Merafe Resources Limited (RZT.F) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Merafe Resources Limited's Annual Results Conference call. [Operator Instructions] Please note that this conference is being recorded. I'd now like to hand the conference over to Zanele Matlala. Please go ahead.

Good morning, and welcome to Merafe's Full Year Results Presentation. Ditabe and I will take you through the presentation but we also have, Japie Fullard, the CEO of Glencore Alloys, who will be available for questions at the end of the presentation. The operating and trading environment for the company was very challenging in 2019. The uncertainty created by trade wars had an impact on demand for stainless steel. And despite the muted growth in stainless steel production, chrome ore supply increased, resulting in oversupply. This pushed prices down, which had a negative impact on our financial results. If you go to Slide 5, where we present the performance for the year, at a glance. As reported in August 2019 during our interim results presentation, we had a fatality in February 2019. Our total recordable injury frequency rate improved by 24%. Ferrochrome production decreased by 9%. Cost of production increased by 12% year-on-year, and that's cost of production per tonne. As mentioned earlier, global uncertainty continued to dampen sentiment. Stainless steel showed a modest growth of 1.5%, chrome ore and ferrochrome supply exceeded demand, which led to depressed prices. On the finances, revenue was 4% lower, and for the first time since 2009, we recorded a headline loss of ZAR 0.018 per share. The board declared a final dividend. I will move to Slide 7, which is an analysis of the market. Slowing demand growth and the rising surplus of ferrochrome caused prices to slump in the second half of 2019. As a result of low prices and cost pressures, the South African ferrochrome producers cut their production, resulting in lower consumption of chrome ore. This, together with growing UG2 supply ultimately led to increased ore supply which pulled prices down. On the back of cheaper ore, Chinese ferrochrome production exceeded demand, pushing ferrochrome prices down. The impact of these dynamics can be seen in these charts, showing the declining trend in both chrome ore and ferrochrome prices. Average realized CIF prices for ferrochrome decreased by 14% and UG2 by 24% compared to 2018. On Slide 8 and 9, we do a better analysis of the market dynamics. Global stainless steel production increased by 1.5% to 51.9 million tonnes. China and Indonesia accounted for more than 58% of global production. The growth rate for China and Indonesia was 8%, whereas the rest of the world production declined by 7%. Global ferrochrome demand increased by 3%, with China accounting for more than 60% of this demand. On Slide 10, ferrochrome production responded to demand showing a growth rate of 3%. China produced 6 million tonnes of ferrochrome, whether entrenching its dominant position at 43% of global production. On the other hand, South African ferrochrome production decreased from 3.9 million tonnes to 3.6 million and only accounted for 26% of global production. This is a clear demonstration of how increasing power costs coupled with increasing exports of ore to China has displaced volumes from South Africa to China. Chrome ore imports into China grew by 11% to 15.9 million tonnes. This increase came mainly from South Africa, which increased its exports of chrome ore into China by 16%. The rest of the world imports into China declined by 3%. If we move to Slide 12, on safety. As I mentioned earlier, we sadly had a fatality at our Magareng mine on 14th February 2019. Our total recordable injury frequency rate improved by 24% to 2.56 in 2019. The safety of our operations remains a critical focus area. We continue to invest in education to build a sustainable safety culture. We have ongoing campaigns and education programs to make all our employees aware of what needs to be done with regards to safety. Also, in 2019, we subscribed to the CEO's-led Khumbul’ekhaya initiative, which is a program by -- driven by the Minerals Council, which is just another way to make safety awareness a big issue in our operations. On Slide 13, ferrochrome production decreased by 9% to 371,000 tonnes. And the key contributors to the decrease were power supply disruptions as a result of load curtailment. The issues created by load sharing from Eskom, I mean, are well documented, so I won't go into detail on that. The other issue that contributed to the decrease in production was community protests that led to production stoppages. And also, we took a decision to cut that production, especially in the second half in response to weaker demand in the market. If we move to Slide 14. Total production costs per tonne increased by 12%. The key contributors to the increase were: an increase in reductant prices as a result of inadequate supply of reductants locally. And therefore, we had to import some [ coke ] from various countries. There was also an increase in labor costs, effective July 2019, and there was increase in electricity costs, effective 1 April 2019, and that was at [ 13.87% ]. As mentioned earlier, the electricity increases that are above inflation, unsustainable and are contributing to the decline in South Africa's -- South African chrome production. At this point, I shall call upon Ditabe to take you through the numbers.

