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Interim results for the six months ended 30 June 2018 and cash dividend declaration
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 "group")
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2018
AND CASH DIVIDEND DECLARATION
Key features
- 5.5% increase in total revenue to R2.721bn (June 2017: R2.580bn)
- Production costs per tonne managed to a 4.8% increase from December 2017
- Net cash decreased to R331m* (December 2017: R600m*)
- 2.4% improvement in TRIFR** to 3.65 (December 2017: 3.74)
- 12.9% decrease in HEPS to 16.9 cents (June 2017: 19.4 cents)
- 165.5% increase in interim dividend to R200m (June 2017: R75m)
* Net cash includes cash and cash equivalents, bank overdraft and working capital loan.
** Total recordable injury frequency rate
Commentary
Review of results
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 2.3m tonnes of ferrochrome per annum. Merafe shares in 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 as a result no
segment report has been presented.
Total revenue increased by 5.5% to R2.721bn (June 2017: R2.580bn).
Ferrochrome revenue increased by 2.6% period on period to R2.342bn (June 2017: R2.282bn) mainly
due to higher sales volumes of 181kt (June 2017: 157kt) partly off set by the stronger average
Rand/US Dollar exchange rate of R12.31 (June 2017: R13.21) and lower net CIF prices.
Chrome ore revenue increased by 27.1% period on period to R378.5m (June 2017: R297.8m) mainly due
to higher realised chrome ore sales prices partly set off by lower sales volumes of 132kt
(June 2017: 146kt) and a stronger average Rand/US Dollar exchange rate. The higher chrome ore
realised prices were impacted by lower local sales volumes period on period.
Merafe's portion of the Venture's EBITDA for the six months ended 30 June 2018 is R814.4m
(June 2017: R887.1m). The EBITDA includes Merafe's attributable share of standing charges of R38.2m
(June 2017: R32.7m) and a foreign exchange gain of R102.6m (June 2017: R50.1m foreign exchange
loss).
After accounting for corporate costs of R18.1m (June 2017: R21.7m), which includes a cash settled
share-based payment expense of R1.4m (June 2017: R2.8m), Merafe's EBITDA reached R796.3m
(June 2017: R865.4m).
Profit for the six months ended 30 June 2018 amounted to R425.1m (June 2017: R486.5m), after
taking into account depreciation of R203.6m (June 2017: R164.9m), net financing costs of R2.8m
(June 2017: R23.8m) and an income tax expense of R164.7m (June 2017: R190.2m). The taxation
expense includes deferred tax income of R19.2m (June 2017: R91.5m) which arose as a result of
temporary and timing differences on property, plant and equipment, the embedded derivative and
provisions. There is no unredeemed capital expenditure balance at 30 June 2018 given the taxable
profits exceeded capital expenditure.
Depreciation increased to R203.6m (June 2017: R164.9m) for the six months ended 30 June 2018 as a
result of the accelerated depreciation arising from the scrapping of assets and the reassessment
of residual values to zero in the second half of 2017. Net financing costs include R13.2m
(June 2017: R11.9m) relating to the unwinding of discount on the provision for rehabilitation.
The significant reduction in net financing costs is as a result of the reduction in borrowings
and higher finance income which is a function of higher average bank balances.
Sustaining capital expenditure incurred for the period was R174.0m (June 2017: R141.3m) and
expansionary capital expenditure incurred for the period was R0.2m (June 2017: R0.8m).
At 30 June 2018, Merafe had cash and cash equivalents of R331.0m*** (Dec 2017: R671.7m***) which
comprised of cash held by Merafe of R255.5m (Dec 2017: R464.0m) and R75.5m (Dec 2017: R207.7m)
being Merafe's share of the cash balance in the Venture. At 30 June 2018, the net cash balance,
which includes cash and cash equivalents, bank overdraft and working capital loan was R331.0m
(Dec 2017: R600.0m).
*** Includes cash and cash equivalents and bank overdraft.
The group has a R200m three-year revolving credit facility which was secured during 2017 as
previously reported. At the reporting date, this facility was unutilised.
Inventories increased to R1.881bn (Dec 2017: R1.498bn) as a result of higher finished goods on
hand at period end, which amounts to approximately four to five months of sales. The increase is
a function of higher production volumes compared to sales volumes as well as higher production
costs.
A reassessment of the closure and restoration costs of all smelters was performed during the period.
As a result of this reassessment, the provision for closure and restoration was increased to R185.8m
(Dec 2017: R157.1m).
