Good day, ladies and gentlemen, and welcome to the Merafe Resources Interim 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. 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 Ferroalloys, 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 logistic challenges. Despite these challenges, Merafe recorded solid results. If we move to slide four, which is 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 the operations. Production volumes were lower for both ferrochrome and chrome ore. We continued to benefit from efficiencies at the smelters.
Production costs increased by double digits, and as mentioned earlier, power and logistics challenges persisted. Global market uncertainties continue. Stainless steel production decreased and resulted in ferrochrome demand and 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%. Interim dividends of ZAR 0.20 per share have been declared by the board.
If we move to the market, which is on slides six, seven, and eight. 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 either staying the same or declining. Chrome ore imports into China increased by 3%, with 80% of these imports originating from South Africa. If we move to slide nine 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 $1 per pound. Move to slides 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 slides 13 and 14. Power supply challenges continued. In fact, we had the worst levels of load shedding during the first six months. For the operations, we are only impacted by load curtailment from stage three 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 cogeneration technologies for off-gas solutions. Both solar and wind sources are being considered, and progress is being made for both on and offsite projects.
Preferred bidders have been selected for offsite generation, and currently, commercial structures are being finalized. We move to slide 15. Ferrochrome production decreased by 9% from 203 kilotons in June 2022, to 185 kilotons. This translates to 96% of available capacity. If we exclude Lydenburg smelter and Rustenburg smelter six, which both remain on care and maintenance. During the winter months, being June, July, and August, only Lydenburg 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 ton increased by 17%, driven mainly by chrome ore costs. 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.
PGM production was higher compared to June 2022. However, basket prices were significantly lower. Siphiwe will touch on the impact on PGM's revenue and profits. We move to slide 18. We are focused on ESG compliance and looking at ways to improve our disclosure in this regard. The venture aims to reduce emissions by 15% by 2026, and by 50% by 2035. That is if we are using the 2019 as a base. I will pause here and call on Ditabe to take you through the financial details. I will come back to conclude thereafter.
Thank you, Zanele. Good morning to everyone joining us today. I am 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 three revenue sources. Ferrochrome revenue increased by 5% to ZAR 3.8 billion, despite a 10% reduction in prices achieved. As earlier 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. 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 rather, once again, the continuing trend of positive earnings.
For the six 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 the H1 EBITDA variances in percentage terms relative to the H1 2022 EBITDA as a base. As earlier indicated, the key performance driver was the weakness of the rand dollar exchange rate.
This accounted for 53% of the variance. Inflation has eroded a sizable chunk of the variance. This impact was followed in size 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, 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 its depreciation and amortization cost of ZAR 116 million.
There was no cash-generating unit impairment adjustment over the period. That is our corporate cost of ZAR 33 million. Next, net financing income of ZAR 21 million. 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 get to review the income statement. We have 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 have already touched 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. Third is higher chrome ore volumes that were sold. Moving on to our corporate costs, Merafe's corporate costs. These were higher than in H1 2022, primarily due to higher VAT amounts that are no longer claimable due to apportionment rules or VAT apportionment rules, and due to inflation.
The depreciation and amortization charge is higher due to capital expenditure over the period. The net interest income amount is higher due to higher cash balances and higher interest rates. 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 six months.
The next slide takes us to the balance sheet. Here we start with non-current assets that increased due to capital expenditure made over the period. This expenditure was predominantly sustaining or replacement in nature. Current assets increased relative to year end. In terms of this increase, the first increase relates to inventory. Our ferrochrome finished goods increased from last year's closing balance of 109,000 tons to 116,000 tons. These volumes represent three to four 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.
Finally, current assets increased because of higher cash balances that increased due to improved 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 SENS 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, working capital resulted in a cash outflow of ZAR 421 million. Generated cash was used to fund the following: capital expenditure of ZAR 227 million, the final 2022 dividends 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 own 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 had been set aside for rehabilitation obligations of ZAR 315 million. As at year-end, the company remains ungeared at period end. 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 insecurity 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 have already seen ferrochrome prices trending downwards. 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. Please state your name before asking a question.
Thank you. If you would like to ask a question, please press star and then one on your touch-tone phone or on the keypad on your screen. If you decide to withdraw the question, you may press star and then two to remove yourself from the queue. For those on the webcast, you may submit your question using the text box at the bottom of your screen. The first question we have is from Tim Clark of SBG Securities. Please go ahead.
Thanks. Can you hear me?
Yes, we can. Please go ahead.
Thanks. 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 am interested in. The first one is just your chrome ore sales mix. If I remember back, you have always sort of said that you do not sell UG2 chrome into the stainless steel market. You sell higher grades of chrome into other alternative markets. 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 volumes into the market? That is the first question. I have got a few more. Should I pause there or should I ask them?
