Review of performance

In compiling this report we have been guided by materiality so that we report concisely on those issues most material to our stakeholders and our ongoing ability to create value.

The year under review has presented the Group with many challenges and has been underpinned by a number of unprecedented structural changes within the mining industry. The global macroeconomic slowdown, driven mainly by the decline in Chinese demand and consumption of raw materials, has necessitated the re-assessment of strategies and expansion plans premised on unabated growth in consumption of commodities.

We have witnessed major mining houses that enjoy competitive cost positions expand production in the face of softer demand. This has squeezed out higher cost and marginal producers, particularly in the iron ore industry. We have also observed a significant increase in “business rescue” cases within the South African resource sector. Business rescues afford the practitioner an opportunity to salvage a business from liquidation. This is a similar process to the Chapter 11 Protection provisions contained within the United States Bankruptcy Code.

Structurally, however, Tharisa remains a low cost producer and it is with this business model that we foresee ourselves succeeding within this unpredictable and volatile commodity cycle. Our full year results demonstrate a business that is in the final stages of ramp up and yet to reach full maturity. The results from operating activities amounted to US$18.4 million, resulting in a net profit after tax of US$6.0 million. This is encouraging and bodes well for a business planning to reach steady state in the year ahead.

We must, however, note that post the financial year end a further decline within the prevailing PGM basket and metallurgical chrome concentrate prices occurred. This reinforces the need for the business to be even more cost effective.

While the initiation of our cost cutting and financial optimisation programmes are evidenced in the financial year under review, further initiatives have been launched on the basis of the state of current commodity spot prices.

These initiatives include plans to reduce overhead and operational costs by at least 10%, improve efficiencies in mining by minimising dilution and providing stable feed into the processing plants, which would ultimately improve the recoveries of PGM and chrome concentrates.

We are pleased to post our first annual profit, with headline earnings per share US$ 2 cents.

SAFETY

Safety remains a priority at Tharisa and at 30 September 2015 our LTIFR was 0.06.

However, as previously advised, it is with regret that we report two fatalities. Mr Johan Raaths, an instrument technician, lost his life in November 2014 during routine maintenance on the Voyager Plant and on 28 September 2015, a mining contractor Mr  Lambert  Petersen lost his life in a trackless mobile vehicle accident. Our heartfelt condolences are extended to the family, friends and colleagues of both men.

We continue to strive for a zero harm work environment and in line with the DMR’s drive to minimise all injuries within the South African mining industry, we have renewed our commitment to our stakeholders and taken the necessary steps in ensuring a safer workplace.

The financial year was disrupted operationally by a number of section 54 and section 55 instructions issued by the DMR in terms of the Mine Health and Safety Act which required the halting of the affected operations. These stoppages resulted in an estimated loss in production of 3.6 koz contained PGMs and 47.4 kt of chrome concentrates. We are working proactively with the inspectorate of the DMR to improve our safety compliance.


OPERATIONAL OVERVIEW

A number of milestones were achieved during the financial year including:

  • 4.4 Mt milled being an increase of 12.5%
  • 118.0 koz 6E contained PGM production, up by 50.9%
  • 65.8% overall PGM recovery, an increase of 17.0%
  • Mt production of chrome concentrates, up by 3.4%.

A number of challenges were also encountered during the financial year including:

  • Reef and inter-burden extraction being below mining plan
  • Sub-optimal run of mine stockpile levels impacting feed grades
  • Section 54 instructions resulting in a loss of production
  • Lower than planned feed grades due to additional dilution within the pit
  • Processing of a higher proportion of unscheduled weathered ore.

The total ore mined was 4.2 Mt, which is short of 600 kt our steady state plan. This, together with a lack of available in-pit reef led to a strategic review of the multi-contractor mining model. A decision was taken post the year end to revert to a single mining contractor and the transition has since been implemented according to plan.

Our objective of mining 4.8 Mt for FY2016 is still on track and the newly empowered mining team is performing in accordance with the mine schedule and in some instances exceeding the plan.


