| Tue 4 Aug 2009, 7:30 | | MRF - Merafe - Reviewed Results For The Six Months Ended 30 June 2009 |
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MRF
MRF
MRF - Merafe - Reviewed Results For The Six Months Ended 30 June 2009
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 2009
Key Features
* Strong cash balance of R466 million
* Cash flows from operations of R144 million
* Ferrochrome inventory reduced by 42% in the last six months
* Net financing costs down by 96%
* Headline loss of R84 million equating to a loss of 3 cents per share
COMMENTARY
Basis of preparation
In compliance with the JSE Limited Listings Requirements, Merafe Resources
Limited Group (Merafe) prepared its interim financial report for the six months
ended 30 June 2009 in accordance with IAS34: Interim Financial Reporting. The
accounting policies adopted are consistent with those applied in the annual
financial statements for the year ended 31 December 2008.
Review of results
The historical interim financial information of Merafe was 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
1,98 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.
The first six months of 2009 has proven to be a very challenging period for
Merafe, with an EBITDA loss of R74,7 million. The loss is primarily as a result
of the decrease in the average European benchmark ferrochrome price from
156,5USc/lb in the first half of 2008 to 79USc/lb in the first quarter of 2009
and 69USc/lb in the second quarter of 2009. This, coupled with the rapid
strengthening of the rand in the second quarter of 2009, also contributed to the
EBITDA loss.
Merafe`s share of saleable ferrochrome production decreased by 15% from 150 500
tonnes in the first half of 2008 to 128 100 tonnes in the first half of 2009.
The decrease in saleable ferrochrome production was mainly attributable to a
decrease in demand for ferrochrome in the first quarter of 2009 as a result of
the global economic slowdown.
Merafe`s share of EBITDA loss from the Venture for the six months ended 30 June
2009 was R56,5 million. The EBITDA loss from the Venture includes Merafe`s
attributable share of standing charges from the temporary suspension of furnaces
and mining operations of R116 million. After accounting for corporate costs of
R15,1 million and a share-based payment expense of R3,1 million, Merafe`s EBITDA
loss was R74,7 million. Depreciation increased period on period primarily as a
result of the sustaining capital expenditure and the re-assessment of useful
lives and residual values of assets.
The loss and total comprehensive loss for the period is R84,2 million after
taking into account depreciation of R50,5 million, net financing costs of R1,1
million, current tax of R1,9 million and deferred tax income of R44 million. The
deferred tax income relates to R23 million recognised on the assessable loss and
R21 million recognised on current temporary differences primarily relating to
property, plant and equipment. The balance of unredeemed capital expenditure is
estimated to be R135,5 million at 30 June 2009.
Merafe started the year with a cash balance of R540 million. After paying
current tax of R88 million, recognising a foreign exchange loss on cash held in
US$ of R44 million and investing R84 million in capex, Merafe still managed to
generate R142 million in cashflows, closing with a healthy cash balance at 30
June 2009 of R466 million. As ferrochrome production increases, the Venture will
experience a buildup in working capital. With its strong cash balance and
available banking facilities the Company is well placed in this regard. Merafe
has a R350 million long-term debt due to be re-paid in one instalment on 31
December 2012. Merafe has agreed to cede R90 million of its cash balance to its
bankers, ABSA Capital.
Review of operations
The Venture operated at an average ferrochrome production capacity of 30% in the
first half of 2009 in response to weak demand and growing stockpiles. The highly
efficient Premus technology furnaces remained in operation resulting in improved
ore consumption efficiency which increased by 8% from the prior period and
increased electricity efficiency, which improved by 14% compared to the first
half of 2008.
Despite improved efficiencies, variable costs rose by 24% due to ongoing
inflationary pressures, which include a 27% increase in electricity prices and
an average 64% increase in reductant prices. The cost of production, excluding
standing charges, increased by 20% over the comparable period. However, cost
savings initiatives limited fixed cost increases to approximately 8% period-on-
period. The initiatives included freezing all new appointments and promotions,
reducing fixed term contract employees, reducing the use of contractors,
limiting maintenance expenditure and eliminating overtime where possible.
