| Tue 2 Aug 2011, 8:00 | | MRF - Merafe Resources Limited - Reviewed interim results for the six months |
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MRF
MRF
MRF - Merafe Resources Limited - Reviewed interim results for the six months
ended 30 June 2011
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 INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2011
KEY FEATURES
- Approved 20,5% participation in Lion II
- Profit of R86 million, EPS of 3,5 cents
- Two fatalities, TRIFR improved by 13%
- Production cost increases of 16%
- Healthy cash balance of R366 million
CONSOLIDATED CONDENSED STATEMENT OF COMPREHENSIVE INCOME
Six months ended Six months ended
30 June 2011 30 June 2010
Reviewed Reviewed
R`000 R`000
Revenue 1 319 278 1 191 272
EBITDA 206 007 322 379
Depreciation (44 906) (46 023)
Net financing costs (16 120) (12 727)
Profit before 144 981 263 629
taxation
Taxation (58 971) (74 890)
Current tax (16 987) -
Deferred tax (37 474) (70 845)
Secondary tax on (4 510) (4 045)
companies
Profit and total 86 010 188 739
comprehensive
income for the
period
Basic earnings per 3,5 7,7
share (cents)
Diluted earnings 3,4 7,6
per share (cents)
Headline earnings 3,5 7,3#
per share (cents)
Diluted headline 3,4 7,2#
earnings per share
(cents)
Ordinary shares in 2 476 656 043 2 460 508 860
issue
Weighted average 2 476 656 043 2 459 799 376
number of shares
for the period
Diluted weighted 2 495 990 715 2 488 677 466
average number of
shares for the
period
# Headline earnings R179 million
Total comprehensive R189 million
income for the
period
Profit on disposal (R10 million)
of property, plant
and equipment
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
As at As at
30 June 2011 31 December 2010
Reviewed Audited
R`000 R`000
Assets
Property, plant and equipment 2 301 262 2 192 600
Total non-current assets 2 301 262 2 192 600
Inventories 889 016 865 251
Trade and other receivables 403 023 435 514
Current tax asset - 3 519
Cash and cash equivalents 366 118 320 724
Total current assets 1 658 157 1 625 008
Total assets 3 959 419 3 817 608
Equity
Share capital 24 767 24 767
Share premium 1 253 568 1 253 568
Equity-settled share-based payment 28 112 24 391
reserve
Retained earnings 1 308 756 1 272 279
Total equity attributable to equity 2 615 203 2 575 005
holders
Liabilities
Loans and borrowings 312 542 312 786
Provision for closure and 46 300 39 439
restoration costs
Deferred tax liability 507 009 469 534
Total non-current liabilities 865 851 821 759
Loans and borrowings 575 831
Financial liability 7 815 11 048
Trade and other payables 456 508 408 965
Current tax liability 13 467 -
Total current liabilities 478 365 420 844
Total liabilities 1 344 216 1 242 603
Total equity and liabilities 3 959 419 3 817 608
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN EQUITY
Six months ended Six months ended
30 June 2011 30 June 2010
Reviewed Reviewed
R`000 R`000
Share capital 24 767 24 605
Balance at the beginning of the 24 767 24 593
period
Share options exercised - 12
Share premium 1 253 568 1 244 872
Balance at the beginning of the 1 253 568 1 244 072
period
Share premium arising from share - 800
options exercised
Equity-settled share-based payment 28 112 20 491
reserve
Balance at the beginning of the 24 391 22 109
period
Share-based payment 3 721 (1 618)
Retained earnings 1 308 756 1 182 314
Balance at the beginning of the 1 272 279 1 042 762
period
Profit and total comprehensive 86 010 188 739
income for the period
Dividend (49 533)a (49 187)b
Total equity at the end of year 2 615 203 2 472 282
a relates to the dividend declared by the Board on 25 February 2011 and paid
on 28 March 2011
b relates to the dividend declared by the Board on 26 February 2010 and paid
on 29 March 2010
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Six months ended Six months ended
30 June 2011 30 June 2010
Reviewed Reviewed
R`000 R`000
Profit before taxation 144 981 263 629
Interest paid 22 209 18 268
Interest received (6 089) (5 541)
Depreciation 44 906 46 023
Adjusted for non-cash items 3 721 (1 411)
Adjusted for working capital 28 851 (236 655)
changes
Cash flows from operations 238 579 84 313
Interest paid (14 103) (16 406)d
Interest received 2 856c 5 541
Net cash from operating activities 227 332 73 448
