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

Good day, ladies and gentlemen, and welcome to the Merafe Interim 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 the Merafe results presentation for the 6 months ended 30 June 2022. Ditabe and I will take you through the results, and we also have Japie Fullard, the CEO of Glencore Alloys with us and he will assess towards operational questions. Although we recorded solid results for the 6 months to 30 June, it doesn't quite reflect the uncertainties and challenges experienced during the period. We had to contend with geopolitical issues such as the war in Ukraine, China Zero-COVID-19 policy and persistent inflation. Locally logistics challenges and unreliable power supply were also factors. If we move to Slide 4, there were no fatalities in the 6 months, and the TRIFR improved by 11%. As mentioned earlier, there has been a global market uncertainty fueled by geopolitical events, high inflation and fears of global recession. Global industry production has decreased for the 6 months. Ferrochrome and chrome ore prices were higher. Ferrochrome and chrome ore production was marginally higher than the comparative period as a result of sustained production efficiency. Cost pressures remain a concern and logistic challenges persist. Revenue is up 15% and headline earnings are 50% higher. The Board has declared an interim dividend of 12 cents per share. Slide 6. Chrome ore prices increased substantially, almost doubling in the 6 months. The increase in prices can be attributed to increased demand with more ferrochrome production in China post the relaxation of our port restrictions. Logistics challenges were another contributing factor. Chrome ore stocks at Chinese ports are estimated to have declined by 40% during H1. Ferrochrome prices have remained robust for most of the 6 months to June 2022. However, prices have since been declining and current Chinese CIF prices being below USD 0.90. On Slide 7, China continues to dominate in terms of global stainless steel production and accounted for more than half of the production. China also accounted for 60% of the global ferrochrome demand. On Slide 8, global stainless steel production has declined by 2.67% from 30 million tonnes in June 2021 to 29.2 million tonnes. However, some growth is expected for the full year. Global ferrochrome demand also decreased by 4.2% from 7.4 million tonnes to 7.1 million tonnes. On Slide 9, global ferrochrome production is expected to grow by 8% from 14.4 million tonnes in 2021 to 15.6 million tonnes per year. This growth will be driven by China as power reforms restrictions that were in place in 2021 have largely been lifted. Chrome ore imports into China remained relatively flat at 6.5 million tonnes, with South Africa accounting for 80% of all imports into China. As mentioned earlier, Chrome ore stocks at chinese cost decreased due to drawdowns as prices remained high. Slide 11. COVID-19 cases have declined and restrictions have been lifted, but risks remain, and we therefore, cannot be complacent. No production stoppages due to COVID-19 we're experienced in the first half of 2022. We continue to observe COVID vaccine protocols. We had a good uptake of vaccines with 94% of employees having had at least 1 jab. Thirdly, 2 employees succumbed to COVID-19 in H1. On Slide 12, there were no fatalities recorded in the 6 months to June 2022. The total recordable Injury frequency rate improved by 11% compared to December 2021. The safety of our employees is a priority focus area and the goal there being achieving zero harm. On Slide 13, ferrochrome production increased marginally by 2% from 199 kilotonnes in H1 2021 to 203 kilotonnes in H1 2022. This is about 85% of installed capacity. The production efficiencies we reported previously have been sustained during the period. Lydenburg smelter continues to be under care and maintenance. On Slide 14, total production costs per tonne increased by 13.6% from December 2021. The key countributors being higher chrome ore costs driven by higher market prices, higher reduction costs as a result of higher market prices and weaker in U.S. dollar exchange rate, increase in electricity tariffs was 9.6% effective 1 April 2022 as well as general price inflation. On Slide 15, the Swedish Sterling plant is planned for construction in H2 2022. The plant will be set up at Lion smelter to convert off-gas to power, the venture considering renewable energy projects, both on-site and off-site projects are being looked at. preferred suppliers for the offsite plants have been identified. And the commercial and structuring arrangements are still to be determined. On Slide 16. The CapEx on the PGM plant has been ZAR 44 million to date with about ZAR 11 million to be spent. Production is being ramped up in 2022 and payback is expected within 1 year. 