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

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

Good morning. Welcome to Merafe's Annual Results Presentation. Ditabe and I will take you through the presentation. And Japie Fullard, CEO of Glencore Alloys, is also on the line available for questions at the end of the presentation. As reported at interim results, COVID-19 had a significant impact on our business, both from a trading and operating perspective. Our operating environment was already fragile before COVID. We faced headwinds from weaker demand, weaker chrome prices and increasing costs. Regrettably, we had a fatality at the Venture's Magareng mine on 20 October 2020. There was also a significant deterioration in the total recordable injury frequency rate. COVID-19 protocols were introduced at our operations, which included screening and testing, social distancing, sanitization and remote working where feasible. The global economy was impacted by the pandemic. This had an impact on industrial production, which experienced negative growth; chrome demand, which was subdued; prices were weaker; logistical challenges increased. As a result of a weaker market, ferrochrome and chrome ore production declined. Cost of production came under pressure, especially from electricity tariff increases. Section 189 consultation processes were completed, resulting in retrenchment. Some of our operations have been placed under care and maintenance. On the financials, revenues decreased by 11%. We processed an impairment loss of ZAR 1.3 billion. The result being a headline loss per share of ZAR 0.008. No dividend has been declared. Post year-end, we have initiated a share buyback program on which Ditabe will give more detail later. Now for the market analysis, global stainless steel production declined by 5% from 53.2 million tonnes in 2019 to 50 million tonnes. This was largely due to the impact of COVID-19 related shutdowns. Global ferrochrome demand followed a similar trend, has declined by 5% from 13.8 million tonnes in 2019 to 13.2 million tonnes. China accounted for 61% of global stainless steel production and 67% of global ferrochrome demand, further entrenching its dominance, whilst all other regions decreased both production and demand. Global ferrochrome production, in line with weaker demand, decreased from 14 million tonnes to 12.4 million tonnes, representing a decrease of 11.2%. However, South Africa's ferrochrome production decreased by 25% due to COVID-19 winter shutdowns and response to weaker demand. Chrome ore exports into China declined by 11% from 15.9 million tonnes to 14.3 million tonnes. 82% of these exports came from South Africa. Ferrochrome and chrome ore prices remained under pressure as a result of weaker demand, with realized CIF prices declining by 8% for ferrochrome and 15% for chrome ore. We are encouraged, though, by the notable increase in market prices in early 2021 due to ferrochrome supply restrictions in China and increase in demand. As mentioned earlier, COVID-19 contributed to the slowdown in the global economy, which impacted stainless steel production and chrome demand, reflecting negative growth. The Venture operations still down from Q2 in response to COVID-19 lockdowns, weak demand and winter electricity tariffs. The installed capacity utilization was 55%. Post the initial lockdown, only Lion smelter, Eastern chrome mines and UG2 recovery plants resumed production. The rest of the operations were only back in operation from September 2020. Another effect of the shutdowns was an increase in standing charges, which increased by 133%. Our response to the challenges imposed by COVID-19 were to focus on cash preservation, including inventory destocking, constant review of our operations to improve cost efficiency. Regrettably, 15 employees succumbed to COVID-19. 10 of the deaths were had in the last 2 months during the second wave of the pandemic. On the safety side, our performance was not great, reversing the improvement -- improving trends experienced over the last few years. We had a fatality at Magareng mine in October 2020. Our TRIFR deteriorated by 52% from 2.56 in 2019 to 3.89. This is despite our continued efforts to achieve 0 harm. We continued to run safety and awareness campaigns, especially to address at-risk behavior. Ferrochrome production reduced by 29% from 371,000 tonnes to 265,800 tonnes, representing 55% utilization of installed capacity. The key driver was lockdowns, which were necessary to contain the spread of COVID-19. Another contributing factor was weak market conditions and winter electricity tariffs. As mentioned earlier, all operations resumed production in September 2020, with the exception of Lydenburg smelter and Rustenburg furnace 5, which remained on care and maintenance. We had previously announced that we had commenced Section 189 consultations, which were necessitated by deteriorating operating and trading conditions in the South African ferrochrome sector. These included unsustainable electricity tariff hikes, cross subsidies and real cost inflation. During these tough times, we focused our efforts on factors within our control, one of them being cost management. Cost of production per ton increased by 8.4% as a result of inflation, mainly labor costs, increase in electricity tariffs of 8.8% effective 1 April 2020, increase in chrome ore prices, lower production volumes, the reason for which has been explained earlier. Electricity costs and supply remains a key risk for our business. The latest approved increase of 15.6% will certainly increase cost pressures and reduce cost competitiveness of the South African ferrochrome sector. Ditabe will now take you through the finances.

