Merafe Resources Limited Deutsche Bank BRICS Metals & Mining Conference (London) 9-10 November 2009
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Contents 3 1. Corporate Information 2. Operational overview 3. Market review 4. Merafe s financial overview 5. Outlook 6. Appendix I ( analyst coverage) 7. Appendix II (Merafe s management) 8. Appendix III (Merafe s six months financial results to 30 June 2009) 9. Appendix IV (austenitic stainless steel)
1. Corporate Information
Corporate Structure 5 20.5% of EBITDA 79.5% of EBITDA *Xstrata-Merafe Chrome Venture Formed 1 July 2004 * Largest ferrochrome producer in the world
Share price information 6 ZAR GBP Market capitalisation* Share price* 12 month high 12 month low 3.42 bn 265m 1.39 0.11 1.70 0.13 0.55 0.04 Shares outstanding 2.46 billion shares *As at 2 November 2009
08/01/01 08/01/15 08/01/29 08/02/12 08/02/26 08/03/11 08/03/25 08/04/08 08/04/22 08/05/06 08/05/20 08/06/03 08/06/17 08/07/01 08/07/15 08/07/29 08/08/12 08/08/26 08/09/09 08/09/23 08/10/07 08/10/21 08/11/04 08/11/18 08/12/02 08/12/16 08/12/30 09/01/13 09/01/27 09/02/10 09/02/24 09/03/10 09/03/24 09/04/07 09/04/21 09/05/05 09/05/19 09/06/02 09/06/16 09/06/30 09/07/14 09/07/28 09/08/11 09/08/25 09/09/08 09/09/22 09/10/06 09/10/20 09/11/03 7 Merafe s share price performance from 2008 to 2009 180.00 160.00 Merafe s share price performance relative to: FTSE/JSE Mining Index FTSE/JSE General Mining Index 140.00 120.00 100.00 80.00 60.00 40.00 20.00 Merafe Resources FTSE/JSE Mining Index FTSE/JSE General Mining Index Source: Datastream
Shareholder analysis 8 Shareholders at end of September 2009 SA Free float 38.5% (Dec'08 : 42%) Royal Bafokeng 29% ( Dec'08 : 29%) Offshore Free float 10.5% (Dec'08 : 7%) IDC 22% (Dec'08 : 22%)
Global ferrochrome production 9 2008 Market share by production Ferbasa 2% Zimasco 2% International Ferro Metals 3% Assmang Chrome 3% Outokumpu 3% Hernic Ferrochrome 5% Vargön Alloys - HCFeCr 1% ASA Metals 2% Chelyabinsk 2% Other 14% China 19% Xstrata Merafe PSV 19% Samancor Chrome 11% ENRC 14%
2. Operational overview
Operations 11 SMELTERS Wonderkop Rustenburg Boshoek Lydenburg Lion Total 5 Production sites CAPACITY 553 kt pa 6 furnaces 430 kt pa 6 furnaces 240 kt pa 2 furnaces 396 kt pa 4 furnaces 360 kt pa 2 furnaces 1 979 kt pa in production capacity 20 furnaces 7 mines **Conventional **Conventional Outokumpu Premus Premus ** Improved with Bokamoso pelletising and sintering technology to the equivalent of Outokumpu energy consumption
Xstrata-Merafe production capacity utilisation 12 Date Production capacity January 2009 20% Average for 6 months to June 2009 30% July 2009 60% September 2009 85% Production of the Xstrata-Merafe Chrome Venture 2008 000/tonnes 2009 000/tonnes Q1 383 92 Q2 390 215 Q3 388 308 Total 1,161 615 Xstrata-Merafe s ferrochrome stocks are currently below normalised levels
Update on the power situation (Eskom) 13 Electricity demand is rebounding fast with 5% growth expected during 2009 (mainly on alloy restarts) with 2-3% growth expected thereafter From Eskom s lows of January/February 2008, Eskom s plant performance has improved, additional maintenance has been done All power station coal stockpiles have been replenished Reserve margins remain low (10% on average and 5% at peak) and will be under pressure as demand picks up With the recent increase in electricity tariffs (effective from 1 July 2009), the electricity prices are now at an average of SA33c/kWh Eskom have requested NERSA for an increase of 45% p.a. for the next three years which if approved will result in tariffs being SA99c/kWh by 2012 Eskom 10% restriction on electricity consumption still applicable It is anticipated that there could be sufficient power by 2014 Source: Merafe/Macquarie Lunch with Eskom s CE Generation Brian Dames on 4 September 2009