Net cash utilised in investing (125 870) (112 057)
activities
Acquisition of property, plant and (63 100) (36 817)
equipment - expansionary
Acquisition of property, plant and (62 770) (75 240)
equipment - sustaining
Net cash used in financing (54 287) (102 930)
activities
Dividends paid (49 533) (49 187)
Secondary tax on companies paid (4 510) (4 045)
Proceeds from issue of shares - 812
Decrease in non-current borrowings (244) (50 510)
Net increase/(decrease) in cash and 47 175 (141 539)
cash equivalents
Cash and cash equivalents at the 320 724 462 632
beginning of the year
Effect of exchange rate (1 781) 2 002
fluctuations on cash held
Cash and cash equivalents at the 366 118 323 095
end of the period
c excludes R3,2 million income relating to the fair value adjustment on the
interest rate swap
d excludes R1,9 million expense relating to the fair value adjustment on the
interest rate swap
COMMENTARY
Basis of preparation
In compliance with the JSE Limited Listings Requirements, Merafe prepared its
interim financial report for the six months ended 30 June 2011 in accordance
with International Financial Reporting Standards ("IFRS"), which include IAS
34 Interim Financial Reporting, and the AC 500 standards issued by the
Accounting Practices Board or its successor. The accounting policies adopted
are in line with IFRS and are consistent with those applied in the annual
financial statements for the year ended 31 December 2010.
Review of results
The condensed group financial results of Merafe and its subsidiaries for the
six months ended 30 June 2011 have been reviewed by the Company`s auditor,
KPMG Inc. In their review report dated 2 August 2011, 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, and have expressed an unmodified conclusion on the
condensed group interim financial statements.
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 20,5%
of the earnings before interest, taxation, depreciation and amortisation
(EBITDA) from the Venture.
Merafe`s earnings from the Venture decreased from the six months comparative
period primarily as a result of the strengthening of the Rand against the US
Dollar and an increase in costs of goods sold. The average Rand Dollar
exchange rate was R6,90 in the first half of 2011 compared to R7,53 for the
2010 comparative period.
The average European benchmark ferrochrome price increased from 118,5USc/lb to
130USc/lb period on period and Merafe`s share of sales tonnes decreased from
148 400 tonnes in the first half of 2010 to 146 100 tonnes in the first half
of 2011. Merafe`s revenue for the first half of 2011 includes chrome ore sales
whereas these were recognised in operating expenses in the prior period.
Merafe`s share of EBITDA from the Venture for the six months ended 30 June
2011 was R263,2 million. The EBITDA includes Merafe`s attributable share of
standing charges of R44,2 million and a foreign exchange gain of R11,9
million. After accounting for corporate costs of R53,5 million and share-based
payment expenses of R3,7 million, Merafe`s EBITDA was R206 million. Corporate
costs of R53,5 million increased period on period primarily as a result of
transaction costs as well as R29,7 million of expenses associated with
indirect tax liabilities, relating to Voluntary Disclosure Submissions to the
South African Revenue Services that the Company is in the process of
finalising.
The profit and total comprehensive income for the period is R86 million after
taking into account depreciation of R44,9 million, net financing costs of
R16,1 million, current tax expense of R17 million, deferred tax expense of
R37,5 million and secondary tax on companies of R4,5 million. The current tax
expense arose primarily as a result of the full utilisation of capital
expenditure in the eastern taxation ring-fence. The effective rate of taxation
has increased from 28% in the first half of 2010 to 41% in the first half of
2011 as a result of the permanent differences associated with the indirect tax
liabilities recognised in the current period. The balance of unredeemed
capital expenditure is estimated to be R161 million at 30 June 2011. Net
financing costs increased period on period as a result of interest of R8,1
million relating to the indirect tax liabilities recognised in the current
period.