Cost savings and efficiency initiatives enabled the Venture to avoid retrenching
any permanent employees. The retention of the Venture`s skilled labour force has
proved to be very beneficial now that the Venture is seeing signs of a market
upturn. Training programmes and maintenance and repairs were carried out at
suspended operations during this period. Mining activities were scaled down
according to smelter requirements and contractual production obligations at
opencast operations were reduced to a minimum. UG2 ore consumption by the
smelters as opposed to mined chrome ore was optimised to reduce input costs.
Developments were curtailed to preserve cash in light of global economic
conditions and poor market conditions. Lower chrome ore demand enabled the
Venture to temporarily cease normal production at the Horizon mine and commence
with the mine`s development, which will increase the run-of-mine chrome ore
capacity from 180 000 tonnes to 480 000 tonnes per annum in 2013.
In respect of Merafe Coal, an environmental impact assessment and an
environmental management programme are currently being conducted at Bankfontein
and Schoongezicht. Once the reports are finalised, they will be considered by
Merafe`s board of directors and the way forward will be determined.
Market review
Production of stainless steel melt weakened significantly in the first half of
2009, materially reducing global demand for ferrochrome. Global stainless steel
melt production of 10,4 million tonnes in the first half of 2009 was
approximately 30% lower than the comparative period in 2008 and 9% lower than
the second half of 2008, with material reductions from Western European,
Japanese and American producers. In contrast, China`s stainless steel melt
production for the first six months of 2009 was 20% higher than in the second
half of 2008 and only slightly weaker than in the first half of 2008.
The significant reduction in demand for ferrochrome from stainless steel
producers and increasing worldwide stockpiles led to a sharp fall in the
European benchmark ferrochrome price from its record highs in the third quarter
of 2008 of 205USc/lb to settle at 79USc/lb in the first quarter of 2009. Prices
dropped further in the second quarter of 2009 to 69USc/lb.
Lower ferrochrome prices led to the majority of Chinese ferrochrome production
becoming uncompetitive and consequently Chinese ferrochrome imports increased by
44% in the first half of 2009 compared to the same period in 2008. China`s
import of chrome ore for the first half of 2009 significantly decreased by 36%
compared to the same period in 2008. Approximately 50% of Chinese chrome ore
imports originated from South Africa.
Outlook
Global stainless steel melt production started to recover towards the end of the
second quarter and is likely to continue into the third quarter on the back of
real demand and restocking. Increasing demand for ferrochrome, combined with
lower global ferrochrome stocks, has resulted in a third quarter European
benchmark ferrochrome price of 89USc/lb, an increase of 29% over the second
quarter price. In response to the strengthening in demand for ferrochrome, the
Venture has increased ferrochrome production capacity to 60% through the re-
commissioning of several furnaces at the Venture`s five ferrochrome operations.
The Company is cautiously optimistic that demand will remain at current levels
in the fourth quarter of 2009. The deferral of most planned expansions is
expected to continue in South Africa and globally, in response to the current
uncertain global economic outlook.
Merafe continued to maintain its strong cash position through the economic
downturn. Inventory levels were reduced considerably and strong cash flows were
generated from the unwinding of stockpiles. The strong rand continues to impact
on earnings, however, the Company remains well positioned to withstand the
present uncertain economic climate.