PROCESSING

The processing plants performed well when they were fed with consistent ROM feed in spite of lower than anticipated feed grades. Plant throughput equated to 91.7% of combined nameplate capacity of the processing plants. The overall performance across both plants saw a marked improvement in PGM recoveries of 65.8% demonstrating the benefits of the high energy flotation circuit and a slight decrease in chrome recoveries of 1.4% year on year. This decrease can mainly be attributable to lower and unstable chrome feed grades into the chrome plants as well as reprocessing of commissioning tails. The average chrome recovery across all plants was 58.0%, falling short of the planned 65%.


LABOUR RELATIONS

Labour relations at the Tharisa Mine remained stable and encouragingly, a three-year wage agreement was reached in the second quarter of the year. The agreement sees annual salary increases in line with this year’s South African inflation rate. The interface between the NUM, which represents the majority of our employees, and the Company is constructive and co-operative. Our main contractor, MCC, has a nationwide recognition agreement, which is governed by a central bargaining council in the construction sector. There have been no material issues with the contractor’s labour during the financial period under review.


UTILITIES

The relationship with our primary utility supplier Eskom has been cemented through clear and open communication lines. During requests for partial load shedding we accommodated the utility in an orderly manner without major disruption. Importantly, due to our two independent processing plants with their distinct and separate primary, secondary and tertiary crushing circuits, there was negligible impact on the overall plant throughput and production. Being an open pit operation, mining is not dependent on electricity and is reliant on diesel energy.

Water supply and sustainability in the face of one of the worst droughts South Africa has experienced presents a risk to the mining industry. While we have redundant sources of supply, a continued drought could result in water supply restrictions.


LOGISTICS

  2015 2014 Change
Average transport cost per tonne of chrome concentrate – CIF China basis 56 65 (13.9%)

The chrome concentrates destined for main ports China were shipped either in bulk from the Richards Bay Dry Bulk Terminal or via containers and transported from Johannesburg by road to Durban from where it was shipped. The economies of scale and in-house expertise have ensured that our transport costs, a major cost of the group, remain competitive.

Arxo Logistics has sufficient storage capacity at both the Richards Bay Dry Bulk Terminal and the Durban container port to manage Tharisa Minerals’ full production capacity.

A total of 974.8 kt (2014: 902.5 kt) of chrome concentrates was shipped by Arxo Logistics in FY2015 mostly to main ports in China. Of this, 87% was shipped in bulk, representing a significant increase on the prior year’s bulk shipments of 55%. Bulk shipments are preferred by customers due to ease of handling and reduced port charges, as well as reduced levels of administration. The increase in bulk shipments demonstrates the effectiveness of the newly upgraded rail siding at Marikana and the use of the Richards Bay Dry Bulk Terminal link, as well as the benefit of Arxo Logistics being certified as a clearing agent with SARS at Richards Bay.

Negotiations regarding a planned public-private partnership for an on-site railway siding at the Tharisa Mine are underway. This  will not only improve efficiencies and costs, but will also improve safety and alleviate environmental impacts by reducing road freight haulage.


SUSTAINABILITY

Sustainability is at the heart of our business. We are proud of our track record in minimising our environmental impact and, while we strive to improve further, we take similar pride in our mature and mutually beneficial relationships with the communities that border the Tharisa Mine.

We not only understand our obligations to create social capital as enshrined in the MPRDA, but strive to achieve these obligations in ways that create ongoing sustainable social capital.


COMMODITY MARKETS AND SALES

    2015 2014 Change
PGM basket price US$/oz 885 1 103 (19.8%)
PGM basket price ZAR/oz 10 620 11 692 (9.2%)
42% metallurgical grade chrome concentrate US$      
contract price tonne 158 158
42% metallurgical grade chrome concentrate ZAR/      
contract price tonne 1 896 1 676 13.2%
Chemical grade chrome US$/      
concentrate price tonne 159 203 (21.8%)
Exchange rate ZAR:US$ 12.0 10.6  

PGM concentrate production continues to be sold to Impala Refining Services in terms of the off-take agreement with a total of 119.9 koz of contained PGMs (on a 6E basis) being sold during the year. This is an increase of 49.1% over the previous year’s sales of 80.4 koz of contained PGMs (on a 6E basis).
The PGM prill split by mass is as follows:-

