of chrome ore was
exported in the first six months of 2012 (source: Chinese Customs/July 2012). The South African ferrochrome industry is
advancing its engagement with the South African Government on a solution for the entire chrome value chain. In this
regard, the industry is hopeful that a chrome ore export levy on unbeneficiated ores will be introduced as a proposed
short term intervention, while a sustainable longer term intervention to regulate the supply of South African ore in line with
demand is worked out between all stakeholders including the platinum industry.
As noted above, South African production was severely constrained as Eskom bought back electricity from South African
producers in order to ensure the country's supply and demand of electricity was kept in balance. Despite Chinese
producers increasing ferrochrome production in the first half of 2012, the availability of ferrochrome is expected to remain
relatively tight as any material produced in South Africa should only filter through to the market at the end of the third
quarter of 2012.
The European benchmark ferrochrome price for the first quarter of 2012 was settled at 115USc/lb and increased to
135USc/lb in the second quarter of 2012. The third quarter European benchmark ferrochrome price was settled at
125USc/lb.
Developments
Project Lion II
The commissioning of Lion II is expected during the second half of 2013 and about 25% of the budgeted cost of R1bn
was incurred to 30 June 2012. The construction of the Lion II smelter and the associated Magareng mine development
has been impacted by labour unrest and severe summer rains in the first half of 2012, however, the expected completion
date is still envisaged in the second half of 2013 and the project remains within budget. The Lion Premus proprietary
technology consumes approximately 40% less electricity per tonne of ferrochrome than the weighted average
consumption of relevant alternative technologies.
Project Tswelopele
The commissioning of Tswelopele is expected during the second half of 2012 and more than 80% of the budgeted cost of
R190m was incurred to 30 June 2012. The project remains within schedule and budget. This plant will enable the
increased use of UG2 ore and will improve the energy and ore consumption efficiencies of the Rustenburg and
Wonderkop plants. Further cost savings are also expected with additional reductant mix optimisation.
Ferrochrome outlook
Despite the recent economic slowdown, stainless steel production is expected to increase by 4%(a) in 2012 to over 35m(a)
tonnes which will lead to continued growth in demand for ferrochrome globally. The lower production in South Africa is
expected to result in a drawdown of stocks and thus ferrochrome availability is expected to remain tight in the short term.
Stainless steel production is expected to grow by 5%(a) in the long term which is expected to increase demand for
ferrochrome. The Venture's suite of energy efficient technologies leaves it well positioned for the upturn in global demand.
(a) source: Heinz Pariser/July 2012
The way forward
Despite the challenges, we continue to remain optimistic about the future of our business. Going forward Merafe has the
advantage of a strong balance sheet, low gearing, a healthy cashflow and partnering with Xstrata, one of the world's
largest diversified mining companies with a reputation for running responsible and efficient operations.
The Venture has the advantage of being one of the lowest-cost and most energy efficient producers of ferrochrome. Our
significant investment in improving the Venture's energy efficiency gives us a competitive advantage and contributes to its
future sustainability.
The Merafe Board continues to recognise the importance of diversification and this will be a major focus for the
management team.
Changes to Directorate
Mr Stuart Elliot resigned as Chief Executive Officer (CEO) with effect from 31 May 2012.
Ms Zanele Matlala, who was Chief Financial Officer (CFO) was appointed as CEO with effect from 1 June 2012. The
Company has embarked on a recruitment exercise to find a suitable replacement for the CFO position by 31 October
2012. Until a suitable candidate has been appointed, Ms Zanele Matlala will also be fulfilling the CFO role in an acting
capacity.
Chris Molefe Zanele Matlala
Non-executive Chairman Chief Executive Officer
Sandton 7 August 2012
Empowerment
Organic growth
Corporate governance
Current ferrochrome operations
Sustainability
Diversification
Mergers and acquisitions
Our goals remain focused
To ensure our interests in the ferrochrome industry are profitable and sustainable.
To continue with organic growth of our ferrochrome business.
To grow through diversification.
