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] Also note that this event is recorded. I would now like to hand the conference over to Zanele Matlala. Please go ahead.

Good morning. Thank you for attending Merafe's results presentation for the year ended 31 December 2022. Ditabe and I will take you through the results. And we also have Japie Fullard, the CEO of Glencore Alloys with us to assist with operational questions. The year end review has been characterized by uncertainties and challenges. The war in Ukraine contributed to higher global inflation, the energy crisis and supply chain disruptions. China's Zero COVID policy negatively impacted global stainless steel production. Locally, electricity supply and logistics challenges were exacerbated. If we move to Slide 4, which is an overview. There were no fatalities for the year, and safety performance improved in terms of the total recordable injury frequency rate. COVID-19 was not a significant factor in the year. Production was marginally higher with efficiencies achieved in previous years sustained. Cost pressures were more pronounced. As mentioned earlier, electricity supply and logistics challenges continue to plague our industry. The global market uncertainty impacted industrial production negatively, which resulted in muted Ferrochrome demand. Ferrochrome and chrome ore prices were higher and the exchange rate was weaker. Revenue was marginally down despite lower volumes. This resulted in headline earnings per share at ZAR 0.564, which was lower than prior year but a good outcome given the challenges. The Board has declared a final dividend of ZAR 0.13 per share. On Slide 6 and 7, global stainless steel production reduced by 4% from 58.7 million to 56.5 million tonnes. As can be seen from the slide, the decline was across the regions. Global ferrochrome demand followed a similar trend, declining by 2% from 14.4 million to 14.1 million tonnes. China accounts for 58% of global stainless steel production and 61% of global ferrochrome production. On Slide 8, on pricing, the trend on pricing for both ferrochrome and chrome ore peaked in quarter 3 before declining. However, there has been some recovery in pricing in the last 2 months with UG2 prices currently above USD 290 per tonne. Ferrochrome prices have also recovered and are currently above $1 per pound. We recently published the benchmark price for Q2, which increased by 15% to USD 1.72 per pound. On Slide 9, global ferrochrome production increased by 6% from 14.4 million to 15.3 million tonnes creating a surplus, which we had expected to put pressure on prices. However, for reasons mentioned earlier, that did not quite materialize. Chrome ore imports into China remained flat at 15 million tonnes. Given the higher ferrochrome production, this resulted in brought down from chrome ore stocks at Chinese ports with balances estimated to be around 2.2 million tonnes. On Slide 11, the risks associated with COVID-19 have reduced significantly from prior years and no significant impact on operations being experienced. Mitigation measures are now part of our operating standards. Testing continues, however, vaccinations were supplied until April 2022. Sadly, 2 more employees succumbed to COVID-19 during the year under review. On Slide 12, which is health and safety. The venture was fatality free for the year. The total recordable injury frequency rate decreased by 14% from 2.8 in 2021 to 2.4. This is the best performance in 5 years. The safety of our employees remains our #1 priority, and we continue to focus on improvement in our safety standards. On Slide 13, power supply challenges were more pronounced in 2022, particularly in the last quarter of the year. The venture was impacted by Stages 3 and 4, which necessitated load reduction for more than 250 hours. The cost of electricity is another key risk for the business. For 2022, the increase in tariffs was 9.61%; and for 2023, this is almost doubled at 18.65% with further double-digit increases already approved by NERSA for 2024. Renewable energy projects are being evaluated and should mitigate the supply risks and costs I will elaborate later in the presentation. Discussions with Eskom on the NPA are continuing. If agreement is reached, that would go some way in providing certainty on pricing. On Slide 14, ferrochrome production was up marginally by 1% from the 379 to 384 kilotonnes. This translates to 80% of total installed capacity and 100% of total available capacity if we exclude smelters and furnaces under care and maintenance. Lydenburg smelter and Rustenburg furnace 6 remain under care and maintenance for the foreseeable future. Boshoek Mine, which has been under care and maintenance for a number of years is in the process of being sold. On Slide 15, global macro factors, which I alluded to earlier, contributed to production costs per tonne increasing by 30%. Chrome ore costs, increased mainly due to higher market prices. With that hence, we impacted negatively by higher market cost of coke and anthracite as well as an adequate supply of anthracite locally. Imports do come at much higher prices and are impacted by weaker exchange rates. Electricity tariff increases have already been touched on earlier. Transport costs were impacted by higher diesel costs, but also they need to use more roads than rail due to challenges at Transnet. General and mining inflation was also affected in the increased costs. On Slide 16, on renewable energy. We had previously reported on an agreement we had with Swedish Stirling. Unfortunately, that deal has fallen through. The Venture is now pursuing alternative technologies for off-gas projects. The Venture is evaluating renewable energy projects, both wind and solar, on-site and off-site. Prepared bidders have been selected from the RFP process. Commercial structuring and related negotiations are being finalized. Announcements of the renewable energy projects will be made in due course. On Slide 17, in 2021, we announced our participation in the Western chrome mines PGM recovery plant. This plant was ramped up to 15,000 ounces in 2022 from feedstock of 160 kilotonnes. A payback period of less than 1 year has been achieved. On Slide 18, focus on ESG matters is key to our sustainability. JSE has issued disclosure guidance for sustainable -- sustainability aspects, which we plan to take on board. More detail will be provided in our integrated annual report. The Venture's target is 15% reduction of total emissions by 2026 and a 50% reduction of total emissions by 2035. I will now call upon Ditabe to take us through the numbers.