Thank you, Zanele. Welcome, everybody. We have restated our 2019 results with no impact on reported loss. Full details of this restatement are provided in our audited financial statements. 2020 has been a challenge in many respects, ranging from market supply and demand dynamics to COVID-19, amongst other factors. This impacted our sales volumes and prices. This is evidenced by the year-on-year decrease in our total revenue by 11% from ZAR 5.4 billion to ZAR 4.8 billion. Ferrochrome revenue, which makes up 84% of our revenue, declined by 10%. There was a decline in chrome ore revenue by 15% to ZAR 777 million. We had a weak Rand coming to our aid. In our trading statement, we guided a decrease in losses compared to the prior year. This next slide shows that year-on-year comparison. The basic and headline losses are lower than the prior year figures. Basic loss of ZAR 0.40 per share includes the ZAR 1.3 billion impairment charge on property, plant and equipment that was raised in our interim results. The headline loss for the year is ZAR 0.008 per share. The next slide provides an analysis of the year-on-year movement in EBITDA. This slide reconciles 2019 against 2020 in terms of EBITDA from the Venture. The slide shows the proportion of the item in percentage terms relative to the 2019 EBITDA. The following contributed positively to the 2020 EBITDA: one, volumes. Although lower volumes sold impacted revenues negatively, the impact was positive on costs. Two, the Rand. We earlier indicated the positive impact that the Rand has had on results and the chart illustrates this benefit. And finally, the reversal of royalty tax provision that we have been making over the years was also beneficial. This reversal was on the strength of internal reviews and opinion from expert advisors. The following functions had negatively proved the 2020 EBITDA: volumes, again, this time, just in terms of lower volumes of ferrochrome and chrome ore sold and which were the biggest factors affecting revenues. Two, prices. Lower commodity prices achieved that have contributed to the variance. And three, inflation. This also contributed, although we continued to manage it as much as possible. As earlier reported, we saw increases in chrome ore prices, Eskom tariffs and staff cost increases in key inflationary forces. Four, standing charges. Due to production stoppages, significantly higher standing charges weighed on earnings. For the year, this cost was ZAR 474 million. Five, retrenchment costs. These were incurred after the Section 189 of the Labour Relations Act consultation process and amounted to ZAR 97 million for the year. And finally, the inventory adjustment due to the impairment of assets that resulted in an additional income statement charge of ZAR 94 million. Next, we review the reconciliation of EBITDA from the Venture to Merafe's reported loss. As in our interim results, depreciation and impairment wiped off earnings for the year. Depreciation for the year was ZAR 153 million. Property, plant and equipment impairment loss has not increased from the ZAR 1.34 billion recognized in June 2020. The deferred tax credit arises from the impairment charge. Finally, corporate costs and current tax rate charges against earnings and net interest income as well as income from equity accounted investment contributed to earnings. The net result is a loss of ZAR 1.003 billion for the year. Next slide presents financial performance in a more normal format. We have already discussed key variances and will run through this slide fairly quickly. We have been -- we have already discussed revenue line. Other revenue in 2020 represents management fees received from the Venture in 2020. In 2019, this item included the sale of sundry and a material such as scrap. The foreign exchange loss shown here represents the effect of the revaluation of net working capital balances at year-end. The NRV adjustment, net realizable value adjustment, raised in 2019 was a benefit in terms of the cost of sales of the impaired inventory in the current financial period. Operating expenses were lower due to lower tonnes sold. As indicated earlier, these expenses include higher standing charges, retrenchment costs and other costs discussed earlier. The reversal of the provision helped reduce this cost. Merafe's corporate costs were lower than in the prior year overall due to lower operating projects. I won't go through the rest of the items which we've already discussed, including depreciation and the impairment charge. In terms of balance sheet, which is on the next page, noncurrent assets reduced due to the impairment of property, plant and equipment and intangible assets. Moving to current assets and starting with inventory, the destocking that happened during the year helped with the reduction of stock levels. Closing inventory volumes of 90,000 tonnes represent a 31% drop from the year-end levels, last year end that is. These volumes represent 3 to 4 months of sales. Trade and other receivables increased due to a weaker closing Rand as well as higher -- as well as higher sales made in the fourth quarter. Cash decreased mainly due to lower earnings, payment of the final dividend for 2019 and acquisition of Unicorn Chrome investment. The largest noncurrent liabilities, the rehabilitation liability of ZAR 175 million, and the largest current liabilities represented by trade and other payables of ZAR 637 million. Next, we analyze the reconciliation of cash. On this slide, you will notice similar items and amounts to what was discussed in our interim results. We opened 2019 with a cash balance of ZAR 354 million. The net cash -- rather cash from operating -- net cash from operating activities added ZAR 495 million to this balance. Cash released from destocking during the year helped with the releasing cash flow. The higher better balance because of the increase through was a drain on cash reserves. Cash was used to fund the following: capital expenditure of ZAR 343 million, and cash preservation has remained one of the key focus areas for our business, as Zanele earlier indicated. This has led to a reduction of -- in CapEx for the year. Cash was used to fund the 2019 final dividend of ZAR 100 million and ZAR 33 million was used to fund the Unicorn Chrome investment. And finally, repayment of the IFRS 16 loans and realized foreign exchange effects also used up cash. We closed the year with a cash balance of ZAR 278 million, which represents Merafe's own cash as well as cash taxes at the Venture portion thereof. Now moving to Merafe's debt headroom. The company was [indiscernible]. Merafe's headroom consists of facilities in place at the PSV to fund operational requirements as well as the ZAR 300 million revolving credit facility with Absa. The next slide deals with dividend. And in terms of the dividend -- the final dividend for the year, the Board has decided not to declare a final dividend due to market uncertainty. But what the company has impact on, as Zanele indicated, is a share buy-back program given the trading levels of our share price. This program was initiated on the 4th of January 2021. The program is within the general authority approved by shareholders at the May 2020 AGM. As at 28 February 2021, 0.418% of the company's issued shares have been repurchased. A price ceiling for the repurchase has been set by the Board. Thank you all for your attention. I will now hand you back to Zanele for final remarks.

