Merafe Resources : Booklet

CONTENTS

Merafe Resources Limited

(Incorporated in the Republic of South Africa) (Registration number: 1987/003452/06) JSE share code: MRF

ISIN: ZAE000060000

("Merafe" or the "Company" or the "Group")

Sponsor

One Capital Sponsor Services (Pty) Ltd

Executive Directors

Z Matlala (Chief Executive Officer), D Chocho (Financial Director)

Non-executive Directors

A Mngomezulu (Chairperson)*, D McGluwa, M Vuso*, K Tlale*, N Mabusela-Aikhuere*, D Green, J Mclaughlan*

* Independent

Company Secretary

CorpStat Governance Services (Pty) Ltd

Registered office

Building B, 2nd Floor Ballyoaks Office Park 35 Ballyclare Drive Bryanston

2191

Transfer secretaries

JSE Investor Services (Pty) Ltd

Investor relations

Ditabe Chocho

Tel:+27 11 783 4780

Email: ditabe@meraferesources.co.za

CEO commentary on results

2021 has been a year of recovery for the Glencore Merafe Pooling and Sharing Venture ("Venture"), both from a financial and operational perspective. Improved economic activity contributed to robust demand for ferrochrome, which coupled with supply constraints resulted in a marked increase in prices. This activity also led to higher volumes sold, however, the impact on revenue was somewhat dampened by a stronger Rand:US$ exchange rate. Merafe achieved the highest profit after tax since the formation of the Venture in 2004. The Board of Directors of Merafe

(the "Board") has declared a final cash dividend of R549.8 million on

22 March 2022 bringing the total dividends for the year to R724.7 million.

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Key features

30% decrease in TRIFR1 to

2.75

(2020: 3.912)

43% increase in ferrochrome production to

379kt

(2020: 265kt)

69% increase in revenue to

R8 063 million

(2020: R4 780 million)

Decrease in production cost per tonne by

5%

(2020: 8% increase)

Increase in EBITDA3

R2 432 million

(2020: R168 million)

1. Total recordable injury frequency rate
2. Restated. The 2020 financial year data related to hours worked was corrected to align with reporting definitions. This impacted on the frequency rates
3. Earnings before interest, taxation, depreciation and amortisation

Headline earnings per share of

67 cents

(2020: loss of 0.8 cents)

Basic earnings per share of

66.8 cents

(2020: loss of 40.0 cents)

Net cash generated from operating activities increased to

R1 156 million

(2020: R495 million)

Net cash of

R972 million

(2020: R278 million)

Cash dividend declared

22 cents per share

(2020: Rnil)

Financial review

The summarised consolidated financial results for the year ended 31 December 2021 are presented below.

Rounding of figures may result in minor computational discrepancies of the tabulations.

Merafe's revenue and operating income is primarily generated from the Venture which is one of the global market leaders in ferrochrome production, with a total installed capacity of 2.3 million 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 of chrome ore and beneficiation of chrome ore into ferrochrome and associated minerals, as a result, no segment report has been presented.

Merafe's share of revenue from the Venture, which includes a management fee, increased by 69% from the prior year to R8 063 million (2020: R4 780 million). Ferrochrome revenue increased by 75% year-on-year to R7 020 million (2020: R4 002 million) primarily as a result of a 50% increase in average net cost, insurance and freight ("CIF") prices and a 29% increase in ferrochrome sales volumes to 394kt (2020: 305kt). Chrome ore revenue increased by 33% year-on-year to R1 036 million (2020: R777 million), driven by an 17% increase in sales volumes to 390kt

(2020: 332kt) and a 27% average sales price increase for the year. Some product was produced and sold from the Platinum Group Metals ("PGMs") processing plant that Merafe invested in (as reported in the announcement published on SENS on 14 January 2022). This revenue was R2.6 million (2020: Rnil).

Merafe's portion of the Venture's EBITDA for the year ended

31 December 2021 is R2 498.1 million (2020: R197.8 million).

The EBITDA includes Merafe's attributable share of standing charges of R108.7 million (2020: R474.2 million) and a foreign exchange gain of R104.3 million (2020: R59.7 million loss). There were no retrenchment costs in the year (2020: R97 million). The Company wrote down inventory by R24.4 million during the year (2020: R13.6 million).

After accounting for corporate costs of R66.0 million (2020: R29.9 million), which include a cash settled share-based payment expense of

R8.9 million (2020: R0.7 million credit), Merafe achieved EBITDA of

R2 432.1 million (2020: R167.9 million). Corporate costs include

Corporate Social Investment expenses of R3.1 million (2020: R0.5 million),

a bonus provision of R10.5 million (2020: R5.5 million) and a provision of

R12.7 million (2020: Rnil) against previously claimed indirect taxes which may be disallowed and have to be expensed.

