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Condensed Consolidated Interim Financial Statements for the six months ended 30 June 2016
Merafe Resources Limited
(Incorporated in the Republic of South Africa)
Company Registration Number: 1987/003452/06
Share code: MRF
ISIN: ZAE000060000
(Merafe or Company)
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the six months ended 30 June 2016
KEY FEATURES
- 1% increase in production to 196kt (2015: 195kt)
- 14% increase in sales to 218kt (2015: 191kt)
- 4% decrease in TRIFR of 4.00 (Dec 2015: 4.17)
- 24% decrease in EBITDA to R257m (2015: R336m)
- 54% decrease in Headline earnings per share to 2.3 cents (2015: 5.0 cents)
- Cash from operating activities increased to R372m (2015: R249m)
- Interim dividend of R20m
Preparation of this report
The following individuals were responsible for the preparation of the condensed consolidated interim financial statements:
Kajal Bissessor CA (SA)
Financial Director
Zanele Matlala CA (SA)
Chief Executive Officer
These results were published on 1 August 2016
COMMENTARY
Introduction
The first six months of 2016 were characterised by low commodity prices and significant fluctuation in the Rand/US Dollar exchange
rate. The global stainless steel and ferrochrome markets were not immune to these influences, and as a result experienced an extremely
volatile first quarter of 2016. The Metal Bulletin charge chrome CIF Shanghai price index (“index”) reduced to a low of 55USc/lb in
March 2016, recovering in the second quarter when the price increased to 74USc/lb in June 2016.
Despite the above mentioned factors, Merafe Resources Limited ("Company" or “Merafe”) remained profitable and cash generative for the
six months ended 30 June 2016.
Review of results
The condensed consolidated interim financial statements of Merafe for the six months ended 30 June 2016 have been reviewed by the
Company's external auditors, KPMG Inc. In their review report, dated 29 July 2016, 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. The auditors 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”) 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.
Revenue increased by 9% period on period mainly due to a 14% increase in ferrochrome sales volumes to 218kt (2015: 191kt) and a 29%
weaker average Rand/US Dollar exchange rate which was partially offset by a 23% decrease in net CIF ferrochrome prices. Chrome ore
revenue as a percentage of total revenue is 11% in the first half of 2016 (2015: 11%). Average export USD CIF prices of chrome ore
reduced by 23% period on period.
Merafe’s portion of the Venture’s EBITDA for the six months ended 30 June 2016 is R275.0m (2015: R355.3m). The EBITDA includes Merafe’s
attributable share of standing charges of R49.2m (2015: R30.1m) and a foreign exchange loss of R28.8m (2015: foreign exchange gain:
R3.0m).
After accounting for corporate costs of R18.4m (2015: R19.4m) which includes a cash settled share-based payment expense of R4.8m
(2015: R2.7m), Merafe’s EBITDA is R256.6m (2015: R335.9m). The cash settled share-based payment expense increased period on period
primarily as a result of a significant increase in the share price at 30 June 2016 compared to 30 June 2015.
Profit for the six months is R57.3m (2015: R124.3m) after taking into account depreciation of R146.5m (2015: R120.5m), net financing
costs of R31.6m (2015: R37.1m) and taxation expense of R21.1m (2015: R54.0m). The balance of unredeemed capital expenditure is
estimated to be R101.0m as at 30 June 2016 (31 December 2015: R173.8m) which relates to the eastern taxation ring-fence. Depreciation
increased period on period primarily as a result of the additional depreciation on Project Lion II as well as the accelerated
depreciation arising from the re-assessment of useful lives and residual values in accordance with IAS 16: Property, plant and
equipment. Net financing costs reduced as a result of the repayment of borrowings which was partially offset by the increase in the
Johannesburg Interbank Agreed Rate (JIBAR) in South Africa. The effective tax rate reduced from 30.3% in the prior period to 26.9% in
the current period primarily as a result of temporary differences on property, plant and equipment which were partially offset by
non-deductible permanent differences arising from operating expenses relating to the Venture.
Sustaining capital expenditure incurred for the six months ended 30 June 2016 is R118.0m (2015: R103.9m) and expansionary capital
expenditure incurred for the six months ended 30 June 2016 is R6.8m (2015: R22.9m). As at 30 June 2016, Merafe’s capital commitments
were R227.7m (2015: R213.0m) of which R70.1m was contracted for but not provided for and R157.6m was authorised but not contracted for.
