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MRF
MRF
Merafe - Reviewed results for the twelve months ended 31 December 2005
Merafe Resources Limited
(Incorporated in the Republic of South Africa)
(Registration number 1987/003452/06)
("Merafe" or "the Company")
Share Code: MRF & ISIN: ZAE000060000
REVIEWED RESULTS FOR THE TWELVE MONTHS ENDED 31 DECEMBER 2005
GROUP ABRIDGED INCOME STATEMENT
12 months to 9 months to
31 December 31 December
2005 2004
Reviewed Audited
R"000 R"000
Revenue 614,562 502,369
EBITDA 110,162 59,540
Depreciation (6,987) (231)
Net financing costs (29,652) (38,585)
Profit before taxation 73,523 20,724
Dividends on preference shares (28,281) -
STC (3,535) -
Net profit after tax 41,707 20,724
Earnings per share (cents) 3.05 1.67
Headline earnings per share (cents) 3.05 1.67
Ordinary shares in issue
2,247,157,460 1,237,917,518
Weighted average shares for period
1,365,438,168 1,236,676,723
GROUP ABRIDGED BALANCE SHEET
12 months to 9 months to
31 December 31 December
2005 2004
Reviewed Audited
R"000 R"000
ASSETS
NON-CURRENT ASSETS 1,330,840 740,826
Options, mineral and participation 258 258
rights
Property, plant and equipment 1,330,236 740,222
Investments 346 346
CURRENT ASSETS 629,500 486,790
Available-for-sale-bonds - 6,062
Financial asset - 1,752
Inventories 324,309 237,270
Trade and other receivables 218,449 189,486
Bank and cash 86,742 52,220
TOTAL ASSETS 2,023,340 1,227,616
EQUITY AND LIABILITIES
CAPITAL AND RESERVES 904,867 319,029
Share capital 22,474 12,379
Share premium 1,091,743 557,035
Equity-settled share-based payment 2,510 1,545
Fair value reserve - 1,637
Accumulated loss (211,860) (253,567)
NON-CURRENT LIABILITIES
Long-term borrowings 2,357 395,990
Long-term borrowings - Preference 322,476 -
shares
CURRENT LIABILITIES 793,640 512,597
Trade and other payables 354,699 412,078
Provisions 33,595 21,817
Current portion of long-term 231,177 54,669
borrowings
Bank overdraft 174,169 24,033
TOTAL EQUITY AND LIABILITIES 2,023,340 1,227,616
STATEMENT OF CHANGES IN EQUITY
12 months to 9 months to
31 December 31 December
2005 2004
Reviewed Audited
R"000 R"000
Share capital - Ordinary shares 22,474 12,379
Balance at beginning of period 12,379 11,957
New shares issued during period 10,095 422
Share premium - Ordinary shares 1,091,743 557,035
Balance at beginning of period 557,035 527,217
Premium on new shares issued during 534,708 29,818
the period
Equity-settled share-based payment 2,510 1,545
Balance at beginning of period 1,545 849
Share-based payment 965 696
Accumulated loss (211,860) (253,567)
Balance at beginning of period (253,567) (264,894)
Prior-year adjustment - (9,397)
Net profit for the period 41,707 20,724
Fair value reserve - 1,637
BALANCE AT END OF PERIOD 904,867 319,029
GROUP ABRIDGED CASH FLOW STATEMENT
12 months to 9 months to
31 December 31 December
2005 2004
Reviewed Audited
R"000 R"000
Cash generated by operations 146,160 38,208
Interest cost (32,666) (42,218)
Interest received 3,014 3,634
Cash flows from operating activities 175,812 (376)
Cash flows from investing activities (597,098) (21,414)
Cash flows from financing activities (657,296) 58,921
Net (decrease)/ increase in cash
and cash equivalents (115,614) 37,131
Cash and cash equivalents at beginning 28,187 (8,944)
of period
Cash and cash equivalents at end of (87,427) 28,187
period
COMMENTARY
Basis of preparation
In compliance with the Listings Requirements of the JSE Limited, ("the JSE")
Merafe has prepared its consolidated financial statements in accordance with
International Financial Reporting Standards ("IFRS") for the twelve months ended
31 December 2005. The accounting policies adopted are consistent with those
applied in the annual financial statements for the period ended 31 December
2004, except for the changes noted under the heading "First-time adoption of
IFRS".
