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

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

Good morning. Welcome to Merafe's annual results presentation for the year ended 31 December 2021. Ditabe and I will take you through the results, and we also have Japie Fullard, CEO of Glencore Alloys, with us who will assist with operational questions. 2021 was a year of recovery from a market, operational and financial perspective. This is reflected in the excellent results we are about to present. We move to Slide 4. I'm pleased to report that there were no fatalities at our operations in 2021, and there was a marked improvement in TRIFR. Focus continue to be on reducing the impact of COVID-19 on our workforce, with 80% having had at least 1 jab. On the market, the global economy recovered from the 2020 lows, which were mainly driven by COVID-19 restrictions. This led to increased industry steel production, which contributed to increased demand in chrome ore and ferrochrome. The uplift in demand, coupled with supply constraints created by power shortages and environmental restrictions in China, pushed prices higher. On the operations, ferrochrome and chrome ore production volumes increased significantly in response to increased demand. Cost pressures remain, particularly from electricity and reductants. Logistics challenges continue to plague the industry. Revenue increased by 69% as a result of higher volumes and higher prices realized. Headline earnings increased to ZAR 0.67 per share from headline losses of ZAR 0.8 in 2020. The Board has declared a dividend of ZAR 0.22 per share. Slide 6. As I mentioned earlier, it has been a year of recovery with ferrochrome prices recovering from depressed levels we saw in 2019 and 2020. The average CIF price is realized by the Venture in 2021 were around USD 1.28 per pound compared to USD 0.72 per pound in 2020. Chrome ore prices, on the other hand, increased modestly with UG2 prices averaging about USD 140 per tonne compared to USD 129 per tonne in 2020. The contributing factors there were environmental restrictions as well as power shortages in China. On Slide 7, China continued dominance in stainless steel production, accounting for about 57%. However, this was lower than in 2020. All other regions except other remained at same levels as 2020. Other grew by 23% from 17.7% to 21.8% mainly as a result of production from Indonesia. As expected, ferrochrome demand mirrored global stainless steel production with China's share decreasing and other increasing driven by Indonesia. On Slide 8, global stainless steel production increased by 14%, exceeding prepandemic levels. However, China's growth was lower at 6%. The highest growth came from other at 40%, mainly driven by Indonesia. Ferrochrome demand also increased by 11% to 14.5 million tonnes, and the pattern was similar to that of stainless steel production with China's growth in demand muted at less than 1% whilst growth from other was 47%. On Slide 9, on the back of increased demand, global ferrochrome production increased by 15% from 12.5 million tonnes to 14.4 million tonnes in 2021. Most of that growth came from South Africa and India being 32% and 30%, respectively. Chrome ore imports into China increased marginally by 5% from 14.3 million tonnes to 15 million tonnes. South Africa made up 80% of chrome ore imports into China. On Slide 11, COVID-19 remains a risk. However, as we all get better at managing it, it was less disruptive to our operations. We continued implementing COVID-19 protocols to reduce risk of infection. We introduced antigen tests across the operations. In addition, a vaccination campaign was rolled out and good progress has been made. 80% of our workforce has been vaccinated, 59% being fully vaccinated. Sadly, 26 employees succumbed to the virus in 2021. We continue to use the lessons we learned from the pandemic to improve efficiency in our operations. Cash preservation continues to be a focus area. On Slide 12, I'm pleased that there were no fatalities in 2021, and our total recordable injury frequency rate improved by 29% from 3.91 in 2020 to 2.75, which is the second lowest in 5 years. We continue to focus on the safety of our employees and pursuing our goal of zero harm. On Slide 13, ferrochrome production increased from 265 kilotonnes in 2020 to 379 kilotonnes in 2021, being 79% utilization of installed capacity. Contributing factors were that the operations were less affected by COVID-related shutdowns and there were improved operational efficiencies, especially at Lion and Wonderkop smelters. Lydenburg smelter remains under care maintenance for the foreseeable future. However, Rustenburg Furnace 5 was brought back into operation in Q3. On Slide 14, cost management does remain a key focus area for the Venture. Total production cost per tonne decreased by 5.2% from 2020. This was mainly as a result of higher volumes resulting in dilution of fixed costs and lower chrome ore costs. However, these were offset by increase in electricity tariffs of over 15% effective 1 April 2021; higher costs of reductants driven by higher market prices and inadequate local supply, necessitating imports at much higher prices; higher fuel and freight costs; and lastly, CPI and mining inflation impacting salaries and wages. On Slide 15, as announced on 14 January 2022, the Venture partners are constructing a processing plant to recover PGM from tailings and current [indiscernible]. The plant has a capacity of 21 kilotonnes per month. To date, ZAR 32 million has been spent, and it is envisaged that a further ZAR 23 million will be spent in 2022 to complete the plant. I will now call upon Ditabe to take you through the numbers, and I will come back at the end to conclude.