  2015 2014
Platinum 56.2% 60.5%
Palladium 16.2% 15.8%
Rhodium 9.3% 8.1%
Gold 0.2% 0.1%
Ruthenium 13.7% 11.7%
Iridium 4.4% 3.8%

Tharisa Minerals is paid a variable percentage of the market value of the contained PGMs in terms of an agreed formula. The PGM basket commodity price has remained under pressure with the average PGM basket price per ounce achieved by Tharisa Minerals reducing by 19.8% to US$885/oz (2014: US$1 103/oz) for the financial year. The Company benefited from a weakening of the South African Rand (ZAR) relative to the US Dollar (US$), resulting in the Rand basket price reducing by a lesser amount of approximately 9.2%.

Chrome concentrate sales totalled 1.1 Mt, 136.1 kt of which was higher value-add chemical and foundry grade chrome concentrates with the bulk of the production being metallurgical grade chrome concentrate. Chrome concentrate sales were in line with those of the previous financial year at 1.2 Mt. The price for metallurgical grade chrome concentrate on a CIF main ports China basis remained flat in US$ terms at US$158/tonne.

China remains the main market for metallurgical chrome concentrate.

Chemical and foundry grade chrome concentrates produced by Arxo Metals continued to be sold to Rand York Minerals in terms of an off-take agreement.

The segmental contribution to revenue and gross profit from PGM and chrome concentrates is summarised below:

  2015 2014
US$ m PGM Chrome Total PGM Chrome Total
Revenue 83.1 163.7 246.8 70.4 170.3 240.7
Cost of sales* 63.9 139.8 203.7 53.5 154.6 208.1
− Cost of sales excluding selling costs 63.7 80.8 144.5 53.4 91.9 145.3
− Selling costs 0.2 59.0 59.2 0.1 62.7 62.8
Gross profit contribution 19.2 23.9 43.1 16.9 15.7 32.6
Gross profit margin 23.1% 14.6% 17.5% 24.0% 9.2% 13.5%

* The allocation of the shared costs of producing PGMs and chrome concentrates was, in accordance with the accounting policy, revised to an equal sharing from the previous allocation of 40% to PGMs and 60% to chrome concentrates.

FINANCIAL OVERVIEW

Group revenue totaled US$246.8 million, a marginal increase of 2.5% relative to the previous year. The increase in revenue resulted principally from the increase in PGM sales of 49.1% notwithstanding the significant reduction in the PGM basket price of 19.8% from an average of US$1 103 per ounce in FY2014 to an average of US$885 per ounce for FY2015.

The gross profit margin of 17.5% compared favourably to the comparable period’s gross profit margin of 13.5%.

The PGM segment gross margin of 23.1% was marginally lower than the previous year, with the sales revenue being negatively impacted by reduced PGM commodity prices. The gross margin was, however, maintained through the increased PGM sales volumes which benefited from the improved PGM recoveries.

The chrome segment gross margin of 14.6% was significantly higher than the year before with contributing factors including competitively priced freight costs for bulk shipments of chrome concentrates.

The change in the allocation of the shared costs impacted on the gross margins with the PGM segment being allocated a higher proportion of the shared costs (50% against 40% previously) and the chrome segment being allocated a lower proportion (50% against 60% previously).

The majority of the cost of sales (excluding the selling expenses) are ZAR based costs while the commodity sales are US$ denominated prices. With the weakening of the ZAR, the Group benefited from an overall reduction in the cost base in US$ terms.

PGM cash cost of sales

Chrome cash cost of sales

After accounting for administrative expenses of US$24.8 million (a reduction of 7.9% over the comparable period), the Group achieved an operating profit of US$18.4 million. The administrative expenses include the expense incurred from share based payments arising from the conditional awards and appreciation rights awarded to employees of the Group and consultants.

EBITDA amounted to US$29.0 million (2014: US$16.5 million).