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. It gives me great pleasure to share our 2022 interim financial results with you. Starting with revenue. Total revenue of ZAR 4.291 billion represents a 15% increase compared to half 1 of 2021. This growth was underpinned by strong commodity price increases as well as a weaker Rand/Dollar exchange rate over the period. Although we had strong operational performance because of continued production efficiencies, our chrome ore and ferrochrome sales tonnages lag production and were lower than the same period in 2021. Delving into the constituent of revenue. Ferrochrome revenue grew by 12% while chrome ore revenue grew by 22% compared to half 1 of 2021. Revenue from our PGMs concentrate grew to ZAR 46 million over the reporting period. We had no PGMs sales in the 2021 comparative period. The next slide shows the history of our earnings. We are pleased to report that continue -- the continuing trend of positive earnings. For half 1, 2022, we achieved headline basic earnings per share of ZAR 0.37 per share. These figures are in line with our trading update guidance. There were no headline earnings adjustments, that said two earnings measures are the same. On the next slide, we present the variance analysis of EBITDA from the range for the first half of 2022 versus half 1 of 2021. The slide shows the proportion of the variance in percentage stands relative to half 1 of 2021 EBITDA as a base. Revenue prices were the biggest contributor to this year's performance. These were followed by the effect of foreign exchange rate on prices, which were overall positive. As expected, lower volumes sold resulted in a positive variance arising from lower cost of sales. And finally, the PGMs business accounted for the balance of the positive derivatives. On the negative side, lower volumes sold resulted in reduced revenue. This was followed by inflationary pressures on costs. And finally, various other smaller movements, which accounted for the balance of the negative variances. The reconciliation of EBITDA to our reported profit is presented on the next slide, Slide 21. From EBITDA of ZAR 1.4 billion from the Venture, Merafe reported profit after tax of ZAR 925 million for the period. This was after accounting for taxation, both current and deferred of ZAR 354 million. Depreciation and amortization cost of ZAR 105 million. There were no impairment adjustment over this period. This includes also corporate cost of ZAR 24 million, net financing income of ZAR 10 million and income from equity accounted investment of ZAR 1 million. We will discuss some of these items further on the next slide. As usual, on this slide, Slide 22, we present financial performance in a more standard format. We have already discussed the revenue line. Foreign exchange gain of ZAR 46 million derived from translating -- or from the translation that of gains on net asset -- asset balances at year-end based on the closing rand/dollar exchange rate. Operating expenses were affected by higher production costs per unit, which could have negatively impacted our cost of sales. The inflationary pressures on production costs include the impact of higher reluctants costs, increased cost of power and higher chrome ore prices that Zanele has already spoken about. Additionally operating expenses increases include higher variable selling cost per tonne due to higher freight and transportation costs. Merafe's corporate costs are higher by ZAR 4 million prudent period. The variance improved -- the variances rather includes higher share-based payment expense through the appreciation of our share price, an increase in the bonus provision as well as inflation. The depreciation and amortization charge includes depreciation on CapEx over the period as well as depreciation on several assets that are fully depreciable in the year. Higher cash balances and higher interest rates led to increased interest income and higher profit led to an increase in the taxation charge. This led to the reported profit of ZAR 925 million. 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 increased from last year's closing balance of 76,000 tonnes to 99,000 tonnes. These volumes represent 3 to 4 months of sales. As expected, the value of closing inventory increased period-on-period mainly due to production volumes exceeding sales and higher inventory costs. Trade and other receivables increased due to sales in quarter 2 influenced by higher commodity prices, weaker closing rand/dollar exchange rate as well as timing of receipts. Cash increased due to improved earnings and once more the largest noncurrent liabilities, the rehabilitation liability of ZAR 187 million and the largest current liability is represented by trade and other payables of ZAR 1 billion. There is some additional breakdown that is provided in the sense announcement on these amounts. Slide 24 provides a reconciliation of our cash balance. We started 2022 with a combined cash balance of ZAR 972 million. Net cash from operating activities increased the cash balance by ZAR 748 million. Due to the high debtors and inventory balances, on a net basis, working capital tied up ZAR 426 million in cash. Cash was used to fund the following items: capital expenditure of ZAR 155 million. Cash was also used to fund the 2021 final dividend of ZAR 549 million and repayment of IFRS 16 loans as well as foreign exchange effects accounted for the balance of cash movement. Closing cash balance was ZAR 1 billion. This includes Merafe's own cash as well as its share of cash at the venture. This split together with Merafe's headroom are shown on the next slide. On Slide 25. Merafe's own cash is shown as ZAR 555 million and the balance is our share of cash at the Venture. Cash at the Venture includes ZAR 194 million, which has been set aside for rehabilitation of obligations. This has increased slightly from the year-end balance due to the yield on the investment over the period. The company was engaged at period end, and Merafe's headroom consists of the ZAR 300 million revolving credit facility with ABSA as well as facilities in place the PSV to fund operational requirements. Moving on to Slide 27, which is my final slide. The Board has declared an interim cash dividend of ZAR 0.12 per share. The dividend works out to 32% of headline earnings and represents a yield of 7.7% in the closing share price at the end of June 2022. Thank you all for your attention. I will now hand you back to Zanele for final remarks.

