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Reviewed Interim Results for the six months ended 30 June 2013
MERAFE RESOURCES LIMITED
(Incorporated in the Republic of South Africa)
Company Registration Number: 1987/003452/06
ISIN: ZAE000060000
Share code: MRF
("Merafe" or "the Company" or "the Group")
Reviewed interim results
For the six months ended 30 June 2013
Preparation of this report
The following individuals were responsible for the preparation of the
reviewed interim results:
Kajal Bissessor CA(SA), Financial Manager
Ditabe Chocho CA(SA), Chief Financial Officer
Key features
Increase in production of 23%
Increase in revenue of 19%
Decrease in EBITDA from R263m to R210m Decrease in HEPS from 5.5 cents to
3.8 cents Operating cash flows of R234m
The Venture's R5bn Project Lion II is on schedule and within budget
Group condensed statement of comprehensive income
Six months Six months
ended ended
30 June 2013 30 June 2012
Reviewed Reviewed
R'000 R'000
Revenue 1 469 324 1 229 840
EBITDA 210 185 262 898
Depreciation and impairment (145 370) (67 832)
Net financing costs (9 579) (10 426)
Profit before taxation 55 236 184 640
Taxation (21 713) (46 570)
Current tax (797) (501)
Deferred tax (22 275) (79 054)
Prior years overprovision 1 359 32 985
Profit and total comprehensive income for
the period 33 523 138 070
Basic earnings per share (cents) 1,3 5,5
Diluted earnings per share (cents) 1,3 5,5
Headline earnings per share (cents) 3,8# 5,5
Diluted headline earnings per share (cents) 3,8# 5,5
Ordinary shares in issue 2 493 221 394 2 493 221 394
Weighted average number of shares for the
period 2 493 221 394 2 493 221 394
Diluted weighted average number of shares
for the period 2 509 534 023 2 499 047 985
# Headline earnings reconciliation:
Profit and total comprehensive income for
the period 33 523 138 070
Impairment 75 933 -
Taxation effect of impairment (15 194) -
Profit on disposal of fixed assets (37) -
Taxation effect of profit on disposal 10 -
of fixed assets
Headline earnings 94 235 138 070
Group condensed statement of financial position
As at As at
30 June 31 December
2013 2012
Reviewed Audited
R'000 R'000
Assets
Property, plant and equipment 2 902 009 2 677 308
Total non-current assets 2 902 009 2 677 308
Inventories 1 142 276 1 088 885
Trade and other receivables 395 990 344 725
Current tax assets 26 986 26 424
Cash and cash equivalents 46 541 82 643
Assets held for sale - 72 127
Total current assets 1 611 793 1 614 804
Total assets 4 513 802 4 292 112
Equity
Share capital 24 932 24 932
Share premium 1 262 481 1 262 481
Equity-settled share-based payment reserve 36 101 33 847
Retained earnings 1 421 892 1 388 369
Total equity attributable to equity holders 2 745 406 2 709 629
Liabilities
Loans and borrowings 571 791 523 872
Provision for close down and restoration
costs 54 800 57 892
Deferred tax liabilities 588 633 551 165
Total non-current liabilities 1 215 224 1 132 929
Loans and borrowings 667 636
Trade and other payables 552 505 430 368
Liabilities held for sale - 18 550
Total current liabilities 553 172 449 554
Total liabilities 1 768 396 1 582 483
Total equity and liabilities 4 513 802 4 292 112
Group condensed statement of changes in equity
Six months Six months
ended ended
30 June 30 June
2013 2012
Reviewed Reviewed
R'000 R'000
Share capital 24 932 24 932
Balance at beginning of the period 24 932 24 932
Share options exercised - -
Share premium 1 262 481 1 262 481
Balance at beginning of the period 1 262 481 1 262 481
Share premium arising from share options
exercised - -
Equity-settled share-based payment reserve 36 101 30 925
Balance at beginning of the period 33 847 31 759
Share grants exercised (716) -
Share-based payment 2 970 (834)
Retained earnings 1 421 892 1 477 566
Balance at beginning of the period 1 388 369 1 339 496
Profit and total comprehensive income for the
period 33 523 138 070
Total equity at end of the period 2 745 406 2 795 904
Group condensed statement of cash flow
Six months Six months
ended ended
30 June 30 June
2013 2012
Reviewed Reviewed
R'000 R'000
Profit before taxation 55 236 184 640
Interest paid 9 919 15 903
Interest received (340) (5 477)
Depreciation and impairment 145 370 67 832
Adjusted for non-cash items 2 970 (834)
Share grants excercised (716) -
Adjusted for working capital changes 31 001 (128 378)
Cash flows from operations 243 440 133 686
Interest paid (9 757) (15 903)
Interest received 340 2 305*
Tax paid - (7 158)
Cash flows from operating activities 234 023 112 930
Cash flows from investing activities (280 016) (241 699)
Proceeds on disposal of property, plant and
equipment 97 -
Acquisition of property, plant and equipment -
expansionary (200 442) (163 875)
Acquisition of property, plant and equipment -
sustaining (79 671) (77 824)
Cash flows from financing activities 47 919 (301)
Increase/(decrease) in non-current borrowings 47 919 (301)
Net increase/(decrease) in cash and cash
equivalents 1 926 (129 070)
Cash and cash equivalents
at the beginning of the period 82 643 220 459
Effect of exchange rate fluctuations on cash
held (38 028) (11 764)
Cash and cash equivalents
at the end of the period 46 541 79 625
* Excludes R2.9 million income relating to the
fair value adjustment on the interest rate swap.