Trade and other receivables increased by 32.2% to R1.167bn (Dec 2017: R0.883bn) mainly due to a
weaker closing Rand/US Dollar of R13.71 (Dec 2017: R12.39) as well as earlier than expected receipts
from debtors in December 2017 compared to June 2018.
The Board of directors of Merafe ("Board") declared an interim cash dividend of R200.0m.
Review of Operations and Safety
Review of operations
Merafe's attributable ferrochrome production from the Venture for the first six months of 2018 decreased
by 2.3% to 211kt (June 2017: 216kt). The production for the period is equivalent to an installed capacity
utilisation of 88% (June 2017: 90%).
Total production costs per tonne of ferrochrome increased by 4.8% compared to 31 December 2017,
mainly as a result of an increase in electricity prices of 5.3% effective 1 April 2018 as well as
an increase in reductant costs, arising from a change in mix due to availability.
The Venture's operations were not significantly impacted by electricity supply constraints in the
first half of 2018.
Wage settlements have been concluded and implemented at the Venture's eastern operations whilst
wage negotiations are currently ongoing at its western operations.
Safety
Safety remains a priority and a critical focus area of the Venture. Our TRIFR reduced by 2.4% to 3.65
compared to 31 December 2017. All efforts continue to be made to ensure that the highest standards of
safety remain in place at our operations.
Mineral Reserves, Mineral Resources and Mining Rights
There were no material changes to 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 2017.
Market Review (source: CRU)
Global stainless steel production increased by 10% period on period. For the first time in years, Chinese
output was not the leading factor behind this rise. Although China's stainless steel production rose by 7%
period on period, the ex-China market, notably Indonesia, increased its stainless steel output by 13%,
period on period. European and North American stainless steel production increased by 2.5% and 1%
period on period, respectively.
Due to strong growth in Indonesia, where stainless steel production is almost entirely dependent on
primary chrome units, global demand for ferrochrome increased by 11%, period on period. Growth in
ferrochrome supply has not matched the rise in demand so far this year with global ferrochrome
production rising by 8%, period on period. Chinese ferrochrome smelters made the largest contribution
to this increase, their output rose by more than 11% period on period to about 2.4m tonnes. More modest
supply increases took place in South Africa and India.
The Chinese market has been periodically in slight deficit in recent months, particularly when
environmental inspections forced the closure of furnace capacity.
Movements in the European benchmark ferrochrome price have largely mirrored the relative balance of
the Chinese market this year. Following a period of tightness in the Chinese market in the first quarter
of 2018, the benchmark rose 20% to reach $1.42/lb for deliveries in the second quarter. Supply disruptions
in China, coincided with the settlement period for deliveries in the third quarter, with the result that the
benchmark dropped by 4USc/lb to $1.38/lb.
A 13% period on period increase in China's chrome ore imports between January and May helped to
maintain UG2 concentrate transaction levels within a range between $170-$250/t CIF China, with
continuing volatility, albeit a narrower range than that recorded for the same period last year.
At 30 June 2018, chrome ore stocks in Chinese ports rose to 3.2m tonnes (source: ICDA) or about 15 weeks
of consumption over the period.
Outlook
Total 2018 stainless steel production is currently forecast to be 50.8m tonnes (CRU), an increase of 4.9%
over 2017. Price and exchange rate volatility are expected to continue, especially given uncertainties
driven by trade wars and the global economic environment.
In accordance with our strategy, we remain committed to maximising return to our shareholders in the
near term in the form of dividends and will continue to assess opportunities to deliver shareholder value.