As at 30 June 2016, Merafe had a net cash balance of R412.2m (2015: R309.6m) which comprised cash held by Merafe of R97.5m and
R314.7m being Merafe’s share of the cash balance in the Venture.
Merafe had total debt owing to ABSA and Standard Bank of R479.5m at 30 June 2016 which reduced by R80m from 31 December 2015. This was
as a result of a R50m mandatory repayment of the term facility on 4 January 2016 and a R30m voluntary pre-payment of the revolving
credit facility on 1 April 2016. Post the reporting period, a R70m repayment was made which comprised of a R50m mandatory repayment of
the term facility and a R20m voluntary pre-payment of the revolving credit facility. This reduced the debt balance to R409.5m,
resulting in unutilised debt facilities of R240.5m.
Trade and other receivables increased from 31 December 2015 primarily as a result of a 62% increase in sales volumes in the second
quarter of 2016 compared to the last quarter of 2015 as well as the impact of the higher than expected receipts from customers in
December 2015, as previously reported. Utilisation of the debtors financing facility increased from R411.4m at 31 December 2015 to
R543.5m at 30 June 2016. Trade and other payables increased from 31 December 2015 as a result of the increase in selling expenses and
commission arising from the increase in sales volumes in the second quarter of 2016 and the increase in production cost in the second
quarter of 2016. The carrying amount of financial instruments are a reasonable approximation of fair value.
Finished goods on hand reduced to 99kt at 30 June 2016 which is approximately ten to twelve weeks of sales.
The Board declared an interim dividend of R20m.
Review of operations and safety
Merafe’s attributable ferrochrome production from the Venture for the six months ended 30 June 2016 increased marginally compared to
the prior comparative period. Production volumes were managed across the first half of the year through timeous furnace refurbishments
in order to optimise stock levels.
Production costs were contained through various cost-saving initiatives. This was achieved in spite of increases in both electricity
and labour costs, which were well above inflation. The National Energy Regulator announced an electricity price increase of 9.4% which
became effective on 1 April 2016. The Venture’s operations were not significantly impacted by electricity supply constraints in the
first half of 2016.
Safety remains a critical focus area and all efforts continue to be made to ensure that the highest standards of safety remain in place
at all the Venture’s operations. The Venture’s total recordable injury frequency rate (TRIFR) improved slightly from 4.17 at the end of
2015 to 4.00 at the end of June 2016 as a result of ongoing safety campaigns and programs at its operations.
Mineral Reserves, Mineral Resources and Mining Rights
During the first half of 2016, there were no material changes to the mineral reserves, mineral resources and mining rights of the
participants in the Venture.
Market review
Global stainless steel production
Estimated global stainless steel production for the first half of 2016 totalled 21.8mt(1), which increased 2.5%(1) period on period.
This increase was primarily driven by China as a result of the introduction of newly built capacity into the market.
Global ferrochrome production and demand
Global ferrochrome production for the first half of 2016 totalled 5.2mt(1), a reduction of 4%(1) period on period. The most significant
decline was seen in China, where output was reduced by 17%(1) period on period. This resulted in South Africa reclaiming its position
as the largest ferrochrome producer in the world. Estimated global ferrochrome apparent demand reduced by 8%(1) to 5.1mt(1) for the
first half of 2016, however the rising stainless steel production created a higher real demand. This shortfall was serviced from
ferrochrome stocks.
Ferrochrome pricing dropped to the lowest levels since 2009 when the 2016 second quarter European ferrochrome benchmark price reduced
to 82USc/lb. The lower price was mainly driven by a destocking of chrome ore, ferrochrome and stainless steel. Market sentiment
improved during the second quarter of 2016 when increased demand for ferrochrome, coupled with shortages of supply, led to significant
price increases. Post the reporting period, the European ferrochrome benchmark price for the third quarter of 2016 was settled at
98USc/lb which represented an increase of 19.5% compared to the second quarter of 2016.
Chrome ore
Chrome ore imports into China for the six months of 2016 amounted to 4.6mt(2) down 6%(2) period on period. Chrome ore prices
reduced significantly, with the weighted average price of South African material reducing to around 105USD/t in May 2016, down 66% in
comparison to 2011 prices.
In the first six months of 2016, South African chrome ore accounted for 78%(2) of imports into China which was up from 73%(2) in the
same period in 2015. This is representative of China’s increased reliance on South African exports for chrome ore.