Thanks, Ditabe. In conclusion, the economic recovery in the short term is very much dependent on the developments around COVID-19. It is positive that the vaccine rollouts are taking place globally and should boost recovery. As mentioned earlier, we are seeing signs of recovery with ferrochrome prices having increased to above $1. We will continue to focus on efficient operations, cost efficiency and cash preservation as well as efficient capital allocation. Thank you. We will now invite questions, first from the call and then from the webcast. Please state your name and company before asking a question.

[Operator Instructions] Our first question is from Tim Clark of SBG Securities.

I've got a few questions. Let's start off with just the current production outlook. You've got care and maintenance on Lydenburg and Rustenburg, but prices are very high. So you're bringing those off care and maintenance? [Technical Difficulty] thinking about production for the year. And then that just ties into the second question, which is about costs and standing charges at more normal production levels in a more normal year, and prices are high and so demand is good. And so for now, as we stand, we shouldn't be too worried about that, I would imagine. Can you give us some kind of indication on what the delta or change in standing charges would be next year at more full production levels? I've got a few more questions, but I'll leave it for that now.

Sorry, the line was quite disturbed here. So I couldn't hear the first question, but I'll deal with the second question on standing charges, then maybe we can have a repeat of the first question at some point. Yes, standing charges, difficult to indicate a normal level because it really is a function of the extent to which our facilities are standing idle or operating. So in an environment where there's very little idle capacity, one would expect for the standing charges to be insignificant. That big charge this year, as you can imagine, is because of the idle time that was also a combination of COVID-19 shutdown -- shutdowns as well as the normal shutdown around the winter period, where we try and manage the higher cost and over that time also deal with maintenance requirements. I hope I've addressed that question.

So just the way to think about that for me is if I add back all the standing charges, assuming you're at, whatever, 80% of...