Commentary
Basis of preparation
In compliance with the JSE Limited Listings Requirements, Merafe Resources
Limited ("Merafe") prepared its interim financial report for the six
months ended 30 June 2013 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 Financial Pronouncements as issued by Financial Reporting
Standards Council. 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 2012.
Review of results
The condensed consolidated interim financial results of Merafe and its
subsidiaries ("Company") for the six months ended 30 June 2013 have been
reviewed by the Company's auditor, KPMG Inc. In their review report
dated 6 August 2013, 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 statements.
Merafe's revenue and operating income is primarily generated from the
Glencore-Merafe Chrome Venture ("the Venture"), one of the worldâs largest
producers of ferrochrome, with a total installed capacity of
1.98 million tonnes of ferrochrome per annum. Merafe shares in 20.5% of
the earnings before interest, taxation, depreciation and amortisation
("EBITDA") from the Venture.
Merafe's share of ferrochrome sales volume from the Venture for the first
half of 2013 amounted to 137 000 tonnes which was 10% above the 2012
comparative period of 124 000 tonnes. Chrome ore revenue as a percentage
of total revenue decreased from 14% in the first half of 2012 to 12% in
the first half of 2013. The average Rand US Dollar exchange rate was R9.21
in the first half of 2013, compared to R7.90 for the 2012 comparative period.
The average European benchmark ferrochrome price was 120USc/lb in the first
half of 2013 compared to 125USc/lb in the first half of 2012.
Merafe's share of EBITDA from the Venture for the first half of 2013 was
R236.5m (2012 H1: R279.3m). EBITDA from the Venture decreased period on
period primarily as a result of the decrease in the average European
benchmark ferrochrome price, inflationary increases, an increase in
standing charges relating to the unprotected strike at the eastern
mining operations and foreign exchange losses incurred which were
partially offset by the weakening of the Rand compared to the US Dollar
and the increase in ferrochrome sales tonnes. EBITDA for the first half of
2013 includes a foreign exchange ("forex") loss of R28.7m against a forex
gain of R3.6m in the comparative period. The forex loss primarily arose as
a result of the realised losses on the forex contract hedge.
After accounting for corporate costs of R23.3m (H1 2012: R17.2m) and a
share-based payment expense of R3m (H1 2012: share based payment income of
R0.8m), Merafe's EBITDA was R210.2m. Corporate costs increased from the
2012 comparative period primarily as a result of the reversal of an
overprovision for an indirect tax liability that was included in the prior
period.
The profit and total comprehensive income for the period was R33.5m after
taking into account depreciation of R69.4m, an impairment loss of R75.9m,
net financing costs of R9.6m, current tax expense of R0.8m, deferred tax
expense of R22.3m and a R1.3m write-back arising from prior years'
overprovision of current tax. The impairment loss was as a result of the
Venture considering the sale of its Horizon mine. The balance of
unredeemed capital expenditure is estimated to be R507m at 30 June 2013.
Property, plant and equipment increased over the six months to 30 June
2013 as a result of capital expenditure of R280m of which R200m was
expansionary and R80m was sustaining. Expansionary capital comprised
expenditure primarily on Project Lion II. Trade and other payables include
a new financing facility made available by Glencore on 30 June 2013.
Merafe's share of the utilised portion of the facility was R101m.
Merafe started the year with a cash balance of R83m, generated operating
cash flows of R234m, invested R280m in capital expenditure, raised loans
of R48m, incurred R38m foreign exchange fluctuations on cash held and
closed with a cash balance of R47m at 30 June 2013. Of this balance,
cash held by Merafe was R17m and Merafe's share of cash in the Venture was
R30m. At 30 June 2013, Merafe had long-term debt owing to ABSA Capital of
R560m and approximately R240m unutilised ABSA long-term debt facilities.