Thank you, Zanele, for that background to our performance. Good morning to everyone on the webinar. I appreciate this opportunity to present our full year results for 2022. It does feel like only yesterday that we are presenting our interim results. My presentation starts on Slide 20, and it starts with revenue. Total revenue decreased by 2% year-on-year to ZAR 7.9 billion. Key factors that impacted our interim results have carried over to the full year results. Full performance, therefore, was supported by strong commodity price increases as well as a weaker rand-dollar exchange rate over the period. Unfortunately, the strong production performance that Zanele alluded to, did not translate to sales due to a softer market. As a result, both chrome ore and ferrochrome sales tonnages were lower than in the 2021 financial year. Our revenue comprises 3 sources, which I will mention in order of size. First in ferrochrome revenue, which contracted by 3% to ZAR 6.8 billion despite an 11% reduction in tonnages sold. The second is chrome ore revenue, which saw a contraction of only 0.4% year-on-year to ZAR 1 billion against a 32% reduction in volumes sold. Average ore price increases of 36% valid against significant revenue shrinkage. The final is revenue from our PGM concentrate, which grew from ZAR 3 million from sales in December 2021 only to ZAR 100 million for the full year 2022. The next slide, Slide 21 details our earnings trend. We are pleased to report the continuing trend of positive earnings. For the year, we achieved headline earnings per share and basic earnings per share of ZAR 0.564 per share. The next slide highlights the EBITDA variances from the venture for 2022 versus 2021. This slide indicates a proportion of variance in percentage terms relative to the 2021 full year EBITDA as a base. Not surprising, revenue volumes were the biggest contributor to this year's performance, impacting it negatively. In terms of impact, this variance was followed by the effect of foreign exchange rates on prices, and this was overall positive. Inflation features as the next significant impact, which reduced EBITDA. The pricing impact this is commodity price impact stand-alone, which was positive, was higher than the chart illustrates. This was negated by the impact of provisional pricing sales, which must be fair valued at reporting date. Lower volumes sold resulted in a positive variance arising from lower cost of sales. This positive impact was, however, reduced by the negative impact of an increase in real prices largely from our production inputs I just -- reductions, as Zanele has spoken to. PGMs contributed positively to EBITDA and various other small variances accounted for the balance of the variances. Next, we look at the reconciliation of EBITDA to our reported profit. This is on Slide 23. From EBITDA of ZAR 2.2 billion from the Venture, Merafe reported profit after tax of ZAR 1.4 billion for the period. This was after accounting for, one, current and deferred tax of ZAR 539 million; two, depreciation, amortization and impairment cost of ZAR 220 million, there were no cash generating unit impairment adjustments over the period; three was corporate costs of ZAR 65 million, fourth was the net financing income of ZAR 24 million; and finally, income from equity accounted investments of ZAR 4 million. We delve into some of these items on the next slide. Slide 24 shows the income statement format of the results in a more familiar format. We have already discussed the revenue line. Foreign exchange gain of ZAR 68 million arises from translation gains on net asset balances at year-end based on the closing rand-dollar exchange rate then. Operating expenses were affected by, firstly, higher production costs per unit, which would have negatively impacted our cost of sales. Next, the inflationary pressures on production costs, including