Thanks, Zanele, and welcome to all on the call. I will take you through items 4 and 5 on the agenda and then hand back to Zanele for concluding remarks. Our financial review starts on Page 17 with an analysis of revenue. The recovery seen in 2021 was quite welcome after a few difficult years. We saw a year-on-year increase in both chrome ore as well as ferrochrome tonnages sold. We similarly had higher prices secured for both commodities. This resulted in a 75% increase in ferrochrome revenue and a 33% increase in chrome ore revenue year-on-year. We also accounted for small revenue arising from PGM concentrate sold from December 2021. The strong average rand-dollar exchange rate for the year reduced some of the revenue gains. Total revenue of ZAR 8.1 billion exceeds the prior year's figure by 69%. Slide 18 shows the history of our earnings. After 2 years of negative earnings, this year we recorded headline earnings per share of ZAR 0.67 per share and basic earnings per share of ZAR 0.668 per share. These figures are in line with our trading update guidance. There were no significant headline earnings adjustments, thus the marginal difference between the two earnings measures. No impairment adjustments were made this year. On the next slide, we present a variance analysis of EBITDA from the Venture for 2021 versus 2020. The slide shows the proportion of the variance in percentage terms relative to the 2020 EBITDA as a base. Prices were the biggest contributor to the -- to this year's performance. These were followed by higher volumes sold. Next were standing charges, which reduced by over ZAR 350 million. And finally, sundry other impacts account for the balance of the positive variance. As expected, negative variances were led by higher costs due to increased volumes sold. This was followed by the effects of the foreign exchange rate on prices, which was overall negative, and finally followed by inflationary pressures on costs. We normally show the reconciliation of EBITDA to our reported profit, and this is presented on the next slide. From EBITDA of ZAR 2.4 billion from the Venture, Merafe reported profit after tax of ZAR 1.67 billion. This was after accounting for taxation, both current and deferred, of ZAR 653 million; depreciation, amortization and impairment costs of ZAR 117 million; corporate costs of ZAR 66 million; and sundry other items, as shown on the chart. We will delve into some of these items on the next slide. Slide 21, which is the next slide presents, financial performance in a more standard format. We have already discussed the revenue line. Foreign exchange gains of ZAR 104 million derive from translation gains on higher net asset balances at year-end as well as a weaker closing rand-dollar exchange rate. Operating expenses were affected by lower production costs per unit, which would have been positive for our cost of sales. We've already spoken about the inflationary effect as well as variable costs impact on expenses. The inflationary impacts include the impact of higher reductant costs, the increased cost of power, higher freight costs as well as variable selling costs. Merafe's corporate costs were higher than in the prior year, and the variances include higher share-based payment expense due to the appreciation of our share price; an increase in our provisions, which include bonus provision; and an increase in our CSI costs. The depreciation, amortization and impairment charge includes a small specific impairment charge of ZAR 6 million in 2021. As indicated, there were no general