Chrome ore stocks at Chinese ports at the end of June 2016 were approximately 1.3mt(3), 7.8%(3) lower compared to the beginning of
January 2016.
Outlook
Global stainless steel production is expected to grow by 2.8%(1) in 2016 and by 3.1%(1) in 2017, indicating increased demand prospects
for ferrochrome.
With only four out of seven ferrochrome producers currently in production in South Africa, together with the Venture’s position as one
of the lowest cost ferrochrome producers in the world, the Venture remains well positioned to take full advantage of this renewed
positive demand outlook and market sentiment.
We remain on track to achieving our strategy of reducing Merafe debt and paying stable to increasing dividends in the short term.
With no major expansionary projects in the pipeline, it is expected that from 2018 onwards free cash flow will be applied mainly to
returning cash to shareholders in the form of dividends and/or share buy backs.
Change to Directorate
As previously announced, independent non-executive director, Zed van der Walt resigned with effect from 7 March 2016.
Chris Molefe Zanele Matlala
Independent Non-executive Chairman Chief Executive Officer
Sandton
1 August 2016
References
(1) Heinz Pariser, July 2016 Report
(2) Chinese Customs
(3) FERROALLOYNET
CONDENSED CONSOLIDATED STATEMENTS
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the six months ended
30 June 2016 30 June 2015
Reviewed Reviewed
R'000 R'000
Revenue 2 412 883 2 222 885
Earnings before interest, taxation, depreciation and impairment 256 569 335 890
Depreciation and impairment (146 509) (120 538)
Net financing costs (31 615) (37 081)
Profit before taxation 78 445 178 271
Taxation (21 127) (54 021)
Current tax (2 464) (38 349)
Deferred tax (18 663) (15 672)
Profit and total comprehensive income for the period 57 318 124 250
Basic earnings per share (cents) 2.3 5.0
Diluted earnings per share (cents) 2.3 4.9
Ordinary shares in issue 2 510 704 248 2 510 704 248
Weighted average number of shares for the period 2 510 704 248 2 508 635 044
Diluted weighted average number of shares for the period 2 510 704 248 2 518 604 858
Headline earnings per share (cents) 2.3 5.0
Diluted headline earnings per share (cents) 2.3 4.9
Profit, total comprehensive income for the period and headline earnings 57 318 124 250
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at
30 June 2016 31 Dec 2015
Reviewed Audited
R'000 R'000
Assets 3 220 116 3 240 370
Property, plant and equipment
Deferred tax asset 19 552 17 995
Total non-current assets 3 239 668 3 258 365
Inventories 1 222 397 1 445 887
Current tax asset 22 857 10 773
Trade and other receivables 530 996 317 454
Cash and cash equivalents 412 246 325 126
Total current assets 2 188 496 2 099 240
Total assets 5 428 164 5 357 605
Equity 25 107 25 107
Share capital
Share premium 1 269 575 1 269 575
Retained earnings 2 147 448 2 120 007
Total equity attributable to equity holders 3 442 130 3 414 689
Liabilities 392 246 472 755
Loans and borrowings
Share-based payment liability 4 121 3 147
Provision for close down and restoration costs 146 757 139 351
Deferred tax 783 942 763 724
Total non-current liabilities 1 327 066 1 378 977
Loans and borrowings 101 462 101 176
Trade and other payables 554 899 444 314
Share-based payment liability 2 578 2 893
Bank overdraft 29 15 556
Total current liabilities 658 968 563 939
Total liabilities 1 986 034 1 942 916
Total equity and liabilities 5 428 164 5 357 605
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended
30 June 2016 30 June 2015
Reviewed Reviewed
R'000 R'000
Profit before taxation 78 445 178 271
Finance expense 32 983 37 836
Finance income (1 368) (755)
Depreciation and impairment 146 509 120 538
Vesting and payment of share grants (4 107) (2 150)
Adjusted for non-cash items 4 766 2 685
Adjusted for working capital changes 154 593 (65 498)
Cash flows from operations 411 821 270 927
Interest paid (26 186) (13 301)
Interest received 1 183 548
Tax paid (14 548) (8 973)
Cash flows from operating activities 372 270 249 201
Cash flows from investing activities (124 825) (126 824)
Acquisition of property, plant and equipment - expansionary (6 823) (22 934)
Acquisition of property, plant and equipment - sustaining (118 002) (103 890)
Cash flows from financing activities (110 386) (28 036)
Dividends paid (29 877) (20 085)
Repayment of borrowings (80 509) (7 951)
Net increase in cash and cash equivalents 137 059 94 341