Chris Molefe Zanele Matlala
Independent Non-executive Chairman Chief Executive Officer
Sandton
6 August 2018
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at
30 June 2018 31 December 2017
Unaudited Audited
R'000 R'000
ASSETS
Non-current assets
Property, plant and equipment 3 215 061 3 271 155
Long term receivables 10 494 13 864
Deferred tax asset 19 362 17 726
Total non-current assets 3 244 917 3 302 745
Current assets
Inventories 1 881 387 1 497 798
Trade and other receivables 1 167 839 883 249
Cash and cash equivalents 341 232 671 655
Total current assets 3 390 458 3 052 702
Total assets 6 635 375 6 355 447
EQUITY AND LIABILITIES
Capital and reserves
Share capital 25 107 25 107
Share premium 1 269 575 1 269 575
Retained earnings 3 539 986 3 340 843
Total equity attributable to equity holders 4 834 668 4 635 525
Liabilities
Non-current liabilities
Loans and borrowings 10 506 11 094
Share based payment liability 2 646 5 379
Provisions 334 023 287 518
Deferred tax 762 546 780 485
Total non-current liabilities 1 109 721 1 084 476
Current liabilities
Loans and borrowings 1 130 1 044
Current tax liability 77 011 8 198
Trade and other payables 600 181 550 556
Working capital loan - 72 272
Share based payment liability 2 460 3 376
Bank overdraft 10 204 -
Total current liabilities 690 986 635 446
Total liabilities 1 800 707 1 719 922
Total equity and liabilities 6 635 375 6 355 447
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Six months ended
30 June 2018 30 June 2017
Unaudited Reviewed
R'000 R'000
Revenue 2 720 702 2 579 981
Earnings before interest, taxation,
depreciation and amortisation 796 251 865 393
Depreciation and amortisation (203 629) (164 938)
Net financing costs (2 820) (23 781)
Profit before income tax 589 802 676 674
Income tax expense (164 696) (190 183)
Current tax (183 914) (281 682)
Deferred tax 19 218 91 499
Profit and total comprehensive income for the period 425 106 486 491
Basic earnings per share (cents) 16.9 19.4
Diluted earnings per share (cents) 16.9 19.4
Ordinary shares in issue 2 510 704 248 2 510 704 248
Weighted average number of shares for the period 2 510 704 248 2 510 704 248
Diluted weighted average number of shares for the period 2 510 704 248 2 510 704 248
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Six months ended
30 June 2018 30 June 2017
Unaudited Reviewed
R'000 R'000
Share capital 25 107 25 107
Balance at beginning and end of the period 25 107 25 107
Share premium 1 269 575 1 269 575
Balance at beginning and end of the period 1 269 575 1 269 575
Retained earnings 3 539 986 2 988 537
Balance at beginning of the period 3 340 843 2 602 474
Profit and total comprehensive income for the period 425 106 486 491
Dividend paid (225 963) (100 428)
Total equity at end of period 4 834 668 4 283 219
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended
30 June 2018 30 June 2017
Unaudited Reviewed
R'000 R'000
Profit before taxation 589 802 676 674
Finance expense 13 850 25 942
Finance income (11 030) (2 161)
Depreciation and amortisation 203 629 164 938
Movement in provisions 21 119 -
Embedded derivative (income)/expense (34 792) 190 304
Vesting and payment of share grants (5 077) (11 057)
Adjusted for non-cash items 1 428 2 813
Adjusted for working capital changes (584 711) (469 375)
Cash flows from operations 194 218 578 078
Interest paid (311) (20 044)
Interest received 9 575 1 754
Tax paid (115 458) (75 177)
Cash flows from operating activities 88 024 484 611
Cash flows from investing activities (174 228) (142 052)
Acquisition of property, plant and equipment - expansionary (188) (785)
Acquisition of property, plant and equipment - sustaining (174 040) (141 267)
Cash flows from financing activities (226 465) (464 049)
Dividend paid (225 963) (100 428)
Repayment of borrowings (502) (363 621)
Net decrease in cash and cash equivalents (312 669) (121 490)
Cash and cash equivalents at the beginning of the period 671 655 263 305
Effect of exchange rate fluctuations on cash held (27 958) (19 431)
Cash and cash equivalents at the end of the period 331 028**** 122 384
**** Closing balance of cash and cash equivalents is net of bank overdraft of R10.2m.
Notes
1. Basis of preparation
Merafe prepared its interim results for the six months ended 30 June 2018 under the supervision of
Kajal Bissessor CA(SA), Financial Director, 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, the Financial Pronouncements as issued by Financial Reporting
Standards Council, the requirements of the Companies Act of South Africa and the JSE Limited
Listings Requirements.
1.1. Going concern
In determining the appropriate bases of preparation of the interim results, the directors are required
to consider whether the group can continue to be in operational existence for the foreseeable future.
The financial performance of the group is dependent upon the wider economic environment in which the
group operates.
These interim results are prepared on a going concern basis. The Board is satisfied that the group
is sufficiently liquid and solvent to be able to support the operations for the next twelve months.
1.2. Accounting policies
The accounting policies applied in the preparation of these interim results 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 2017.
No new standards or amendments to the published standards or interpretations which became effective
for the year commencing on 1 January 2018 had an effect on the reported results or the group
accounting policies. The group did not early adopt any new, revised or amended accounting
standards or interpretations. The most prominent was IFRS: 15 Revenue from Contracts with
Customers and the following assessment was performed to conclude that the standard does not
have an impact on the company:
IFRS 15 contains a single model that applies to contracts with customers and two approaches to
recognising revenue: at a point in time or over time. The model features a contract-based five
step analysis of transactions to determine whether, how much and when revenue is recognised.