Finance costs (totalling US$11.9 million) principally related to the senior debt facility secured by Tharisa Minerals for the construction of the Voyager Plant.

The Group recorded a substantial turn-around in profitability, generating a profit before tax of US$9.6 million compared to the comparable period loss of US$40.3 million. The amount of the previous year’s loss (for comparative purposes) needs to be adjusted for the “changes in fair value of financial liabilities at fair value through profit and loss” arising from the conversion of the preference share liability into ordinary shares following the listing of the Company on the JSE in the amount of US$32.4 million. The pro forma comparable period loss was US$7.9 million.

The tax charge amounted to US$3.6 million, an effective charge of 37.6%, due primarily to disallowable charges being incurred within the Group’s activities.

Foreign currency translation differences for foreign operations, arising where the Company has funded the underlying subsidiaries with US$ denominational funding and the reporting currency of the underlying subsidiary is not in US$, amounted to US$39.4 million against the prior year’s charge of US$21.2 million. The average exchange rate for the main operating subsidiary (which reports in ZAR) weakened from ZAR10.60 in FY2014 to ZAR12.00 in the current reporting period.

Basic and diluted profit per share for the year amounted to US$ 2 cents (2014: loss of US$ 20 cents).

Additions to property, plant and equipment for the period amounted to US$24.6 million, including an amount of US$15.2 million relating to the capitalisation of deferred stripping.

During the financial year the Company issued 1 111 240 new ordinary shares ranking pari passu with the existing issued ordinary shares following the inaugural issue of shares that vested from the award of the first tranche of the conditional awards.

The Group entered into a number of pre-pay transactions for the forward delivery of chrome concentrates. As at 30 September 2015, outstanding deliveries for approximately 74.2 kt of metallurgical and chemical grade chrome concentrates were still due and the outstanding amount for the chrome prepay, which is included in trade and other payables, as at that date amounted to US$8.3 million.

The total debt amounted to US$75.6 million, resulting in a debt to total equity ratio of 42.3%. Offsetting the debt service reserve account amount of US$10.6 million, resulted in a pro forma debt to equity ratio of 36.3%. The long-term targeted debt to equity ratio is 15%.

The senior debt facility terms require the completion of certain economic and technical completion tests. The technical completion tests commenced on 1 August 2015. The long stop date for achieving the technical completion tests was 28 November 2015. Following the fatality at the Tharisa Mine on 28 September 2015 and the consequent and subsequent section 54 instructions from the DMR, the technical completion tests were halted. The lenders have agreed to extend the long stop date to 28 November 2016.

The Group generated net cash from operations of US$41.4 million (2014: US$22.4 million). Cash on hand amounted to US$24.3 million. In addition, the Group held US$10.6 million in a debt service reserve account.

It is Company policy to pay an annual dividend of 10% of consolidated net profit after tax. However, in the current commodity price cycle with both PGM prices and chrome concentrate prices reducing further post the financial year end, no dividends have been proposed or paid to ordinary shareholders during the year under review.


OUTLOOK

The general mining environment is under immense pressure and this coupled with domestic challenges, means the Tharisa business model is being stress tested. We are confident that we will succeed and emerge leaner, more efficient and ready to reap the rewards of an improving global commodity market. Our plans to reach steady state remain a priority and we have made positive strides towards achieving the recoveries required to attain those production levels.

Importantly, our financial performance proves that we can still remain profitable and continue our operations based upon the revised plan and trajectory as set out during the first half of the year. With the stringent management of our costs and improved efficiencies, we continue to be firmly positioned in the lowest cost quartile for both PGM and chrome concentrate producers.

We would like to thank our stakeholders for their support and continued belief in the Tharisa group of companies. You have our commitment that as the leadership of this Group, we will continue to seek out opportunities to improve our efficiencies and create additional value for all stakeholders.

Ioannis Drapaniotis who has served the Tharisa board as an independent non-executive director since 2008 will be retiring at the next AGM and will not be available for re-election. The Board thanks Ioannis for the invaluable contribution he has made to the Company since his appointment.

We thank our Board, management, employees, customers, suppliers and partners who have assisted the Company during this profitable year.