Group condensed statement of comprehensive income
Six months ended Six months ended
30 June 2012 30 June 2011
Reviewed Reviewed
R'000 R'000
Revenue 1 229 840 1 319 278
EBITDA 262 898 206 007
Depreciation (67 832) (44 906)
Net financing costs (10 426) (16 120)
Profit before taxation 184 640 144 981
Taxation (46 570) (58 971)
Current tax (501) (16 830)
Deferred tax (79 054) (37 474)
Prior years overprovision/(underprovision) 32 985 (157)
Secondary tax on companies (4 510)
Profit and total comprehensive income for the period 138 070 86 010
Basic earnings per share (cents) 5,5 3,5
Diluted earnings per share (cents) 5,5 3,4
Headline earnings per share (cents) 5,5 3,5
Diluted headline earnings per share (cents) 5,5 3,4
Ordinary shares in issue 2 493 221 394 2 476 656 043
Weighted average number of shares for the period 2 493 221 394 2 476 656 043
Diluted weighted average number of shares for the period 2 499 047 985 2 495 990 715
Group condensed statement of financial position
As at As at
30 June 2012 31 Dec 2011
Reviewed Audited
R'000 R'000
Assets
Property, plant and equipment 2 541 110 2 372 768
Total non-current assets 2 541 110 2 372 768
Inventories 1 090 031 1 065 932
Trade and other receivables 362 845 262 979
Current tax asset 26 102
Cash and cash equivalents 79 625 220 459
Total current assets 1 558 603 1 549 370
Total assets 4 099 713 3 922 138
Equity
Share capital 24 932 24 932
Share premium 1 262 481 1 262 481
Equity-settled share-based payment reserve 30 925 31 759
Retained earnings 1 477 566 1 339 496
Total equity attributable to equity holders 2 795 904 2 658 668
Liabilities
Loans and borrowings 312 477 312 778
Provision for close down and restoration costs 50 109 48 396
Deferred tax 585 258 506 204
Total non-current liabilities 947 844 867 378
Loans and borrowings 592 508
Financial liability 3 144 6 098
Trade and other payables 352 229 375 946
Current tax liability 13 540
Total current liabilities 355 965 396 092
Total liabilities 1 303 809 1 263 470
Total equity and liabilities 4 099 713 3 922 138
Group condensed statement of changes in equity
Six months ended Six months ended
30 June 2012 30 June 2011
Reviewed Reviewed
R'000 R'000
Share capital 24 932 24 767
Balance at beginning of the period 24 932 24 767
Share options exercised
Share premium 1 262 481 1 253 568
Balance at beginning of the period 1 262 481 1 253 568
Share premium arising from share options exercised
Equity-settled share-based payment reserve 30 925 28 112
Balance at beginning of the period 31 759 24 391
Share-based payment (834) 3 721
Retained earnings 1 477 566 1 308 756
Balance at beginning of the period 1 339 496 1 272 279
Profit and total comprehensive income for the period 138 070 86 010
Dividend (49 533)#
Total equity at end of period 2 795 904 2 615 203
# relates to the dividend declared by the Board on 25 February 2011 and paid on 28 March 2011
Group condensed statement of cash flows
Six months ended Six months ended
30 June 2012 30 June 2011
Reviewed Reviewed
R'000 R'000
Profit before taxation 184 640 144 981
Interest paid 15 903 22 209
Interest received (5 477) (6 089)
Depreciation 67 832 44 906
Adjusted for non-cash items (834) 3 721
Adjusted for working capital changes (128 378) 28 851
Cash flows from operations 133 686 238 579
Interest paid (15 903) (14 103)
Interest received 2 305## 2 856#
Tax paid (7 158)
Cash flows from operating activities 112 930 227 332
Cash flows from investing activities (241 699) (125 870)
Acquisition of property, plant and equipment expansionary (163 875) (63 100)
Acquisition of property, plant and equipment sustaining (77 824) (62 770)
Cash flows from financing activities (301) (54 287)
Dividends paid (49 533)
Secondary tax on companies paid (4 510)
Decrease in non-current borrowings (301) (244)
Net (decrease)/increase in cash and cash equivalents (129 070) 47 175
Cash and cash equivalents at the beginning of the period 220 459 320 724
Effect of exchange rate fluctuations on cash held (11 764) (1 781)
Cash and cash equivalents at the end of the period 79 625 366 118
# excludes R3,2m income relating to the fair value adjustment on the interest rate swap.
## excludes R2,9m income relating to the fair value adjustment on the interest rate swap and R0,2m interest accruals.
Sponsor: Merrill Lynch South Africa Proprietary Limited
Executive directors: Z Matlala (Chief Executive Officer), B McBride
Non-executive directors: CK Molefe (Chairman)*, NB Majova*, M Mamathuba, A Mngomezulu*, K Nondumo*, M Salanje*, S Phiri,
M Mosweu, Z van der Walt* Company secretary: A Mahendranath
Registered office: First Floor, Block B, Sandton Place, 68 Wierda Road East, Wierda Valley, Sandton, 2196 Transfer
secretaries: Link Market Services South Africa Proprietary Limited
* Independent
Date: 07/08/2012 07:30:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
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