The major effect on Merafe"s financial statements of adopting IFRS, relates to
the changes to the accounting policy for property, plant and equipment and share
based payments.
The effects of the first-time adoption of IFRS are detailed below under the
heading "First-time adoption of IFRS".
Review of results
The reviewed results of the Company, as set out above, have been reviewed by the
Company"s auditors, KPMG Inc, as required by the JSE. Their review report is
available for inspection at the Company"s registered address.
Merafe"s current source of income is generated from its chrome venture with
Xstrata SA (Proprietary) Limited ("the Xstrata-Merafe Chrome Venture"), which
became effective on 1 July 2004 and reinforced the merged entity then as the
market leader with a total managed capacity of 1.38 million tonnes of
ferrochrome per annum. Merafe shared in 11% of the earnings before interest,
tax, depreciation and amortisation ("EBITDA") from the Xstrata-Merafe Chrome
Venture until 30 June 2005. Merafe"s share of the EBITDA from the Xstrata-Merafe
Chrome Venture increased to 14% from 1 July 2005. Following the Wonderkop
acquisition, as described below, Merafe"s share of the EBITDA increased by a
further 3% to 17% and the managed capacity to 1.56 million tonnes from 16
November 2005. The 17% share of EBITDA will increase to 20.5% from 1 July 2006.
With Project Lion being commissioned in the third quarter of 2006, the total
managed capacity of the Xstrata-Merafe Chrome Venture will increase to 1.92
million tonnes.
The following table provides an analysis of the EBITDA of Merafe for the two 6
month comparative periods.
6 months to 6 months to 12 months to
30-6-2005 31-12-2005 31-12-2005
R"000 R"000 R"000
Revenue 296,068 318,494 614,562
EBITDA - Chrome Venture 76,304 62,560 138,864
Transaction costs * (2,000) (10,275) (12,275)
Corporate costs (7,000) (9,427) (16,427)
EBITDA - Merafe 67,304 42,858 110,162
Attributable saleable 64,861 77,156 142,017
production (kt)
* - transaction costs and advisory fees relating to the acquisition of the
Wonderkop JV and the Capital Raising referred to below.
Whilst net profit after tax increased by R21 million year on year, the second
half results were disappointing after the positive first six months. This was as
a result of a 13% decline in the ferrochrome price and the Rand strengthening by
8% against the US$ over this six-month period as well as standing charges from
the temporary closure of furnaces.
During the last twelve months, R65 million of the redeemable preference shares
were redeemed, reducing the balance at year-end to R322 million.
Review of operations
Operating conditions benefited during the year from improved performance at the
Rustenburg pelletising plant, the increased availability of Outokumpu pellets
from the Boshoek plant and reduced overall raw material requirements through
better efficiencies from higher pellet availabilities. Following routine
maintenance work, the two furnaces at the Wonderkop JV have remained suspended
in light of prevailing market conditions and to improve the distribution of
agglomerated ores across the chrome operations. In addition, a further five
furnaces are being temporarily suspended, comprising two furnaces at Wonderkop,
two furnaces at Rustenburg and one furnace at Boshoek, and will be returned to
production according to market conditions.
In June 2005, further suspensions were announced at seven of the Xstrata-Merafe
Chrome Venture furnaces to perform planned maintenance during the winter months
when energy costs are elevated. All seven furnaces were brought back into
operation during the third quarter. The standing charges attributable to Merafe
due to the temporary closure of these furnaces were R10.5 million.
Modifications were made in 2005 to the Boshoek furnaces as part of the
refurbishment undertaken during the winter shutdown. Using the combined
expertise within Xstrata and Merafe, the modifications produced excellent
results: the two Boshoek furnaces are currently operating with great stability,
production volumes have increased and operating costs have been significantly
reduced.
Operating costs were well contained in 2005 despite lower production volumes.