the impact of higher reductant costs, increased cost of power and higher chrome ore prices that we've spoken about earlier. General inflation on both fixed and other variable costs such as transportation costs would also then have impacted our operating costs. Merafe's corporate costs were marginally lower than in the 2021 financial year. The variances include higher share-based payment expense due to appreciation of our share price. They also include an increase in compliance costs as well as inflation. During our interim results, we reported that the depreciation and amortization charge includes depreciation on CapEx as well as depreciation on several assets acquired that were fully depreciable in the year. This was the position at the year-end as well. Higher cash balances and higher interest rates led to increased net interest income. And finally, although the total taxation expense is lower year-on-year, the current tax is higher than last year's because there was no pushing of unredeemed capital expenditure in the 2022 financial year. All these led to the reported profit of ZAR 1.4 billion. Moving to Slide 25, which is our balance sheet. There was an increase in noncurrent assets due to capital expenditure made in the year. Expansionary capital expenditure relates mainly to our investment in the PGM's 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 109,000 tonnes. These volumes represent 3 to 4 months of sales. The value of closing inventory increased year-on-year mainly due to production volumes exceeding and sales volumes and higher inventory costs. Trade and other receivables decreased primarily due to lower sales in quarter 4 as well as collections over the period. Cash increased due to improved earnings. The largest noncurrent liability is the rehabilitation liability of ZAR 265 million and the largest current liability is represented by trade and other payables of ZAR 1 billion. Additional breakdown of these results is provided in the SENS announcements -- SENS announcement rather, in our annual financial statements. Slide 26 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 1.7 billion. Due to the high inventory balances, on a net basis, working capital tied up ZAR 59 million in cash. Cash was used to fund the following: Net capital expenditure of ZAR 483 million, which includes the nominal amount received from sale of assets; cash was also used to fund both at 2021 final dividend as well as the 2022 interim dividend, which amounted to ZAR 850 million; and finally, there was a repayment of IFRS 16 loans, advances and foreign exchange effects that accounted for the balance of the movement amounting to an outflow of ZAR 68 million. The closing cash balance was ZAR 1.3 billion and 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, Slide 27. Merafe's owned cash is ZAR 670 million and the balance represents our share of cash at the Venture. Cash at the Venture includes ZAR 301 million, which has been set aside for rehabilitation obligations. The increase of the rehabilitation fund rate increases from an independent review of our rehabilitation obligations. The obligations were assessed to be higher due to higher closure costs. The ringfenced cash caters for both the mines and smelter closure costs. The company was [ engaged ] at period end. Merafe's headroom consists of facilities in place at the PSV to fund operational requirements and as well as the ZAR 300 million revolving credit facility with ABSA, which is the Merafe facility. Moving to Slide 29, and this is my last slide. We touched on dividend. The Board has declared a final dividend of ZAR 0.13 per share. This brings the total dividend for the year to 44% of headline earnings represents a yield of 19% on the closing share price at the end of December 2022. Thank you all for your attention. I will now hand you back to Zanele for final remarks.