Chris Molefe Steve Phiri
Non-Executive Chairman Chief Executive Officer
Sandton
4 August 2009
GROUP CONDENSED STATEMENT OF COMPREHENSIVE INCOME
Six months ended Six months ended
30 June 2009 30 June 2008
Reviewed Reviewed
R`000 R`000
Revenue 824 081 1 627 610
EBITDA (74 737) 893 601
Depreciation (50 507) (28 157)
Net financing costs (1 145) (28 097)
(Loss)/profit before taxation (126 389) 837 347
Taxation 42 203 (234 889)
Current taxation (1 898) (799)
Deferred taxation 44 101 (233 558)
Secondary taxation on - (532)
companies
(Loss)/profit and total (84 186) 602 458
comprehensive (loss)/income
for the period
(Loss)/earnings per share (3) 25
(cents)
Diluted (loss)/earnings per (3) 24
share (cents)
Headline (loss)/earnings per (3) 25
share (cents)
Diluted headline (3) 24
(loss)/earnings per share
(cents)
Ordinary shares in issue 2 459 258 860 2 459 258 860
Weighted average number of 2 459 258 860 2 451 166 292
shares for the period
Diluted weighted average 2 479 639 408 2 488 928 176
number of shares for the
period
GROUP CONDENSED STATEMENT OF FINANCIAL POSITION
As at As at
30 June 2009 31 December 2008
Reviewed Audited
R`000 R`000
Assets
Non-current assets 1 918 383 1 861 185
Property, plant and equipment 1 918 383 1 861 185
Current assets 1 614 782 1 893 165
Inventories 798 304 1 067 153
Trade and other receivables 350 138 286 271
Cash and cash equivalents 466 340 539 741
Total assets 3 533 165 3 754 350
Equity and liabilities
Equity 2 398 272 2 479 338
Share capital 24 593 24 593
Share premium 1 244 072 1 244 072
Equity settled share-based 18 706 15 586
payment reserve
Retained earnings 1 110 901 1 195 087
Liabilities 1 134 893 1 275 012
Non-current liabilities 804 926 845 136
Loans and borrowings 365 439 366 174
Provision for close down and 34 356 29 730
restoration costs
Deferred tax 405 131 449 232
Current liabilities 329 967 429 876
Loans and borrowings 1 298 1 200
Financial liability 8 723 11 466
Trade and other payables 319 930 331 364
Current tax liability 16 85 846
Total equity and liabilities 3 533 165 3 754 350
GROUP CONDENSED STATEMENT OF CASH FLOWS
Six months ended Six months ended
30 June 2009 30 June 2008
Reviewed Reviewed
R`000 R`000
(Loss)/profit before taxation (126 389) 837 347
Interest paid 20 874 29 124
Interest received (19 729) (1 027)
Depreciation 50 507 28 157
Adjusted for non-cash items 376 20 529
Adjusted for working capital 218 695 (641 918)
changes
Cash flows from operations 144 334 272 212
Interest paid (20 874) (29 124)
Interest received 19 342 1 027
Taxation paid (87 728) (266)
Cash flows from operating 55 074 243 849
activities
Cash flows from investing (83 470) (89 110)
activities
Proceeds on disposal of - 47
property, plant and equipment
Acquisition of property, plant (925) (82 035)
and equipment - expansionary
Acquisition of property, plant (82 545) (7 122)
and equipment - sustaining
Cash flows from financing (735) (39 294)
activities
Proceeds from issue of shares - 5 528
Decrease in non-current (735) (44 822)
borrowings
Net (decrease)/increase in (29 131) 115 445
cash and cash equivalents
Cash and cash equivalents at 539 741 (153 469)
the beginning of the year
Effect of exchange rate (44 270) 4 878
fluctuations on cash held
Cash and cash equivalents at 466 340 (33 146)
the end of the period
GROUP STATEMENT OF CHANGES IN EQUITY
Six months ended Six months ended
30 June 2009 30 June 2008
Reviewed Reviewed
R`000 R`000
Share capital 24 593 24 593
Balance at the beginning of 24 593 24 494
the period
New shares issued during the - 99
period
Share premium 1 244 072 1 244 072
Balance at the beginning of 1 244 072 1 238 643
the period
Premium on new shares issued - 5 429
during the period
Equity settled share-based 18 706 10 492
payment reserve
Balance at the beginning of 15 586 7 993
the period
Share-based payment 3 120 2 499
Retained earnings 1 110 901 769 854
Balance at the beginning of 1 195 087 167 396
the period
(Loss)/profit and total (84 186) 602 458
comprehensive (loss)/ income
for the period
Balance at end of the period 2 398 272 2 049 011
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, NB Majova
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
Sandton
4 August 2009
Sponsor
Deutsche Securities (SA)(Proprietary) Limited
Date: 04/08/2009 07:30:01 Produced by the JSE SENS Department.
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