Good day, ladies and gentlemen, and welcome to the Merafe Resources results presentation. All participants will be in listen-only mode. There will be an opportunity to ask questions later during the conference. If you should need assistance during the call, please signal an operator by pressing star then zero. 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. Thank you for attending Merafe's results presentation for the year ended 31 December 2023. I will take you through the operational results, and Ditabe will deal with the financial results. Japie Fullard, CEO of Glencore Ferroalloys, is also on the call and will be available to assist with operational or technical questions. If we move to slide four, which gives the summary of the results.
Sadly, there were two fatalities at the venture smelters during the year under review. The total recordable injury frequency rate improved marginally. The challenges that we encountered in previous years in the operating environment persisted. Production volumes were lower than the previous year. However, smelter efficiencies were sustained. Cost of production continued to rise. Challenges with electricity supply and logistics persist. The Eastern PGM Plant now forms part of the venture operations. NERSA and Eskom have now approved the negotiated pricing agreement.
Global market uncertainty continued, mainly as a result of geopolitical tensions. Stainless steel production increased and ferrochrome demand followed suit. Chrome ore prices were significantly higher in 2023. The weaker rand dollar exchange rate contributed to the sterling financial results. Revenue was up 16% year-on-year. Headline earnings of ZAR 0.601 were recorded. Final dividend of ZAR 0.22 per share has been declared by the board.
If we move to slides six and seven, which deals with the market. There was an uptick in stainless steel production, which resulted in higher ferrochrome demand. Stainless steel production increased by 3%. Most of the growth came from China, which accounted for 61% of stainless steel production in 2023. Ferrochrome demand increased marginally by 1.2%, with China accounting for 66% of that demand. On slide 8, ferrochrome production increased marginally, outpacing demand, with China being the largest producer.
Chinese ferrochrome production increased by 14%, whilst all other regions either remained flat or declined. This was largely driven by introduction of additional low-cost capacity in China, which contributed to pressure on pricing. Chrome ore imports into China increased from 15 million tons to 18.3 million tons, a 22% increase. More than 80% of the chrome ore imported into China in 2023 came from South Africa, representing a 21% increase of chrome ore exports from South Africa to China. On slide 10, pricing was a mixed bag, with chrome ore prices increasing and remaining high throughout the year, mainly due to logistics constraints out of South Africa. On the other hand, ferrochrome prices were under pressure and trended downward. On slide 11, as I mentioned earlier, sadly, we recorded two fatalities at the venture smelters in Rustenburg and Boshoek.
The total recordable injury frequency rate improved from 2.4 to 2.34 in December 2023. As can be seen from the slide, this is the lowest rate in the last five years. We continue to be committed to improving safety at the operations with the goal of achieving zero harm. We move to slide 12. Power supply challenges continued in 2023 and is likely the worst year in terms of power outages.
For 2023, electricity tariffs increased by 18.65% and are expected to increase by 12.74% effective 1 April 2024. Negotiated pricing agreements have been approved by NERSA and Eskom. We are at final stages of concluding the agreements, which will culminate in price certainty for the agreed period. The venture is exploring renewable energy projects, which should assist in mitigating power shortages and costs. To slide 13. The venture is considering alternative technologies for producing electricity from off gas.
A combination of solar and wind projects are at various stages of development, and these would be both on-site and off-site projects. Negotiations on the first round of off-site projects are near complete, with the first off-site solar project expected to achieve financial close in the second quarter of 2024. On slide 14, ferrochrome production decreased by 22% from 384 kilotons to 300 kilotons. This translates to 78% of available capacity.
The reduction in production was as a result of planned pullback in response to weaker market conditions. Only Lion smelter operated during the winter months, which is a period of high electricity demand and significantly higher tariffs. Lydenburg smelter, Rustenburg furnace six, and Waterval Mine remain under care and maintenance. Post the winter months, the Rustenburg smelter was not brought back to production and remains under care and maintenance. The sale of Boshoek mine is almost complete.
