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Risk management


DISCLOSURE ON MANAGEMENT APPROACH


Risk philosophy
Effective risk management is central to maintaining competitive advantage and adapting to changes in the internal and external business environment. The underlying principle of integrated enterprise-wide risk management (ERM) is that risk management must form part of all strategic, business planning and day-to-day operational activities. Exxaro’s ERM adopts a holistic approach to managing uncertainty, representing both risk and opportunity. The aim is to establish the acceptable level of risk in each area of business, which should be as low as reasonably practical, while taking full advantage of the highest returns possible to maximise shareholder wealth. In all risk management activities, compliance with South Africa’s King III is achieved by coordinating and integrating these activities for effective integrated risk management governance.  

Risk owners are responsible for continuous identification, assessment, mitigation and management of risks within the existing and ever-changing risk profile of the environment in which they operate.  

The internal auditors and chief audit executive, being responsible for the combined assurance process, evaluate the effectiveness of the risk management process and report to the audit, risk and compliance committee (audit committee) which, in turn, provides assurance to the board.  

Risk appetite
The audit committee approves Exxaro’s consolidated risk appetite for residual risks (ie the result after applying mitigation or control measures to the inherent risks identified and assessed), and ensures this is aligned with the group strategy. Exxaro’s risk appetite is a function of its ability to withstand unexpected losses and their impact on the group’s ability to continue as a going concern. Differentiated risk appetites apply at different levels throughout the group. The top residual risks at different levels in the organisation receive continuous and enhanced attention and are subject to periodic monitoring and reporting by risk owners to reduce the residual risk rating.  


Risk identification and assessment process
The risk management process is continuous, with well-defined steps. Risks from all sources are identified and once they pass a set materiality threshold, a formal process begins in which causal factors and consequences are identified and the correlation with other risks and mitigating controls is reviewed.  

The top residual business risks, appropriately categorised and based on impact and likelihood of occurrence, together with mitigating control measures, are disclosed below in descending order. These risks do not exceed Exxaro’s risk appetite but have the highest residual risk rating, warranting disclosure and continuous management as per the decision of the executive committee, audit, risk and compliance committee of the board, and the board itself.

EXXARO’S TOP RESIDUAL BUSINESS RISK MAP FOR 2010

Legend for 2010 residual business risk map

  1. Infrastructure constraints impacting on current operations and growth aspirations (100)
  2. Commodity price and currency volatility impacting on profitability, investment returns, project evaluations and BEE shareholding structure (80)
  3. Inability to maintain a licence to operate due to non-compliance with all applicable legal and regulatory frameworks (80)
  4. Potential delays to operations and projects associated with the time taken to obtain approval for mining and environmental rights (80)
  5. Lack of security of, and cost of electricity, impacting adversely on safety and sustainable operations (80)
  6. Inadequate regulatory changes to enable meaningful participation in IPPs in the South African industry (80)
  7. Climate change impacting adversely on sustainable operations (64)
  8. Late commissioning of growth projects fundamental to Exxaro’s future sustainability (60)
  9. Insufficient supply of clean water for sustainable operations and communities (51)
  10. Insufficient attraction and retention of key skills negatively impacting on current operations and growth aspirations (48)
  11. Risks associated with the closure of current operations (48)
  12. Adverse impact of above inflation increases on operating costs, profitability, and cost of capital projects (48)
  13. Insufficient security of critical materials due to scarcity and price (48)
  14. Fraud perpetrated resulting in quantifiable losses (40)
  15. Risk of not successfully implementing improvement project initiatives (Project Siyaya) thereby not realising revenue, cost reduction and increased operational efficiency targets (32)
  16. Funding of current operations and growth aspirations hampered by balance sheet capacity and other resource constraints (32)
  17. Risk of previous versions of software applications impacting negatively on information security and availability (32)
  18. Investment opportunities do not yield expected returns (32)
  19. Resource nationalisation resulting in sub-optimal utilisation of resources (24)
  20. Reliance on a non-managed operation for financial stability (20)

Residual risk ratings (percentages) are disclosed in brackets after the description of the residual risk.

High-level business risks


Risk and category   Impact Probability   Control measures (mitigation) 
Strategic and operations
Infrastructure constraints impacting on current operations and growth aspirations  
High High   Continuous collaboration with Transnet Freight Rail. Upgrade loading facilities. Leasing or acquiring export entitlement. Evaluate viability of own rolling stock  

Strategic and financial

Commodity price and currency volatility impacting on profitability, investment returns, project evaluations, loan covenant compliance and BEE shareholding structure  
High High   Continuous business improvement initiatives with rigorous tracking. Optimised use of operating assets to leverage benefits of higher throughput. Increased manpower productivity. Pursue downstream beneficiation and integration. Diversification of markets and product sector. Restructure, if necessary, to be profitable throughout commodity cycles  