In conclusion, the global economic growth has been revised down for various reasons, including persistent inflation. Geopolitical issues will impact the growth direction. The local economy is facing a number of risks. Industrial production is expected to increase after declining in the first half. Prices are already under pressure and costs are escalating. We will continue to focus our energy on efficiency at our operations and cost control as well as cash preservation and capital allocation. As always, we will continue to assess opportunities that will deliver value, in June. We will now take questions, first from the conference call, then from the webcast. [Operator Instructions]

[Operator Instructions] At this moment, we have no questions on the conference call. I would like to hand over to Ditabe for webcast questions.

Thanks, Irene. The first question on the platform is from Martin. And the question is what progress has been made to provide renewable energy and core generated power to business in the light of the President's latest energy statement. Perhaps, I'll let Japie take that question.

Thank you, Ditabe. Yes, I think I did already previously also discussed this. I told the forum of our intentions. I can now say that our durable energy strategy is now well in hand. We, at the PSV also established a new division, which we -- which falls where time of change and energy falls into that. And like I said previously as well, we are focusing on 3 areas: we are looking at cogeneration. We've started with our project at the Lion complex with Swedish sterling. So that first block will be delivered within the next month. And then after, we will then continue on that. So that's on the cogeneration side. There's also other projects that we're looking at, including battery technology or storage technology. So we're also starting to look into that. If we then look at on-site or behind the meter, that would be typically a PV. We're also considering installing some capacity at some of our bigger operations and also in the eastern side, closer to the Chrome mines, that's behind the meter projects. There's quite a couple that we are busy with our prefeasibilities on that. And then if we look at our off-site projects, like was stated by Zanele is that we already identified some players, some IPPs, where we've signed deals to take it also to feasibility study. So clearly, we are looking at bigger installations as well. The fact that the president also gave his presentation 2 weeks ago. We can now also -- we are also investigating other projects to the tune of about 150-megawatt each that we are also considering. So quite substantial focus in that area. Not sure if there's a follow-up on that.

Thanks, Japie. I'll move to the next question. When do you see the PGM business cutting produced revenue and what sort of volumes are you expecting to receive from that business? I think we've already indicated that, that business is operating already and therefore the 6 months to June, we've managed to generate ZAR 46 million of revenue arising from a 1.3 thousand ounces of PGM concentrates sold. And so that business is, in fact, operating and the plant that we started to build last year has been fully constructed. The next question is what is the rent -- is the rough rent price of ferrochrome at Merafe breaks even at assuming production remains the same, not exact, a rough estimated number. And that is such a difficult question to answer because it really does depend on a number of factors. But if I am to Venture an estimate I would say, the price of between ZAR 0.80 to ZAR 0.90 as depending on the rand/dollar exchange rate, but that is really a rough estimate of that price. The next question is what do you publish the European quarterly ferrochrome price? Why do you publish rather the price when it has no relevance to your sell price received and most sales are to China? I'll let Zanele answer that and then move on to the next question, which is also a related question, but I'll read that out just now.

Yes, I think you are correct to say that price -- the benchmark price has become sort of irrelevant for our purposes. It stays relevant for the stainless steel producers because the way they price stainless steel is on a surcharge basis. So hence, we continue to publish it. But if you're analyzing our business, it's better to look at the Chinese CIF prices and then for the European market, you always a bit of a premium.

Thanks, Zanele. The next question why was the European benchmark price of quarter 2 and quarter 3 of USD 216 cents and USD 180 cents account so much lower than the spot European prices of USD 4/300 cents per pound. Let Zanele take that one as well.

Yes. I mean there isn't much of a spot price -- of the spot market, but also that price just sounds like a lot higher. I'm not sure whether it would have been high carbon or low carbon. So it just depends on what that product was you were looking at today. But there's very, very little spot market.

Thank you, Zanele. The next question, I think with antiviral it's a question on the breakeven price for ferrochrome prices. Okay. The next question related to that is what does the business have mechanisms in place to hedge the risk of prices dipping below this certain break even price. And the straightforward answer days, we do not -- our policy is not to hedge both rand/dollar exchange rate and commodity prices, not that there is a mechanism in fact in place to hedge the commodity prices that we are aware of. Why were sales volumes lower than last year and lower than production volumes?

I think that's just the function of stainless steel production, with global stainless steel production, which has decreased and therefore, the demand would have reduced for ferrochrome.