We are currently just waiting for regulatory approvals. On slide 15, the total cost of production per ton of ferrochrome increased by 28%. The key drivers of this escalation is higher chrome ore market prices, higher reduction costs, higher power tariffs, higher fixed costs as a result of lower production, that is fixed cost per unit. Lastly, general and mining inflation. On slide 16, as mentioned earlier, the Eastern PGM Plant now form part of the venture.
The contribution of the plant has resulted in increased production capacity. The new PGMX plant is under construction and up to the end of the financial year, about ZAR 71 million was spent as expansionary CapEx on this plant. The PGM volumes produced were higher, with feed tons and PGM ounces increasing significantly as a result of the inclusion of the PGM plant in the venture.
PGM pricing is currently under pressure, with rhodium prices having declined by 59%. On slide 17, we continue to focus on ESG compliance and reporting. In terms of reporting, we are guided by the JSE's sustainability disclosure requirements, and we are exploring other avenues on how to improve our reporting. The venture's target is a 15% reduction of total emissions by 2026, and a 50% reduction of total emissions by 2035. That's based on the 2019 levels as a base. I will now hand over to Ditabe for the financial review. Over to you, Ditabe.
Thank you, Zanele, and good morning to everyone joining us today. It is my pleasure to present Merafe Resources' 2023 year-end results today. I will start off with revenue on slide 19. Total revenue increased by 16% for the year to ZAR 9.2 billion. Three items that were key contributors to this growth were the weaker rand dollar exchange rate, higher chrome ore volumes sold, and higher chrome ore prices over the period. Due to weakness in the market, ferrochrome volumes sold were lower than in the prior year. Delving a bit more into each of the three revenue sources, starting with ferrochrome revenue, this increased by 1% to ZAR 6.9 billion, despite a 10% decrease in prices achieved and a 7% reduction in volume sold. Chrome ore continued to perform well for the remainder of the year.
Higher prices, which held up over the reporting period and higher volume sold, contributed to 114% increase in revenue year-on-year. Finally, our PGMs revenue of ZAR 133 million was 33% higher than in the prior year. Although the PGMs asking price was lower, higher sales volume and a favorable exchange rate supported this growth. The increase in volumes is directly attributable to the contribution of the Eastern PGM Plant to the venture. Moving to the earnings slide. We are pleased to report an improvement in earnings. For the year, we achieved basic earnings per share of ZAR 0.701 and headline earnings per share of ZAR 0.6010. We analyze our EBITDA on the next slide. This EBITDA slide indicates the proportion of the 2023 EBITDA variances, in percentage terms relative to the 2022 EBITDA as the base.
As earlier indicated, one of the key performance drivers was the weaker rand-dollar exchange rate. This accounted for 40% of the variance. Inflation was the second largest variance and eroded 28% from our EBITDA. The net impact of prices achieved, and volume sold added 10% to the 2022 EBITDA. The impact of chrome ore prices and volumes more than offsets the impact of ferrochrome. Production cutbacks over the winter period led to an increase in standing charges, which shaved off 10% from EBITDA. Contribution of the Eastern PGM Plant was responsible for a 2% improvement in the 2022 EBITDA. Later, we will talk a bit more about the gain realized on acquisition of this investment, which is not included in the 2%. Other smaller variances are responsible for the balance of the movement. Overall, there is a 6% improvement in EBITDA from the venture year-on-year.
Moving on to the next slide, which looks at EBITDA of ZAR 2.4 billion generated from the venture and reconciles that to Merafe's reported profit after tax of ZAR 1.8 billion for the year. The following items go off against EBITDA from the venture to arrive at the reported profit after tax. Current and deferred tax of ZAR 600 million. Depreciation and amortization costs of ZAR 249 million. We had no cash generating unit impairment adjustment over the period. Third is corporate cost of ZAR 76 million. Next is net financing income of ZAR 38 million. Then income from equity accounted investment of ZAR 90 million. Finally, a new item accounted for this year is the gain on acquisition of a joint operation of ZAR 250 million. This relates to the acquisition of the Eastern PGM Plant.