Xstrata-Merafe well placed to handle higher energy tariffs - Lion Ferrochrome 14 Xstrata-Merafe anticipated the changes in the South African electricity tariffs and invested in efficiencies: 5 Specific Energy Consumption (MWh/T) 4.8 4.5 4 4.1 3.5 3.5 3 2.5 2.4 2 Premus Outokumpu Conventional DC Arc
Bokamoso improved energy consumption Xstrata-Merafe s position with regard to the forecast high energy tariffs 15 4.5 4.1 4.0 3.5 3.0 3.0 3.5 2.5 2.3 2.0 Conventional Bokamoso MWh/tonne Alloy 4.1 3.5 Ore tonne/tonne Alloy 3.0 2.3
3. Market review
Market review on stainless steel the first 3 quarters of 2009 17 During the second and third quarters of 2009, major Chinese stainless steel mills increased their stainless steel capacity utilisation to almost 100% The market became fully supplied Leading stainless steel mills in China have reduced their output in the current quarter by an estimated 15% Demand from Europe is attributed mainly to restocking The USA stainless steel market has shown signs of recovery, with August stainless steel output being the highest for 2009. Third quarter production was 59% above the second quarter output at 538kt This is further evident from the USA August ferrochrome imports returning to normal levels
Market review on ferrochrome the first 3 quarters of 2009 18 Global ferrochrome capacity utilisation was about 40% at the beginning of 2009 This has improved significantly in the second half of the year and is currently at about 75% China s imports of ferrochrome have increased in the first nine months of 2009 by 81% to 1.66 million tonnes compared to 919kt for the same period in 2008 Major suppliers were South Africa, Kazakhstan and India 2009 ferrochrome supply is expected to be almost 7 million tonnes (5.5 million tonnes from production and the rest from inventories)
Crude stainless steel production 19 2007 2008 2008/2007 2009 2009/2008 2010 000 t 000 t % 000 t % 000 t (estimate) (forecast) NAFTA 2,171 1,925-11.3% 1,715-10.9% 2,120 European Union 8,109 7,822-3.5% 5,738-26.6% 6,629 Japan 3,901 3,564-8.6% 2,644-25.8% 3,330 S.Korea/Taiwan/India 5,305 4,458-16.0% 5,016 12.5% 5,895 Others 1,414 1,298-8.2% 1,225-5.6% 1,442 China 7,610 7,344-3.5% 9,716 32.3% 10,230 Total 28,510 26,411-7.4% 26,054-1.4% 29,646 Source: Heinz Pariser / Merafe Resources
Stainless steel melting capacity utilisation for the first three quarters of 2009 20 China Taiwan Brazil India USA South Africa South Korea Japan Europe 54.9 86.0 85.7 84.6 82.1 79.4 76.5 100.0 99.3 Total 83.8 30 40 50 60 70 80 90 100 in % Source: Heinz Pariser
Regional ferrochrome demand 21 2007 2008 2008/2007 2009 2009/2008 000 t 000 t % 000 t % (estimate) NAFTA 455 502 10.3% 130-74.1% European Union 2,080 1,993-4.2% 1,246-37.5% Japan 866 768-11.3% 395-48.6% S. Korea/Taiwan/India 1,326 890-32.9% 1,032 16% Others 709 633-10.7% 637 0.6% China 2,105 2,352 11.7% 3,413 45.1% Total 7,541 7,138-5.4% 6,853-4% Source: Heinz Pariser/Merafe Resources
Charge/High carbon ferrochrome production 22 2007 2008 2008/2007 2009 2009/2008 000 t 000 t % 000 t % (estimate) Brazil 164 187 14.0% 123-34.2% European Union 366 351-4.1% 294-16.2% Russia, Turkey, Albania 492 531 7.9% 349-34.4% India 820 750-8.5% 500-33.3% Kazakhstan 1,070 955-10.7% 918-3.9% South Africa 3,536 3,239-8.4% 1,876-42.1% Zimbabwe 201 152-24.4% 120-21.0% Iran 17 10-41.2% 15 50% China 1,060 1,284 21.1% 1,350 5.1% Total 7,726 7,459-3.4% 5,545-25.7% Source: Heinz Pariser/Merafe Resources
Xstrata-Merafe s sales by region for the nine months 23 to September 09 Other 5% (2008: 8%) USA 5% (2008: 12%) Europe 27% (2008: 40%) Asia 63% (2008: 40%)
Q1'06 Q2'06 Q3'06 Q4'06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08 Q4'08 Q1'09 Q2'09 Q3'09 Q4'09 0.63 0.70 0.75 0.78 0.75 0.82 0.79 0.69 US$/lb 1.00 1.00 0.89 1.03 1.21 1.92 1.85 2.05 Charge Chrome prices starting to show recovery from the lows of Q2 09 24 European benchmark ferrochrome prices 2.5 2 1.5 1 0.5 0
