| Wed 6 Aug 2008, 7:30 | | MRF - Merafe - Reviewed Results For The Six Months Ended 30 June 2008 |
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MRF
MRF
MRF - Merafe - Reviewed Results For The Six Months Ended 30 June 2008
Merafe Resources Limited
(Incorporated in the Republic of South Africa)
(Registration number 1987/003452/06)
Share Code: MRF
ISIN: ZAE000060000
(Merafe or the Company or the Group)
REVIEWED RESULTS FOR THE SIX MONTHS ENDED
30 JUNE 2008
* Revenue up 123% to R1,6 billion
* EBITDA up 387% to R894 million
* Net profit after tax up 571% to R602 million
* Earnings per share up 525% to 25 cents
COMMENTARY
Basis of preparation
In compliance with the JSE Limited Listings Requirements, Merafe has prepared
its interim financial report for the six months ended 30 June 2008 in accordance
with IAS 34: Interim Financial Reporting. The accounting policies adopted are
consistent with those applied in the annual financial statements for the year
ended 31 December 2007.
Review of results
The historical interim financial information of the Group has been reviewed by
the Group`s auditors, KPMG Inc. Their unqualified review report is available for
inspection at the Company`s registered address.
Merafe`s income is generated from the Xstrata-Merafe Chrome Venture (the
Venture), the market leader in ferrochrome, with a total managed capacity of
1,96 million 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 significantly from the six month
comparative period, primarily as a result of an increase in the average European
benchmark ferrochrome price from 78,5 USc/lb in the first half of 2007 to 156,5
USc/lb in the first half of 2008 and as a result of Merafe`s saleable
ferrochrome production increasing by 8% from 139,000 tonnes in the first half of
2007 to 150,500 tonnes in the first half of 2008. The increase in saleable
ferrochrome production was attributable to increased production from furnaces
brought back into commission and increased production from the Lion Ferrochrome
plant.
Merafe`s share of EBITDA from the Venture for the six month period ended 30 June
2008 was R914 million. After accounting for corporate costs of R15 million, debt
restructuring fees of R2,5 million and a share-based expense of R2,5 million,
the Merafe Group`s EBITDA was R894 million. Depreciation increased period-on-
period by R10 million, primarily as a result of the Bokamoso pelletising and
sintering plant being depreciated for the full six months of 2008 and the
depreciation of computer equipment and software acquired in the second half of
2007. The net profit after tax for the first half of 2008 is R602,5 million
after taking into account net finance costs of R28 million and a deferred tax
expense of R233,6 million. The balance of unredeemed capital expenditure at 30
June 2008 is estimated to be R487 million.
During the six months ended 30 June 2008, Merafe repaid R200 million in debt
comprising R45 million relating to preference shares, R48 million owing to
Xstrata and R107 million of its overdraft. The debt balances remaining at 30
June 2008 are R75 million in respect of preference shares, R350 million in
respect of the five year non-amortising credit facility and R99 million owing to
Xstrata, included in trade and other payables.
Review of operations
The six months to 30 June 2008 have been a record period for Merafe in terms of
ferrochrome sold, ferrochrome prices achieved and EBITDA from the Venture. This
was achieved despite the widely publicised disruptions to the electricity supply
from Eskom in January 2008, which ultimately resulted in Eskom restoring only
90% of normal power supply to the Venture`s operations. Uncertainty remains as
to when the remaining 10% will be restored.
The anticipated increased production from furnaces brought back into commission
and increased production from Lion Ferrochrome was offset by the reduced power
supply. Notwithstanding this, attributable saleable production increased by 8%
to 150,500 tonnes (30 June 2007: 139,000 tonnes).
In addition to the recent investments in power efficient technologies (Premus
technology at the Lion Ferrochrome plant and the Bokamoso pelletising and
sintering plant), the Venture is evaluating power generation through the use of
off-gas from its furnaces.
Production costs for ferrochrome producers are rising primarily due to the
increased prices of oil, electricity, reductants (in particular metallurgical
grade coke prices which increased by 51% compared to the prior year first half)
and high mining sector inflation. The Venture operations outperformed industry
peers in containing unit costs, which fell by 11% in real terms year-on-year,
due to the Premus technology used at the Lion Ferrochrome plant and the
contribution of the Bokamoso pelletising and sintering plant, which was
commissioned in the second half of 2007.These technologies improved the
efficiency of power and ore consumption at the chrome operations by 13% and 9%
respectively and also allowed a reduction in the proportion of metallurgical
grade coke used, through partial substitution with lower-priced reductants such
as anthracite. A further benefit came from the Venture`s access to Xstrata`s
internal char and anthracite resources. Bokamoso`s design capacity was exceeded
by more than 15% for three consecutive months during the first quarter of 2008.