It replaced IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations and is
effective for annual periods beginning on or after 1 January 2018.
The Venture has done an assessment to determine whether the the five-step model will have an impact
on the existing revenue recognition principles. The assessment involved a review of the various types
of sales contracts and to identify and consider each component of the five-step model. The conclusion
of the assessment is that IFRS 15 does not have a significant impact on the company.
1.3. Use of estimates and judgements
The preparation of the interim results requires management to make judgements, estimates and assumptions
that affect the application of accounting policies and the reported amounts of assets, liabilities, income
and expenses. The estimates and associated assumptions are based on historical experience and various
other factors that are believed to be reasonable under the circumstances, the results of which form the
basis of making the judgements about carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates
are recognised in the period in which the estimate is revised.
In particular, information about significant areas of estimation, uncertainty and critical judgements in
applying accounting policies that have the most significant effect on the amount recognised in the interim
results are as follows:
- Measurement of depreciation, useful lives and residual values of property, plant and equipment;
- Inputs used in the determination of the fair value of the share-based payment transactions;
- Lease classification between operating and finance lease and depreciation of finance lease assets;
- Assumptions used in calculation of the life of the mines/smelters, estimation of the closure and
restoration costs and inputs used in the calculation of the present value of the provision for
closure and restoration costs;
- Recognition of deferred tax asset and projection of future taxable income to recover the deferred
tax asset;
- Consolidation: control assessment; and
- Fair value measurement of embedded derivative.
2. Determination of fair values
A number of the accounting policies and disclosures require the determination of fair value, for both
financial and non-financial assets and liabilities. Fair values have been determined for measurement
and/or disclosure purposes based on the methods as indicated below.
2.1. Embedded derivative
The embedded derivative is included in trade and other receivables at fair value. The fair value of the
embedded derivative is based on the latest available ferrochrome prices and closing foreign exchange rate.
The embedded derivative at 30 June 2018 was R14.4m debit (Dec 2017: R35.5m credit) and is based on
level 2 hierarchy per IFRS 13: Fair value measurement. The valuation is based on observable market
inputs including prices and exchange rates.
2.2. Share based payment transactions
The fair value of employee share options and share grants is measured using the Black-Scholes
Merton model. Measurement inputs include share price on measurement date, exercise price of the
instrument, expected volatility (based on weighted average historic volatility adjusted for changes
expected due to publicly available information), weighted average expected life of the instruments
(based on historical experience and general option holder behaviour), expected dividends, and the
risk-free interest rate (based on Government bonds). The total balance of the share-based payment
liability at 30 June 2018 was R5.1m (Dec 2017: R8.8m).
Six months ended
30 June 2018 30 June 2017
Unaudited Reviewed
R'000 R'000
3. Earnings per share
Headline earnings per share (cents) 16.9 19.4
Diluted headline earnings per share (cents) 16.9 19.4
Profit, total comprehensive income for the period and
headline earnings 425 106 486 491
4. Capital commitments 348 822 314 558
Contracted for but not provided for 138 725 112 938
Authorised but not contracted for 210 097 201 620
5. Related parties
5.1. Related party transactions
The Company, in the ordinary course of its business, enters into various transactions with related
parties as defined in IAS 24, Related Party Disclosures.
Related party transactions were concluded on an arms-length basis and relate to Merafe's
attributable 20.5% interest in the Venture.
Name of related party Description of relationship Transactions and balance
Glencore Limited Glencore Limited acts as the Sale of ferrochrome including
(Stamford) (GLS) Venture's exclusive marketing derivative (R237m) (2017: (R379m))
agent to sell ferrochrome on Commission expense R5m (2017: R13m)
its behalf and act as distributor Interest expense R3m (2017: R2m).
in the USA and Canada. Receivable at the end of the period
(R208m) (Dec 2017: (R205m)) which
is reduced as and when GLS receives
funds from customers.
Glencore International AG Glencore International AG acts Commission expense on the sale of
as the Venture's exclusive ferrochrome and chrome ore R104m
marketing agent to sell (2017: R102m)
ferrochrome and chrome ore Marketing expense R1m (2017: R1m)
on its behalf. Interest income (R1m) (2017: (R2m))
Purchase of raw material R180m (2017: R80m).
The Venture purchases various raw Balance owing at the end of the period R60m
materials from Glencore (Dec 2017: R36m) payable on confirmation
International AG on an ongoing basis. of final sales.