impairment adjustments processed in the year. Higher cash balances led to increased interest income, and higher profits led to an increase in the taxation charge. The significance of this year's performance is that the reported revenue, EBITDA and profit are the highest since the inception of Merafe. Moving on to the balance sheet on the next slide. There was an increase in noncurrent assets due to capital expenditure made in the year. Expansionary capital expenditure includes our investment in the PGMs processing plant. Moving to current assets and starting with inventory. Ferrochrome finished goods reduced from last year's closing balance of 90,000 tonnes (sic) [ kilotonnes ] to 76,000 kilotonnes. These volumes represent 2 to 3 months of sales. The value of closing inventory, however, increased year-on-year due to an increase in some raw materials inventory, which investment was made to secure supply, as well as higher inventory costs. Trade and other receivables increased due to higher commodity prices, higher sales in the fourth quarter, the weaker closing rand-dollar exchange rate as well as timing of receipts. Cash increased due to improved earnings. The largest noncurrent liability is the rehabilitation liability of ZAR 171 million, and the largest current liability is represented by trade and other payables of ZAR 863 million. The full breakdown is disclosed in our annual financial statements. The next slide provides a reconciliation of our cash balance. 2021 started with a combined cash balance of ZAR 278 million. Net cash from operating activities increased the balance by ZAR 1.156 billion. Due to [indiscernible] balance, on a net basis, working capital tied up ZAR 666 million in cash. The available cash was used to fund the following. Capital expenditure of ZAR 490 million. I've already spoken about the expansionary capital that included PGMs processing plant, and ZAR 32 million was spent on this plant. Cash was also used to fund the 2021 interim dividend of ZAR 175 million. ZAR 6 million was spent on the share repurchase program. And repayment of IFRS 16 loans and foreign exchange effects accounted for the balance of the cash movement. The closing cash balance was ZAR 972 million, and this includes Merafe's own cash as well as cash at the Venture. This split, together with Merafe's headroom, are shown on the next slide. Moving on to Slide 24. The split of the cash is shown here with Merafe's own cash sitting at ZAR 483 million and the balance, which is our share of the cash at the Venture, being ZAR 488 million. Cash at the Venture includes ZAR 189 million which has been set aside for rehabilitation obligations. The company was ungeared at period end, and Merafe's headroom consists of the facility in place within Merafe of ZAR 300 million, which involves the revolving credit facility with ABSA, as well as facilities in place at the PSV to fund operational requirements. Moving on to Slide 26. And here, we give some feedback on the share buyback program. And most of the information was already reported on -- at our interim results. The only update here is that the Board suspended the repurchase program in November 2021 after we had repurchased just over 11 million shares. Moving on to the next slide, which is my last slide. The Board has declared a final cash dividend of ZAR 0.22 per share. This takes our total dividend for the year to ZAR 0.29 per share, and this represents 43% of headline earnings per share. Thank you all for your attention. I will now hand you back to Zanele for final remarks.