Thank you, Zanele, and good morning to all. As Zanele indicated, 2019 was not a good year. Total revenue decreased by 4% to ZAR 5.4 billion. Ore ferrochrome's sales volume -- volumes and prices were lower, resulting in an 8% decrease in ferrochrome revenue. Chrome ore revenue of ZAR 910 million was lifted by a 45% increase in ore sold and this was despite lower prices achieved. The weaker rand for the year helped to reduce the negative price impact. In terms of earnings, which is on the next slide, for the year, we reported a disappointing loss. This results in a basic loss of ZAR 0.542 at a headline loss per share of ZAR 0.118 after adjusting for impairment loss on our assets and profit on sale of property, plant and equipment. Although there were other factors and key contributors to the basic loss were low commodity prices. We will touch on these factors in the next slide. The next slide deals with a reconciliation of our EBITDA, the 2018 EBITDA from the Venture compared to what we achieved in 2019. EBITDA from the Venture was ZAR 392 million for the year, down 69% from the prior year. As evident from the chart, the main contributors to the decline were pricing as the biggest contributor, both ferrochrome and chrome ore. This is followed by inflation with chrome ore, Eskom and reductant -- and reductants being key factor that influence the rise, as Zanele indicated. Inventory impairment loss follows next as a result of NRV adjustments that has to be made in the current year. The NRV adjustments were necessary because of pricing -- pricing that was lower than the carrying value of the inventory. Then we're extending charges as the next contributor, which was as a result of production stoppages. On the positive side, contributors to EBITDA were higher chrome ore sales and volumes. We also had a net foreign exchange benefit of the weaker rand as well as a lower royalty tax. The next slide is a reconciliation of EBITDA to profit. And on that slide, we can see a -- that depreciation and impairment used up most of the EBITDA. Impairment was necessitated by pricing assumptions that led to a lower recoverable value relative to the carrying value of the assets. Net finance income is due to unwinding of a rehabilitation liability. This resulted in income in the current year due to lower inflation and a higher discount rate used in the year compared to what was used in the prior year. Deferred tax includes the tax effect of the adjustments that we -- that I just talked to, giving us the net result of a loss of ZAR 1.36 billion. The next slide, Slide 20 talks to the income statement and presents the earlier picture, where we showed the waterfall of the makeup of the EBITDA in the income statement format. I've already talked to most of the items on the slide, just to confirm our inflationary increases that I talked about earlier, led to production costs per tonne an increasing by 12% as reported earlier also by Zanele. Merafe head office costs were lower than the prior year, principally due to no short-term incentives paid in 2019. Moving on to the balance sheet on the next slide. Our inventory is net of the NRV adjustments of ZAR 133 million for the year. Closing inventory volumes of 131,000 tonnes were marginally higher than our opening inventory levels and represent 4 to 5 months of stock. Trade and other receivables decreased due to lower sales in quarter 4 as well as a stronger closing rand against the U.S. dollar. Cash increased mainly due to a lower dividend as well as released working capital. Noncurrent assets reduced due to impairment of property, plant and equipment. Moving on to cash reconciliation. Thereof, we opened 2019 with net cash of ZAR 281 million. Cash from operating activities added ZAR 761 million to this cash balance. And this movement included cash inflow from a reduction of working capital by ZAR 297 million. This arose mostly from a reduction of debtors due to lower sales in -- especially in November and December. Key items, that the cash was used for a sustaining CapEx of ZAR 531 million, as well as the 2018 final dividend of ZAR 150 million. We closed 2019 with a cash balance of ZAR 354 million. In terms of our debt facilities, which is the next slide, Merafe was [ unpaid ] at year-end. [ Over ] our cash reserves, Merafe had -- and continues to have -- has access to ZAR 1.1 billion of debt facilities, ZAR 300 million of the facility represents Merafe's revolving credit facility. And the rest of the facilities are those that -- as a Venture that Merafe has access to. This position is ideal for -- the uncertain and difficult times that the company and industry currently operate under. Zanele indicated that there is a final dividend plate and the Board has declared a dividend of ZAR 100 million, which represents ZAR 0.04 per share. Since we had no interim dividend, this ZAR 100 million is the full dividend for the year, which is lower than the 2018 dividend of ZAR 351 million. Although Merafe made a loss, the dividend declared remains in line with our dividend policy, since there was enough excess cash to distribute. At this point, I wish to set to -- hand back to Zanele for the outlook, and thank you for your attention.