4. Merafe s financial overview
26 Key features for the six months ended 30 June 2009 Revenue down by 49% to R824 million Net financing costs down by 96% Headline loss of R84 million equating to a loss of 3c per share Cash flows from operations of R144 million Strong cash balance of R466 million Ferrochrome inventory reduced by 42% in the last six months Permanent debt of R350 million payable in one installment at 31 December 2012
Summary of cash flows for the six months to 30 June 2009 27 R m Opening cash balance 1 January 2009 540 Cash flows after interest from operations 142* Taxation paid (accrual 31 Dec 2008) (88) Capital expenditure (84) Forex loss on US$ cash held (44) Closing cash balance 30 June 2009 466 * After accounting for R116 million of standing charges
ZARm ZARm Financial performance over the last three years 28 Revenue 3,000 2,781 2,500 2,000 1,500 1,000 500 1,030 1,656 824 0 2006 2007 2008 Jun-09 Revenue 6 months EBITDA 2,000 1,500 1,000 500 0 (500) 1,612 465 179-75 2006 2007 2008 Jun-09 EBITDA 6 months
ZARm ZARm Financial performance over the last three years (cont.) 29 EBITDA and margin evolution 2,000 1,500 1,000 500 0 (500) 58% 28% 17% -9% 2006 2007 2008 Jun-09 EBITDA % Margin 6 months 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% Net profit after tax 1,200 1,000 800 600 400 200 0 (200) 1,028 160 240-84 2006 2007 2008 Jun-09 NPAT 6 months
Cents Cents Financial performance over the last three years (cont.) 30 Earnings per share 50 40 30 20 10 0 (10) 42 10 7-3 2006 2007 2008 Jun-09 Eps 6 months Net asset value per share 120 100 80 60 40 20 0 101 97 48 59 2006 2007 2008 Jun-09 NAV per share 6 months
ZARm Financial performance over the last three years (cont.) 31 Net (debt) / cash position 400 200 173 100 0 (200) 2006 2007 2008 Jun-09 (400) (600) (800) (1,000) (801) (787) Net (debt) Net cash
Working capital requirements in second half of 2009 32 Expect cash to be locked-up in working capital for the remainder of 2009 This is due to the ramp-up in ferrochrome production Typical working capital cycle 5-6 months Mining of chrome ore Ferrochrome smelting Transport (road/rail, shipping) Debtors days Cash Merafe has sufficient cash and banking facilities to manage this cycle
Production costs 33 Despite improved efficiencies, production costs continue to be a challenge Looking forward at production costs Merafe sees: electricity prices increasing - Eskom has asked NERSA for a 45% p.a. increase for the next three years reduced inflation dollar denominated costs such as shipping and reductants reducing owing to the stronger Rand higher absorption of fixed costs, thereby reducing overall costs
Points of caution 34 Some of the immediate concerns to the Company are as follows: Risk of ferrochrome producers ramping up too quickly and possibly oversupplying the market Over reliance on Chinese stainless steel production with the rest of the world recovering slowly stainless orders in Europe are being driven by restocking and not real demand A pull back in Chinese stainless steel production is currently being experienced mainly due to: the rapid growth in stainless steel production which has outpaced the demand recovery leading to an over build of stainless steel inventory Power constraints on SA ferrochrome producers both for ramping up this year and also for future expansions Industrial action Ferrochrome price still soft Strengthening Rand Chrome ore exports
Barriers to entry 35 Low barriers to entry in South Africa, a thing of the past: Pre 2008 Capital cost of building smelters up by over 500% Long lead time for critical items needed for construction Shortage of available quality ore reserves Shortage of artisans and skilled labour Post 2008 Escalating production costs Access to funding (debt and equity markets) Power supply when will power be available for new projects, 2014?