Thank you, Ditabe. In conclusion, the rapid recovery experienced in 2021 is expected to slow down in 2022. The current geopolitical developments in Ukraine are expected to contribute to that slowdown. COVID-19 does remain a risk, although we are getting better at managing its impact. There are concerns, however, about the recent outbreak of a sub-variant of Omicron. In South African, Eskom issues, the political climate, social unrest does add to the uncertainties going forward. Our forecast for 2022 will be on renewable energy projects, efficient operations, cost management, and cash preservation and efficient capital allocation. As always, we continue to assess opportunities that can deliver shareholder value. Thank you. We will now take questions first from the conference call and then from the webcast. [Operator Instructions]

[Operator Instructions] The first question comes from [ Leo Altimi ] from [ IMI ].

Good morning, Zanele and Ditabe, and well done on an incredible set of results and also for your robust turnaround. I had a couple of questions relating to CapEx and the balance sheet and then operations. First, on the CapEx side, with regards to the green energy project that you mentioned or make reference to, is -- are you able to elaborate on the extent of it or the size of it and a possible time frame on that CapEx? Second one is relating to the PGM CapEx. What are the metrics on that? Namely, what is your expected IRR and the expected payback on that? The next question is relating to your inventory and trade receivables, which I see are significantly up on last year on the back of increased sales. Has that converted to cash presently? And how your cash -- what is your cash position looking like at this stage? And lastly, you mentioned that you brought another furnace back online in Rustenburg. What is that expected to do to your production in 2022?

Thanks, [ Leo ], for your questions. I think the first question -- because you had quite a number of questions. The first question was around the green energy project, as to sort of the duration of that and sort of a ballpark number. I think Japie can come in on this one, but I think overall is that we're looking at doing this in phases, and it's over a long term, say, 10- to 12-year period. And I think you also asked something around the balance sheet, what that impact could be. It's still very early ages for us, so we haven't made final decisions as how much will be on balance sheet and how much could be off balance sheet. But I think Japie can come in as he's closer to the operations.

Thank you, Zanele, good morning, [ Leo ]. So, I mean, obviously, we are seeing that we are a business that is very high on Scope 1 and Scope 2. It is very important for us that we do focus on reducing the Scope 2 specifically. And there are three distinct areas that we are focusing on. So first would be the on-site off-gas conversion. So we are looking at taking the off-gas and turning that into electricity. And we have already signed agreements with a few suppliers. We are running pilot circuits on that as well, and we are well on our way to get the best efficiencies from the operations with regards to CO conversion into electricity. So that's the first main focus area for us, and there's a lot of work that we're doing there. The second area is behind-the-meter projects, and that would be on-site solar and/or wind. And we're also fairly advanced with regards to desktop studies in that regard. And we will be starting to put in some capital within the next year to start with that. So that's the second part. And then thirdly, we're also looking at various virtual power purchase agreement contracts, and we went out on an RFQ a couple of months ago and we are in the stage of now evaluating that. And that could be staged. It will be staged. And it will be at various points, and it could be -- there will also be multiple financial instruments to actually execute this. This is a combination of wind and solar. I'm not sure if there's any follow-up on that.

No.

And then we'll touch then on the PGMs project that you asked about. The -- I think suffice it to say that the return on the project is sufficiently higher than our weighted average cost of capital of 11.4% after tax. And we -- our calculations on the project, obviously, based on current assumptions around pricing, et cetera, is a payback period of, let's say, an average of about 4 years. And then on the cash position, you are quite right. We had a bit of cash tied up in working capital at year-end because of the nature of our operations. And the cycle would have meant that over the first quarter of the month -- of the year, some of that capital releases. But it's a continuous cycle where the [indiscernible] balance will always be a function of sales that we make. But certainly, a bit of that has converted to cash over the period.

Okay. If that answers your question, then I think there was also the question on Furnace 5 in Rustenburg. Maybe Japie can deal with that.

Yes. Thanks again, Zanele. I think you would have all seen what happened last year, quarter 2, quarter 3, with electricity shortage in the world and obviously also with the depressed prices on chrome ore and also the fact that from a logistical point of view, it was very difficult to get ore out of South Africa and I still believe that is the case. And so that then meant that there was quite a spike in the ferrochrome pricing. And we as [indiscernible] knew that PSV always had this opportunity of Furnace 5 almost like a swing unit so that we can capitalize whenever we can. And in this case, that is exactly what we've done. We don't anticipate switching it off. It also fits into our supply-demand model quite nicely at this stage. And that's the reason why Furnace 5 was then recommissioned. And like I said, it was part of our strategy to be agile as the PSV, coming through quite a difficult time in the previous cycle. I'm not sure if that also answers the question.

Yes.

[ Leo ], do you have any further questions?

No further questions.

Okay. At this point in time, we don't have any questions -- we don't have any further questions on the telephone line. Ditabe, can I hand back to you for questions from the webcast?

