| Tue 6 Mar 2007, 7:30 | | MRF - Merafe - Reviewed results for the 12 months |
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MRF
MRF
MRF - Merafe - Reviewed results for the 12 months ended 31 December 2006
Merafe Resources Limited
(Incorporated in the Republic of South Africa)
Registration number: 1987/003452/06
Share code: MRF ISIN: ZAE000060000
("Merafe" or "the company")
Reviewed results for the 12 months ended 31 December 2006
- Group highlights
- Revenue up 68%
- EBITDA up 62%
- Profit for the period up 290%
- Earnings per share up 133%
- Net asset value up 24%
Group Abridged Income Statement
Year ended 31 Year ended 31
December 2006 December 2005
Reviewed Audited
R`000 R`000
Revenue
EBITDA
Depreciation (6,987)
Net financing costs (29,652)
Profit before taxation 144,119 73,523
Dividends on (29,967) (28,281)
preference shares
Taxation
Net profit after tax 41,707
Earnings per share 7 3
(cents)
Headline earnings per 7 3
share (cents)
Ordinary shares in 2,341,569,564 2,247,157,460
issue
2,296,747,099 1,365,438,168
Group Abridged Balance Sheet
As at 31 December As at 31
2006 December 2005
Reviewed Audited
R`000 R`000
Assets
Non-current assets 1,515,884 1,330,840
Options for mineral 258 258
rights
Property, plant and 1,465,481 1,330,236
equipment
Deferred tax 49,799 -
Investments 346 346
Current assets 612,540 692,500
Inventories 319,356 324,309
Trade and other 273,708 281,449
receivables
Bank and cash 19,476 86,742
Total assets 2,128,424 2,023,340
Equity and liabilities
Capital and reserves 1,117,948 904,868
Issued share capital 23,415 22,475
Share premium 1,142,888 1,091,743
Equity-settled share- 3,300 2,510
based payment
Accumulated loss (51,655) (211,860)
Non-current 424,753 232,425
liabilities
Non-current borrowings 413,799 224,833
Provision for close 10,954 7,592
down and restoration
costs
Current liabilities 585,723 886,047
Trade and other 302,501 585,828
payables
Other provisions 22,708 26,003
Current portion of non 153,371 100,047
-current borrowings
Bank overdraft 107,143 174,169
Total equity and 2,128,424 2,023,340
liabilities
Statement of changes in equity
Year ended 31 Year ended 31
December 2006 December 2005
Reviewed Audited
R`000 R`000
Issued share capital - 23,415 22,475
ordinary shares
Balance at the 22,474 12,379
beginning of the year
New shares issued 941 10,096
during the year
Share premium - 1,142,888 1,091,743
ordinary shares
Balance at the 1,091,743 557,035
beginning of the year
Premium on new shares 51,145 534,708
issued during the year
Equity-settled share- 3,300 2,510
based payment
Balance at the 2,510 1,545
beginning of the year
Share-based payment 790 965
Accumulated loss (51,655) (211,860)
Balance at the (211,860) (253,567)
beginning of the year
Net profit for the 160,205 41,707
year
Fair value reserve - -
Balance at the - 1,637
beginning of the year
Movements recognised - 322
directly in equity
Fair value gain on
available-for-sale
financial instrument - (1,959)
matured
Balance at end of year 1,117,948 904,868
Group Abridged Cash Flow Statement
Year ended Year ended
31 December 2006 31 December 2005
Reviewed Audited
R`000 R`000
Cash flows from (88,454) 113,535
operating activities
Interest paid (39,914) (60,948)
Interest received 726 3,015
Taxation paid (3,745) (3,535)
Cash flows from (131,387) 52,067
operating activities
Cash flows from (166,590) (590,920)
investing activities
Cash flows from 297,737 423,239
financing activities
Net decrease in cash (240) (115,614)
and cash equivalents
Cash and cash (87,427) 28,187
equivalents at the
beginning of the year
Cash and cash (87,667) (87,427)
equivalents at the end
of the year
Basis of preparation
In compliance with the JSE Limited (JSE) Listings Requirements, Merafe has
prepared its consolidated annual financial statements in accordance with
International Financial Reporting Standards (IFRS) for the year ended 31
December 2006. The accounting policies adopted are consistent with those applied
in the annual financial statements for the year ended 31 December 2005.
Review of results
The results of the Company have been reviewed by the Company`s auditors, KPMG
Inc, as required by the JSE. 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 per annum.
Merafe shared in 17% of the earnings before interest, taxation, depreciation and
amortisation (EBITDA) from the Venture for the six months to 30 June 2006.
Merafe`s share of the EBITDA increased to 20.5% for the six months to 31
December 2006.
During the first half of the year, a net loss of R27,8 million was incurred
(loss per share of 1 cent), mainly due to weak ferrochrome prices and a strong
rand. The second half of the year showed an increase in the ferrochrome price
and a weaker rand and operations that had been shut down were restarted,
resulting in increased production. The net profit after tax during the second
half of the year was R188 million (earnings per share of 8 cents) after taking
into account the recognition of a deferred tax asset of R49,7 million.
In compliance with IAS 12, the Company has raised a deferred tax asset for
deductible temporary differences as it is probable that sufficient future
taxable income will be generated against which these temporary differences can
be utilised. Merafe`s attributable saleable production of ferrochrome from the
Venture was 239,742 tonnes and the EBITDA includes corporate costs of R22
million.
During the last twelve months, R100 million of the redeemable preference shares
were redeemed, reducing the balance at year-end to R225 million. The Company
borrowed an additional R300 million in order to finance the Lion Ferrochrome
project.