The additional agglomeration capacity provided by the Lion Ferrochrome plant and
the Bokamoso pelletising and sintering plant allowed for the use of larger
volumes of lower-cost UG2 chrome ore. Optimisation of the UG2 concentrating
plants and 146,000 additional tonnes of UG2 chrome ore from the Mototolo and
Eland PGM concentrators further supplemented UG2 chrome ore supply.
New ferrochrome smelter projects in South Africa are being postponed until there
is more certainty in respect of Eskom`s new generating capacity. The Venture
will time the planned start-up of the Lion Phase 2 expansion to coincide with
the availability of sufficient power supply for this project. This second phase
expansion will have an installed capacity of 350,000 tonnes of ferrochrome
production per annum.
The Venture completed all submissions to the Department of Minerals and Energy
(DME) for New Order Prospecting and Mining Rights and in respect of which 8 of
the 10 submissions have been granted to date. In addition, 6 out of 12 mining
right conversions submitted to the DME have been granted.
Market review
Supported by strong demand and high spot prices, the European benchmark
ferrochrome price rose to a record $1,92/lb in the second quarter of 2008, up
from a previous record level of $1,21/lb in the first quarter and climbed to
$2,05/lb in the third quarter of 2008. The European benchmark ferrochrome prices
have increased by 105% so far this year, from $1,00/lb in the fourth quarter of
2007 to the current third quarter price of $2,05/lb.
Stainless steel melt production has steadily increased since the slowdown seen
in the second half of 2007, resulting in increased demand for ferrochrome
globally. Stainless steel production in Western Europe, and to a lesser extent
Eastern Europe, has increased in the first half of 2008, from the second half of
2007, while the rate of growth in production in China has slowed somewhat
compared to historical averages. Global production of stainless steel for the
first half of 2008 is estimated at 15,3 million tonnes, 1% lower than the
comparable period of 2007, but 16% higher than the second six months of 2007.
Fluctuating nickel prices and increased costs of raw materials have resulted in
numerous stainless producers increasing production of ferritic (higher virgin
chrome content) grades at the expense of nickel-bearing austenitic grades,
continuing the trend of the past two years. The switch away from austenitic
stainless steel increases demand for virgin chrome units, as less ferritic scrap
is generally available in the market. However, reduced levels of austenitic
production and unchanged levels of lower cost austenitic scrap availability will
result in lower virgin chrome unit usage in austenitic production in the future.
Growth in stainless steel melt production from the depressed levels of the
second half of 2007 and increased ferritic production, combined with reduced
South African ferrochrome production due to power constraints, resulted in a
surge in spot ferrochrome prices. Production of ferrochrome in China increased
in the first half of 2008, increasing imports of chrome ore. In the first five
months of 2008 China imported 2,9 million tonnes of ore, an increase of 23% over
the same period in 2007.
Stainless steel production is set to slow in the third quarter of this year due
to the traditional northern hemisphere summer shutdowns, speculation around the
fluctuating nickel price by buyers resulting in some destocking, and a weaker
global economy. This has resulted in some Asian stainless steel mills announcing
cuts in output. The market is expected to show renewed strength during the
fourth quarter of 2008 barring any further weakening in global economic
conditions.
Merafe Coal
Merafe Coal is a 50/50 joint venture with Sentula Mining Limited. Merafe Coal
continues to look for growth opportunities in the coal mining sector as well as
developing the Schoongezicht and Bankfontein coal deposits. These properties
have total target coal resources of approximately 10 million tonnes. New Order
Prospecting Rights in respect of Schoongezicht and Bankfontein have been granted
and applications for New Order Mining Rights are in the process of being
submitted to DME. Merafe Coal should be in a position to commence mining during
the second half of 2009. Both these projects are opencast and are well
positioned to supply export quality and Eskom quality coal into a variety of
markets.
Prospects
Stainless steel production is anticipated to increase to above 29 million tonnes
in 2008, around 6% higher than the previous year, supporting robust ferrochrome
prices. The third quarter of 2008 has seen the European benchmark ferrochrome
price reach a record level of $2,05/lb. Merafe believes that ferrochrome prices
will remain strong. Supply-side constraints on South African producers as a
result of Eskom`s power reduction programme are expected to result in a supply
deficit during 2008 and possibly into 2009. Merafe`s attributable saleable
ferrochrome production for the full year is expected to be approximately 307,000
tonnes, an increase of 8% over the previous year.
Merafe expects the earnings per share (EPS) and headline earnings per share
(HEPS) for the second six months to 31 December 2008 to be higher than the EPS
and HEPS reported in these interim results. The expected increase in EPS and
HEPS for the second six months is based on the fact that the EPS and HEPS for
the six months to 30 June 2008 were achieved at an average European benchmark
ferrochrome price of $1,56/lb whilst the European benchmark ferrochrome price
for the third quarter of 2008 has been set at $2,05/lb.
The strong cashflows being generated by Merafe are being used to reduce its long
and short-term debt and strengthen its working capital position.