Unit costs fell by R48 per tonne in real terms (excluding standing charges)
compared to 2004, due to lower coke prices, mechanical improvements at the
Boshoek furnaces and improved furnace efficiencies resulting from higher pellet
availabilities.
Mining operations improved during 2005. Higher underground production volumes
from the Kroondal mine, especially after the acquisition of the Marikana
reserves announced in July 2005, enabled the lower quality opencast operations
at Kroondal and Boshoek to be scaled down by 200,000 tonnes of run-of-mine
production.
The Horizon mine was refurbished during 2005 with the objective of improving
yields and production costs and was recommissioned in December 2005. The
Thorncliffe mine in the East remained the best performing and lowest cost chrome
ore mine in the group in 2005. The Thorncliffe mining complex is being expanded
with the development of the Helena mine to supply ore to the new Lion
ferrochrome smelter.
Market review
The first half of 2005 was characterised by strong growth in stainless steel
melt, which accounts for approximately 80% of global ferrochrome consumption,
and in ferrochrome demand. As a result, ferrochrome prices rose to 78Cents (USD)
per pound in Q2 2005. In the second half, stainless steel stocks began to build,
particularly in China, as high nickel prices impacted demand for stainless
steel, leading to a slow-down in stainless steel melt production. While
globally, stainless steel melt production in 2005 continued at a similar level
to the previous year in Europe, stainless steel melt declined by an estimated
4.8% to 8.3 million tonnes in 2005. Production of stainless steel melt also fell
in the United States by 7%, in Taiwan, down by 4%, and in Japan, where
production declined by 2.5% year-on-year. China was the exception, experiencing
significant growth of 33% to around 3.7 million tonnes.
Demand for ferrochrome continued to grow year-on-year, albeit at a slower rate
than in the first half of the year, by around 3.6%, bringing global demand to
5.7 million tonnes, up from 5.5 million tonnes in 2004, primarily due to
increased production of ferritic grade stainless steel.
As the correction in stainless steel melt production translated into lower
ferrochrome demand in the second half of 2005, ferrochrome prices came under
pressure, with the base price reducing by 5Cents (USD) in each quarter to end
the year at 68Cents (USD) per pound.
Relatively weak stainless steel melt production continued into the first quarter
of 2006 resulting in further downward pressure on prices; in the first quarter
the base price reduced by a further 5Cents (USD) to 63Cents (USD) per pound
which will place South African ferrochrome producers under pressure. However, a
recovery in the second half of 2006 is expected as both stainless steel melt
production and ferrochrome demand gain momentum, with China again anticipated to
drive this growth.
Wonderkop acquisition
With effect from 16 November 2005, Merafe acquired a 50% participation interest
in the Wonderkop Joint Venture, a 50% interest in the Kroondal resources and a
26% interest in the Marikana resources from Samancor Holdings (Proprietary)
Limited for a purchase consideration of R331.7 million.
These assets now form part of the Xstrata-Merafe Chrome Venture which resulted
in Merafe increasing its share of EBITDA by 3% to 17% from 16 November 2005.
Project Lion
The first stage of Project Lion, a 360,000 tonnes per annum smelting complex in
the Mpumalanga province, is currently under construction following ground
clearing which commenced during December 2004. The project utilises Xstrata
Alloys" proprietary Premus technology, which will deliver significant production
cost savings compared to alternative ferrochrome production technologies.
Project Lion was awarded a substantial grant by the South African Department of
Trade and Industry in 2005 in recognition of the project"s contribution to the
sustainable development of the surrounding area. This is a result of the
project"s beneficial impact on local communities in the form of direct and
indirect employment, training schemes, and specific social development
programmes initiated, as well as the associated improved infrastructure that
will benefit local communities and surrounding industries.
The project has encountered some external difficulties, in particular the
quality of the kiln riding rings and roller support castings and difficult
ground conditions. Despite these challenges, the project is on track to
commission on time and within budget during the third quarter of 2006. The
Helena mine development also remains within the project timing schedule and
budget, with chrome ore already being brought to surface.
Capital raising
In November 2005, Merafe successfully raised R554 million in equity and R300
million in debt funding to fund the Wonderkop acquisition as well as to fund
Merafe"s 20.5% participation in Project Lion.