The gain relates to the net asset value of the operations attributable to Merafe on signature date. No consideration was paid for these assets. On the slide that follows, we analyze some of these items further. The income statement is presented on this slide. We have already discussed the revenue line. Foreign exchange gain of ZAR 99 million was recognized for the year against a gain of ZAR 68 million in the prior period.
The weaker rand-dollar exchange rate helped with this performance. The next item we will discuss is the operating expenses line. These expenses were affected by, one, higher production cost per unit, which negatively impact cost of sales. We have already discussed the reasons for the increase in these costs. Two, general inflation on both fixed and other variable costs, which contributed to the increase. Finally, higher chrome ore volume sold.
We have already spoken about the ZAR 250 million gain on acquisition of the joint operation. From 1st September 2023, financial results from this operation have been proportionally consolidated. Merafe's corporate costs were higher than prior year, primarily due to higher VAT expense due to apportionment rules, higher legal fees incurred, and general inflation. The depreciation and amortization charge is higher due to capital expenditure over time.
The net interest income amount is higher due to higher cash balances and higher interest rates. Although the total charge for tax is higher than the prior year amount, the equal current tax charge is lower due to higher capital expenditure deductions in the reporting period. Our capital expenditure was ZAR 187 million more than in the prior year. The resulting profit after tax for the year is ZAR 1.8 billion, a 24% improvement on the prior year.
The next slide takes us to the balance sheet. Starting off with non-current assets, which increased due to capital expenditure over the period. Next is current assets. The balance closed higher than the opening balance. The material increases relate to trade and other receivables, which increased due to higher sales over the period, as well as a weaker closing exchange rate. These increases also relate to cash and cash equivalents, which increased due to improved earnings.
The increases exceed the decreases in current assets, which come from inventory balances. The balance of inventory reduced due to inventory drawn down during the year. Ferrochrome finished goods decreased from last year's closing balance of 109,000 tons to 81,000 tons, resulting in volumes that represent two to three months of sales. Moving on to liabilities. These include provision for environmental obligations of ZAR 155 million.
This liability reduced from last year's balance due to use of a higher discount rate. The largest current liability is trade and other payables of ZAR 944 million. Additional breakdown of these results is provided in the SENS announcement and in our audited financial statements. Next, we move to slide 25, and here we provide a reconciliation of our cash balance. We started the year with a combined cash balance of ZAR 1.3 billion. Net cash from operating activities increased the cash balance by ZAR 1.9 billion. This includes a net working capital outflow of ZAR 160 million. Cash was used to fund capital expenditure of ZAR 670 million. Cash was also used to fund dividends of ZAR 825 million, which comprise the 2022 final dividend as well as the 2023 interim dividend.
Finally, payment of leases and foreign exchange effect accounted for the balance of the cash movement of ZAR 4 million. The closing balance of cash was ZAR 1.7 billion, and this includes Merafe's own cash as well as Merafe's share of cash at the venture. This split together with Merafe's headroom are what we will discuss on the next slide 26. Merafe's own cash is ZAR 679 million at period end. Merafe's share of cash at the venture is the balance of ZAR 959 million, both resulting in a total cash of ZAR 1.7 billion. Cash at the venture includes ZAR 328 million, which has been set aside for rehabilitation obligations.
The company was ungeared at period end, and as far as headroom is concerned, Merafe's headroom consists of facilities in place at the PSV for our operational requirements, as well as a ZAR 300 million revolving credit facility with Absa. Moving on to slide 28, which is my last slide. This deals with the final dividend. As alluded to in key features of the results, the board has declared a final cash dividend of ZAR 0.22 per share. The 2023 and interim dividend amount to a total distribution of 70% of headline earnings and represents a yield of 32% on the closing share price at year-end. Thank you all for your attention. I will now hand you back to Zanele for final remarks.