Earnings for the year ended 31 December 2021 amounted to

R1 673.7 million (2020: loss of R1 003 million), after taking into account

depreciation charge of R111.2 million (2020: R153.4 million), an impairment

of assets of R5.8 million (2020: R1 365 million), net financing income of

R11.1 million (2020: R4.8 million) and taxation expense of R653.1 million

(2020: R342.7 million credit). While the 2020 financial year's impairment adjustment related to the cash generating unit ("CGU"), the current year's impairment loss was specific to an asset that was written off.

An impairment assessment was performed at year end, resulting in

no further CGU impairment adjustment for the period. Taxation includes a deferred tax expense of R199.2 million (2020: R344.2 million credit) which arose primarily as a result of temporary differences on property, plant and equipment as well as those relating to provisions and accruals. There is no unredeemed capital expenditure balance at 31 December 2021 (2020: R274.6 million) as taxable profits exceeded capital expenditure. Depreciation decreased year-on-year primarily as a result of an impairment loss processed in the prior year.

Sustaining capital expenditure increased by 34% to R448.1 million (2020: R333.7 million) due to catch-up spend necessitated by COVID-19-related spending restrictions in the prior year. Expansionary capital includes R32 million spent on the PGMs processing plant. Although the plant has commenced producing product, its development is planned for full completion in the 2022 financial year and will be financed from own cash reserves.

The unsecured credit facility with Absa of R300 million remained unutilised for the year.

At 31 December 2021, Merafe had cash and cash equivalents of

R972.1 million (2020: R277.6 million) which comprised cash held by

Merafe of R483.2 million (2020: R151.9 million) and R488.9 million

(2020: R125.7 million), being Merafe's share of the cash balance in the Venture. The Venture has set aside cash, ringfenced to fund its future environmental rehabilitation obligations. Merafe's share of this cash is R189.3 million and is included in its share of the cash in the Venture of R488.9 million referred to above.

Trade and other receivables increased by 76% compared to the previous year primarily as a result of higher prices, a weaker closing Rand:US$ exchange rate and higher volumes sold in the last quarter of the year. The Rand:US$ exchange rate closed at R15.94 (2020: R14.65) as at 31 December 2021.

Ferrochrome finished goods volumes of 76kt (2020: 90kt) on hand at year end represent approximately two to three months of sales. The closing inventory value increased to R1 652.2 million (2020: R1 433.7 million) post the write down of inventory. The increase in the closing value of inventory was due to higher costs as well as an increase in our raw materials inventories volumes in an effort to secure supply.

Pursuant to a share repurchase programme, the Company acquired

11 577 378 ordinary shares in the open market between 19 January 2021 and 5 May 2021. The shares represent 0.46% of the Company's issued share capital immediately prior to the buy-back. The shares were acquired at an average price of 49 cents, with prices ranging from 43 cents to

60 cents. The total cost of R5.8 million, including transaction costs, was deducted from share capital. In line with the JSE Limited's approval, the shares bought back were delisted and cancelled on 18 August 2021.

The share repurchase programme was suspended on 26 November 2021.

The Board has declared a final cash dividend of R549.8 million

(2020: Rnil). This amounts to 22 cents (2020: nil cents) per share before dividend tax, and brings the total dividend for the year to R724.7 million (2020: Rnil).

Safety

The safety of our employees remains our number one priority. The Venture was fatality free for the year. Our total recordable injury frequency rate improved by 29.67% to 2.75 (December 2020: 3.91^).

A safety culture is encouraged as evidenced by a concerted effort by everyone to ensure not only their own safety but that of their co-workers as well. The SafeWork programme is another illustration of our focus on safety. The SafeWork programme framework is risk-based, focusing on eliminating fatalities and serious injuries by identifying the hazards that can result in fatal incidents and developing life-saving behaviours and protocols to target them. This programme was reviewed and a gap analysis against new requirements conducted during the last part of 2021, with actions

to ensure continuous improvement of our safety programme in creating a safe working environment.

Health

COVID-19 is still a risk that we deal with on a daily basis. Our operations continue to manage the spread of the virus through ensuring adherence to all approved COVID-19 protocols.

The implementation of antigen testing across all operations since January 2021 assisted greatly in curbing super spreader events by preventing asymptomatic positive people from entering the workplace. On average a total of 68 784 antigen tests were conducted during 2021. To confirm the reliability of the antigen test, all COVID-19 positive results were followed up a Polymerase Chain Reaction test which demonstrated an effectiveness rate of 99%.

With the emergence of the Delta variant, we have seen a substantial increase in positive cases throughout South Africa and across our operations. This was followed with the identification of the Omicron variant and the emergence of the fourth wave in South Africa. 2 873 members of our workforce tested positive during 2021 compared to 694 positive cases during 2020. It is with great sadness that we report that during 2021 we have lost 26 (December 2020: 5) of our colleagues due to COVID-19.