Property, plant and equipment increased from the prior period as a result of
R126 million of capital expenditure of which R63 million is expansionary and
R63 million is sustaining. Expansionary capital expenditure comprises R45
million spent on Project Tswelopele and R18 million relating to the
expansionary development of the Venture`s eastern and western mines. The
expansionary and sustaining capital expenditure was financed using internally
generated cash flows.
Merafe started the period with a cash balance of R321 million, generated R225
million in cash flows, paid a dividend and secondary tax on companies of R54
million and invested R126 million in expansionary and sustaining capex,
closing with a healthy cash balance of R366 million. Cash in Merafe is R146
million and Merafe`s share of cash in the Venture is R220 million. Merafe has
long-term debt of R300 million due to be repaid in one instalment on 31
December 2012.
Review of operations
Ferrochrome production in the first half of 2011 was 150 000 tonnes, 4% lower
than the comparative period, due to a number of furnace refurbishments that
were brought forward to the first half of 2011. The refurbishment activities
largely focused on the more efficient Premus furnaces, resulting in lower
efficiencies and increased production costs.
Production costs increased by 16% in Rand terms period on period. Chrome ore
costs have risen as a result of higher UG2 prices and increased mining costs.
Eskom, the South African power utility, increased energy prices by 27% in
2011. Ongoing electrical energy efficiency improvements and prioritising of
maintenance during the high-tariff winter months will offset some of this
impact on costs. During the past decade, energy efficiency improvement
initiatives at the Venture`s ferrochrome operations and the development of the
Venture`s proprietary Premus technology have reduced electricity consumption
per tonne of ferrochrome produced by more than 25%. Further improvements will
result from the commissioning of Lion II and the Tswelopele pelletising and
sintering plant from 2013 onwards.
Ongoing initiatives to optimise reductant mixes to reduce the impact of highly
priced metallurgical coke have contributed to a slight reduction in average
reductant prices, compared to the comparative period.
Safety, health, environment and mineral resources
We are saddened to report that the Venture did not achieve its goal of zero
harm as a result of two unfortunate fatal injuries sustained at the Wonderkop
and Lydenburg operations during the period. Our condolences are extended to
the families of the deceased.
The ongoing efforts by the Venture to strive for zero harm is evident by an
improvement of 13% on its total reportable injury frequency rate (TRIFR)
during the first six months of 2011 when compared to the 2010 year.
During the period, there were no cases of occupational diseases resulting from
current working conditions in the Venture. There were no adverse environmental
impacts on the Venture during the period. There have been no material changes
to mineral resources and mineral reserves for the period.
Market review
Global consumption of ferrochrome reached 4,7 million* tonnes in the first
half of 2011, due to record stainless steel production of 17,4 million tonnes,
which was 4,2% higher than the comparative period. Growth in global demand for
both stainless steel and ferrochrome was driven by strong end user demand and
restocking by stainless steel distribution centres and the stainless steel
processing industries. China produced more than a third of the world`s
stainless steel in the first half of the year, an increase of 12% compared to
the comparative period.
While stainless steel production grew in the first half of 2011, towards the
end of the period renewed concerns over European sovereign debt, tightening of
credit in China, a major earthquake in Japan and civil unrest in North Africa
and the Middle East impacted confidence in global financial and commodity
markets.
The third quarter European benchmark ferrochrome price was settled at
120USc/lb in early July 2011, down from 135USc/lb in the second quarter,
reflecting reduced stainless steel demand, particularly in Europe and China.