Thanks, Zanele. Next question. Dividend payout is incredibly conservative [indiscernible] of payout ratio. Why is this when you have ZAR 1 billion in net cash and there is cash to unwind for working capital. There's also excessive cash at Merafe head office. And I think that the position that we already take around June is one where the board looks at the full year. And based on the market circumstances made the appropriate call around what dividend to declare. I think Zanele has already spoken to the uncertainty that persist in the market. And that was one of the key factors that the board considered in arriving at the decision around how much dividend to declare. But also to indicate that the [indiscernible] that is referred to is the cash that sits at the venture as well as cash that sits at Merafe. And at Merafe, as the presentation indicated, we had ZAR 500 million cash available. And of that the ZAR 300 million was to get out of the cash available than leaving the balance to see us through the remainder of the year. Obviously, at year end, we then have the opportunity to consider appropriate dividends declared in light of the full year events have been transpired. We move on to the next question. Your inventory increases materially at 12 months. of sales and absorbed material cash, why are you holding such high invents and what is the target of [indiscernible]?

Yes. Maybe if I may answer that. I mean our targeted stockholding is really around 3 to 4 months. So 4 months is not necessarily out of kilter. So obviously, for the first half, we produced more than we sold. But also in the second half, we also have 2 months of winter. We -- production does come down a bit. But at 3 to 4 months, we kind of there -- because when you look at the stock, it's not only stock at plant, it's what at the port, what's on consignment. So if you take the overall, that's not out of kilter. If we are at 3 month or 4 months, we try and reduce it back to the plan here was to sell whatever we produce. But obviously, the market went the week went, and we ended up with a little bit more is not out of kilter necessarily.

Thanks, Zanele. The next question is around dividend, but I think we've already covered that question. The following question, what level of ferrochrome inventions optimal? I think that question is also one that we've covered. Yes. Yes, it is a question we've covered already talked about the working capital inventory working capital tied up in cash. Can you please comment on how July and August trading has been as volumes have picked up?

Would like pick up in July of volumes. And that in terms of August, we're still in August. So we can't really give you a true picture of that.

Yes. And I think if CRU again -- CRU forecast anything to go by because sales are also in fact to large extent the function of stainless steel production and that an alevates to that. There is expectation that a bit small positive growth, but there will be a positive growth for the rest of the year. So if that has come through, we should see a pickup in volumes sold. And then the next few questions. What are you expecting for same business CapEx going forward? What do you see at the normalized levels? I read out all the questions and then answer them. And then the question -- the next question is what are your plans being Lydenburg Eskom and share view of potential production. And then the next question is the prices have been declining as Chinese production has come back online. Do you think that we are near a point of cost save support? And then the final question from the same person, with the sales lower than production, is it likely that sales in half 2 are likely to exceed production. I'll take the first question and then...

Japie can take...

Japie, can take the second in the and then we'll deal with the rest of the questions accordingly. But saying business CapEx, our expectation is still that CapEx for the full year will be between ZAR 400 million and ZAR 450 million, and we consider that those are sort of the normalized levels, especially that it would have come down a bit from the slightly higher levels in the prior year where there was a bit of catch-up capital spend. And perhaps, Japie, you could take a question on Lydenburg. And I think that question in case we didn't get all of it. What are your plans to bring Lydenburg Eskom? And can you say -- can you share a view of potential production and CapEx?

Yes. Thanks, Ditabe. Currently, what we are doing sees coming from Tim is that we are continuously evaluate -- evaluating our cost of production versus the sales prices. And currently, the way that it is now. And remember, we're also looking at our negotiated price agreement that we want to secure the with Eskom. So at this stage, we are -- we are not envisaging starting up the Lydenburg complex just because it doesn't make sense currently. But obviously, once we do see all these initiatives coming through, it's still something that we keep on considering and we are running scenarios. I also want to say that before that reason, we've also did not cut down our maximum demand. So we can -- I mean that's why we keep it. We keep it there for a specific reason. Also, what we're looking at is if we do start up Lydenburg, unfortunately, as you would know, this is a very old plant, and that was part of the reason why we did close the plant is that there will be a fair amount of capital injected or let's say, the requirement would be very close to about ZAR 1 billion to start it up to make it viable for us. And yes, the production is about between late side 300,000 tonnes of ferrochrome production. Not sure if that's enough that I can share. We're also considering other options by the way at Lydenburg. So we're also looking at perhaps converting some of the areas into stockyards and to see if we can't push out further value out of that infrastructure.

Thanks, Japie. And the next question, I'll hand over to Zanele. Prices have been declining as Chinese production has come back online, do you think that we are near point of cost care support?

