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Summarised consolidated financial statements for the year ended 31 December 2013
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)
Summarised consolidated financial statements for the year ended
31 December 2013
Highlights
32% increase in production tonnes to 319k
38% increase in revenue to R3.5bn
Cash from operating activities of R487m
112% increase in HEPS to 10.8 cents
5% improvement in TRIFR to 3.84
Hot commissioning of Project Lion II commenced
Preparation of this report
The following individuals were responsible for the preparation of this
report:
Kajal Bissessor CA(SA) Ditabe Chocho CA(SA)
Finance and Investor Relations Manager Chief Financial Officer
Our business model and strategy
Ferrochrome
The aim of our business model and strategy is to ensure our ferrochrome
interests are profitable and sustainable and that they add value to all
our shareholders.
We achieve this by:
• extracting chrome ore from the Venture’s mines and beneficiating it in
its smelters in a safe and cost-efficient manner
• investing in projects that include the Bokamoso and Tswelopele
pelletising and sintering plants and the Lion ferrochrome plant Phases I
and II that improve the energy efficiency and cost effectiveness of its
ferrochrome operations
• employing the Venture’s proprietary Premus technology to ensure it is
the lowest-cost producer of ferrochrome in South Africa and, despite
rising energy costs in South Africa, remains in the lowest quartile of
the global ferrochrome production cost curve
• using the flexibility provided by the Venture’s variety of technologies
to meet changing operating circumstances and customer requirements.
Diversification
Our medium-term objective is not only to grow and improve our
ferrochrome operations but to grow through diversification.
Commentary
Basis of preparation
On 6 March 2014, the board of directors (the board) of Merafe Resources
Limited (the Company) approved the audited consolidated annual financial
statements of the Merafe Group (Group) and the Company for the year
ended 31 December 2013.
These summarised consolidated financial statements have been prepared in
accordance with the framework concepts, the measurement and recognition
requirements of International Financial Reporting Standards (IFRS), the
requirements of the Companies Act 71 of 2008, as amended, the SAICA
Financial Reporting Guides as issued by the Accounting Practices
Committee, the Financial Pronouncements as issued by Financial Reporting
Standards Council and the presentation and disclosure requirements of
IAS 34 Interim Financial Reporting.
The accounting policies applied in the preparation of the audited
consolidated annual financial statements from which the summarised
consolidated financial statements were derived are in terms of IFRS and
are consistent with those accounting policies applied in the preparation
of the previous audited consolidated annual financial statements, except
as disclosed below:
New standards and amendments to published standards
The following standards and amendments to published standards which became
effective for the year commencing on 1 January 2013 were adopted
by the group:
IFRS 10 Consolidated Financial Statements
IAS 27 Separate Financial Statements
IFRS 11 Joint Arrangements
IAS 28 Investments in Associates and Joint Ventures
IFRS 12 Disclosures of Interests in Other Entities
In management’s view, the Glencore-Merafe Chrome Venture (the Venture)
is a joint arrangement which constitutes joint control, as defined in
IFRS 11. The adoption of these standards have not resulted in any changes
in the measurement and recognition of assets, liabilities or equity in the
audited consolidated annual financial statements. Additional disclosures
were included in the audited consolidated annual financial statements, as
a result of adoption of these standards.
In 2013 the Group did not early adopt any new, revised or amended
accounting standards or interpretations. The accounting standards,
amendments to issued accounting standards and interpretations which are
relevant to the Group but not yet effective at 31 December 2013 are being
evaluated for the impact of these pronouncements.
Auditors report
The Group annual financial statements from which the summarised
consolidated financial statements were derived have been audited by the
Group’s auditors, KPMG Inc. The auditors have expressed an unqualified
audit opinion. The audit report is available for inspection at the
Company’s registered office.
The summarised consolidated financial statements is extracted from the
audited consolidated annual financial statements, but is not itself
audited. The board takes full responsibility for the preparation of the
summarised consolidated financial statements and the financial information
has been correctly extracted from the underlying audited consolidated
annual financial statements, which is available at the Company’s
registered office on request.
Review of results
Merafe’s revenue and operating income is primarily generated from the
Venture, previously known as the Xstrata-Merafe Chrome Venture, which is
one of the global market leaders in ferrochrome production, with a total
installed capacity of 1.98m 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 revenue from the Venture increased by 38% from the prior year
primarily as a result of a 23% increase in ferrochrome sales to 314kt
(2012: 255kt) and a 17% weaker Rand/Dollar exchange rate which were
partially offset by a 4% decrease in the average European benchmark
ferrochrome price to 116USc/lb (2012: 121USc/lb).Chrome ore revenue as a
percentage of total revenue increased from 13% in 2012 to 14% in 2013.