Dividend
No ordinary dividend has been declared by the directors of Merafe for the twelve
months ended 31 December 2005.
First time adoption of IFRS
The date of transition to IFRS for Merafe is 1 April 2004 and therefore as
required by IFRS 1, Merafe"s opening balance sheet at 1 April 2004 has been
restated to reflect all existing IFRS statements expected to be applicable at 31
December 2005. Merafe has adopted the following transitional arrangements:
Share-based payments
Merafe has applied the provisions of IFRS 2, share-based payments, except for
share options granted before 7 November 2002, or to share options granted after
this date but which had vested prior to 1 January 2005.
Previously, share options granted to employees did not result in any expense to
Merafe, other than a dilution in earnings per share when the shares were issued.
In accordance with the requirements of IFRS 2, Merafe has recognised an expense
in the income statement, with a corresponding credit to equity. The fair value
at the date of granting the options is charged to income over the relevant
option vesting periods, adjusting to reflect actual and expected levels of
vesting.
Property, plant and equipment
Merafe has applied the provisions of IAS 16 - Property, Plant and Equipment,
which requires that the Company provide an annual review and assessment of the
useful life of its assets, depreciation method and residual values at the end of
each financial year and adjusts depreciation charges accordingly. Thus the
depreciable amount of property, plant and equipment is its cost less its
residual value. Where items of property, plant and equipment comprise individual
components for which different depreciation methods are appropriate, each
component is accounted for separately.
Previously, individual components were not always separately identified and no
residual value was used in determining the depreciable amount of the component.
The effect of the above adjustments on accumulated loss on an annual basis is as
follows:
Rand
Accumulated loss - 31 March 2004 - "SA GAAP" (316,740,082)
IFRS adjustments:
- Share-based payments (848,577)
- Property, plant & equipment 43,298,239
Accumulated loss - 31 March 2004 - "IFRS" (274,290,420)
Net profit after tax - 31 Dec 2004 - "SA GAAP" 5,547,730
IFRS adjustments:
- Share-based payments (696,036)
- Property, plant & equipment 15,871,826
Accumulated loss - 31 Dec 2004 -"IFRS" (253,566,900)
The effect of the above adjustments on net profit after tax is as follows:
Nine months to
31 Dec 2004
Rand
Net profit after tax -"SA GAAP" 5,547,730
IFRS adjustments:
- Share-based payments (696,036)
- Property, plant & equipment 15,871,826
Net profit after tax -"IFRS" 20,723,520
Future prospects
The 19% decline in the ferrochrome base price from 78Cents (USD) per pound in
Quarter 2, 2005, to 63Cents (USD) per pound in Quarter 1, 2006, coupled with the
Rand strengthening by 12% against the US$ during the same period, will place
severe downward pressure on the EBITDA from the Xstrata-Merafe Chrome Venture in
the first half of 2006. After accounting for corporate costs, interest,
preference share dividends and depreciation and assuming current Rand:US$
exchange rates, the Company is expected to make a loss for the 6 months to 30
June 2006. However, a recovery in the second half is expected as both stainless
steel melt production and ferrochrome demand gain momentum, with China again
anticipated to drive this growth.
Having consolidated and grown the Company"s ferrochrome business during the year
under review, the board intends giving effect to the Company"s previously
announced diversification strategy in the year ahead.
Changes to board
As announced on SENS during the year in review, Mr Andre Bekker, Mr Renier
Meyjes and Dr Todor Vlajcic resigned from the board and Ms Zanele Matlala, Ms
Lebogang Mogotsi and Mr Guy Clarke were appointed to the board.
Interim results
The results for the six months ending 30 June 2006 will be published on SENS at
around 07h30 on 2 August 2006 and in the press on 3 August 2006.
Chris Molefe Steve Phiri
Non-Executive Chairman Chief Executive Officer
Johannesburg
2 March 2006
Sponsor
ABSA
Corporate & Merchant Bank
Corporate Finance
A division of ABSA Bank Limited
Reg No 1986/004794/06
Date: 02/03/2006 10:00:13 AM Produced by the JSE SENS Department