5. Outlook
Outlook 37 Recovery of global stainless steel production likely to continue Stainless steel production for 2010 estimated at 29.6 million tonnes, a 13.8% increase y-o-y Real demand coming from Asia with Europe mainly restocking Ferrochrome inventory levels have normalised (currently below normal) Ferrochrome demand for 2010 is forecast at 7.4 million tonnes vs demand in 2009 of 6.8 million tonnes Ferrochrome production capacity is estimated at an average of 75% for 2010 Possible consolidation in the ferrochrome industry imminent with International Mineral Resources (IMR) raising its share to 67% in Samancor Chrome, South Africa s second largest ferrochrome producer
Outlook (cont.) 38 16% increase in European benchmark ferrochrome price in Q4 09 to $1.03/lb Xstrata-Merafe s ferrochrome order book full until end 2009 Size and flexibility of the Venture provide an advantage Xstrata-Merafe s retention of its skilled labour force has proved very beneficial Xstrata-Merafe has increased production to 85% of annual operating capacity Merafe well positioned to deliver into growth Strong balance sheet with cash on hand
in US$ / lb Charge chrome price development 39 2.50 2.00 Realistic Price Forecast (in 2008 US$) 1.50 1.00 0.50 0.00 Nominal Prices 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: Heinz Pariser
www.meraferesources.co.za
Appendix I Analyst coverage
Analyst coverage of Merafe Resources 42 Tim Clark Deutsche Bank Email : tim.clark@db.com Avishkar Nagaser Macquarie First South Email: avishkar.nagaser@macquarie.com Willem Venter Prescient Securities Email: willie@prescient.co.za Richard Hart Afrifocus Securities Email: richardh@afrifocus.co.za
Appendix II Merafe s Management
Management 44 Steve Phiri Chief Executive Officer Steve joined Merafe Resources as its Chief Executive Officer in May 2003. Before joining Merafe Resources he headed up Corporate and Legal Affairs for the Royal Bafokeng Nation (RBN) and led the negotiating team that successfully resolved the dispute between the RBN and Impala Platinum Limited. He also negotiated the RBN investment in Merafe Resources and the Nation s joint venture with Anglo Platinum Limited. He is a member of the Minerals and Mining Development Board and the South African Diamond and Precious Metals Regulator, a non-executive director of Royal Bafokeng Holdings (Pty) Ltd, Impala Platinum Limited and Zurich Insurance Company SA. Stuart Elliot Chief Financial Officer Stuart gained extensive experience in the accounting and corporate finance fields before joining Merafe Resources in 2001. He was an Audit Manager at KPMG and a Senior Manager at FirstCorp Merchant Bank. As a project finance consultant with Gencor in London he worked exclusively on Gencor s acquisition of Billiton plc from Royal Dutch Shell. Stuart was also an Associate Director with Deutsche Bank and a director of The Corner House (Pty) Ltd for three years prior to joining Merafe Resources
Management 45 Bruce McBride Commercial Director Bruce was a Senior Partner at law firm Bell, Dewar and Hall before joining Merafe Resources in 2001 as Commercial Director. During his time in law he specialised in commercial litigation, banking and mining law. Dr Jurg Zaayman General Manager Merafe Chrome Jurg started his career in the ferrochrome industry with Xstrata Alloys in 1997. He joined the Merafe Resources team as Operations Manager during 2001 and later headed up its operations as Managing Director. In 2004 he was seconded to the Xstrata-Merafe Chrome Venture and was the project leader for the Bokamoso pelletising plant project before being appointed to his current position in 2007.