Merafe’s share of EBITDA from the Venture for the 2013 year was R583.5m
which was 67% higher than the R349,4m EBITDA from the 2012 comparative
year. The EBITDA for 2013 includes a foreign exchange loss of R21.3m
(2012: R3.9m), which increased from the comparative year primarily as a
result of the utilisation of the Venture’s US Dollar overdraft and
short-term inventory facility as well as the realised losses on the
Venture’s foreign exchange contract hedge that was entered into in the
first half of 2013.
The EBITDA also includes Merafe’s attributable share of standing charges
of R63.9m (2012: R151.8m). After accounting for corporate costs of R19.7m
(2012: R33.6m) and a share-based payment expense of R6.2m (2012: R2.1m),
Merafe’s EBITDA was R557.6m (2012: R313.7m). Corporate costs decreased
year-on-year primarily as a result of a write-back of a R22.0m provision
for VAT.
The profit and total comprehensive income for the year was R210.6m (2012:
R48.9m) after taking into account depreciation of R179.0m (2012: R140.1m),
an impairment loss of R74.0m (2012: R77.5m), net financing costs of R17.3m
(2012: R19.7m), current tax expense of R18.7m (2012: R0.3m), deferred tax
expense of R59.7m (2012: R60.2m) and a R1.7m (2012: R33.0m) write-back
arising from prior years’ overprovision of current tax. The balance of
unredeemed capital expenditure is estimated to be R553m at 31 December 2013
(2012: R446m). The decrease in the effective rate of tax arose from the SARS
assessment of our returns during 2013 which resulted in a prior years’
overprovision. Depreciation increased year-on-year as a result of the
re-assessment of useful lives and residual values in accordance with IAS16:
Property, Plant and Equipment and the accelerated depreciation recognised
on assets scrapped during the year.
An impairment loss was recognised on the Horizon mine which was placed on
care and maintenance during 2013 as the production from this mine is not
viable in the current economic climate. Whilst efforts to sell the Horizon
mine are continuing, the requirements were not met to present the mine as
held for sale at 31 December 2013 in accordance with IFRS 5 Non-current
Assets Held-for-sale.
Property, plant and equipment increased from 31 December 2012 as a
result of capital expenditure of which R208m was sustaining and R397m was
expansionary. Expansionary capital comprised expenditure primarily
on the Venture’s flagship expansion, Project Lion II. Borrowing costs of
R23.3m (2012: R8.2m) were capitalised during 2013 and included in
expansionary capital expenditure.
Merafe closed the year with a net overdraft balance of R10.7m at
31 December 2013. This comprised of cash in Merafe’s books of R24.9m and
Merafe’s share of the net overdraft in the Venture of R35.6m. At
31 December 2013, Merafe had total debt owing to Absa Capital of R581m and
approximately R219m unutilised Absa long-term debt facilities.
Trade and other payables increased from the prior year primarily as a
result of the R194m (2012: nil) utilisation of the short-term inventory
facility at 31 December 2013. The provision for closure and restoration
costs increased from the prior year primarily as a result of the
following: (i) an increase in rehabilitation costs, based on more recent
expert rehabilitation assessments, (ii) additional provisions arising from
new mines and plants and (iii) the re-assessment of the Horizon mine’s
provision taking into consideration the decision to place the mine on care
and maintenance. The income statement impact of the increase in the
provision for closure and restoration costs was R38m (2012: R9m). Trade
and other receivables increased from the prior year primarily as a result
of the increase in the ferrochrome and chrome ore sales tonnes, the weaker
Rand and the higher European benchmark ferrochrome price in the fourth
quarter of 2013 compared to the previous period.
The Merafe board has not declared a dividend for the 2013 financial year.
Review of operations
During 2013, Merafe’s share of ferrochrome production from the Venture was
319kt (2012: 242kt). This represents a 32% increase from the
previous year’s production and is primarily as a result of higher demand
and improved efficiencies, resulting in increased operating capacity
utilisation of 87% (2012: 66%). During 2013 the Venture participated in
Eskom’s power buy-back programme at levels similar to those in the
comparative year.
In spite of higher electricity tariff increases this year, production cost
increases were contained below inflation in the ferrochrome sector of
South Africa.
The energy use per tonne of ferrochrome produced by the Venture reduced by
7% to 13.49Gj (2012: 14.50Gj) and the carbon dioxide emissions per tonne
of ferrochrome produced by the Venture reduced by 3% from 5.10 in
2012 to 4.95 in 2013.
The Venture’s wage negotiations at its smelters and mines were
successfully concluded and no industrial action arose as a result of these
negotiations. Unfortunately, the Venture’s eastern and western
mining operations were affected by industrial action, which was not wage
related. The unprotected strike in the eastern mining operations
resulted in the dismissal of more than 1 200 employees. The eastern
mining operations were resumed in the second half of the year and the
smelters that were supplied by these mines were not significantly impacted
due to sufficient stock piles of chrome ore.