Chris Molefe Steve Phiri
Non-Executive Chairman Chief Executive Officer
Sandton
6 August 2008
GROUP CONDENSED INCOME STATEMENT
6 months ended 6 months
ended
30 June 2008 30 June 2007
Reviewed Reviewed
R`000 R`000
Revenue 1 627 610 729 833
EBITDA 893 601 183 348
Depreciation (28 157) (18 001)
Net financing costs (28 097) (31 317)
Profit before taxation 837 347 134 030
Normal taxation (799) (164)
Deferred taxation (233 558) (42 631)
Secondary taxation on companies (532) (1 388)
Profit for the period 602 458 89 847
Earnings per share (cents) 25 4
Diluted earnings per share (cents) 24 4
Headline earnings per share 25 4
(cents)
Diluted headline earnings per 24 4
share (cents)
Ordinary shares in issue 2 459 258 860 2 386 479 739
Weighted average number of shares 2 451 166 292 2 351 095 379
for the period
Diluted weighted average number of 2 488 928 176 2 371 518 437
shares for the period
GROUP CONDENSED BALANCE SHEET
As at As at
30 June 31 December
2008 2007
Reviewed Audited
R`000 R`000
Assets
Non-current assets 1 861 780 1 800 793
Property, plant and equipment 1 861 780 1 800 793
Current assets 1 457 380 785 409
Inventories 611 416 496 877
Trade and other receivables 795 257 251 064
Bank and cash 50 707 37 468
Total assets 3 319 160 2 586 202
Equity and liabilities
Capital and reserves 2 049 011 1 438 526
Issued share capital 24 593 24 494
Share premium 1 244 072 1 238 643
Equity-settled share-based payment 10 492 7 993
Retained earnings 769 854 167 396
Non-current liabilities 722 241 518 094
Non-current borrowings 367 368 400 948
Provision for close-down and restoration 29 330 25 161
Deferred tax 325 543 91 985
Current liabilities 547 908 629 582
Trade and other payables 388 992 352 340
Current portion of non-current borrowings 75 063 86 305
Bank overdraft 83 853 190 937
Total equity and liabilities 3 319 160 2 586 202
GROUP STATEMENT OF CHANGES IN EQUITY
6 months ended 6 months
ended
30 June 2008 30 June 2007
Reviewed Reviewed
R`000 R`000
Issued share capital 24 593 23 865
Balance at beginning of the period 24 494 23 416
New shares issued during the period 99 449
Share premium 1 244 072 1 162 993
Balance at the beginning of the 1 238 643 1 142 887
period
Premium on new shares issued during 5 429 20 106
the period
Equity-settled share-based payment 10 492 3 738
Balance at the beginning of the 7 993 3 300
period
Share-based payment 2 499 438
Retained earnings 769 854 17 130
Balance at beginning of the period 167 396 (72 717)
Net profit for the period 602 458 89 847
Non-distributable reserve - -
Balance at beginning of the period - 9 103
Downstream project - (9 103)
2 049 011 1 207 726
GROUP CONDENSED CASH FLOW STATEMENT
6 months 6 months ended
ended
30 June 2008 30 June 2007
Reviewed Reviewed
R`000 R`000
Net profit before tax for the 837 347 134 030
period
Finance cost 29 124 31 604
Finance income (1 027) (287)
Depreciation 28 157 18 001
Adjusted for non-cash items 20 529 17 634
Adjusted for working capital (637 040) (73 264)
changes
Cash flows generated by operations 277 090 127 718
Finance cost (29 124) (31 604)
Finance income 1 027 287
Taxation paid (266) (1 567)
Cash flows from operating 248 727 94 834
activities
Cash flows from investing (89 110) (60 085)
activities
Proceeds on disposal of property, 47 -
plant and equipment
Acquisition of property, plant and (82 035) 346
equipment - maintenance
Acquisition of property, plant and (7 122) (60 431)
equipment - expansionary
Cash flows from financing (39 294) (112 691)
activities
Proceeds from issue of shares 5 528 11 452
Repayment of non-current (44 822) (124 143)
borrowings
Net increase/(decrease) in cash 120 323 (77 942)
and cash equivalents
Cash and cash equivalents at the (153 469) (87 667)
beginning of the year
Cash and cash equivalents at the (33 146) (165 609)
end of the period
Sponsor
Deutsche Securities
(SA) (Proprietary) Limited
Executive Directors:
DS Phiri (Chief Executive Officer), B McBride, S Elliot
Non-Executive Directors: CK Molefe, (Chairman), CJ Fauconnier,
J Matlala, M Mthenjane, T Ramantsi, M Mamathuba, A Mahendranath (Company
Secretary)
Registered office:
First floor, Block B, Sandton Place
68 Wierda Road East
Wierda Valley, Sandton, 2196
Transfer Secretaries:
Link Market Services South Africa (Pty) Limited
Date: 06/08/2008 07:30:01 Produced by the JSE SENS Department.
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