Apologies. We've lost the line from Tim. We'll just have to wait for him to dial back. [Operator Instructions] We will pause a moment to see if we have any other questions from the conference.

Okay. Maybe if there are no questions from the conference, maybe we can then look at some of the questions from the webcast. I think the first question I see there is what are the main logistical challenges? And how much are they costing the South African economy through negative impact? And what steps are you taking to meet these challenges? Maybe I will give Japie an opportunity to answer that from an operational point of view. Japie?

Thank you, Zanele. Yes, I think that's quite a good question. I believe for us as the Venture last year during COVID, seeing that we've got a very good logistical team, we were able to move most of our product, is the reason why we could have destocked in 2019. But currently, with all the operations and all the ferrochrome smelters coming back into operation, that clearly is putting a huge amount of pressure on the whole logistical chain. To such an extent that we are really battling now to get our product out. And I'm talking through our -- the whole chain. I'm talking through the ports, from the trains and we had TFR. So definitely a big challenge, which actually moved to, I would say, one of our top focuses. On a daily basis, we actually relook at our logistical challenges. I also believe that a part of this issue that we've got is that unfortunately, there's also huge problems on the networks -- on the logistical network. So I'm sure that you would have seen many, many challenges with TFR, even in the ports, where cable freight is playing a big role in that. Subsequent to that, we also had various discussions, and I'm talking about not us as the Venture on its own, but as the chrome forum or the chrome industry, we've got continuous discussions with the Chief Executive of Transnet almost again on -- about 2 weeks ago, and it's continuing almost on a weekly basis where we would like to join hands to see how we can assist in getting our logistical challenges sorted. I think one of the biggest reasons definitely is the whole availability of the well capacity. Utilization setting, I think it's setting -- some people are quoting figures of 60%, but I mean, we've seen it as low as 40%. So really a huge concern for us.

Okay. Thanks, Japie, for that. The next question is like a 3 in 1. It says to what extent is high Eskom power hedging your business? And is Eskom prepared to provide special power tariffs in the short term? And what steps are being taken to self-generate solar, wind power, et cetera? Maybe I'll start and I suppose Japie can end. I mean it goes without saying that an increase of 15.6% is not sustainable, in that -- I mean it is 3x what the level of inflation is. And from what we understand, Eskom has indicated that they may need increases at that level again in the next year before we normalize to sort of the inflation. So that is a concern for us. But maybe just for context, for our business, electricity cost comprises just over 20%. So then you'd have to take that 15 by 20 to say what is the impact on cost of production. Then on the issue of are they prepared to provide special power tariffs, I mean there are discussions underway and let Japie maybe add a bit of color to that. And on the self-generation for solar, there is a process requesting proposals for us to consider virtual power purchase agreements. And maybe Japie will add a bit of color to that as well. Japie?

Thank you, Zanele. Yes, obviously, one of the biggest reasons why we did put Lydenburg under the care and maintenance, obviously, as you know, would have been on the electricity prices, that's putting it in a very high bracket. We now know, with this increase that, that was definitely the right decision. This would just exaggerate the whole situation. But just to come back on Eskom, so obviously, you would also know that Eskom through NERSA has approved that companies can apply for the NPA, that's the negotiated price agreement. And we, as the PSV, already lodged our NPA a couple of weeks ago. I must say that we had some good feedback from Eskom. So obviously, you can see that there's definitely the need to get a special pricing. If we do not get special pricing as Zanele said, it will just add to our already stressed environment. I think also on Eskom, we had long discussions also with NERSA with regards to the cross subsidy. I'm sure by now, everybody would understand that the energy-intensive users, the baseload customers. So it's not only ferroalloys, but also ferromanganese and some of the other bigger players. We're all being slapped with an additional up to 14% cross subsidy. So we are also discussing with NERSA, with Eskom, how can we ensure that we can perhaps drop the cross subsidy because, obviously, seeing that the cross subsidy is exactly that it is actually unduly penalizing the energy-intensive users, which we believe is incorrect. So that's on the cross subsidy, definitely something that we're pushing very hard. The NPA, we're pushing hard. We did submit. We're just waiting for feedback. And then looking at alternatives, that's our commitment as the PSV. And we're looking at various opportunities. We are evaluating on-site generation and that could be by our carbon monoxide processes. We're also looking at investing at the Lion smelter, the Swedish Stirling project. But then also on top of that, as Zanele had said, we are evaluating a virtual purchase power -- power purchase agreement, where in functionality, it will work like this, where we've got off-site generation. This will happen via wind and solar. It will happen, let's say, in the Northern Cape. And then it will be reeled onto the grid and be used somewhere else. That's the concept of that. And we are at quite an advanced stage in terms of evaluating whether this will make sense. And obviously, it's important for us, as a PSV or a Venture, to ensure that we take the correct decisions, seeing that it's quite capital-intensive and we will be liable for the agreements in terms of this. So very important that we look at all these various facets. That's on Eskom. Thank you.