Safety and environment
As reported in our interim report, we were saddened by two fatalities
during 2013. There were no fatalities in 2012. The safety of our
employees remains a priority as evidenced by the Venture’s total
recordable injury frequency rate (TRIFR) of 3.84 (2012: 4.05) for 2013
which decreased by 5%. There were no significant adverse environmental
incidents in the Venture during the reporting period.
Mineral reserves, mineral resources and mining rights
During 2013, there were no material changes to the mineral reserves,
mineral resources and mining rights of the Venture.
Market review
Global stainless steel production reached a record 38.5m* tonnes in 2013,
which was 8%* higher than in 2012. Global demand for ferrochrome reached
10.3m* tonnes, driven by stronger stainless steel production as a result
of a general improvement in the global economic environment. Globally,
stainless steel production growth was driven largely by China and India,
which had 17%* and 6%* year-on-year growth rates respectively. European
mills’ stainless output declined by 5%* year-on-year, with North America
showing a strong performance at 4%* year-on-year growth.
Global ferrochrome production was 10.2m* tonnes in 2013, 8%* higher than
2012’s levels. China continued to dominate global production levels, with
its ferrochrome production growing by 13%* year-on-year to 3.8m*
tonnes. In 2013, it is estimated that China produced 50%* of the world’s
stainless steel and 37%* of the world’s ferrochrome, cementing its
position as the world’s leading producer of both stainless steel and
ferrochrome. Despite South African ferrochrome producers participating
in Eskom’s buyback scheme in the first half of 2013, their ferrochrome
output grew by 2%* to 3.2m* tonnes in 2013. South Africa’s market share of
ferrochrome production, however, decreased to 32%* from 34%* in 2012.
Chrome ore imports into China increased by 30%* year-on-year to 12.1mt*,
of which 6.7mt* (2012: 4.5mt*) was from a South African source.
The European benchmark ferrochrome price for the first quarter of 2014
was settled at 118USc/lb, which was 5% higher than the price in the fourth
quarter of 2013. This was as a result of improved demand outlook from the
European, Japanese and US stainless steel markets.
Project Lion II update
We are pleased to report that commissioning of the Venture’s Lion II
smelter commenced in the last quarter of 2013 and will continue into the
first half of 2014. This R5bn project involves the construction of a
350 000 tonne per annum capacity smelter. First production of ferrochrome has
been slightly delayed mainly due to limited availability of contractors over
the December holiday period as well as heavy rainfall and windy conditions
in the last quarter of 2013. The overall project remains within budget and
was estimated to be 87% complete at 31 December 2013. It is envisaged that
the smelter will be fully operational by middle of 2014. The project has
a very good safety record with more than 7 million man hours worked without
any lost time injury.
The Lion I ferrochrome plant produced excellent volumes during 2013 with
its average production volume during the second half of the year exceeding
its design capacity by 8%. The cost performance of this plant was 16%
below the average of the Venture’s other plants during the same period.
Its performance highlights the advantages of the energy
efficient Premus technology installed at this plant. We look forward to
Lion II’s performance further reducing the Venture’s total ferrochrome
cost per tonne.
Outlook
The Venture has performed very well through the combination of
being the lowest cost producer in South Africa and its ability to
negotiate favourable pricing through its partnership with Glencore. While
the South African ferrochrome industry faces a number of challenges,
including its market share dropping from 51%* in 2003 to 32%* in 2013,
demand fundamentals for ferrochrome remain strong. The stainless steel industry
is set to maintain a growth rate of more than 4%* per annum and to meet this
demand, approximately 2.5Mt** of additional ferrochrome will be required by 2017.
The Venture’s investments in energy efficient technology will continue to provide
it with a significant advantage in the ferrochrome market. The additional high
quality and low cost production the Venture will gain from Lion II will allow
it to maintain its position as the lowest cost ferrochrome producer in South
Africa and to aggressively target new customers.
Diversification remains a key part of our strategy and with no immediate major
expansionary capital investment planned, we look forward to repaying our debt,
paying dividends and pursuing value enhancing opportunities for our shareholders.
* Source: Heinz Pariser/January 2014.
** Calculated taking into consideration the average trend in the last five
years.
Changes to directorate
Mr Ditabe Chocho was appointed CFO with effect from 2 January 2013.
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 and to grow
through diversification.