Certainly. Thanks, Claudia. The first question is what are the benefits of developing the PGMs plant at Kroondal. In fact, maybe what I'll do is I'll run through the questions because it's not a lot of them at this stage and then a lot of them have to do with operations. And I'll probably then hand over to Japie. So that was the first question on the PGMs. And then the second question; what are the benefits of ferrochrome being classified as a green metal? And next question is what is Merafe's -- Merafe planning to do to decarbonize its operations. And the next question is what arrangements is Merafe making to generate its own clean and green electricity. And I'll stop there for now. We'll continue with the rest of the questions that are coming through thick and fast now.

Okay. So, I mean, obviously, the foreseen benefits of developing the PGM plant at Kroondal quite easy. I mean it's something that we don't envisage as the PSV. And by treating the tailings from the chrome plant, that we then get the benefit of the PGM because it's already been mined, if I can call it that. So any addition that we can have, that is the main benefit of that. And we've seen that the plant is already now into almost final completion. We believe that the plant will be fully commissioned in quarter 2. We started to treat the material already, and we are seeing some very good benefits on that. Just in terms of the second question, what are the benefits of ferrochrome being classified as a green metal, ferrochrome is actually not being classified as a green metal. But surely, stainless steel is being seen as a [ green metal ] of the future. And for that -- and, I mean, we all know that ferrochrome is a very important part or ingredient into the stainless steel market. And for that reason, we believe that ferrochrome is definitely in it for a long time, seeing that stainless steel is actually where the longevity lies. So that's on that one. Then what Merafe is planning to do with decarbonizing its operations. I think we touched on that already. We are budgeting -- in our own model, we do want to go on-site generation. So that means, like I said, behind the meter, we're looking at about -- currently at about 150-megawatt installed wind and solar and then also a phased approach up to 800 megawatts going into the future for the next to 10 to 12 years. I think the other one has also been dealt with. Any follow-up?

Thank you, Japie. Perhaps then to move on to the next question. Some of the questions on the webcast, we've already dealt with. I think there's a question on the renewable project. And I think we've dealt with that in terms of the funding of that project. Again, that whole project is being evaluated at this stage, and the decision around how it's funded will be part of what comes out of that evaluation process. The next point is around net working capital. And the question is it seems high. Is this a year-end timing issue? Yes, I mean, a lot of focus from our business goes into managing working capital. And, I mean, the positives that have come out of that have been seen in the, for instance, the closing inventory levels management. Those numbers have consistently come down over the years with us closing the year with lower ferrochrome finished goods. We have indicated that there was an increase in raw materials, but that was for a strategic reason, to secure supply. In terms of accounts receivable balance, that, again, is a function of year-end, quite right, in terms of the indication in the question. And it went high this year because of the high sales at year-end, as I indicated in my presentation, but also as a result of pricing as it is a function of that as well and the rand-dollar exchange rate and the timing of receipts. And then accounts payable balance was thereabout in similar levels to what -- in terms of days, similar levels to what we reported at the end of last year. The next question is when is the PGM plant expected to be operational and what indicative contributions to headline earnings on commissioning. I think this, we've already answered in one form or another, and the expectation is that it will be operational by quarter 2. And we've spoken about the expected returns on the project and the payback period. What are you doing in -- there's another question here on what grade of PGM concentrate are you expecting to produce.

Yes. So unfortunately, we are not allowed to actually divulge that. We do have an offtake. We all understand that the chrome content in your PGM concentrate is fairly important, and we do have an agreement with a PGM producer that we are selling that product into the market.

Thanks, Japie. The next question is what are you doing to improve logistics. Is very possible in the future?

I think on the logistics, it's obviously an issue for ourselves and the industry. And we're working very closely with the minerals council to try and address the matter. We've had various meetings from an industry point of view with Transnet to address the issues, and we're in the process of trying to develop solutions. But obviously, in the meantime, we've got to move product, so we're relying a lot more on road than rail. And that does cause its own issues around conditions at the port, but we also rely on the flexibility that we have to use the various ports to try and deal with them. And -- but it is an ongoing issue that we are addressing. So rail is happening but not at the levels that should be happening because I think the question says, is it possible in the future? But there's actually some rail that's being used, just not at the levels that we'd like it to be.