Thanks, Ditabe. The global economic growth is expected to be impacted by the coronavirus. Although even before the coronavirus, it was predicted that the growth rate would slow down for 2020. On the stainless steel side, it's expected that stainless steel is to grow by 3%, but that was before the impact of the coronavirus. We expect that or from a South African point of view that there will be further cutbacks on ferrochrome production given the cost pressures and the lower prices. From a company perspective, there are no major expansionary projects planned and on the sustaining CapEx, we will closely manage that to maintain asset integrity and meet safety and environmental compliance. The business remains ungeared as Ditabe has indicated, with facilities of more than ZAR 1 billion, and the forecasts for 2020 will be on cash preservation, cost control, and efficient capital allocation. I shall end up here. Thank you. We will now take questions, first from the conference call, then from the webcast. Please identify yourself before asking the questions.

[Operator Instructions] The first question comes from Tim Clark of SBG Securities.

I've got 3 questions, please. The first 1 is just -- you're closing Rustenburg. What will that do, a, your CapEx number? The second question is, what will it do to your depreciation? I'm assuming that Rustenburg wasn't making money. So it shouldn't have an enormous impact, perhaps you'd like to comment on that? And then my last question is just have you done a full review of all of your smelting activities or all of your integrated operations? And is there anything else that is losing -- sort of an EBITDA negative or cash negative at this point in time that you're concerned about?

Thanks, Tim. Maybe on the issue of Rustenburg. I think the first thing on Rustenburg is that it's an asset that is 100% owned by Glencore, and therefore, would not have an impact on the depreciation at Merafe level.

And on CapEx?

And on CapEx, it could be a similar issue because the sustaining CapEx on Rustenburg does not have an impact on Merafe.

Okay.

Maybe then the question on the rest of the operations, I'll get Japie to comment on that.

Tim, just in terms of the Rustenburg complex. When we went into 2020, it wasn't anticipated a closure. And I just want to say again here, the Section 189 doesn't mean closure yet. It means contemplating closure. So obviously, we are looking at various alternatives prior to closure. So there's a lot of initiatives that we are installing into the Rustenburg complex, which is currently starting to work. We are not sure if it's going to be enough, though. So it's the reason why we are following the process. If we must close Rustenburg due to the market conditions that remains as is, then the capital impact will be about ZAR 200 million. Then just on the rest of operations, obviously, we also are seeing much lower market conditions as what we anticipated, since the beginning of the year, and again I would say, a couple of months ago. So we are, on a monthly basis, evaluating all our operations in terms of NPVs, in terms of the longer outlook. We do not want to take quick actions and then the market changes and then we [indiscernible] [ operations ] are shut.

Yes. I think...

That's all your questions, Tim. Is there any follow-up?

Yes, that's perfect. Sorry, what's the -- just a follow-up, what does that do to -- so you share production and so you share -- so don't share capital, you don't share depreciation, but you share production and I'm assuming Rustenburg wasn't really making money. So what should I take on my production number just from that number in the Glencore gardens? Is that the best way of looking at it? Because I don't know what else is in there?

Yes, look. So that total -- Rustenburg's total installed capacity Tim is 4,40,000 tonnes. So based on our guidance that for 2020 of about 70% of installed capacity to the extent that Rustenburg closes, I think you can shave off then 70% of that figure.

[Operator Instructions] We don't think we have any further questions from the lines at this stage. Can I hand over to the webcast for questions.

Okay, let's do that.

On the webcast, we seem to have a question from North Capital, asking about an update on the Section 189 process and possible financial impact on the JV going forward. And I think some of the issues that Tim asked, deal with this question. Let's maybe...

Yes. Maybe Japie can provide an update where we are.

Yes. So I just quickly want to -- yes, so the update on that is that we had our first meeting with the unions. We also pointed the CCMI to be the mediator of the process. And our second meeting will be this month between the 17th and 19th of March, where we will have follow-ups. Obviously, from this meetings, a lot of interactions must still apply. We are also seeing various stakeholders to see how we can all assist in this regard. The process is in the 60-day period, and it can be extended for [ 50 ] days.

Any other question?

Okay. That seems to be the only question on the webcast.

Okay. On that note, then we can finalize the call. Thank you very much for dialing in.

Thank you very much, ma'am. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.