Thank you, Ditabe. In terms of outlook, we expect the year ahead to be a mixed bag of challenges and opportunities. The challenges could include slower economic growth, cost pressures, geopolitical tensions, which will increase uncertainty and price volatility. Opportunities, on the other hand, could be brought about by easing inflation and interest rates as well as recovery in Europe, specifically from a ferrochrome demand point of view.
Local risks include electricity and logistics challenges, which are expected to continue in 2024. At the venture level, the opportunities are the implementation of the NPA and development of green energy solutions. Our focus will continue to be on efficient operations, cash preservation, cost management, and efficient capital allocation. We remain committed to creating value for all our stakeholders. Thank you. We will now take questions, first from the conference call and then from the webcast. Please state your name before asking a question.
Thank you. Ladies and gentlemen, for those on the conference call, if you would like to ask a question, you may press star and then one on a touch-tone phone or on the keypad on your screen. If you however, wish to withdraw the question, you may press star and then two to remove yourself from the question queue. For those on the webcast, you may submit a question using the text box at the bottom of your screen. Once again, if you would like to ask a question on the conference call, you may press star and then one. We will pause for a moment, see if we have any questions from the conference call. At this time, we have no questions on this conference call, and I would like to hand over for any questions from the webcast.
Thank you. There are questions on the webcast. This is Ditabe speaking. I will read them out, and then assign them to the appropriate person to answer them. The first question reads, "To what extent will you be benefiting from self-arranged renewable energy generation? Will the venture not use green hydrogen instead of coking coal?" I will pass this on to Japie to respond to. Japie, over to you.
Good morning, Ditabe, and good morning, all. I just want to make sure that you can hear me.
We can hear you, Japie.
Okay, thanks. I see that the question came from Martin. Good morning, Martin. For us, in terms of self-arranged renewable energy generation or solutions, like I said previously, and also as what Zanele described in her presentation, we are looking at cogen solutions. We have cogeneration at some of our operations, but there are new, more efficient technologies and we are pursuing that. That's the first thing, is to use off gas as a continuous process enhancement in terms of generating electricity. That's the first point. The second one would be the behind-the-meter solutions. At one of our other operations, we have already pulled the trigger in terms of execution, in terms of the behind-the-meter. So we've got a very good model already, and we are looking the same for the PSV.
We are in final design stages, in terms of the behind-the-meter solutions. The third one, as Zanele also clearly stipulated, would be our IPP versus PPA. In that regard, we are very close to signing our first bankable PPA solution. But in the meantime, we're also continuously looking at other and more solutions out there. Obviously, by doing that, it allows us then to wheel.
As you all know, a PPA or a power purchase agreement, is where there's, let's say, a plant been built in the Northern Cape and then you wheel it. So it's a virtual wheeling agreement and all those agreements with the authorities are already in place. Not sure if I satisfied that first question. If you would allow me, Ditabe, after you have read the second question, it's also from Martin, I just want to follow up on that one as well.
Please do, Japie.
Okay. On the second question.
Maybe let me read it out first. Sorry, Japie.
Yes, thanks.
For the benefit of the platform. Are price premium likely in future for green chrome and green ferrochrome production? Would you not use your own PGMs to produce green hydrogen once your renewables are in place? How committed are you to decarbonization and confronting climate change, and thus considering these paradigm-shifting measures? Thanks, Japie.
Thank you for that, Ditabe. Obviously, currently we do not see any differentiation between green chrome or green ferrochrome versus, let's say the South African produced in a ferrochrome. I think through the CBAM, I am sure that you all know that CBAM is being pushed quite hard through Europe. This is this Carbon Border Adjustment Mechanism. And in that mechanism, they want to start to differentiate between fossil fuel-produced products, be that ferrochrome or whatever type of product versus a cleaner energy solution.
Until that is not materialized, we don't see that there will be a difference between prices. Obviously, there are questions coming through, how do you generate your ferrochrome now? The PSV has got a clear pathway in terms of decarbonization. I think Zanele also clearly articulated that in her presentation with set targets, and that's the way that the PSV will do it. In terms of hydrogen, unfortunately, in our view, there's not really a commercialized project yet that you can take that to the floor to really make a big difference.