Thanks, Zanele. The next question is what is Merafe's cost of equity. I had indicated that our weighted average cost of capital is 11.4%. Cost of equity 19.4%. The final question is, "we've seen a strong increase in ferrochrome prices in Europe, whereas in China it has been more muted since they resolved their energy issues. Is the business able to meaningfully increase exports to Europe?"

I suppose, whether you sell to China or Europe is a function of their own demand. As we all know, China accounts for more than 50%, actually closer to 60% of global stainless steel production. Therefore, that implies that most of the demand comes from China, whereas -- so we'll sell as much as we can to Europe, but I don't necessarily believe there's room to increase that in a major way. I don't know, Japie. You want to add anything?

Yes. I think with regards to this, this is -- it's all a function of supply and demand. And for sure, I mean, if we can move product into Europe, we will definitely do that, seeing that we are very exposed to China. And we've been doing that. We've been quite successful entering also that market. So we are constantly looking at increasing that, without a doubt. And -- yes. So, I mean, it's all about the supply/demand. Seeing that China also -- I mean, if you have a look at what happens -- what happened with China over the last, let's say, quarter 4, that they are almost back to the original quantities of production already. So obviously still, the small furnaces are down, the minus -- the 25 [ MBA ] type of furnaces. But, I mean, once they get all those environmental issues right, Chinese ferrochrome production will definitely stabilize again.

Thank you, Japie. Okay. There -- a few more questions have come through. The next one is around the trucking of product. Are all products still trucked to Maputo Port?

Yes. I think on that one, I mean, Maputo port is one of the ports that we use. So we basically use Maputo, then we use Richards Bay and even Durban. So there would be some trucking that happens to -- via the Maputo port.

Thanks, Zanele. And the next one is, has there been any improvement -- any movement rather on the possible imposition of a chrome export tax?

I think on that one, like we've reported before, our Cabinet, as you know, had approved that. That process should start, but there hasn't been any movement from the government side. And we're just waiting for developments on their side. Not much that can be done on our side.

Okay. Thank you. The next question is, has the local supply of reductants been resolved? Or will the business still need to import coal?

Okay. So as you all know, the energy side of things, the coal pricing had spiked to prices well [indiscernible] per tonne, which is a big concern with regards to, obviously, just getting that out of South Africa. But also for us as a reductant-intensive company, our coal supply is definitely also under pressure. I mean you would rather sell your coal export than sell it inland currently. And for that reason, we had to really negotiate with our suppliers. We -- from an anthracite point of view, I think that we've got -- we secured it fairly consistent now, and we are working together with our suppliers. On the coke side, we also -- you would see that the inventory -- as Ditabe had spoken about previously, we also made sure that we do have enough stock on the coke side. But surely, on the coke -- coal pricing, because we're also using that and we're also buying char, there's definitely a risk. Although we don't believe that we've got a security risk per se, but definitely a reductant price increased risk.

Thank you. That seems to be it from the webcast. I think we'll hand back to Claudia. Are you still there?

Yes. Yes, I am. Thank you. So we also have no further questions on the telephone lines. So can I hand back to Zanele for closing remarks?

Thank you, Claudia. Firstly, let me thank all of you for making the time to attend this presentation. Like we've said, it has been a good year, a good recovery, but we do face some challenges, which I've outlined and Japie has just outlined. For instance, the issues around cost of reductants, issue of electricity. The reliability of electricity supply is also something that we have to think about. But since the beginning of the year, I mean, we have seen some tick-up in prices, which is positive. Obviously, the current geopolitical events, we don't know really how that's going to affect us going forward. But thank you again for your attention.

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