Thanks, Japie. The next question is, when will chrome export tariffs be imposed? And what percentage chrome export tariffs is likely to be? I think the answer to that is short. We haven't been notified yet as to when the timing of that is. All we have is that the cabinet has announced that it intends to impose some form of tariff or export tax. We don't even know what it's going to be called. And we just don't have the latest on which direction that will take. I mean, safe to say, if it does happen, it's something that will be positive for our business. And you would have noticed that in the presentation, we do show that, for 2020, about 80% or 81% of the chrome ore imports in China came from South Africa. So that indicates the importance of the chrome reserves that South Africa has. I don't know whether Ditabe or Japie, you would like to add anything?

Nothing from me, Zanele.

Okay. Thank you. Then maybe I'll move to the next question. Can you provide some information on the expected 12% bounce in stainless steel market in 2021? I'll let Ditabe answer that aspect. And can you provide the expected operating rates for 2021, and also your installed capacity for that period? I think Ditabe can take both.

Sorry, I just have been talking to myself. I realized I was on mute. Yes, the growth in stainless steel is a projection that comes through from CRU, as we've indicated in our reports. And as one can imagine that is growth that comes off the low base of 2020. Indications from CRU is that, that growth will be set by a combination of domestic appliance demand, auto -- demand from auto as well as some indication of [ rig count ] units that might add to the demand in stainless steel. And obviously, some growth expected to come from China, but quite significant growth forecast from Indonesia, which sums almost all the other regions in terms of growth that is forecasted to come from the -- at least from a percentage point of view. The second question on expected operating rates. I assume that this refers to production as a function of installed capacity and guidance that we can give is linked to 1 other similar question that has come through. Guidance for 2021, from a production point of view, is between 70% and 80% of installed capacity. [Technical Difficulty]

Yes. I think you have. The next question, I think it is, can you provide the latest on chrome ore test? I think that's been dealt with. And then can you please give production guidance for FY '21 and expectation on costs? I think that is dealt with that.

Maybe just to add on costs, because we haven't touched on costs. Costs, I think the best way of dealing with guidance on cost is that we've gone through the variance analysis in terms of EBITDA for 2019 versus 2020. I mean overall CPI guides on costs in terms of the increases that we expect. We already know that Eskom's increase is going to be a double-digit rate. So that will then feed into the cost of electricity. And I mean expectation for next year is that we are unlikely to see the sort of standing charge in terms of operations that we've seen this year, in which case, the standing charges cost will come down substantially. And yes, I think maybe that's sufficient for now.

Okay. And then the next question is, when was the last ferrochrome output in the JV at this level? Do you envision further restructuring and job cuts at mines and ferrochrome plants during 2021 because of the electricity increase? And what option does the ferrochrome industry have to counter these? So that's like 3 questions in 1. On the level of production at this level, my recollection is that when we hedge at a level below, sort of 60% was, I think, in 2008, 2009 during the financial crisis. At that stage, it was much, much lower than that even. And whether there would be any further restructuring, it's not something that is on the cards at the moment. But it depends on the developments in terms of the market. We did indicate in the presentation that since early 2021, there's been recovery in prices. And if that is sustained, I doubt that we would have to consider that. I think we've dealt with the issue of the 15.6% electricity increase and more or less what the plans are in terms of options, in terms of clean energy, and so on. So I don't know if there's anything you'd like to add, Japie?

