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

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

Good morning. Welcome to Merafe's interim results presentation for the period ended 30 June 2023. Ditabe and I will take you through the results. And we also have Japie Fullard, CEO of Glencore Alloys, with us to assist with operational questions. The first half of 2023 was characterized by similar challenges to those we had in 2022 financial year. These included persistent high inflation, unreliable electricity supply and logistics challenges. Despite these challenges, Merafe recorded solid results. If we move to Slide 4, which is the year -- or the half year at a glance, no fatalities were recorded in the first half of 2023, and there was improvement in the total recordable injury frequency rate. There was no impact of COVID-19 on operations. Production volumes were lower for both ferrochrome and chrome ore. We continue to benefit from efficiencies at the smelters. Production costs increased by double digits. And as mentioned earlier, power and logistics challenges assisted. Global market uncertainties continue. Stainless steel production decreased, and results had in ferrochrome demand end in lower ferrochrome prices. On the positive side, chrome ore prices increased significantly and together with the weaker currency contributed to the higher profitability. Revenue increased by 11%, and headline earnings of ZAR 0.42 per share was higher by 14%. The interim dividends of ZAR 0.20 per share has been declared by the Board. If we move to the market, which is on Slide 6, 7 and 8, global stainless steel production decreased by 2%. Only China showed growth, with all other regions remaining the same or declining. China continues to dominate global stainless steel production, accounting for almost 60%. Global ferrochrome demand has also declined marginally, with only China registering some growth. China accounted for about 65% of this demand. Global ferrochrome production increased by about 6%, contributing to the oversupply of ferrochrome. The increase in production came from China and Kazakhstan, with the rest of the regions as staying the same or declining. Chrome ore imports into China increased by 3%, with 80% of these imports originating from South Africa. We move to Slide 9 on pricing. Chrome ore prices remained strong, mainly as a result of logistic constraints in South Africa and Chinese port stocks remaining low. On the other hand, ferrochrome prices were weaker due to subdued demand and oversupply of ferrochrome. Ferrochrome prices have been trending lower recently, and current Chinese CIF prices are just below USD 1 per pound. Move to Slide 11 and 12. COVID-19 risks have reduced significantly. However, we are not complacent and continue with mitigation measures. There were no fatalities in our operations. The TRIFR decreased from 2.4 in December 2022 to 2.0 in June 2023. We continue to focus on employee safety with campaigns and programs to increase awareness. We move to Slide 13 and 14. Power supply challenges continued. In fact, we had the worst levels of load shedding during the first 6 months. For the operations, we are only impacted by load curtailment from stage 3 upwards. With effect from 1 April 2023, electricity tariffs increased by 18.65%, putting more pressure on costs. The NPA applications, which we reported on previously, are progressing, albeit slowly. We continue to explore renewable energy options to counter both availability and pricing challenges. We are looking at co-generation technologies for off-gas solutions. Both solar and wind sources are being considered, and progress is being made for both on- and off-site projects. Preferred bidders have been selected for off-site generation. And currently, commercial structures are being finalized. We move to Slide 15. Ferrochrome production decreased by 9% from 203 kilotonnes in June 2022 to 185 kilotonnes. This translates to 96% of available capacity. And if we exclude Lydenburg smelter and Rustenburg furnace 6, which both remain on care and maintenance, during the winter months in June, July and August, only Lion smelter was operating. This is also a period where electricity tariffs are higher due to high demand. We move to Slide 16. Our total production cost per tonne increased by 17%, driven mainly by chrome ore cost. As explained earlier, market chrome prices were significantly higher. Reductant costs were also affected by higher market prices and lack of adequate local supply, necessitating imports. General and mining inflation were also a contributing factor. We move to Slide 17. PGMs production was higher compared to June 2022. However, [ basket ] prices were significantly lower. Ditabe will touch on the impact of -- on PGMs' revenue and profit. We move to Slide 18. We are focused on ESG compliance, and looking at ways to improve disclosure in this regard. The Venture aims to reduce emissions by 15% by 2026 and by 50% by 2035, that's if we're using the 2019 as a base. We'll pause here and call on Ditabe to take you through the financial details. I will come back to conclude thereafter.

Thank you, Zanele, and good morning to everyone joining us today. I'm happy to present Merafe's 2023 interim results. My part starts with Slide 20, which covers revenue. Total revenue increased by 11% period-on-period to ZAR 4.8 billion. Rand has been weak for most of the reporting period. And this is one of the key contributors to our financial performance. Chrome ore prices have also been strong, and these supported revenue growth over the period. Due to weakness in the market, ferrochrome volumes sold were lower than in the prior year. Now touching on each of the 3 revenue sources. Ferrochrome revenue increased by 5% to ZAR 3.8 billion, despite a 10% reduction in prices achieved. As Zanele indicated, ferrochrome volumes sold were marginally lower. Moving on to chrome ore, it was the star performer this time around. Higher prices, which held up over the reporting period, and higher volumes sold contributed to a 49% increase in revenue. And finally, our PGM revenue of ZAR 35 million was negatively affected by both production issues in terms of feed and yield as well as PGM prices, which have been under pressure in 2023. Moving to the next slide. We are pleased to announce or to report data once again, the continuing trend of positive earnings. For the 6 months, we achieved headline earnings per share and basic earnings per share of ZAR 0.42. We analyze our EBITDA on the next slide. To those that may not be familiar with this slide, it indicates the proportion of H1 EBITDA variances in percentage terms relative to the H1 2022 EBITDA as a base. As Zanele indicated, the key performance driver was the weakness of the ZAR-dollar exchange rate. This accounted for 53% of the variance. Inflation has eroded a sizable chunk of the variance. This impact was followed inside by the net impact of prices. Although chrome ore prices were up, their impact was more than offset by the impact of lower ferrochrome prices. Overall, the impact of revenue volumes was positive, accounting for 4% of the variance. Other smaller variances are responsible for the balance of the movement. Moving on to the next slide. Here, we look at EBITDA of ZAR 1.6 billion generated from revenue from the Venture -- generated from the Venture and reconcile that to Merafe's reported profit after tax of ZAR 1 billion for the period. The following items go off against EBITDA from the Venture to arrive at the reported profit after tax: The first is current and deferred tax of ZAR 414 million. Then it's depreciation and amortization cost of ZAR 116 million. There was no cash generating unit impairment adjustment over the period. [ Next ] is our corporate cost of ZAR 33 million. Next, net financing income of ZAR 21 million, and finally, income from equity accounted investment of ZAR 9 million. On the slide that follows, we look at these items in further detail. On Slide 24, we had to review the income statement. We've already discussed the revenue line. Net foreign exchange gain for H1 2023 was ZAR 148 million against ZAR 27 million in the prior period. This arises from foreign exchange translation movements and was favorable largely due to a weaker rand. As in the full year in 2022, operating expenses were affected by, one, higher production costs per unit, which negatively impact cost of sales, we've already passed on the reasons for these increases; two, there was a general inflation on both fixed and other variable costs that also contributed to the increase; and third is higher chrome ore volumes that were sold. Moving on to our corporate cost -- Merafe's corporate costs, these were higher than in H1 2022, primarily due to higher debt amounts that are no longer attainable due to apportionment rules, or [ debt ] apportionment rules, and due to inflation. The depreciation and amortization charge is higher due to capital expenditure over the period. Net interest income amount is higher due to higher cash balances and higher interest rates. And the current tax charge is lower due to higher capital expenditure, deductions in the reporting period. Our capital expenditure was ZAR 71 million, higher than it was in H1 2022. All these led to reported profit of ZAR 1 billion for the 6 months. The next slide takes us to the balance sheet. Here, we start with noncurrent assets that increased due to capital expenditure made over the period. This expenditure was performing [ and is sustaining ] or replacement in nature. Current assets increased relative to year-end. And in terms of this increase, the [ first ] increase relates to inventory. Ferrochrome finished goods increased from last year's closing balance of 109,000 tonnes to 116,000 tonnes. These volumes represent 3 to 4 months of sales. The value of closing inventory increased from December '22, 2022, mainly due to production volumes that exceeded sales volumes and higher inventory costs. The second increase that resulted in an increase in current assets was due to trade and other receivables. This balance increased due to higher sales over the period as well as the weaker closing exchange rate. And finally, current asset increased because of higher cash balances that increased due to improve earnings. Liabilities include provision for environmental obligations of ZAR 279 million, and the largest current liability is trade and other payables of ZAR 800 million. Additional breakdown of these amounts and results is provided in the [ sales ] announcement. On Slide 26, we provide a reconciliation of our cash balance. We started 2023 with a combined cash balance of ZAR 1.3 billion. Net cash from operating activities increased the cash balance by ZAR 795 million. Due to higher working capital balances, on a net basis, waging capital resulted in cash outflow of ZAR 421 million. Generated cash flow was used to fund the following: capital expenditure of ZAR 227 million, the final 2022 dividend of ZAR 325 million, repayment of leases and foreign exchange effects accounted for the balance of the cash movement, which was a net inflow of ZAR 92 million. This resulted in the closing cash balance of ZAR 1.6 billion. This balance includes Merafe's own cash as well as its share of cash at the Venture. The split together with Merafe's headroom are shown on the next slide. Merafe's owned cash is ZAR 325 million. Merafe's share of cash as a venture was ZAR 1.3 billion. This ZAR 1.3 billion included cash as a venture, which has been set aside for rehabilitation obligations of ZAR 315 million. As in at year-end, the company remains on [ debt ] at [ 0 cents ]. Merafe's headroom consists of facilities in place at the PSV as well as ZAR 300 million revolving credit that we've got with ABSA Bank. My last slide, which is Slide 29, deals with our interim dividend. As indicated in key features of the results, the Board has declared an interim cash dividend of ZAR 0.20 per share. This amounts to a distribution of 48% of headline earnings and represents a yield of 20% on the closing share price at 30 June 2023. Thank you all for your attention. I will now hand you back to Zanele for final remarks.

Thank you, Ditabe. The economic outlook for the rest of the year is not so great, with disruptions and volatility likely to persist, the global risks such as high inflation, fears of recession, supply chain challenges and energy and security are likely to continue, although there are some signs of inflation easing. On the local front, electricity and logistic challenges should remain at least for the short to medium term. . As a result, we expect the second half of 2023 to be challenging. We've already seen ferrochrome prices trending downward. We will continue to focus on efficiency of operations, cost control, cash preservation and efficient capital allocation. We remain committed to creating 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 we have is from Tim Clark of SBG Securities.

Can you hear me?

Yes, we can.

Well, firstly, congratulations on the results, a very strong set of results and very pleasing to see. As I run through my numbers in the model, there are just a couple of questions that come up that I'm interested in. The first one is just your chrome ore sales mix. If I remember back, look back, you've always sort of said that you don't sell UG2 chrome into the sort of stainless steel market, you sell higher grades of chrome into other alternative markets. And your -- it looks like maybe your mix is changing. . Is the curtailment on ferrochrome production in South Africa resulting in you putting some of the more stainless type of chrome ore roll volumes into the market? That's the first question. I've got a few more. Should I pause there or shall I ask them?

Maybe it might be easier to just answer that one. And I think the way the mix goes does really depend on the market at a particular time. But in general, I mean we are ferrochrome producers, so our first port of call is to use our chrome in the ferrochrome production. And then to the extent that we have access, then we do export that. And the mix, that depends on what is available. As you know, we do have -- we do pitch UG2 from the PGM producers. So just depending on what the mix is, so you might find in a particular period, we actually export no UG2 at all, and we export the higher chrome content ore. I do have Japie with me as well. So I don't know whether japie would like to add anything there.

Yes. Thank you, Tim. So obviously, you know that during the winter months, we do close all our smelters that's not financially viable due to the electricity price. And then obviously, we will then have excess ore available. And we will then export the chrome or that we do have available because mines keep on producing. We've got contracts on the UG2 offtake. So you can't just build stock. And for that reason, we always had a very good balance between exporting chrome ore versus also producing ferrochrome and then exporting that. Like Zanele said, our preference still remains -- and our focus, as [Audio Gap] of course, still remains beneficiation in South Africa. We feel extremely strong about that, but you cannot produce ferrochrome and not make profits. So for that reason, we do export chrome ore, yes.

Okay. That's very helpful. The second question just on ferrochrome received pricing. If I -- and I'm quite early on looking in the model, so I hope to have mistaken this. But if I look at the European benchmark versus the average China received price, it looks like you've received a higher percentage, which speaks to higher level of sales into the European benchmark or similar customers. Is that the case? It looks like you've just received a better percentage or a higher revenue per unit than you historically have, which has been closer to the Chinese benchmark.

Yes, Tim, I don't necessarily think that that's how it is. We still have China as the majority customer for [indiscernible]. So most of our product, I think, shows to the [ 60% ] mark, goes to sort of the Asian market. So you are right in that when we do sell to Europe or America, then the prices are higher for different reasons, also logistics to get to those markets and so on, but we're not necessarily selling more to Europe. Because even if you look at just where the demand was, you will see that most of the demand came from China. There was increase in demand from China compared to the other markets. But the prices were generally stronger for a longer period in the 6 months.

Okay. So it's just sort of a timing effect on received pricing, I guess?

Yes.

Okay. Then my third question, I've got 4. So my third question is just on the power agreement. You said it's moving slowly, but it's still progressing. So you're not worried about it. You just, given all of the sort of [ muddy waters ] that Eskom is facing, you just think it's a nursery. It's just taking longer, but you still think -- you're still confident that you're going to receive that. And does that mean then that you'll bring back Lydenburg or that with that, you'll commit to additional production?

I'll probably, I guess, ask Japie to come on this one. But [Audio Gap] just that by saying where the process is, is that it's gone past Eskom. It's now worth [indiscernible] and is going through its processes, which would include public comment for consultation. So at the end of the day, it depends on those processes, whether we get it or not. But what it would do if we were to get it, it will give us a lot more certainty than we have currently because you'll have prices that's agreed for a number of years. Japie?

Thanks, Zanele. Yes. Tim, actually, the process of the NPA, or the negotiated price agreement, is actually well on its way. It's already been passed through by Eskom there to NERSA. And it's already published. And the first official public participation will occur on the first of September, so I mean that's in 2 weeks' time. So definitely, well on its way, and we don't see any barriers for this not to happen. Yes, that's the first thing. And then obviously, if we do see where the price lands, we will then put that into our models. We will run our models and see if it would be viable to look at restarting Lydenburg. I think the concern on the Lydenburg smelter complex is that we've done our evaluations, and for us to start it up will be a substantial amount of capital that we need to inject. So all these factors we need to take into consideration. I'm not sure if there's any follow-up on that.

Okay. And then Ditabe, just one for you. It's a bit unusual for you to pay a ZAR 500 million dividend with [ ZAR 300-somewhat million and ZAR 325 million ] in the bank. Normally, you've spoken to us about keeping a buffer at Merafe level. I look at your events after the reporting period, note 11, and it didn't say anywhere there that the joint venture had declared the dividend to you so that your cash balance rose after the 30th of June. I don't know if you could just clarify for us your thinking there or what we should think as a forward looking, does this mean that you're happy to be in a slight debt position at Merafe level? Or is -- am I missing something?

Yes. Tim, the decision was largely taken on the back of our financial performance at period-end. The Board looked at the extent of our cash reserve. You're quite right, there is some cash that we [ received ] with not nearly enough to fully fund the dividend, but the intention is to possibly dip into some of our [ RCF ] for the short period of time that the flow from -- of funds from the Venture might take to reach us, which we expect to be at the end of September, but that will be for a very short period of time before we fully repay that debt. But the decision really largely is based on availability of cash reserves both within Merafe as well as at the Venture. Obviously, the decision around the final dividend is something that will be made at that point in time based on the market circumstances there.

Cheers. So I think that's really -- I think given the financial performance, given the confidence that you've got the cash balance that you're sitting with, I think that's exactly the right thing to do.

We have no further questions on the conference line. I would like to hand over for webcast questions.

Thank you. I'll -- about the list of questions, I'll read them and then pass them on to the appropriate person. The first question, and one question, but it's got several questions in it, are Merafe chrome and ferrochrome competitors more green than Merafe is and is not being green price [ spec ]? When will Merafe products have some green energy in them? Are stainless steel producers demanding green ferrochrome? Do you receive a price premium if your products are produced with clean energy rather than coal-fired power? This is one I'll pass on to Japie to respond to. Japie, over to you.

Thank you, Ditabe. Okay. So the first question, it's quite an important question and also obviously coming more and more to the [ 4 ] with regards to green chrome and green ferrochrome, and you would all know that the structure of the C-band is approved already now in Europe. And if I can recall that will start in 2024, where there's cross-border adjustment or abatement mechanism. So that means that there will be carbon tax or -- there will be a tax to the carbon that you do attract. I think what is important to note is that we believe it will be a supply [ imbalance ]. As you know, more than 80% of the world's chrome resources are coming from South Africa. You would also note on the presentation is that if you have a look at Page 8 of the presentation, chrome or ferrochrome production for, let's say, full year 2022 was 15.1 million tonnes of ferrochrome, and more than 10 million tonnes of these were produced in South Africa and in China. So obviously, in these two regions, there's not a lot of, let's say, request or carbon taxes already on that. In South Africa, yes, but if we have a look at our competitors, our competitors mainly would be the Chinese. The other ones, which will be applicable will be the ones in Europe, which is about 1.3 million tonnes in 2022. And in full year 2023, again, 1.3. So there will be the C-band mechanism will be applicable there. So in our case, as you know, we've got only one real competitor in South Africa that's also producing ferrochrome. So obviously, they won't be a problem. So we see this that it's going to be a requirement more and more, especially into Europe. But seeing that 64% of our product goes into China, currently, we would not realize that yet. Then on your second question, when we would offer products that have some green energy in them, I can say that we are already aggressively looking at co-generation. So that's where you take the off-gas and you turn that into electricity. And I mean, obviously, doing that, you will then reduce your electricity dependency on fossil fuels, and that will have a direct impact. So that's definitely turning green. I'm sure that you also know that we as the PSV, Merafe, Glencore, we are looking at various behind-the-meter projects. And some quite big projects that we are looking at would be at our Wonderkop area, at your Eastern chrome mines and also the Lydenburg complex, there's also adjacent ground there. So there's various mechanisms that we are looking behind the [ meter ]. Then obviously, also on the grid or purchase -- power purchase agreements with independent power producers, we are currently 4 down the line with 2 specific IPPs. And with the one, our PPA is down 95% complete in terms of submission, and the other one is about 40%. So we are quite far down the line in terms of getting into the green space. Then on your other question, are stainless steel producers demanding green ferrochrome, like I said, currently, especially in Europe, yes, they are starting to request that. And like I said, that mechanism will come into play in 2024. But we do have some of our products going there between, let's say, 15% and 20%. But like I said, it will be a balancing act because of the products that's coming from South Africa or that's where the major chrome [ unit ] producers are. Then, will you receive a price premium if your products are produced with clean energy, I can't really -- I mean, if you think about the cost of carbon, that's exactly what they wanted to do, is to create a difference between material that's been produced by clean -- a clean methodology versus fossil fuel. So in the future, if you think about ESG and you think about all these type of mechanisms, that's exactly what they want to do. But currently, we are not seeing that yet. I hope I've answered that one clearly. Thanks.

Thanks, Japie. You have.

The next question is, what are you planning to do to remove or lessen logistics constraints in the export of chrome -- export of chrome rather in ferrochrome? I pass that one onto Zanele.

I think it's more a question of what are we doing currently. So from an industry point of view where the Minerals Council, we are working with Transnet to try and find ways to improve the railing because at the end of the day, rail is still cheaper. So for us, our preference would be to rail more because not is it only cheaper, but also it lessens the burden on the road because the more you truck, the more congestion as well at the port. . At what -- from a company point of view, what we are doing already is to diversify the channels that we use. We do use Maputo. We do use Richards Bay, and obviously, we truck and we rail. That's just our way of mitigating what we're dealing with. But the ideal situation is for transmit to come to the party, and we're happy to work with them to get them to try and move to more rail than road.

Thank you, Zanele. Next question is, what percentage of chrome ore is railed and what percentage is trucked to port? What percentage of chrome ore is exported via Maputo?

I would say I've sort of already answered, is that we definitely are trucking more than we would prefer to. And that split currently sits around 30-70, so that is 70 trucking, which is quite high. And in terms of percentage to Maputo, it just depends on how we allocate. So I wouldn't be able to give like an exact amount of how much goes by Maputo, but it just depends. It has become a port we use a lot more. In the past, it used to be a lot more of Richards Bay. Given the current challenges, we do tend to use a little bit more of that.

Thanks, Zanele. Then next question is, what does it cost to rail a tonne of chrome ore versus trucking a tonne through Richards Bay and to truck a tonne to Maputo?

I think in a way, we've answered it to it costs more to truck than to rail but...

All right. Thank you. The next question. Please elaborate on your reported needs to import more consumables, owing to this no longer being available to -- available to local [ dealer ]. Is it because of cessation of local production of some key consumables? We'll pass this one on to Japie.

Sorry [indiscernible] button. But anyway, so yes, I mean, obviously, if you have a look at consumables, if we do talk about reductants, that's something else. I mean, obviously, we are battling to get reductants in South Africa. So we did have to import reductants. So that is a challenge. So I mean, the local sales on that and also because of the scarcity of coal in South Africa because of the war that happens, a lot of the product -- people even exported metallurgical coal. So we're really battled with that. And for that reason, we had to go abroad. On other materials, I mean, most of the materials that we do use is not locally manufactured. I mean if you think about all the underground operations or things like that, there's a lot of equipment that we do need to buy also from abroad. And for that reason, we do not have always the flexibility of that. I'm not sure if there's any further questions on that.

Thanks, Japie. I think that covers it. The next question is, please provide more detail on significant trade receivables built during the period. To what extent we expect the increase in receivables to reverse in H2? I think I'll answer this generally just as a working capital question because it does come up now and again, both trade receivables and inventory. I'd say receivables, I mean our working capital really and truly a function of our operations, there are amounts that we manage very tightly, and the net amount that we end up with a period -- [ for a ] period end are really a function of a number of things, including how much we have been able to produce in a particular period relative to how much we've been able to sell. If we take receivables as an example, this time around, definitely a function of sales over the period, the strong dollar or the weaker rand over the period, there is the closing balance that we closed which was higher than at the end. If you look at the days, for instance, of receivables, we're looking at 45 days. And if you put that in context in terms of the various sales terms that we've got with the various suppliers, I think that is a number that we are fairly comfortable with. And it's the same with inventory as well sitting with 3 to 4 months of sales. Our preference, as we previously indicated, is 2, 3 months of sales, but again, a function this time around of how much we've been able to sell relative to how much we've produced. And the intention, as we've just indicated, is that over the second half, while we are only producing at [ Lion ] by the winter months, especially, the intention is to draw down on the high inventory levels so that we end up with lower levels of inventory at year-end. The next question is, considering your large cash balances and low PE, why are not repurchasing shares? Share buybacks are reviewed by the Board regularly. The decision was taken not to consider a buyback since the share price currently trades above its long-term mean or median prices. The next question is solid -- any further details on negotiated pricing agreement stocks? What factors are mainly behind a delayed progress? I think we have answered.

Yes, we have answered. Japie dealt with that extensively.

The next question is on our cost of production. Unit cost of sales is up 17%, and your results have been saved by much recurrent. But cost reduction initiatives do you have in the pipeline, and how much will they save? I mean there are no specific initiatives that are aimed at reducing costs. This is something that we do on a regular basis to monitor our cost and make sure that they are within control. I mean if you look at our C3 production costs, you'll notice that over [ 50%, 60% ] -- over 65% -- or over 70% of our cost of production comes from chrome ore, comes from reductants [ influxes ], and it comes from power. Power is a cost that we take in -- obviously, our green initiatives will both [indiscernible] what's helping us manage this cost, but also deal with the green effects thereof. Reductant influxes, as I indicated, is an item that we constantly manage both in terms of ensuring availability of the consumable but also in terms of managing the pricing, we've had to import some of the products, unfortunately, because of unavailability of that product locally. And chrome ore prices, as you know, have been high over the period, which was one of the key reasons that led to the increase in our cost of production. The next question is around inventory. Why can't you reduce inventory to 6 weeks of sales? That's leasing working capital, I think I've dealt with that question earlier. The next question is how much capital, if any, will be committed by the Venture to deploying new off-site energy generation? I mean these are initiatives that are currently in progress. And I think once we are discussing the commercials, we'll have a better sense of how much the cost of those initiatives will be. Japie, do you have some color add to that? Or are you comfortable with that response?

No, no, Ditabe. I think it's okay. But it's just -- I can just give you an example. We've just now, in Glencore, went to the next phase in terms of on-site behind-the-meter installation of a 25-megawatt plant. And I can tell you that, that's about -- in the region of about ZAR 500 million to ZAR 600 million the [ 25 ]. So if you're going to put up a plant -- behind-the-meter plant, let's say, at Wonderkop, your capital cost is going to be just over ZAR 2 billion for about 100 megawatts. So obviously, you can ratchet it up. If you put up a 200-megawatt, it becomes ZAR 4 billion or ZAR 5 billion. So it is quite substantial. And you must remember that when we do it ourselves behind the meter, we will obviously look at doing the capital injections ourselves as a PSV or we can get banks to assist us. But once you do the PPA, you actually move it off the balance sheet, and that means it's a liability. So -- but I mean, it would be the same type of value, if you can think about it. I mean that's the liability that you are to go into. And the PPAs normally has got a 20-year take-or-pay agreements. So it's not straightforward. And that's why the PPA, again, the [ baler ] purchase agreements, is taking such a long time because there are so many, let's say, risks in terms of building these big plants or signing a contract with IPP because I cannot sit here and say that we will be still smelting instead of that -- South Africa for the next 10 years, I can't. I mean, we've closed out Lydenburg because of financials. Because of our electricity pricing, we are definitely on the higher cost curve. And I mean, for that reason, that's where the challenge comes in, in terms of that specific commitment. So -- and that's why it takes a bit longer. Not sure if that adds a bit of color, Ditabe?

It does, thanks so much, Japie. Moving on to the next question, maybe you can describe what is the key -- I suppose what are the key issues that are hindering this performance by Transnet. Are there -- Okay. Okay. Want to take it, Japie? Or shall I give Zanele to deal with it?

Maybe I can take it. I think it's -- it's important that we just give a bit more color in terms of Transnet add. Let's say, the 3 crises in South Africa, I'm sure that all of you by now know that there are 3 declared crises in South Africa, which is energy, logistics, crime and corruption. And all of them has been elevated to the President's table, logistics being one as well. And I'm sure that you also know that through the Minerals Council, we had this [ steer ] oversight committee that we dealt with the Board of Transnet to see exactly how we can help. Now this will now be filtered into this new National Logistics Crisis Committee, the NLCC. And all the issues that's been experienced by the industry and also by Transnet will now be elevated, and it's already been done. And all the issues have been tabled. And I mean I'm sure that most of the [ people on the call ] would know that the whole CRRC contract is a big concern for South Africa. And we've got more than 300 locals standing because there's no spares available. So it's a big problem. So obviously, the locals being one of the biggest concerns in terms of where we stand. You all know that we are seeing way lower performance coming through from Transnet, but we are working together with them to see how we can sort out some of the operational issues as well. So I would say locals, obviously, being a major contributor; security, another major contributor. And again, I know that Transnet has now signed the outcome-based security agreement. So hopefully, that will now get traction in terms of securing more of the infrastructure and putting plans in place to make sure that we can curb that as well. And then also another major challenge would be the capital availability on the infrastructure. So those are the areas that we all know. It's all public, and we are busy putting in action plans to make sure that we can try to navigate through this. Just also a bit of update. So we, as the PSV in the past, used to rail 70% of our product and 30% on road. It's now the other way around. As Zanele said, it's now 70% on road and 30% on rail. So that just shows you the magnitude of the challenges that we do face. Thanks.

Thank you, Japie. And I think the next one might be up you alley as well. Rustenberg operations experienced problems with construction mafia that seems prevalent in recent -- or have Rustenberg the operation -- so I didn't ask. The Rustenburg operations experienced problems with the construction mafia that seems prevalent in recent months.

Yes. Thanks, Ditabe. We've actually seen this at most of the operations. You get these construction mafias or procurement mafias, they would come in and they would mobilize the community. But I mean, we did see this at Rustenburg. And so what we did is we've taken some legal action. Obviously, with -- nowadays with proper technology, we could have identified certain individuals, and we did take them to court. I mean that's what we do. We have got an obligation as the PSV to secure our infrastructure, and that's what we're doing. So we are not shying away from any communication at all if it's a structure or a committee that is well structured, we don't have a problem talking to. But if people just come and they want to talk to us and demand and close our gates, we will definitely not tolerate that.

Thank you, Japie. The last question, which I'll pass on to Zanele, is you mentioned about the glooming outlook for the second half. However, with the exchange rates lingering around ZAR 19 and in most recent weeks, a slight uptick in chrome ore prices back to $300 for UG2, as well as recent increases on ferrochrome spot prices in China, do you think the outlook could be overexaggerated? And do you think it could be a strong Q4?

Yes, that's a good question. And what it does indicate is that there is volatility in the system. So it wasn't so much about gloominess but more about caution because the issues in terms of China, there are challenges there, issues around debt and so on remain. And in fact, the weakening of the exchange rate is probably because of the challenges that are coming through from China. So -- and this weakening, I mean, it has been in the last few days. I know that just last week, we were looking and saying the rand is looking a lot stronger, and therefore, the caution that we built into this presentation. And even the prices for ferrochrome, the uptick has just been in the last few days as well. So there's a lot of volatility. So it's really difficult to say Q4 will be strong. But based on the information we had at the end of the week at -- it looks like it will be a challenging second half. And I mean, the other issues like around logistics, I think we're not going to see a resolution in this half; necessarily electricity, also similar challenges. So there's quite a lot of noise and volatility in the system, and we think it's prudent to say let's expect some headwinds.

Thank you, Zanele. And that's the end of the questions.

Yes. Thank you to everyone for your attendance. And may you have a good day.

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