Strategic and compliance

Inability to maintain a licence to operate due to non-compliance with applicable legal and regulatory frameworks  
High High   Engagement with relevant authorities and non-governmental organisations. Ensure gap identification and progressive compliance with revised mining charter, King III report on governance for South Africa, environmental and other legislation to ensure sustainable operations within the framework of a responsible corporate citizen  

Compliance and operations

Potential delays to current operations and projects associated with the time taken to obtain approval for mining and environmental rights  
High High   Continuous engagement with relevant authorities. Ensure compliance with legal and regulatory requirements to progress approvals required  

Operations

Lack of security, and cost, of electricity impacting on safety and sustainable operations  
High High   Participation in industry forums that engage with Eskom and the National Energy Regulator of South Africa (NERSA). Investigation into co-generation and other renewable energy sources. Implementing power-sharing initiatives and examining alternatives for conserving electricity in operations. Continued commitment to Eskom to assist where possible with additional coal supply to achieve stability in the power grid  

Strategic

Inadequate regulatory changes to enable meaningful participation in IPPs in the South African industry  
High Medium   Ongoing engagement and participation in regulatory processes and continued lobbying of decision makers  

Operations

Climate change impacting on sustainable operations  
High Medium   Continuous research and industry participation to understand and quantify impacts to ensure mitigation initiatives are current and effective  

Strategic

Late commissioning of growth projects critical to Exxaro’s sustainability  
Medium Medium   Robust project management discipline. Knowledge sharing from experiences with previous projects  

Strategic and operations

Insufficient supply of clean water for sustainable operations and communities  
Medium Medium   Continuous enhancement of current water management programmes combined with investigation of additional mitigation initiatives  

Strategic and operations

Insufficient attraction and retention of key skills impacting negatively on current operations and growth aspirations  
High Medium   Implementation of effective retention strategy for key disciplines. Remain an employer of choice due to:

  • regularly benchmarked market-related remuneration
  • comprehensive training and development
  • growth opportunities  
Focus on innovative recruitment initiatives and succession planning. Continuous rotation and exposure of own talent in multi-disciplinary project teams  

Operations

Risks associated with the closure of current operations  
High Medium   Restructure, where necessary and where possible, to be profitable throughout commodity cycles  

Continuous improvement to enhance efficiencies, productivity and profitability  

Investigate downstream opportunities or alternative applications for current technology  

Financial

Adverse impact of above-inflation increases on operating costs, profitability and costs of capital projects  

High Medium   Ensure comprehensive provision for escalation on project costing and timing of long-lead items. Continuous business improvement initiatives and knowledge sharing  

Operations

Insufficient security of critical materials due to scarcity and price  

High Medium   Strategic sourcing and long-term contracting with reliable suppliers. Implement mitigation plans to avert or minimise potential impact  

Financial

Fraud perpetrated, resulting in quantifiable losses  

High High   Sound and entrenched internal controls and governance. Discipline with procedural compliance. Zero tolerance to fraud. Strong and experienced forensic investigation capability. Continuous internal audit of controls and assurance of effective functioning  

Strategic

Risk of not successfully implementing improvement project initiatives thereby not realising targets for revenue, cost reduction and increased operational efficiency  

High Medium   Robust execution of initiatives complemented by tracking to confirm set targets are realised  

Strategic and operations

Funding of current operations and growth aspirations hampered by balance sheet capacity and other resource constraints  

High Medium   Ranking value-adding opportunities in an approved commodity strategy-aligned growth process and acceptable capital structure, underpinned by cash flow generation and preservation, giving credence to maintaining Exxaro’s empowerment status  

Explore alternatives to raise equity given the group’s equity-raising restrictions  

Compliance

Risk of previous versions of software applications impacting on information security and availability  

High Medium   Centralised control and enforcement of discipline combined with training opportunities on updated software applications  

Financial

Investment opportunities do not yield expected returns  

High Medium   Applying conservative and strict criteria for project evaluation. Continuous update of prices and macro-economic parameters complemented by a comprehensive risk analysis  

Strategic

Resource nationalisation resulting in sub-optimal utilisation of resources  

High Low   Influence decision-making through collective lobbying and discussions at participative industry forums  

Financial

Reliance on non-managed operation for financial stability  

High Low   Focus on sustainability of managed operations in isolation  

Due to a different assessment of the impact, probability or control measures, or a combination of these, certain business risks disclosed in 2009 now have a residual risk rating that no longer warrants disclosure or the risk no longer exists, namely:
  • Future of the KZN Sands operation
  • Medium-term reserve confirmation for Namakwa Sands
  • Long-term, viable quality zinc concentrate supply to Zincor
  • Securing a strategic partner for Australia Sands
  • Poor safety record resulting in government, labour union and stakeholder intervention
  • HIV/Aids pandemic.

 

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