Maybe it might be easier to just answer that one. I think the way the mix goes just really depends on the market at a particular time. But, in general, we are a ferrochrome producer, so our first port of call is to use our chrome in the ferrochrome production. Then to the extent that we have excess, then we do export that, and the mix just depends on what is available. As you know, we do purchase UG2 from the PGM producers. So just depending on what the mix is. 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. I do not know whether, Japie, you would like to add anything there.
Yeah. Thank you. Tim, yeah, good morning. So obviously, you know that during the winter months we do close all our smelters that is not financially viable due to the electricity price. Then obviously we will then have excess ore available and we will then export the chrome ore that we do have available. Because your mines keep on producing, we have got contracts on the UG2 offtake, so you cannot just build stock. 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 Merafe of course still remains beneficiation in South Africa. We feel extremely strong about that but you cannot produce ferrochrome and not make profits. For that reason, we do export chrome ore, yes.
Okay, thanks. That is very helpful. Thank you. The second question, just on ferrochrome received pricing. I am quite early on looking at the model, so I hope I have not got a mistake in this. But if I look at the European benchmark versus the average China received price, it looks like you have received a higher percentage. Which speaks to a higher level of sales into the European benchmark or similar customers. Is that the case? It looks like you have just received a better percentage or a higher revenue per unit, than you historically have, which has been closest to the Chinese benchmark.
Yeah, Tim, I do not necessarily think that is how it is. We still have China as the majority customer for lack of a better word. So most of our product, I think closer 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. We are 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 than the six months.
Okay. So it is just a sort of a timing effect on received pricing then, I guess.
Yeah.
I will have a look at that.
Okay. Then my third question. I have got four, so my third question is just on the power agreement. You said it is moving slowly, but it is still progressing, so you are not worried about it. Given all of the sort of bumpy water that Eskom is facing, you just think it is at NERSA, it is just taking longer, but you are still confident that you are going to receive that. And does that mean then that you will bring back Lydenburg or that with that you will commit to additional production?
I will probably get Japie to come in on this one. But just start by saying where the process is that it has gone past Eskom, it is now with NERSA, and NERSA is going through its processes, which would include public comment or consultation.
So at the end of the day, it depends on those processes whether we get it or not. What it would do if we were to get it would give us a lot more certainty than we have currently, because we will have pricing that is agreed for a number of years. Japie?
Yeah, thanks, Zanele. Yes, Tim, actually, the process of the NPA or the Negotiated Pricing Agreement is actually well on its way. It has already been passed through by Eskom there to NERSA, and it is already published. The first official public participation will occur on the 1st of September. So that is in two weeks' time. So definitely well on its way, and we do not see any barriers for this not to happen.
That is on 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 a Lydenburg. I think the concern on the Lydenburg smelter complex is that we have done our evaluations, and for us to start it up will be a substantial amount of capital that we need to inject. All these factors we need to take into consideration. I am not sure if there is any follow-up on that.
Okay. Thank you. Then to Ditabe, just one for you. It is a bit unusual for you to pay a ZAR 500 million dividend with ZAR 300 and somewhat million, ZAR 25 million in the bank. Normally you have spoken to us about keeping a buffer at Merafe Resources level. I looked at your events after the reporting period, note 11, and it did not say anywhere there that the joint venture had declared a dividend to you so that your cash balance rose after the 30th of June. I do not 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 are happy to be in a slight debt position at Merafe Resources level, or am I missing something?
Yeah. 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 reserves. You are quite right, there is some cash that we sit 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 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 Resources 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 then.
Cheers. I think that 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, and so congratulations. Thank you very much. I'll leave it there.
Thanks, Tim.
Thank you. We have no further questions on the conference line. I would like to hand over for webcast questions.
Thank you. I have got a list of questions. I will read them and then pass them on to the appropriate persons. The first question, and it is one question, but it has got several questions in it. Are Merafe chrome and ferrochrome competitors more green than Merafe is, and is not being green a price threat? When will Merafe products have some green energy in them? Are stainless steel producers demanding green ferrochrome? Will you receive a price premium if your products are produced with clean energy rather than coal-fired power? This is one I will pass on to Japie to respond to. Japie, over to you.
Thank you, Ditabe . Okay, the first question, it is quite an important question and also obviously coming more and more to the fore with regards to green chrome and green ferrochrome. You would all know that the structure of the CBAM is approved already now in Europe, and if I can recall, that will start in 2024, where there is a cross-border adjustment or abatement mechanism. That means that 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 on balance. 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 eight on the presentation, ferrochrome production for let us say full year 2022 was 15.1 million tons of ferrochrome, and more than 10 million tons of these were produced in South Africa and in China. Obviously, in these two regions, there is not a lot of, let us 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 tons in 2022, and in full year 2023, again 1.3. So there will be the CBAM mechanism will be applicable there. In our case, as you know, we have got only one real competitor in South Africa that is also producing ferrochrome.