Thank you, Ditabe. I'm trying to look forward global stainless steel production is expected to bounce back on the back of easing of China's Zero COVID-19 policy, volatility and disruption is likely to persist, risks of high inflation, years of recession, supply chain challenges and the energy crisis are likely to remain for 2023. Locally, the precarious situation was electricity supply and logistics challenges are not likely to disappear. So the landscape will remain uncertain. We will, therefore, focus on what is within our control, which is efficiency of operations, cash preservation, cost management and efficient capital allocation. We remain committed to creating value for stakeholders. Thank you. We will now take questions first from the conference call and then from the webcast. [Operator Instructions]

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

Just a few questions from me, please. The first one, just on this capacity utilization rate. You spoke about 100% utilization rate, ex care and maintenance activities. Clearly, that can't last. So I just wonder if you could give us a bit of an outlook as to what you think you realistically can do for the year ahead, when your big maintenance program requirements are. And obviously, care and maintenance items excluded, what kind of capacity utilization rate do you think you can achieve? The second one, maybe this one is for Japie. I'm not terribly sure. Just an update on progress on the NPA and what that means. Does it mean that Lydenburg will be restarting in a slightly different format as we've previously discussed. And if that is the case, what kind of CapEx numbers are you setting aside? Or should we be thinking about to set aside for a potential restart? And then just an outlook for CapEx for the coming year, just given those capacity utilization rates and CapEx and maintenance. And then the last question for me, just on Transnet. There have been quite a lot of comments on poor or weak Transnet performance because locomotives have been taken on to the coal lines. I just wondered if you could give us a bit of an update on what to expect there because that looks like it happened later in the year. Is that going to have a cost impact? So given we can model in the electricity cost effect should we also be thinking of a transport cost effect for Transnet?

Thanks, Tim. On the capacity utilization, yes, you're correct, it was 80% on total capacity at 100% on the ones available. So that is excluding Lydenburg and furnace 6. So yes, I think you're absolutely correct. You can always operate at 100% because it depends on when you're planning your rebuild for and so on. So for the 2023 year, I think we're looking at somewhere between 70% and 75% of total installed capacity. And then your next question is on the NPA and Lydenburg and maybe Japie can comment on that one.

Yes, good morning, all. Thanks, Tim. So just in terms of the NPA, we really did get some solid traction there with Eskom with regards to the NPA. We are in negotiations as well. Obviously, we want to include all the smelters. We do have some specific questions that we must still follow-up, but we've got a very -- we've got strong confidence that the NPA will be approved. I'm not sure if you've got any specific follow up on that one before I continue.

Will it -- Japie, it would involve then a restart of Lydenburg in some form?

No. So obviously, what we will do is if we do get the rate, we will then obviously run all the models like we normally do. And then also I think what's important to note is that before we can start up Lydenburg, there is capital that we need to invest to start it up professional, responsibly and all that so...

Okay. And so we'll get that information perhaps -- so we'll hear that later. So first, you're going to get the NPA, then we'll get the Lydenburg in detail. Does NERSA have to approve this as well? Is it -- do you think this is a 3-month, 6-month, 12-month process or you're not sure?

No, no. I'm sure. It's definitely already from Eskom to NERSA. So NERSA has now got -- if I can recall 90 days or 120 days to respond, there's also still a public participation process. So we can see this unfolding within the next 4 to 6 months.

The next question, I think, was on the CapEx and maybe Ditabe can deal with that.

Thanks, Zanele. Thanks for the question, Tim. Our guidance for the year-end is CapEx of between ZAR 450 million to ZAR 500 million.

Yes. Then the last question, I think, was on the Transnet on whether you should factor in more cost. My sense is that a lot of the costs are already in because just for this year -- for 2022 that is, we already -- of all the tonnes that we've shipped, only about 30% were on rail. So we're already incurring a lot of the cost on the road. And I mean, I don't necessarily think that would change that much in the current year because the challenges still remain. I don't know if Japie, you have any other thing to add on that?

Thanks, Zanele. I just think that -- seeing that we are now working together with the Board of Transnet, and we are looking at solutions. So I mean, Tim, you are correct to say that some of the logos were taken away. Our, let's call it target, of chrome and ferrochrome should be about 8.6. We're currently sitting at just over 4. So there's definitely a huge challenge in terms of getting more product on rail. And remember, if we don't rail it, the problems in the port are also actually escalating because your ports are being designed to take by truck and by rail. So if you now export everything via road, it's also a problem for us at the port. So it's definitely something that we're working with Transnet and I can tell you we've got some robust discussions with them, very good initiatives coming out there. So hopefully, we will be able to solve some of the problems. We must get more product on rail.