• There was a restatement of the December 2020 statistic from 3.89 to 3.91. The 2020 financial year data related to hours worked was corrected to align with reporting definitions. This impacted the frequency rates.

The impact of the virus on our people only reinforces our determination to ensure the safety and health of our workers.

In partnership with Ndlovu Laboratories, we have embarked on a vaccination campaign in support of the vaccination drive by government. As at 31 December 2021, 80% of our workforce had at least one dose.

Operational review

Merafe's attributable ferrochrome production volumes increased by 43% from 265kt to 379kt for the year ended 31 December 2021. The increase was mainly due to production being less affected by COVID-19 shutdowns coupled with improved plant efficiencies achieved at the Venture's smelters. New annual production records were achieved for total furnaces and total plant production at Wonderkop and Lion smelters.

Lydenburg smelter, Rustenburg furnace 6, Waterval mine and Boshoek mine remain on care and maintenance. Rustenburg furnace 5 was brought back into operation in the third quarter of the year. Total unit cost of production of ferrochrome decreased by 5.2% year-on-year, mainly as a result of fixed costs dilution due to higher volumes produced and lower cost of chrome ore. However, these were somewhat offset by the higher cost of electricity and reductants.

Reliability of supply and escalating cost of electricity remain key risks for our business. Electricity tariff increased by 15.06% effective 1 April 2021. The Eskom approved tariff increase is 9.61% effective from 1 April 2022.

To mitigate against these unsustainable electricity tariffs, the Venture is pursuing Negotiated Pricing Agreements with Eskom in terms of the Department of Mineral Resources and Energy Interim Framework for Long Negotiated Pricing Agreements.

The Venture is at the request for proposals stage regarding construction of renewable energy facilities and supply of green power.

The cost of reductants was impacted by increased market prices and shortage of local supply of anthracite and coke, necessitating imports which are more expensive.

New PGMs plant - Western Chrome mines

As earlier reported, Merafe and Glencore Operations South Africa have reached an agreement to contribute to the PGMs plant which is currently under construction at the Kroondal mine. The new PGM Plant's main operations will be the treatment of PGM-bearing material (i) derived from the mining operations at the JV's western chrome mines; (ii) available in applicable tailings facilities and dams; and (iii) from certain mining operations in the vicinity of the Kroondal Mine to which Glencore Operations South Africa and/or Merafe directly or indirectly have/has rights in relation to PGMs. The plant has the capacity to treat 21kt of PGM-bearing material per month. Merafe's portion of the estimated cost to complete construction of the plant in 2022 is R23m which will be paid for by the Venture.

Market review

Global ferrochrome demand outpaced supply during most of 2021 as stainless-steel production increased 14.5%¹ year-on-year to 59mt1. Chinese ferrochrome production (ca. 41%¹ of global production) was significantly impacted by power reform policy and energy shortages throughout most of the year. This supply shortage was exacerbated by a 14%³ year-on-year decline in Chinese ferrochrome imports.

South African ferrochrome production increased 35%¹ year-on-year to 3.7mt¹, in line with pre-COVID-19 levels.

Despite a lifting of COVID-19 restrictions during 2021, chrome ore exports from South Africa remained flat year-on-year at 13.5mt³ due to mine closures and logistical bottlenecks. Port inventories in China dropped 28% to 2.6mt² at the end of January 2022, from 3.6mt² a year earlier.

Logistics proved to be a challenge in 2021 and resulted in increased road usage due to rail challenges, high diesel prices as well as increased sea freight costs as a result of an imbalance in supply/demand of vessels.

The average European benchmark ferrochrome price was US cents 1524 per pound in 2021, 37.6%4 higher than the 2020 average of US cents 111 per pound.

Outlook

The strong growth in stainless steel production as well as developments in China have been key to the buoyancy in the ferrochrome market in 2021. The efficiencies achieved in our operations not only responded to this demand but assured us of the ability to operate at these levels sustainably. Our capital expenditure programme which is necessary to enable these performances was resumed in 2021 and will continue in 2022. There is expectation that global growth, while still positive, will slow down from the highs experienced in 2021. While the COVID-19 effects have been less damaging in recent periods, the pandemic remains a threat which we will continue to monitor. We accordingly remain cautious in our approach to the future and will continue to focus on efficient operations, cash preservation, cost control and efficient capital allocation. The PGMs plant and green energy initiatives are some of the important and exciting projects that will receive management's attention in 2022.

In accordance with our strategy, we remain committed to maximising return to our shareholders in the near term and we will continue to assess opportunities to deliver shareholder value.