Merafe Resources Limited June 2008 1
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Corporate structure 20.5% of EBITDA 79.5% of EBITDA Xstrata-Merafe Chrome Venture Formed 1 July 2004 Largest ferrochrome producer in the world (±20% market share) Second lowest cost ferrochrome producer in the world Opportunity to invest directly into Xstrata s ferrochrome business 3
Share information Listing (Ticker MRF, Bloomberg MRFSJ) Market capitalisation Share price 52-week Price Range: High Low Shares in issue JSE Limited (main board) US$1.2bn (ZAR9.8 bn)* US$0.50 (ZAR 398 cents)* US$0.52 (ZAR 414 cents) US$0.17 (ZAR 136 cents) 2.467 billion shares * Closing price at 10 June 2008 ZAR/US$ R7.94 at 10 June 2008 4
Shareholder analysis Major shareholders June 2008 Royal Bafokeng Resources 29% The IDC 22% Minorities 49% 5
Liquidity Value 160,000 140,000 120,000 100,000 80,000 Average daily volume 10m shares Average annual volume 100% of issued shares equivalent to: 200% of free float 40,000 35,000 30,000 25,000 20,000 Volume 60,000 15,000 40,000 10,000 20,000 5,000 0 01-Nov-07 08-Dec-07 14-Jan-08 20-Feb-08 28-Mar-08 04-May-08 10-Jun-08 0 V olume V alue Volume and value of shares traded over the last 6 months 6
International shareholding 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% International shareholding as at May 2008 January February March April May June July August September October November December 08-Jan 08-Feb 08-Mar 08-Apr 08-May Merafe s international shareholding has increased from just over 2% in 2006 to 10% in 2008 7
Xstrata-Merafe, the world s largest ferrochrome producer Chelyabinsk, Russia 2% Ferbasa, Brazil 2% Zimasco, Zimbabwe 2% Outokumpu, Finland 3% Assmang Chrome, South Africa 3% Vargön Alloys, Sweden 2% ASA Metals, South Africa 2% Others 15% Xstrata Merafe PSV 20% Hernic Ferrochrome, South Africa 5% Samancor Chrome, South Africa 13% ENRC, Kazakhstan/Russia 14% China Various, China 17% Data: Chromenet/ XSA 8
The role of chrome Steel + minimum 12% chrome = Stainless Steel Chrome makes steel stainless The element that provides resistance to corrosion ( rust ) No substitute for chrome 50% Fe : 50% Cr (South African charge chrome) 40% Fe : 60% Cr (India and Turkey) 32% Fe : 68% Cr (Kazakhstan) 9
Operations overview SMELTERS Wonderkop Rustenburg Boshoek Lydenburg Lion Total 5 production sites CAPACITY 520 kt FeCr - 6 furnaces (Conventional) 440 kt FeCr - 6 furnaces (Conventional) 240 kt FeCr 2 furnaces (Outokumpu) 400 kt FeCr - 4 furnaces (Premus 360 kt FeCr - 2 furnaces (Premus) 1 960 kt in production capacity 20 furnaces 7 mines 10
Operations overview (cont) Operations All 20 furnaces in production in 2008 (capacity 1,960kt) Expected saleable production was 85% of capacity (1,666kt) Available power load from Eskom decreased by 10% Expected saleable production reduced to 75% of capacity (1,500kt) Situation could last until 2012 11
Market review 12
The dawning of a new age Low barriers to entry, a thing of the past: Huge pressure on return on capital Capital cost of building smelters have gone up over 500% Lead times for critical items needed for construction now 3 years Power supply when will power be available for new projects? Remaining large quality ore reserves? Shortage of skilled labour Rising production costs 13
The South African situation All new expansion projects have been delayed power availability issue Exports of chrome ore out of SA continue No export duty on chrome ore exports (unlike India $77/t) No beneficiation requirements imposed by the Department of Minerals and Energy 14
Eskom forecasts indicate that their reserve margin will be well below optimum levels post 2014 4% Data: Eskom 15
Average power rates in 2008 Country USc/kWh China India Japan Finland Sweden Russia Brazil Zimbabwe Iran South Africa Kazakhstan 5.1c 4.9c 4.3c 4.2c 3.7c 3.2c 3.2c 3.0c 2.8c 2.5c* 1.8c *As at 1 April 2008 Data: CRU Analysis 16
Production costs are rising for all FeCr producers.. FeCr producers have been hit hard by surging costs Mining/ore costs have increased: higher oil prices felt in transporting ore rising % of fines needing pelletising Electricity costs have increased Eskom increased tariffs by 15% from 1 April 2008 Expected increases of 20% p.a. for next 5 years (NERSA to consider and decide on 18 June 2008) Labour costs SA has seen double digit increases for the 1 st time in many years Cost of reductants have increased significantly Coke prices have risen to over $550 (fob China) Rising coal prices Transport costs have increased due to higher oil prices Road Shipping 17
Production costs (cont) $1.30/lb 18
New capacity Assumptions: No new expansions in South Africa for next 3 years Growth to come from Kazakhstan, China and India Ferrochrome supply ( 000 tonnes alloy) 2007 2008 2009 2010 2011 2012 SA 3,562 3,616 3,773 3,802 4,317 4,538 Kazakhstan 934 970 1,003 1,047 1,246 1,246 India 773 894 1,035 1,168 1,213 1,237 China 1,226 1,381 1,546 1,711 1,801 1,901 Other 1,368 1,432 1,386 1,467 1,590 1,615 Total 7,863 8,293 8,743 9,195 10,167 10,537 Data: XSA 19