In a normal year, Tim, I would say we probably especially if you take into account that chrome ore prices are still relatively high. So for the Chinese to produce they need the chrome ore and hiring the right person. So you think the current prices are there. But in a year like we have when there's other factors. For instance, in the first half, we already expected that prices would come under pressure because the Chinese production was back. But then there were other factors like the Russia-Ukraine war and all those uncertainties kept the prices sort of up. So if logically, you would say, given the fundamentals we're probably at that level.

Thanks, Zanele. I think we've kind of touched on the last question that came through saying about sales lower than production whether this is likely to continue into the second half of the year. And the [indiscernible] really is a function of what sort of production comes through from stainless steel to let them that is that comes through and China continues to come up with plans to pick up the economic activity in China, then that should translate to demand for ferrochrome and we should see increased volumes in the second half of the year. Next question is what were the main reasons behind the lower sales volumes in the first half. I think we've covered that question. Following question is that China slowdown affected the ferrochrome price and why this Merafe breakeven ferrochrome price in the ferrochrome. The breakeven question we have touched on and the China slowed down I think it's more than China. It's just global sentiment and recessionary concerns in optimum that have continued as to the sort of pricing that we are seeing currently. Next question is how many megawatts in total plant? And I take that one, I think this has to do with the renewables.

Yes. Thanks, Ditabe. So currently, the Lion project, if we can install all the units, we're looking at about 10-megawatt cogeneration at Lion. Then behind the meter, we're looking at about in the region of 200 megawatts PV at the Wonderkop smelter complex area that we are doing the pre-feasibility. We're also looking at 50-megawatt in the eastern Crow mines area. So that is behind the meter. And then on your let's say, off-site generation. We're looking at about the ones that we gave, let's say, approval to continue to a bankable solution. We're looking at about 184 megawatts PV installation. And the ones that we're also considering now, we're looking at another 300 megawatts, 150, 150 and 1 is wind and 1 is summer.

Thank you, Japie. The next question is South Africa has lost substantial ferrochrome market share to China. You have a long-term plan to win back some of the lost ferrochrome market share? Or are you content with simply exporting more crew. I'll let Zanele handle that one.

Yes. I think from a South African point of view, it's unlikely that you will see more capacity for ferrochrome because that's smelting and high energy and currently with the challenges we have. I'm not aware of any plans to increase capacity of smelting. And when it comes to chrome ore, I mean we only export what is in excess, what we don't require in our smelters. So we don't necessarily have plans to increase chrome ore exports beyond the levels that we had.

Thank you, Zanele. Next question is, given the value that the share price is at, has the board considered any share buybacks. The issue of the share buybacks is something that the Board last year made a call to sustain the share buyback and it's an issue that is review them at should positions at that if they revisited a decision on that will be made by the Board. But at the moment, there isn't any intention to buy back the shares. The next question is, what is your expected volumes from the PGM -- PGMs plant in steady-state production. Japie, you want to take that one? I think we did see the sense announcement indicate what installation capacity of the plant is, but I'll let you tackle that one.

Yes. Perfect. Thank you. Thank you, Ditabe. We are looking at about -- in the region of about 25,000 ounces for the next year. So yes, I'm not sure if that's -- I mean I can't be more clear than that, but yes.

I think that's sufficient.

Yes, the 2022 budget, we are looking at 16,000 ounces. But for the 2023, we are looking at 25,000. Thanks.

Thank you. The next question is -- okay. It's around inventory levels. And again, I think we expect the working capital question. Following question is, what average, what average rand dollar rate that you achieved in H1 results, the average for -- that we achieved over the period was ZAR 16 -- ZAR 15.40 to the dollar over the 6 months. The next question is apart from parent ferrochrome pure-play and now PGM business coming through as the business looks to diversify [indiscernible] steel within the mining space. I think I'll let Zanele tackle that.

Yes. Thanks for that question. I mean we continue to evaluate opportunities to necessity. And likely, it will be within the mining space sticking to what we know, what I don't see us going beyond that, that we continue to look at opportunities. there are any that we're considering right now.

Thanks, Zanele. The next question is the chrome ore spot tax still on that path at all?

Whatever submissions that needed to be made to the various government departments around that we need and at some point, having took a decision, but that was the direction to go, and it's just old from a government side. So really difficult one to answer it. It's not something that we're actively pursuing right now because we've submitted whatever we could. And within government, it just hasn't been a clear direction as to whether that's coming or not coming.

Thanks, Zanele. I think the last one that has come through is not a question, but just a comment essentially suggesting that we -- Board considers and buyback of shares given the PE ratio of the company and that there be no debt. And I think that takes us to the end of the questions on the web. And if there are no other questions.

Yes. Thank you all for dialing in. And all the questions that you've asked. Yes, that's it. Thank you.

Thank you so much.

Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect.