Ferrochrome: Merafe reports loss amid pandemic

The COVID-19 pandemic, coupled with an already fragile operating environment, have resulted in a loss after tax for the first half of 2020, reports Merafe Resources. A slow-down in global economic activity has contributed to not only reduced volumes of commodities sold, but also to lower realised cost, insurance and freight (CIF) ferrochrome and chrome ore prices.

Merafe recorded a loss after tax for the period ended 30 June 2020 against a profit after tax in the prior comparative period. This includes a significant impairment loss on property, plant and equipment. A weaker average Rand:US$ exchange rate provided some cushion to the loss.

Merafe’s revenue and operating income are primarily generated from the Glencore-Merafe Chrome Venture (Venture) which is one of the global market leaders in ferrochrome production, with a total installed capacity of 2.3m tonnes of ferrochrome per annum. Merafe shares in 20.5% of the earnings before interest, taxation, depreciation and amortisation (EBITDA) from the Venture. Merafe has one reportable segment being the mining and beneficiation of chrome ore into ferrochrome in the Venture and as a result no segment report has been presented.

Merafe’s revenue from the Venture decreased by 16% from the prior period to R2 338 million (June 2019: R2 789 million).

Ferrochrome revenue decreased by 16% from the prior period to R2 005 million (June 2019: R2 391 million) primarily as a result of decrease in ferrochrome sales volumes to 151kt (June 2019: 189kt) and lower average realised prices.

Chrome ore revenue decreased by 16% from the prior period to R333 million (June 2019: R397 million), as a result of a 6% decrease in sales volumes to 138kt (June 2019: 147kt) as well as weaker chrome prices for the first half of the year.

Merafe’s share of the Venture’s EBITDA for the six months ended 30 June 2020 is R170.6 million (June 2019: R454.4 million). The EBITDA includes Merafe’s attributable share of standing charges of R277.3 million (June 2019: R42.2 million) and a foreign exchange gain of R90.2 million (June 2019: foreign exchange loss of R6.4 million).

The increase in standing charges is due to production stoppages in the Company’s operations necessitated primarily by the COVID-19 nationwide lockdown regulations as well as a difficult operating environment.

After accounting for corporate costs of R13.2 million (June 2019: R19.4 million), which include a cash settled share-based payment credit of R1.3 million (June 2019: expense of R227k), Merafe’s EBITDA was R157.5 million (June 2019: R435.1 million).

The loss for the six months ended 30 June 2020 amounted to R961.1 million (June 2019: profit of R165.2 million), after taking into account depreciation of R100.8 million (June 2019: R205.9 million), impairment of assets of R1 340 million (June 2019: Rnil), net financing income of R4.1 million (June 2019: R8.0 million) and a net taxation income of R318.2 million (June 2019: taxation expense of R72.0 million).

The taxation income includes an income taxation expense of R4.5 million (June 2019: R90.2 million) and a deferred tax credit of R322.8 million (June 2019: R18.1 million) which arose primarily as a result of temporary differences on property, plant and equipment as well as those relating to provisions and accruals.

The unredeemed capital expenditure balance at 30 June 2020 was R9.2 million (June 2019: Rnil) given that taxable profits did not exceed capital expenditure. Depreciation decreased year on year primarily as a result of the property, plant and equipment impaired in the prior year.

The impairment loss was incurred after a detailed review of the models and assumptions used to determine the carrying amount as at 30 June 2020. The impairment loss is included in the consolidated statement of comprehensive income.

A loss of R162 000, being Merafe’s proportionate share in the loss from an associate, was recorded for the period ended 30 June 2020. Reference is made to the Company’s announcement published on SENS on Friday, 29 May 2020 in which the acquisition of a shareholding interest in Unicorn Chrome (Pty) Ltd was communicated.

Sustaining capital expenditure decreased by 21% to R95.9 million (June 2019: R121 million). The decrease was as a result of cash preservation measures initiated in response to the COVID-19 pandemic and tough market conditions.

The R300 million committed three-year revolving credit facility with ABSA was unutilised for the period ended 30 June 2020.

As at 30 June 2020, Merafe had net cash and cash equivalents of R263.3 million (December 2019:

R354.1 million) which is inclusive of a bank overdraft of R1.7 million (December 2019: Rnil). The balance comprises cash held by Merafe of R64.7 million (December 2019: R211.5 million), R197.6 million (December 2019: R142.6 million) being Merafe’s share of the cash balance in the Venture as well as R1 million being Merafe’s share of cash at Unicorn Chrome.

Trade and other receivables increased by 46% to R988.9 million (December 2019: R675.3 million). The increase is primarily as a result of the timing of sales and payment receipts. The Rand:US$ exchange rate which closed at R17.35 as at 30 June 2020 (June 2019: R14.16) also increased the receivables balance.

Ferrochrome finished goods volumes of 99kt (June 2019: 145kt) on hand represent approximately three to four months of sales. The closing inventory value was R1 641.1 million (December 2019: R2 008.8 million).