Obviously there will not be a problem. We see this, that it is 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. On your second question, when will Merafe products have some green energy in them? I can say that we are already aggressively looking at cogeneration. That is where you take the off gas and you turn that into electricity, and obviously doing that, you will then reduce your electricity dependency on fossil fuels, and that will have a direct impact. That is 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. There's various mechanisms that we are looking behind the meter. Then, obviously also on the grid or power purchase agreements with independent power producers.
We are currently far down the line with two specific IPPs and with the one, our PPA is about 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. On your other question, Arcelor still produces the Morning Green ferrochrome. Like I said, currently, especially in Europe, yes, they are starting to request that.
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 producers are. Then will you receive a price premium if your products are produced with clean energy?
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 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 rather than ferrochrome? I'll pass that one on to Zanele.
I think it's more a question of what are we doing currently. From an industry point of view via 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. For us, our preference would be to rail more, because not is it only cheaper, but also it lessens the burden on the roads, because the more you truck, the more congestion as well at the ports.
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 Durban. 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 Transnet to come to the party, and we're happy to work with them to get there, 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 ports? What percentage of chrome ore is exported via Maputo?
I would say, which 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 an exact amount of how much goes via 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. But given the current challenges, we do tend to use a little bit more of that.
Thanks, Zanele . The next question is, what does it cost to rail a ton of chrome ore versus trucking a ton to Richards Bay and to truck a ton to Maputo?
I think in a way we've answered it. It costs more to truck than to rail.
All right. Thank you. Next question. Please elaborate on your reported need to import more consumables owing to these no longer being available locally rather. Is this because of cessation of local production of some key consumables? Maybe I'll pass this one on to Japie. Hello, Japie?
Sorry.
Japie Fullard doesn't seem to be
Sorry.
Hello?
Sorry Ditabe . I battled here with other button. Anyway. Yes, obviously, if you have a look at consumables, if we do talk about reductants, that is something else. Obviously, we are battling to get reductants in South Africa, so we did have to import reductants. That is a challenge. The local sales on that, and also because of the scarcity of coal in South Africa, because of the war that happened, a lot of the product, people even exported metallurgical coal.
We really battled with that, and for that reason, we had to go abroad. On other materials, most of our materials that we do use is not locally manufactured. If you think about all our underground operations or things like that, there is a lot of equipment that we do need to buy also from abroad. For that reason, we do not have always the flexibility of that. I am not sure if there is any further questions on that.
Thanks, Japie. I think that covers it. The next question is, please provide more detail on significant trade receivables held during the period. To what extent do you expect the increase in receivables to reverse in H2? I think I will answer this generally just as a working capital question, because it does come up now and again, both trade receivables and inventory. Trade receivables, our working capital really and truly a function of our operations. They are amounts that we manage very tightly. The net amounts that we end up with at period, reporting period ends, are really a function of number of things, including how much we have been able to produce in a particular period relative to how much we have been able to sell.
If we take receivables as an example this time around, definitely a function of our sales over the period, the strong dollar or the weaker rand over the period, that had an impact on the closing balance that we closed, which was higher than at the year-end. If you look at the days, for instance, of receivables, we are looking at 45 days. If you put that in context in terms of the various sale terms that we have got with the various suppliers, I think that is a number that we are fairly comfortable with.
It is the same with inventory as well. We are sitting with three to four months of sales. Our preference, as we have previously indicated, is two to three months of sales. Again, a function this time around of how much we have been able to sell relative to how much we have produced. The intention, as we've previously indicated, is that over the second half, while we are only producing at Lion Smelter over 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 the end.
The next question is: considering your large cash balances and low P/E, why are you not repurchasing shares? Share buybacks are reviewed by the board regularly. A 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, any further details on Negotiated Pricing Agreement talks? What factors are mainly behind said delayed progress? I think we have answered.
Yeah, we have answered. Japie dealt with that extensively.
Yeah. The next question is on our cost of production. Unit cost of sales is up 17%, and your results have been saved by much weaker rand. What cost reduction initiatives do you have in the pipeline, and how much will they save? There are no specific initiatives that are aimed at reducing costs. This is something that we do on a regular basis to monitor our costs and make sure that they are within control.