Can I just ask one more follow-up question, sorry. Just this rehab liability. So I've covered Merafe for a long time. And the -- suddenly in the last sort of 12 months starting in June and now in December, we've had this emerging cash saving for rehabilitation. What's changed? I mean, it doesn't feel like the underlying business has changed. I can't see a massive regulatory change. So what has changed that you suddenly feel like there's a need to keep what is a considerable amount of cash aside for rehabilitation?

I'll take that question, Tim, and Japie can come in if I've left anything out. But I think the simple question has to do with how previously the rehab obligations have been held with through guarantees that we've given the DMR, those guarantees have been provided by banks, are essentially guarantees that are not funded by any cash. So to the extent that the obligations arose and needed to be funded, would have to then source the cash to finance those. And so this is really a proactive approach to say, we know this is coming. And we have in the past provided the guarantees, but perhaps let's start building some cash reserves to be able to fund those obligations. Another benefit with the funded with the building up of cash is that the guarantees themselves become cheaper in the sense that they then become funded guarantees.

Okay. Well, I mean, it makes good sense, right? But obviously, it raises -- I mean you sort of said it's ringfenced. That's not legally ringfenced. It's kind of corporately ring-fenced. So it could be available for other things if you wanted it to be.

That's spot on.

We have no further questions on the conference call. And I would like to hand over to take some questions from the webcast.

Thanks, Chris. There are a few questions on the webcast, which I will run through and then perhaps ask my colleagues whoever I think is best suited to answer them to deal with each of them. The first question is on issues around Transnet, and I think Japie in his response has dealt with that question. And then the second question is how significant is the impact of recent earthquake on Turkish chrome exports. Maybe Zanele can take that quickly.

Yes. On that one, the impact isn't significant because, as you know, Turkey is high chrome content. So it's a niche product. So it's not like, out like comes from South Africa. So if you just look at the import into China, you will see that the bulk of it comes from South Africa anyway.

Thanks, Zanele. The next question is how do ferrochrome sales volumes in January 2023 and February 2023 compare to last year? Obviously, for obvious reasons, we can't give that information because it's not publicly available. But I think perhaps guidance can be -- some guidance can be obtained from the fact that with opening up of the Chinese market with the relaxation of the Zero COVID policy that has been positive overall to our industry and one can then therefore conclude that it has had a positive impact on sales volumes. Is logistics a constraint -- this is the next question now. Is logistics a constraint on ferrochrome sales volume, if the market [ depends ], how much excess ferrochrome stock are you holding currently?

Yes. I mean, look, the logistics are a constraint for both. But I think we felt it more on the chrome ore side. So -- but in terms of how much stock are we holding? I mean you'd have seen that we've produced more than we sold and therefore we're holding like in excess of, I don't know what the exact number is, maybe Ditabe has it, but there is an excess because of various reasons. Firstly, it was logistics, especially on the chrome ore side. But on the ferrochrome side, there was also the demand side part of it that impacted how much stock. And I think we've put out the number.

Correct. Thanks, Zanele. I mean we also just on inventory, we had indicated previously that with the guidance given around production for the year that plans current year are to only produce a smelter over the winter months in 2023. And to some extent, this will then enable us to draw down on the high-level levels of inventory that we are sitting with at the moment. The next question is around renewables renewable energy. Please provide more details on how the potential construction of an offsite renewable energy facility will be financed, how much will the JV have to spend. This is something that is ongoing in terms of the evaluation of the opportunity in terms of looking at the commercial aspects of the transaction. But the thinking currently seems to be more around PPA type of arrangement where the third party will finance the full facility and we just pay fee for utilization of electricity. Obviously, should that change, then we'll have to look at ways of financing this. But that, at the moment, is not a consideration. Japie, have I captured that correctly?

Yes, Ditabe, 100%. We are in close discussions with various IPPs, and we are also close to our financial closure on these projects. So we could see quarter 2, quarter 3 that we will have a financial model already.

Thanks, Japie. With ferrochrome pricing being stronger in 2023 than the second half of 2022, are you accelerating sales volume to take advantage?

Theoretically, that's what we should be doing, but it's also a function of demand and logistics. But yes, theoretically that's what we should do.