Appendix III Merafe s six months financial results to 30 June 2009
Group Condensed Statement of Comprehensive Income 47 6 months ended 30 June 2009 Reviewed R 000 6 months ended 30 June 2008 Reviewed R 000 Revenue 824,081 1,627,610 EBITDA (74,737) 893,601 Depreciation (50,507) (28,157) Net financing costs (1,145) (28,097) (Loss)/profit before taxation (126,389) 837,347 Taxation 42,203 (234,889) Current taxation (1,898) (799) Deferred taxation 44,101 (233,558) Secondary taxation on companies - (532) (Loss) / profit and total comprehensive (loss) / income for the period (84,186) 602,458 (Loss) / earnings per share (cents) (3) 25 Diluted (loss) / earnings per share (cents) (3) 24 Headline (loss) / earnings per share (cents) (3) 25 Diluted headline (loss) / earnings per share (cents) (3) 24 Ordinary shares in issue 2,459,258,860 2,459,258,860 Weighted average number of shares for the period 2,459,258,860 2,451,166,292 Diluted weighted average number of shares for the period 2,479,639,408 2,488,928,176
Group Condensed Statement of Financial Position 48 As at 30 June 2009 Reviewed R 000 As at 31 December 2008 Audited R 000 Assets Non-current assets 1,918,383 1,861,185 Property, plant and equipment 1,918,383 1,861,185 Current assets 1,614,782 1,893,165 Inventories 798,304 1,067,153 Trade and other receivables 350,138 286,271 Cash and cash equivalents 466,340 539,741 Total assets 3,533,165 3,754,350
Group Condensed Statement of Financial Position (cont.) 49 As at 30 June 2009 Reviewed R 000 As at 31 December 2008 Audited R 000 Equity and liabilities Equity 2,398,272 2,479,338 Share capital 24,593 24,593 Share premium 1,244,072 1,244,072 Equity settled share-based payment reserve 18,706 15,586 Retained earnings 1,110,901 1,195,087 Liabilities 1,134,893 1,275,012 Non-current liabilities 804,926 845,136 Loans and borrowings 365,439 366,174 Provision for close down and restoration costs 34,356 29,730 Deferred tax 405,131 449,232 Current liabilities 329,967 429,876 Loans and borrowings 1,298 1,200 Financial liability 8,723 11,466 Trade and other payables 319,930 331,364 Current tax liability 16 85,846 Total equity and liabilities 3,533,165 3,754,350
Appendix IV Austenitic stainless steel
Austenitic ratios Nickel bearing stainless steel 51 Changes in austenitic production ratios 70.00% 60.00% 50.00% 40.00% 30.00% Cr Mn Ferritic Austenitic 20.00% 10.00% 0.00% 2006 2007 2008 2009 (e) 2010 (f) Source: Heinz Pariser/Merafe Resources
Austenitic vs Ferritic stainless steel grades 52 The demand for nickel year to date has softened mainly due to the increase in nickel prices This has resulted in an increase in the production of ferritic stainless steel grades Japan s ferritic stainless steel production for August increased by 24.3% compared to July Nickel demand for August in China declined by 35.8% Germany s August nickel usage in stainless steel production declined 10.6% despite the higher stainless steel output of 6% Source: Heinz Pariser
Austenitic stainless grades 304 price components 53 Intrinsic Cr Value of Effective Price in % Price Ratio Intrinsic Ni Value of Effective Price in % 2000 7.4% 22.4% 2001 7.2% 18.0% 2002 6.7% 16.6% 2003 7.6% 18.8% 2004 8.6% 26.8% 2005 9.5% 30.5% 2006 6.7% 33.9% 2007 6.7% 61.4% 2008 16.3% 34.3% 2009 (Q1-Q3) 11.4% 23.2% Source: Heinz Pariser