Cash and cash equivalents at the beginning of the period 309 570 (162 468)
Effect of exchange rate fluctuations on cash held (34 412) (1 726)
Cash and cash equivalents at the end of the period 412 217 (69 853)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the six months ended
30 June 2016 30 June 2015
Reviewed Reviewed
R'000 R'000
Share capital 25 107 25 107
Balance at beginning of the period 25 107 25 053
Share grants vested - 54
Share premium 1 269 575 1 269 575
Balance at beginning of the period 1 269 575 1 269 578
Share premium arising from share options exercised - (3)
Equity-settled share-based payment reserve - -
Balance at beginning of the period - 24 651
Share grants vested - (2 205)
Transfer to retained earnings - (8 090)
Transfer to share-based payment liability - (16 820)
Share-based payment expense - 2 464
Retained earnings 2 147 448 1 916 475
Balance at beginning of the period 2 120 007 1 804 220
Profit and total comprehensive income for the period 57 318 124 250
Dividend paid (29 877) (20 085)
Transfer from share-based payment reserve - 8 090
Total equity at end of period 3 442 130 3 211 157
NOTES TO THE INTERIM FINANCIAL STATEMENTS
Basis of preparation
Merafe prepared its condensed consolidated interim financial statements for the six months ended 30 June 2016 in accordance with
International Financial Reporting Standard, IAS 34: Interim Financial Reporting, the SAICA Financial Reporting Guides as issued by
the Accounting Practices Committee, the Financial Pronouncements as issued by Financial Reporting Standards Council and the
requirements of the Companies Act of South Africa. The accounting policies applied in the preparation of these condensed
consolidated interim financial statements are in terms of International Financial Reporting Standards and are consistent with those
applied in the annual financial statements for the year ended 31 December 2015.
Declaration of an ordinary dividend for the interim period ended 30 June 2016
Notice is hereby given that a gross interim ordinary dividend of R20m (0.80 cent per share) has been declared payable, by the
Board of Merafe, to holders of ordinary shares. The dividend will be paid out of reserves.
The ordinary dividend will be subject to a local dividend tax rate of 15%. The net ordinary dividend, to those shareholders who are
not exempt from paying dividend tax, is therefore 0.68 cent per share. Merafe Resources Limited's income tax number is 9550 008 602.
The number of ordinary shares issued at the date of the declaration is 2 510 704 248.
The important dates pertaining to the dividend are as follows:
2016
Declaration date: Monday, 1 August
Last day for ordinary shares respectively to trade cum ordinary dividend: Tuesday, 23 August
Ordinary shares commence trading ex-ordinary dividend: Wednesday, 24 August
Record date: Friday, 26 August
Payment date: Monday, 29 August
Share certificates may not be dematerialised/rematerialised between Wednesday, 24 August 2016 and Friday, 26 August 2016, both days
inclusive. Where applicable, in terms of instructions received by the company from certificated shareholders, the payment of the
dividend will be made electronically to shareholders' bank accounts on payment date. In the absence of specific mandates, cheques will
be posted to shareholders. Shareholders who have dematerialised their shares will have their accounts with their CSDP or broker
credited on Monday, 29 August 2016.
Events after the reporting period
No material event or circumstance occurred between 30 June 2016 and 1 August 2016 that may require adjustment or disclosure in these
condensed consolidated interim financial statements.
Sponsor:
Merrill Lynch South Africa Proprietary Limited
Executive Directors:
Z Matlala (Chief Executive Officer)
K Bissessor (Financial Director)
Non-executive Directors:
CK Molefe (Chairman)*
NB Majova*
A Mngomezulu*
K Nondumo*
M Mosweu
S Blankfield
* independent
Company Secretary:
CorpStat Governance Services
Registered office:
Building B, 2nd Floor, Ballyoaks Office Park, 35 Ballyclare Drive, Bryanston, 2191
Transfer secretaries: Link Market Services South Africa Proprietary Limited
Financial Director:
Kajal Bissessor
Tel: +27 11 783 4780/+27 83 784 6686
Email:
kajal@meraferesources.co.za
www.meraferesources.co.za
Date: 01/08/2016 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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