I mean, our PGM area that we play in is small in comparison with the bigger PGM players. So, we do have got off-take agreements, so we don't convert our concentrate into metal. We've got various off-take agreements where we sell our PGMs to. So we don't see that currently as a focus area. Our clear focus would be on solutions that's already workable, which is solar and wind. Thanks.
Thanks for that, Japie. The next question is from Tim, and there are a couple of questions in one. Read it out. Good morning. Thanks for the presentation. Please, may we have more color on the NPA. What are you expecting as the impact, and when is the effective implementation date? The first question. The second question, what do you see as the optimal or necessary level of cash at the venture?
The third question, please talk through the sale of chrome ore. How much of this chrome ore is UG2, or is this largely the high-grade material? The fourth question, please talk through your emission reduction plan. How do you make renewable power base load as required by a furnace? Then the final question is, please talk through which furnaces are now operating and how the NPA will change your operational plan going forward.
Okay. Maybe I can deal with the first question on the NPA. Like I indicated earlier, we are very close to finalizing those agreements. So, the implementation should be, I would say, the next quarter of that. The biggest impact, I think, which we are appreciative of, is that it brings a bit of certainty around pricing. Because as you know, in the past, obviously, the increase in price tariffs were based on the methodology that Eskom would use, which would not necessarily give you an idea of what your increase next year is. So for us, what is important is that we have more certainty around pricing. The next question is around the optimal cash at the venture.
Our business is quite cyclical, so we try and anticipate what the year ahead looks like, and on that basis, decide on how much cash we'd like to retain. Not so easy to give a number and say, we'd like to keep so much, because it just depends on the circumstances. If we're looking for the year ahead and it looks like we are positive about pricing and the market and so on, we might decide to retain less. But if we think there are headwinds, we might decide to retain more. It just depends on how we see the market.
Thanks, Zanele. Maybe, Japie, to pass on to you for the next three questions, starting with the sale of chrome ore, emissions, as well as the furnaces.
Okay. Thank you for that, Ditabe. If I must just look at the percentage in terms of UG2 sales versus our other chrome units, you would also know that we are also producing foundry and we're also producing chemical grade, which is more specialized chrome that you do make from your primary sources. You cannot make that from UG2. Your UG2 quality is definitely lower than your primary mined chrome ore. If I have a look at our exports, I would say that in terms of obviously using our chrome units in terms of converting them into ferrochrome, we do use a combination of higher quality chrome ore that we're mining plus UG2. But if we export, I would say predominantly would be UG2, I would say 50/50 in that region. I hope I answered that one.
In terms of your emission reduction plan, how do you make renewable power a base load? Obviously, we're also looking at various aspects in terms of storage. You would appreciate that currently storage of electricity is still a very costly exercise, and it will take you more expensive than Eskom. Obviously that's why you would always want to work through a solution or to a solution where you've got a combination of wind and solar. Solar, obviously, you can only use during the day, but the wind in many of the areas that we are investigating, we do have a 40% load factor, and that can then run through the night as well. So that's how we can smoothen out your base load. Currently, you will never be able to move away from base load in totality.
For that reason as well, the NPA that we do have also caters for this. We must just make sure that we've got all our plans in terms of that. I hope I've answered that one. Please take us through which of the furnaces are now operating. I think Zanele also alluded to that. As you know, Lydenburg smelter currently is on care and maintenance, and we continuously reevaluate the Lydenburg complex in terms of restarting. That means even with the NPA, it doesn't mean that you've now got the NPA, that your electricity tariffs is of such a nature that it will be more profitable by starting it up. We are running those scenarios continuously. You also would know that Rustenburg smelter is currently also standing.
Although we still do not have a signed NPA or agreement, let's say, with the municipality of Rustenburg, if we do get the NPA, we will also evaluate if it's better for us to run it or not, because we continuously compare profitability in terms of selling the chrome ore versus beneficiating that. We will keep on doing that. Currently, just to get back to you, Lion is running four furnaces, Wonderkop is running six furnaces, and then Boshoek mine, two furnaces. There was just another question in terms of. I think that's still coming now. It's just in terms.