Review of operations
The first quarter of 2006 was characterised by weaker market and pricing
conditions. This presented an opportunity for the suspension of production at a
total of seven furnaces for varying periods of time for major maintenance and
refurbishing. Routine maintenance stoppages also occurred at a number of other
furnaces during the winter months. Four furnaces remained closed at the end of
2006, two of which have been returned to production in the first quarter of
2007. The lower production volumes during 2006 reduced the demand for raw
materials that allowed for improved availability of quality raw material
supplies, resulting in improved metallurgical efficiencies in the furnaces,
particularly in the Western operations.
Operating costs were well contained in 2006 despite the cost pressures and
standing charges associated with idle capacity together with the impact of the
ongoing mining sector inflation. Efficiencies were achieved through more stable
reductant prices, improved metallurgical performance and sound energy
management.
The full commissioning of the Lion Ferrochrome plant in 2007 is expected to have
a significant positive impact on average unit operating costs, primarily due to
increased energy efficiency from the Venture`s Premus technology.
All the above took place whilst achieving an excellent safety performance
meeting all targets and zero fatalities.
The Venture has also been active in its submission to the Department of Minerals
and Energy for New Order Prospecting and Mining rights, and for the conversion
of Old Order Mining and Prospecting Rights under the Minerals & Petroleum
Resources Development Act, 2002. Good progress is being made and the Venture
expects the process to be successfully completed during 2007.
Market review
The stainless steel market, which accounts for over 80% of global ferrochrome
demand, displayed robust growth in 2006. Global demand for stainless steel is
estimated at approximately 28 million tonnes, some 14% higher than the previous
year. The stainless steel market experienced particularly strong growth from the
second quarter, with most major European, American, Asian and Chinese stainless
mills operating at full capacity. China is by some margin the largest stainless
steel producing country, with stainless melt production of approximately 5.6
million tonnes in 2006 and also remains the most important driver of global
demand growth.
In response to strong growth in demand for stainless steel, demand for
ferrochrome increased by an estimated 10% in 2006, bringing global demand to 6.3
million tonnes. This demand for ferrochrome has, however, been slightly
negatively affected by the increase in consumption of austenitic stainless scrap
(replacing primary chrome units in the market), a trend characteristic of the
high nickel pricing environment.
Higher nickel prices have also prompted an increase in ferritic stainless steel
production, as this stainless does not contain nickel. Most of the chrome units
in ferritic production are sourced from virgin ferrochrome, which to a degree
offsets the weakened demand resulting from increased austenitic scrap usage.
While China has emerged as a significant producer of ferrochrome, it is expected
that environmental pressure, limited availability of electricity and reliance on
expensive imported ore will restrict further expansions in Chinese ferrochrome
production, resulting in increased ferrochrome imports into China. The Chinese
government recently halved the import duty on ferrochrome to 1%.
With effect from 1 April 2007, the Indian government plans to impose a $44 per
tonne export duty on chrome ore thereby providing a strong disincentive for
exports and further increasing the price of ferrochrome production in China.
South Africa`s Department of Minerals and Energy also plans to gazette new
legislation restricting chrome ore exports.
Ferrochrome base prices were under pressure in the first quarter of 2006 with
the base price reducing to 63USc/lb. The strong recovery in demand seen from the
second quarter of 2006 resulted in price increases to 70USc/lb in the second
quarter and 75USc/lb for the three subsequent quarters to the first quarter of
2007. Even though there will be additional ferrochrome units in the market in
2007 (including units from Xstrata-Merafe Lion Ferrochrome), analysts are
pointing to rising rather than falling prices in 2007.
Lion Ferrochrome
The Lion Ferrochrome plant was commissioned on schedule and within budget in the
third quarter of 2006. The plant`s design criteria was met within the first
three months of operation, and full commissioning and ramp-up remains on track
for completion in the second quarter of 2007. The plant will then be operating
at 100% capacity to produce 360 000 tonnes per annum. Growth in global demand
for ferrochrome, coupled with the specific quality grades of the Premus
technology, will ensure that the product gets absorbed in the market,
particularly in China.
Dividend
No ordinary dividend has been declared by the directors of Merafe for the year
ended 31 December 2006.
Future prospects
Strong stainless melt production is expected to continue, with China anticipated
to further increase stainless production in 2007. The Venture will show
increased sales into China in 2007. As a result, the momentum gained during 2006
in ferrochrome demand is set to continue into at least the first half of 2007.
Longer term, stainless steel demand is forecast to grow at approximately 6% per
annum, which should result in similar
growth in global ferrochrome demand.
Merafe will for the first time account for the 20.5% of EBITDA from the Venture
for a full 12 months and the 20.5% of the Lion Ferrochrome production in 2007.
This, coupled with ferrochrome prices and the Rand/US dollar at their current
levels, means that Merafe should show meaningful profits in 2007. Cashflows
will continue to be used to reduce gearing levels and Merafe still has
unredeemed capex in excess of R1 billion.
Management continues with its efforts towards achieving its diversification
strategy. Opportunities have been and will continue to be assessed whilst taking
cognisance of the commodity cycles, returns to shareholders and the need to
reduce the Company`s gearing levels.
Chris Molefe Steve Phiri
Non-Executive Chairman Chief Executive Officer
Sandton
6 March 2007
Sponsor
ABSA Capital
A division of ABSA Bank Limited
Reg no 1986/004794/06
Date: 06/03/2007 07:30:00 Produced by the JSE SENS Department.