Chris Molefe Zanele Matlala
Non-executive Chairman Chief Executive Officer
Sandton
11 March 2014
Summarised consolidated statement of comprehensive income for the year
ended 31 December 2013
Year ended Year ended
31 December 2013 31 December 2012
Audited Audited
R’000 R’000
Revenue 3 496 983 2 541 984
EBITDA 557 650 313 650
Depreciation and impairment (252 990) (217 641)
Net financing costs (17 281) (19 660)
Profit before taxation 287 379 76 349
Taxation (76 763) (27 476)
Current tax (18 688) (306)
Deferred tax (59 740) (60 155)
Prior years’ over provision 1 665 32 985
Profit and total comprehensive income
for the year 210 616 48 873
Basic earnings per share (cents) 8.4 2.0
Diluted earnings per share (cents) 8.4 2.0
Headline earnings per share (cents)# 10.8 5.1
Diluted headline earnings per share
(cents)# 10.8 5.1
Ordinary shares in issue 2 494 171 394 2 493 221 394
Weighted average number of shares
for the year 2 493 679 476 2 493 221 394
Diluted weighted average number of
shares for the year 2 504 389 482 2 500 172 742
# Headline earnings reconciliation
Profit and total comprehensive income
for the year 210 616 48 873
Impairments* 58 842 77 497
Profit on sale of assets** (28) –
Headline earnings 269 430 126 370
* Net of taxation of R15m (2012: nil).
** Net of taxation of R11k (2012: nil).
Summarised consolidated statement of financial position as at
31 December 2013
Year ended Year ended
31 December 2013 31 December 2012
Audited Audited
R’000 R’000
Assets
Property, plant and equipment 3 099 988 2 677 308
Total non-current assets 3 099 988 2 677 308
Inventories 1 132 986 1 088 885
Trade and other receivables 677 649 344 725
Current tax assets 7 440 26 424
Cash and cash equivalents 85 547 82 643
Assets held for sale – 72 127
Total current assets 1 903 622 1 614 804
Total assets 5 003 610 4 292 112
Equity
Share capital 24 942 24 932
Share premium 1 262 899 1 262 481
Equity-settled share-based payment reserve 39 011 33 847
Retained earnings 1 598 985 1 388 369
Total equity attributable to equity holders 2 925 837 2 709 629
Liabilities
Loans and borrowings 576 311 523 872
Provision for close down and restoration
costs 111 456 57 892
Deferred tax liabilities 626 099 551 165
Total non-current liabilities 1 313 866 1 132 929
Loans and borrowings 19 471 636
Trade and other payables* 648 143 430 368
Liabilities held for sale – 18 550
Bank overdraft 96 293 –
Total current liabilities 763 907 449 554
Total liabilities 2 077 773 1 582 483
Total equity and liabilities 5 003 610 4 292 112
* Includes R194 million (2012: nil) short-term inventory facility.
Statement of changes in equity
for the year ended 31 December 2013
Year ended Year ended
31 December 2013 31 December 2012
Audited Audited
R’000 R’000
Issued share capital – ordinary shares 24 942 24 932
Balance at beginning of year 24 932 24 932
Share options exercised 10 –
Share premium – ordinary shares 1 262 899 1 262 481
Balance at beginning of year 1 262 481 1 262 481
Share premium arising from share
options exercised 418 –
Equity-settled share-based payment reserve 39 011 33 847
Balance at beginning of year 33 847 31 759
Share-based payment 5 164 2 088
Retained earnings 1 598 985 1 388 369
Balance at beginning of year 1 388 369 1 339 496
Profit and total comprehensive income
for the year 210 616 48 873
Total equity at end of year 2 925 837 2 709 629
Summarised consolidated statement of cash flow for the year ended
31 December 2013
Year ended Year ended
31 December 2013 31 December 2012
Audited Audited
R’000 R’000
Profit before taxation 287 379 76 349
Interest paid 19 942 29 302
Interest received (2 661) (9 642)
Depreciation and impairment 252 990 217 641
Adjusted for non-cash items 6 124 2 088
Adjusted for working capital changes (61 699) (31 747)
Cash flows from operations 502 075 283 991
Interest paid (19 942) (29 302)
Interest received 2 512 9 642
Tax received (paid) 1 961 (7 285)
Cash flows from operating activities 486 606 257 046
Cash flows from investing activities (605 178) (603 210)
Proceeds on disposal of property,
plant and equipment 113 16
Acquisition of property, plant and
equipment – sustaining (208 147) (179 658)
Acquisition of property, plant and
equipment – expansionary (397 144) (423 568)
Cash flows from financing activities 70 568 211 094
Vesting and payment of share grants (999) –
Proceeds from the issue of shares 428 –
Loans raised during the year 71 139 211 094
Net decrease in cash and cash equivalents (48 004) (135 070)
Cash and cash equivalents at the beginning
of the year 82 643 220 459
Effect of exchange rate fluctuations on
cash held (45 385) (2 746)
Cash and cash equivalents at the end
of the year (10 746) 82 643
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
Finance and Investor Relations Manager: Kajal Bissessor
Tel: +27 11 783 4780/+27 83 784 6686
Email: kajal@meraferesources.co.za
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