Thank you, Zanele. I think that you summed it up fairly well. I mean we -- it is not -- it's not on the cards to prune down further. I mean one of the reasons why we can -- we believe that we can be sustainable, obviously, is that we are still showing that we're going to produce close to 1.8 million tonnes of ferrochrome production for the Venture. This is even after we've closed down by complex. So that just means that from an efficiency point of view, we are able -- we would be able to really run the furnaces at full or -- close to full production, except for winter. So it's something that we'll definitely keep on evaluating. Luckily, the spike in the pricing is currently helping us. But the outlook, once Inner Mongolia starts up again, and starting to show signs of that, we could be seeing again a better paced prices. And for that reason, it's very important that we keep on monitoring the whole situation. But our viewpoint or our forecast is definitely not to cut down any more furnaces. Saying that, that's why all these initiatives are so important. This has now got to do with the NPA, on Eskom, the dropping of the cross subsidy and also the chrome ore tax. These are the things that we are hoping that will also assist us. But in the meantime, back at the operations, there's a huge amount of focus in all areas to make sure that we can stay sustainable. So I think that's the long one and short of it. If we see the 15.63% increase continuously, it's just going to put us under further pressure. That's factual as well.

The next question is the level of staffing at Merafe? Well, the question says, how many employees remained at Merafe, following Section 189 process? And then with the Lydenburg smelter's return online, should prices improve? And please kindly give color on the outlook for the share buyback program. On the employees at Merafe, obviously, there's employees at Merafe level, which is head office, and it has just 7 employees. And then, at the Venture level, we did indicate that with the Section 189, there were retrenchments. I think overall, there were like 976. And maybe Ditabe can give how many employees remain?

Yes. Zanele, just -- all parts figures, just in terms of staff, including fixed-term contractors, excluding long-term contractors, artisans and other short-term contractors, just over 7,000 employees. If you add all of those categories, then it's over 8,000 and just under 9,000 employees, more or less.

Okay. And then there was a question of color around the buyback. Maybe Ditabe can talk through that? Although -- I mean we've indicated as at 28 February -- the whole repurchase started post year-end, and we've only done 0.4% of the issued shares. So it hasn't moved much, but it's something we will continue looking at going forward.

Yes, I think you've touched on it, Zanele. Not much more to add except as indicated, there is a price that has been set. And in terms of pursuing that program, we are doing it within the confines of the authority that has been given to us at the last AGM. Because of where the level has been trading at the moment, there have been limited quantities that we have acquired. But the program is still in place, and the decision will be made around whether to continue or not at the appropriate stage.

Zanele, is it okay if I just then give feedback on will the Lydenburg smelter return online because of pricing?

Yes, Japie. Go ahead.

Okay. I think it's important that I do unpack this, but -- I mean, obviously, if prices could have stayed where they are now, we would, on a continuous basis, evaluate if we are going to start up or not. Also, very important to note that we did not give back our maximum amount of Lydenburg smelter. So I mean if we were going to close it or anticipate closing it, continue it -- I mean on a continuous basis, we would have told Eskom that, look, I can take back the maximum amount. We kept that door open because as part of our NPA, what we submitted to NERSA and to Eskom, the Lydenburg smelter complex is included. It's the only way that we can, in a way, guarantee Eskom sufficient revenue for a lowered electricity price. So in our whole NPA, we have included all our furnaces, all the operations as far as possible. And then also, as you know, the NPA also talks about, if you must pull back electricity, then we would be able to give more to Eskom by doing that. So definitely, in our calculations, Lydenburg was included. But then the NPA or the pricing that they must give us must be of such a value that we will be able to start up Lydenburg sustainably. I mean we can't just start up Lydenburg and the install does not make the profit. That's not the way it works. So it's important that everybody understands. This is the reason why it is -- if all these things fall in place, we will keep on evaluating Lydenburg. And if it makes sense for us to start it up, we will definitely do it. That's why we're also still keeping it in a good space. We are -- there's a whole team -- maintenance team there to make sure that we do keep the place in a well-maintained position if things change. So we are just waiting for these triggers to determine if we would be able to start it up again or not. Thanks.

Thanks, Japie. It doesn't look like we have any further questions on the webcast. I think at this stage, I'd like to thank everyone for attending. Thank you very much. Enjoy your day further.