Yeah, it is coming, Japie, and maybe you might want to take both of them. The first one deals with how many megawatts of renewables are planned in total, and the second one is a follow-up question from Martin on the gas solution, whether it's low carbon and how much lower than present.
Okay. Thank you. It's always good to have these questions in front of you. That's why. It's easy to go over that. I just want to understand from Tim, I see that those questions that came from Tim, I just hope that we actually covered the five of them. Just in terms of how many megawatts, if you have a look at the behind-the-meter projects, we are looking quite a big total. If you have a look at the Eastern Limb, we're looking at 27 MW. At Wonderkop smelter, 234 MW. At Lydenburg, 160 MW. The behind-the-meter projects are quite substantial. Obviously, we must still do a lot of evaluation work on that. If you then also look at the PPA projects, we have really lined up the one that we spoke about that's very close to bankable.
But if you have a look at the wind projects, we are looking at in the region of about possible projects, 400 MW and additional solar, 200 MW. You can see that there is quite a large amount of projects that we do evaluate. I think what is different for us in terms of just making general statements out there is that we would rather work to bankable solutions and then declare that. So like the one that we are now very close to the financial close, like we said, as Zanele also alluded to in her specific presentation, that will be within the next quarter. That one could be signed off. So that is just a bit of light on that one. Then the other one from Martin, is your gas solution low carbon? How much lower than present?
Obviously, what your gas solution does, it will take you off gas. Then that converts that off-gas into electricity generation. So that means in total, you then use less electricity on your plant. So obviously it means that you directly have got a reduction of CO2 equivalents of that electricity that you use. So you should know that for every one ton of ferrochrome produced is in the region of about four tons of CO2 equivalent. So that means for every one kilowatt or megawatt that you can use less, obviously your carbon footprint will then be smaller. So if you have got a gas solution, it is actually 100% green, if that makes sense. Thanks.
Thanks, Japie. It would appear that Martin struggled to get most of what you said, and maybe if I could try and summarize. Martin, hopefully you can hear me better. In terms of the first question around megawatts, Japie indicated that there are several projects that are being considered in terms of on-site opportunities. There are several that include, a plant at Wonderkop smelter, a plant at Lydenburg. Wonderkop is about 250 MW, Lydenburg is about 160, and Eastern PGM Plant mines as well are being considered. So quite substantial megawatts being considered off-site. But also if you consider on-site, that is being considered on-site. Then if you consider off-site, the near term project, which is close to Bankable, is 100 MW project.
Additional to that, we are looking at a couple of wind as well as solar projects, which in total would amount to about between 400 and 500 MW. So quite substantial projects as far as megawatt wattage is concerned. Then as far as your gas question is concerned, what Japie indicated is that the gas that is being referred to is off gas that comes off our operations and is being used to produce electricity.
So as a consequence of that, the natural thing is that it will result in us producing less carbon, because we are reducing usage of power and using the off gas to produce electricity. Hopefully that answers your questions. Then the last question is from Anthony. Please advise if listing serves any purpose. Glencore is already listed, and has a much bigger market cap. Is there a possibility that Glencore buys out minorities?
Yeah. I suppose that's always a tricky question because listing does serve a purpose at different stages of a company's life. So, it depends on whether you want to raise capital or not. Obviously, as Merafe, we haven't raised capital on the equity markets for a long time, so I understand where the question is coming from. But very much it is a shareholder-driven process. So, to the extent that the majority shareholders, like a Glencore and an IDC would like to take us off the market, that's something that they would have to drive.
Thanks for that, Zanele. I think we've come to the end of our questions on the platform. Is it over to the coordinators? Or is it over to you, Zanele?
Maybe before we go to the coordinators, I'd just like to thank everyone for attending our presentation and thanks for all the good questions. They're all appreciated. I think we'll now close the call.
Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.