If you look at our C3 production costs, you will notice that over 65% or over 70% of our cost of production comes from chrome ore, comes from reductant and fluxes, and it comes from power. Power is a cost that we are taking in. Obviously, our green initiatives will go some way towards helping us manage this cost, but also deal with the green effects thereof. Reductant and fluxes, as Japie indicated, it 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 product, 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 six weeks of sales, thus releasing 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 offsite energy generation? These are initiatives that are currently in progress. I think once we come to discussing the commercials, we'll have a better sense of how much the cost of those initiatives will be. Japie, did you have some color to add to that, or are you comfortable with that response?
No, Ditabe, I think it's okay. 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-MW plant. I can tell you that that's about in the region of about ZAR 500 million -ZAR 600 million per 25. So if you're going to put up a behind-the-meter plant, let's say at Wonderkop, your capital cost is going to be just over ZAR 2 billion for about 100 MW.
Obviously, you can ratchet it up. If you put up a 200 MW, it becomes ZAR 4 billion or ZAR 5 billion, so it is quite substantial. 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. Once you do the PPA, you actually move it off the balance sheet, and that means it's a liability. It would be the same type of value, if you can think about it. That's the liability that you are going to go into.
The PPAs normally has got a 20-year take or pay agreement, so it's not straightforward, and that's why the PPA, again, the power 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 the IPP, because I cannot sit here and say that we will be still smelting in South Africa for the next 10 years. I can't. We've closed down Lydenburg because of financials. Because of our electricity pricing, we are definitely on the higher cost curve. For that reason, that's where the challenge comes in terms of that specific commitment. 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 are the key issues that are hindering this performance by Transnet? Are there
No.
Okay. Do you want to take it, Japie, or shall I get Zanele to deal with it?
Maybe I can take it. I think it's important that we just give a bit more color in terms of Transnet and, let's say, the three crises in South Africa. I'm sure that all of you by now know that there are three declared crises in South Africa, which is energy, logistics, crime, and corruption. All of them has been elevated to the president's table. Logistics being one as well. I'm sure that you also know that through the Minerals Council, we had this steerco or oversight committee that we dealt with the board of Transnet to see exactly how we can help. This will now be folded into this new national logistics crisis committee, the NLCC.
All the issues that's been experienced by the industry and also by Transnet will now be elevated, and it's already been done. All the issues have been tabled. I'm sure that most of the people would know that the whole CRRC contract is a big concern for South Africa, and we've got more than 300 locos standing because there's no space available. It's a big problem. Obviously, the locos 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. I would say locos obviously being a major contributor. Security, another major contributor, and again, I know that Transnet has now signed the outcome-based security agreement. 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.
Also, another major challenge would be the capital availability on the infrastructure. Those are the areas that we all know. It is all public. We are busy putting in action plans to make sure that we can try to navigate through this. Just also a bit of update. We, as the Pooling and Sharing Venture, in the past, used to rail 70% of our product and 30% on road. It is now the other way around. As Zanele said, it is now 70% on road and 30% on rail. That just shows you the magnitude of the challenges that we do face. Thanks.
Thank you, Japie . I think the next one might be up your alley as well. Rustenburg operations experienced problems with construction mafia that seems prevalent in recent. Or have Rustenburg operations, sorry, I didn't ask the question. Have Rustenburg operations experienced problems with the construction mafia that seems prevalent in recent months?
Yeah. Thanks, Ditabe . We have actually seen this at most of the operations. You get these construction mafias or procurement mafias, and then they would come in and they would mobilize the community. But we did see this at Rustenburg. What we just did is we have taken some legal action, obviously, nowadays with proper technology, we could have identified certain individuals, and we did take them to court.
That is what we do. We have got an obligation as the Pooling and Sharing Venture to secure our infrastructure, and that is what we are doing. We are not shying away from any communication at all. If it is a structure or a committee that is well-structured, we don't have a problem talking to people. But if people just come and they want to talk to us and demand and close our gates, we will definitely not tolerate that.
Thanks, Japie. The last question, which I will pass on to Zanele, is you mentioned a rather gloomy outlook for the second half. However, with the exchange rate 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 over-exaggerated, and do you think it could be a strong Q4?
Yeah, that's a good question. What it does indicate is that there is volatility in the system. 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. In fact, the weakening of the exchange rate is probably because of the challenges that are coming through from China. This weakening has just 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. Even the prices for ferrochrome, the uptick has just been in the last few days as well. There's a lot of volatility.
It's very difficult to say Q4 will be strong, but based on the information we had at the end of the week, it looks like it will be a challenging second half. The other issues, like around logistics, I think we're not going to see a resolution in this half necessarily. Electricity, also similar challenges. 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. That's the end of the questions.
Yeah. Thank you to everyone for your attendance. May you have a good day further.
Thank you. Bye-bye.
Ladies and gentlemen, that concludes today's event. Thank you for joining us. You may now disconnect your line.