African Carbon African Carbon Manufacturers (Pty) Purchase of raw materials R10m (2017: R11m)
Manufacturers (Pty) Ltd Ltd sells raw materials to Balance owing at the end of the period R1m
the Venture. (Dec 2017: R2m) payable 30 days from
statement date.
African Fine Carbon (Pty) Ltd African Fine Carbon (Pty) Ltd sells Purchase of raw materials R16m (2017: R12m)
raw materials to the Venture. Balance owing at the end of the period R4m
(Dec 2017: R3m) payable 30 days from
statement date.
Chartech Technology (Pty) Chartech Technology (Pty) Ltd sells Purchase of raw materials R16m (2017: R16m).
Ltd raw materials to the Venture. Balance owing at the end of the period R3m
(Dec 2017: R2m) payable 30 days from
statement date.
Glencore Property Glencore Property Management Company Lion housing expense Rnil (2017: R2m)
Management Company (Pty) (Pty) Ltd owns and manages employee Balance owing at the end of the period Rnil
Ltd housing at the Lion operation. (Dec 2017: Rnil).
Glencore Operations South Glencore Operations South Africa Raw material expense R4m (2017: Rnil)
Africa (Pty) Ltd (Pty) Ltd is Merafe Ferrochrome Employee costs R56m (2017: R49m)
and Mining (Pty) Ltd's partner Head-office costs R9m (2017: R9m)
in the Venture. Lion housing expense R7m (2017: R4m)
Training and Human Resource Development
expenses R3m (2017: R3m)
Shared service center expenses R4m
(2017: R4m).
Balance owing at the end of the period
R24m (Dec 2017: R2m) payable 10 days
after month end.
Access World (South Africa) Access World (South Africa) (Pty) Storage expenses R6m (2017: R5m).
(Pty) Ltd Ltd is a warehousing company that Balance owing at the end of the period
provides storage facilities of R1m (Dec 2017: R3m) payable 30 days after
ferrochrome and chrome ore to statement date.
the Venture.
6. Taxation
The group's effective tax rate for the six months ended 30 June 2018 is 28% (June 2017: 28%).
7. Events after reporting period
An interim cash dividend of R200.0m (2017: R75.3m) was declared on 6 August 2018. No other material events
occurred between the reporting date of 30 June 2018 and the date of issue of these condensed consolidated
interim financial statements.
8. Contingent liabilities
There were no contingent liabilities at 30 June 2018.
9. Directors
Ms Karabo Nondumo resigned as an independent non-executive director of Merafe on 8 May 2018. Ms Kajal Bissessor
has resigned in her capacity as Financial Director effective 31 August 2018. Mr Ditabe Chocho has been appointed
as the Financial Director for the group effective 1 August 2018. Ms Matsotso Vuso has been appointed as an
independent non-executive director of Merafe effective 30 July 2018. There were no other changes to the Board.
10. Review by independent auditors
These condensed consolidated interim financial statements of Merafe Resources Limited for the six months ended
30 June 2018 have not been reviewed by the independent auditor, Deloitte & Touche.
11. Declaration of an ordinary cash dividend for the interim period ended 30 June 2018
Notice is hereby given that a gross interim local ordinary cash dividend of R200.0m (7.96589 cents per share)
has been declared payable, by the Board, to holders of ordinary shares. The dividend will be paid out of
income reserves.
The ordinary dividend will be subject to a local dividend tax rate of 20%. The net local ordinary cash dividend,
to those shareholders who are not exempt from paying dividend tax, is therefore 6.37271 cents per share.
Merafe'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:
Declaration date: Monday, 6 August 2018
Last day for ordinary shares to trade cum ordinary dividend: Tuesday, 28 August 2018
Ordinary shares commence trading ex-ordinary dividend: Wednesday, 29 August 2018
Record date: Friday, 31 August 2018
Payment date: Monday, 3 September 2018
Shares may not be dematerialised/rematerialised between Wednesday 29 August 2018 and Friday, 31 August 2018,
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, 3 September 2018.
Sponsor: One Capital Sponsor Services (Pty) Ltd
Executive Directors: Z Matlala (Chief Executive Officer), K Bissessor, D Chocho
Non-executive Directors: CK Molefe (Chairman)^, NB Majova^, A Mngomezulu^, M Vuso^,
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 (Pty) Ltd
Investor relations: Kajal Bissessor/Ditabe Chocho Tel: +27 11 783 4780
Email: kajal@meraferesources.co.za/
ditabe@meraferesources.co.za
www.meraferesources.co.za
Date: 06/08/2018 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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