Review of operations
Ferrochrome production for the first six months of 2013 was 23% higher
than the comparative 2012 period. Operating capacity utilisation for the
first six months of 2013 was 79% compared to 64% for the prior comparative
period. This was primarily as a result of operational improvements of
furnaces, higher winter month production and the impact of the successful
commissioning and ramp up of the Tswelopele pelletising plant. Ferrochrome
production volumes in the first half of 2013 were also impacted by the Eskom
power buyback agreement as in the 2012 comparative period.
Unfortunately, the Venture suffered an unprotected strike at its eastern
mining operations towards the end of the first half of 2013 which resulted
in the dismissal of more than 1 200 employees. These mining operations
were recently resumed and the smelters that were supplied by these mines
were not significantly affected due to sufficient stockpiles of chrome
ore.
Safety
The safety of our employees remains a key focus area as evident from our
total recordable injury frequency rate of 4.27 for the first half of
2013 which was at similar levels to the prior year. Despite these
efforts, we deeply regret to report that there were two fatalities during
2013. In addition to the fatality already reported on 5 March
2013, another employee, Mr Gabafiwe Petrus Ramatlapeng passed away on 10
July 2013. Our deepest sympathies go out to his family, colleagues and
friends.
Market review
Global stainless steel production was 19.2m* tonnes in the first half of
2013 which was 7% higher than the 2012 comparative period. Global
consumption of ferrochrome reached 5.1m* tonnes in the first half of
2013, driven by stronger stainless steel production. Despite a strong
start to the year, stainless steel production continues to be threatened
by global economic uncertainty and weak market sentiment. In addition, the
downward trend in the nickel price continues to negatively impact prices,
keeping inventory levels and apparent consumption of stainless steel
suppressed.
Global ferrochrome production was 4.8m* tonnes in first half of 2013 which
was 3%* higher than the comparative 2012 period. China remains the
determining factor in the industry producing more than 47%* of the worldâs
stainless steel and accounting for 37%* of the worldâs total ferrochrome
production in the first half of 2013. Chinese ferrochrome production
continues its forward growth momentum and China maintained
its position as the largest producing country in the world. China is
currently ahead of South Africa, which accounted for only 29%* of global
ferrochrome production in the first half of 2013. Ferrochrome supply
from South Africa was most impacted in the first half of 2013 by
producers participating in Eskomâs buyback programme. Most South African
ferrochrome producers are expected to produce at higher capacity
utilisation rates in the second half of 2013, post the buy-back programme.
South African ferrochrome imports into 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 3.1m** tonnes
of chrome ore was imported into China from South Africa in the first
half of 2013, which is an increase of 48% period on period. The South
African ferrochrome industry has continued to advance its engagement with
the South African Government to find sustainable solutions to this
challenge.
The European benchmark ferrochrome price for the first quarter of 2013
was settled at 112.5 USc/lb and increased to 127USc/lb in the second
quarter of 2013. The third quarter European benchmark ferrochrome price
was settled at 112.5USc/lb.
Developments
We are delighted to report that good progress has been made on our
flagship Lion II smelter project which should be ready for hot
commissioning by the end of this year. The Magareng mine, which will be
supplying chrome ore to the Lion II smelter, is already in production and
the surface processing plant at the mine was recently commissioned.
The overall Lion II project remains on schedule and within budget and to
30 June 2013 about 65% of the total budgeted cost of R5bn, Merafeâs
portion of which is R1bn, was spent.
Outlook
Stainless steel production is expected to grow by 7%* in 2013 and by 5%*
in the long-term which is expected to lead to increased demand for
ferrochrome globally. Since the Tswelopele pelletising plant is in full
operation, we are proud to report that our Rustenburg plant is now on par
with the cost performance of our other non-premus furnaces. This should
enable an increase in production going forward as already evidenced by our
capacity utilisation improvement in the first half of 2013. In addition, once
Lion II ramps-up to full production capacity, we forecast an improvement
of 6% in total cost per tonne, across our operations. These investments in
improving our cost efficiencies in our operations leave us well positioned
as one of the lowest cost producers in the world. This will enable us to
take advantage of the increased demand for ferrochrome and grow our market share.
Merafe has the advantage of a strong balance sheet, low gearing, a healthy
cash-flow and a partnership with Glencore, one of the world's largest and
profitable mining companies.
*source: Heinz Pariser/July2013
**source: Chinese Customs/June 2013
Chris Molefe Zanele Matlala
Non-executive Chairman Chief Executive Officer
Sandton
6 August 2013
Sponsor:
Merrill Lynch South Africa Proprietary Limited
Executive directors: Z Matlala (Chief Executive Officer), D Chocho
(Chief Financial 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: 06/08/2013 07:30:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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