Thank you. The next question, what percentage of your anthracite tonnes consumed are imported as opposed to being sourced locally? If still importing, from which country are you importing anthracite? I'll give this a [indiscernible] then Japie can fill in where I've left. In 2022, consumption of what was the imported anthracite is about 10% of our total consumption. And the bulk of what we import we source from Russia. So with the Russia-Ukraine conflict, we haven't been importing at the moment. Japie, anything to add to that?

Yes. No, thanks for that. Yes, we are also looking at various sources in South Africa. We are also assisting in terms of evaluating some of the anthracite in operations. We're also looking at neighboring countries. I can say that we are looking at suppliers from Swaziland. There's also a couple of projects that's coming up that we are going to see if we can capitalize on that.

Thanks, Japie. The next question is, can you please talk us through how you determine excess cash for distribution as dividends?

Yes. I think there, we look at our dividend policy which is 30% of headline earnings. But over and above that we then look at how much cash is available. But taking into account how we see the market going forward and whether there are any obligations that we might have to settle. So it's a holistic view of what the future looks like or at least what we can see at a point in time. As you know, we have a lot of volatility. But overall, it's policy and then how much cash and -- what does the future look like?

Thanks, Zanele. The next question is what is the trend in head office costs and the assumption here is the reference is to Merafe's head office costs. The costs are fairly well managed. And other than inflationary costs that come through, what we have seen is certainly an increase in compliance costs which are then from various compliance departments that have come either from the JSE or from other regulatory bodies. But it is an area of costs that we manage very strictly. And as is evidenced by this year's costs that are only marginally higher than last year's. Any ballpark -- the next question, any ballpark estimate of contingent liability, tax liability, potentially material? It is a matter that we have engaged advisers to assist with arising from the [indiscernible] findings. Unfortunately, we are not at liberty to discuss the values involved based on advice from our legal advisers. The matter is ongoing and it discloses a contingent liability precisely because its outcome remains uncertain, including whether any tax exposure exists. And any developments around that will certainly be -- we communicate those to the market in due course. The next question is to expect your rehab liability to increase further. Yes, this is an exercise that's done every 3 years by independent third parties. And from an accounting point of view, every year, there is an increase based on inflationary adjustments that come with the way you account for this liability. But whether in the future, when we do this exercise, again, the number will be higher or lower, I suppose only time will tell. But generally, I think if one considers other inflationary costs, the chances are it will -- it's likely to increase, but we obviously can't indicate the quantum at this stage. The next question is, would you consider doing share buybacks and or retaining special dividends should your access -- should your cash exceed internal cash buffers? Certainly, these are 2 methods that are constantly evaluated within the business, whether or not it's appropriate to do a share buyback. And if not, whether any additional cash that is held within the company should be paid out as additional -- as an additional dividend. And as an earlier indicated, depending on the conditions at a point in time, there certainly could be opportunities where share buyback maybe makes sense to revisit or additional cash payments as the dividends are considered by the Board. And the last question, which ports -- Okay. The question, I think, is around which ports we use to transport are material and whether there are any efficiencies that we experience at the ports. Maybe Japie, you can take that last question.

Yes. Look, I think that we -- as the PSV, we are fortunate that we've got various exits. So we do use various ports -- and by doing that, it gives us a bit more flexibility. We do use Maputo quite extensively, but we also look at [indiscernible]. But I think in there comes the problem is that some of the ports because of all the trucks and all the material that must be tracking, we do see some issues with loading and offloading definitely. Thanks, Ditabe.

Thanks, Japie. I think this concludes all the questions that were on the webinar. Back to you, Chris.

Thank you, sir. We have no further questions on the conference call. So I'd like to hand back for some closing comments.

Okay. Thank you for your attendance this morning. We are pleased with the results because when we look at them, we think they don't quite reflect the challenges. I mean, they're lower than the prior year. But given all the challenges, whether it's logistics, load shedding and so on, it's still a very solid result. And thank you very much for your attendance.

Thank you very much. Ladies and gentlemen, that then concludes today's conference and you may now disconnect.