Global ferrochrome production was 4,7 million* tonnes in the first half of
2011, 4,4% higher than the comparative period. Despite rising chrome ore
prices, Chinese ferrochrome production continued to expand, reaching 1,2
million* tonnes in the first half of the year. However, China remains a net
ferrochrome importer, with approximately 47% of its 4,5 million tonnes per
annum requirement sourced overseas.
* estimate / Heinz Pariser, July 2011
Developments
In 2010, the Venture concluded an agreement with Lonmin to increase and extend
the current UG2 off-take agreement from tailings at Lonmin`s Marikana
operations, providing a lower cost source of chrome ore to the smelters. Two
chromite recovery plant modules were erected at Rowland and a third module was
constructed at the Karee 4 processing plant at a total capital cost of R216
million. Merafe`s portion, at cost, was R44 million. The recovery plants were
successfully commissioned during the first half of 2011 within budget and on
schedule.
On-site construction of Project Tswelopele pelletising and sintering plant
commenced during April 2011 and is on track to be completed during the second
half of 2012, with full production anticipated in 2013. The project is within
the total budgeted cost of R917 million (Merafe`s portion at cost is R188
million) and progress is according to plan. The plant will agglomerate some of
the additional UG2 from the Lonmin operations for effective usage in the
Rustenburg smelter and will significantly improve operational efficiencies and
costs and will enable further environmental improvements.
The Merafe Board of Directors approved, subject to the conclusion of the
relevant legal agreements, the participation by Merafe in the Lion II
expansion, in accordance with its 20,5% participation interest. The expansion
will involve the construction and commissioning of a 360,000 tonne per annum
capacity smelter and the development of the Magareng mine at a budgeted
capital cost of R4,9 billion. Merafe`s portion, at cost, is R1 billion.
Commissioning is planned for the first half of 2013. The completion date of
the Magareng mine has been moved forward. Full underground capacity will be
reached by end of the first quarter of 2013 with the processing plant in full
operation during the first quarter of 2013.
Waterval East mine started up underground operations during May 2011. The
build-up is slightly slower than anticipated due to a shortage of trained
labour in key positions as well as the impact of geological inconsistencies.
The Development at the Horizon mine is progressing according to plan and is on
schedule to reach production capacity of 40 000 tonnes per month by the end of
2013.
Outlook
During 2011, stainless steel production is anticipated to grow by 6%, equating
to an increase of 5% in the world consumption of ferrochrome, including a 14%
increase in demand for ferrochrome from China. Stainless steel production is
expected to continue to grow at around 5% per annum in the medium term, driven
predominantly by demand from China.
We expect the destocking of ferrochrome by stainless steel producers to be
completed during the third quarter of 2011. This is matched by South African
ferrochrome producers` cut back of production during the winter months. We
expect seasonal demand improvement, stainless steel restocking by distribution
centres and ferrochrome restocking by stainless steel producers resulting in
improved trading conditions during the fourth quarter of 2011 and into 2012.
Changes to the Board of Directors during the period
Ms Mpho Mosweu, the Industrial Development Corporation`s representative,
joined the Board as a Non-executive Director with effect from 2 March 2011.
Mr Zed Van Der Walt joined the Board as an Independent Non-executive Director
with effect from 1 July 2011.
On behalf of the Board
Chris Molefe Stuart Elliot
Non-executive Chairman Chief Executive Officer
Sandton
2 August 2011
Preparer:
Kajal Bissessor CA(SA)
Financial Manager
Supervisor:
Zanele Matlala CA(SA)
Chief Financial Officer
Executive Directors:
S Elliot (Chief Executive Officer), Z Matlala, B McBride
Non-executive Directors:
CK Molefe (Chairman)*, NB Majova*, M Mamathuba
A Mngomezulu*K Nondumo*, M Salanje*, S Phiri
M Mosweu, Z vd Walt* * Independent
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
www.meraferesources.co.za
Sandton
2 August 2011
Sponsor
Deutsche Securities (SA) (Proprietary) Limited
Date: 02/08/2011 08:00:01 Produced by the JSE SENS Department.
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