Xstrata-Merafe initiatives to contain costs FeCr SMELTING Lion Ferrochrome commissioned Q4 2006 360,000tpa ferrochrome smelter Utilises Venture s proprietary Premus technology CHROME ORE AGGLOMERATION Bokamoso pelletising and sintering plant commissioned Q3 2007 1.2mt agglomeration capacity based on Outokumpu technology 20
Xstrata-Merafe challenge to contain costs The Venture anticipated the changes in the South African production environment and invested in efficiencies: 5 4.5 4 Specific Energy Consumption (MWh/T) 4.1 4.8 3.5 3.5 3 2.5 2.4 2 Premus Outokumpu Conventional DC Arc 21
Xstrata-Merafe challenge to contain costs (cont) Comparative resources consumption gives Premus a further edge: 95 Chrome Recovery 70% Coke Consumption 90 90 88 60% 60% 60% 50% 85 % Recovery 80 77 Consumption/t 40% 30% 75 20% 20% 70 68 10% 65 Conventional Outokumpu DC Arc Premus 0% Conventional Outokumpu DC Arc Premus 0 22
Bokamoso - improved energy consumption Xstrata-Merafe position in regard to the forecast high energy tariffs 4.5 4.0 4.1 3.5 3.5 3.0 3.0 2.5 2.0 MWh/tonne Alloy Ore tonne/tonne Alloy Conventional 4.1 3.0 Bokamoso 3.5 2.3 2.3 23
Global market review of Chrome Ore World Resources Data : US Geologial Service 24
Distribution of World Chromite Reserves About 23.4 m tonnes of chromite ore produced in 2007. Used in producing countries Exported : 70% (16m tonnes) : 30% ( 7m tonnes) Chrome ore imports into China from Jan 08 April 2008 YTD in kt South Africa Turkey India Oman Philippines Pakistan Iran Others Total 776 354 272 242 134 128 102 317 2,324 Data : Eti Krom and Heinz Pariser 25
Chrome ore prices (US$/tonne, C.I.F. China) Soaring chrome ore prices have pushed up China s cost of production Ore prices start to accelerate at the beginning of 2007 Indian ore prices are close to $750/t more than 11 times higher than in early 2003 Data : CRU 26
Stainless steel production expected to reach 38m tonnes by 2011, driven mainly by Asian markets Global stainless melted production, 2001-2011 45,000 40,000 35,000 ISSF Actual Xstrata - Merafe Forecast 000 tonnes 30,000 25,000 20,000 CAGR 7.33% 15,000 10,000 5,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 World ISSF Europe USA Japan Other China Data: ISSF / XSA 27
Demand driven by China China forecast to produce 10 mt Stainless Steel by 2010 Stainless Steel Production ('000 Tonnes) 14000 12000 10000 8000 6000 4000 2000 0 CAGR of 21.79% to 2011 2004 2005 2006 2007 2008 2009 2010 2011 Major Chinese Stainless Steel Producers capacity 2006 and 2011 Baosteel Tisco Lisco ZPSS Jisco Total % of Total capacity 2006 1,440 1,500-100 300 3,340 71% 2010 1,440 3,000 800 800 600 6,640 63% Data: Xstrata, CRU 28
Ferrochrome price Q2 2008 saw FeCr price reaching record levels of US$1.92/lb an increase of 59% from US$1.21/lb in Q1 2008 Expect further price increases in 2H 2008 and 2009 29
Austenitic vs ferritic grade stainless steel Switch taking place from austenitic to ferritic grade Stainless Steel (now 60:40 vs 75:25) Ferritic grades (400 series) Cr 12% to 17% No nickel Cr costs $3 500lt Austenitic grades (300 series) Cr 17% to 26% Nickel 7% to 19% Ni costs $23,000lt Date: CRU 30
Outlook Stainless steel production slowed in first quarter of 2008 due to production cuts in China and destocking in Europe We believe this is a short-term situation Chinese and European production set to recover in 2008 Merafe expects prices to increase further during 2008 and 2009 31
Current focus 2008 cash flows used to reduce long-term debt and working capital facilities of Merafe Cash flows in 2009 could be utilised to: fund expansions; and/or pay dividends/buy back shares 32
Analyst coverage Deutsche Securities Afrifocus Securities Prescient Securities Tim Clark Richard Hart Willem Venter tim.clark@db.com richard.hart@afrifocus.co.za willem@prescient.co.za Reports due out soon HSBC (London) Shamim Mansoor shamim.mansoor@hsbcib.com Macquarie (JHB) Avishkar Nagaser avishkar.nagaser@macquarie.com 33
Consensus analyst forecast* 2008 2009 FeCr price ($/lb) $1.82 $2.15 Sales MRF share (tonnes) 300,000 304,000 Exchange rate (R:$) R7.84 R8.26 EPS (cents) 54c 76c * Based on research published since 15 April 2008 34
www.meraferesources.co.za 35
Austenitic vs ferritic grade Stainless Steel Switch taking place from austenitic to ferritic grade Stainless Steel (now 60:40 vs 75:25) Ferritic grades (400 series) Cr 12% to 17% No nickel Price of CR 430 (17% Cr) currently $2,900t Cr accounts for 26% ($754) Iron, production costs & profit 74% ($2,146) Austenitic grades (300 series) Cr 17% to 26% Nickel 7% to 19% Price of CR 304 (18% Cr, 8% Ni) currently $5,0751t Cr accounts for 14% ($710) Nickel accounts for 43% ($2,183) Iron, production costs & profit accounts for 43% ($2,183) Data: CRU 36
Debt and facilities At 31 December 2007 R350m long-term debt R120m preference shares (non-convertible) R147m owed to Xstrata R200m overdraft R140m debtors discounting facility 37