Risk management

Risk philosophy

Effective risk management (ERM) is central to maintaining and improving a competitive advantage while adapting to changes in the business environment. The underlying principle of ERM or enterprise-wide risk management is that every entity exists to provide value for its shareholders. 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 the King III Code of Corporate Practice and Conduct is a fundamental principle.

Risk appetite

The audit, risk and compliance committee of the board approves Exxaro’s risk appetite and ensures it is aligned with 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. In addition, risk appetite is determined by obtaining robust risk information that enables management to assess overall capital needs and enhance capital allocation capability.

Risk culture

Risk owners are responsible for continuously monitoring the ever-changing risk profile of the environment in which they operate.

The internal environment encompasses the whole organisation and sets the basis for how risk is viewed and addressed by all responsible employees. It takes into account the risk management philosophy, risk appetite, integrity and ethical values (corporate governance) and other compliance issues.

Risk identification 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 reviewed.

The top business risks, appropriately categorised and based on impact and likelihood of occurrence, together with mitigating control measures, are disclosed below in descending order. These top business risks have been approved by the executive committee, the audit, risk and compliance committee of the board, and the board itself.

High-level business risks
Risk	Impact	Probability	Control measures
STRATEGIC
Future of KZN Sands operation	High	High	Continuous review of viability should significant sustainable changes transpire in market fundamentals of the commodity.
Retention of new mining rights and prospecting rights	High	High	Prioritisation of prospecting rights. Engaging with non-governmental organisation and relevant authorities. Ensure compliance with all legal and regulatory requirements.
Funding current operations and value-added growth within balance sheet and equityraising constraints	High	High	Ranking value-adding opportunities in an approved commodity strategy aligned growth process and within an acceptable capital structure, underpinned by cash flow generation and preservation, giving credence to maintaining Exxaro’s empowerment status.
Longer-term decline in commodity prices affecting dividend payouts, and impacting on stable BEE shareholder structure	High	Medium	Exploring alternatives to raise equity given the group’s equity-raising restrictions. Continuous business improvement. Optimised use of operating assets. Maintain healthy balance sheet through judicious consideration of growth aspirations and global market conditions.
Medium-term reserve confirmation for Namakwa Sands	High	Medium	Redefine and confirm physical properties of ore reserve at Namakwa Sands; investigate redesign and product blending opportunities.
Long-term, viable, quality zinc concentrate supply to zinc refinery in Springs	High	Medium	Continued exploration activity at Rosh Pinah zinc mine and identification of other viable zinc concentrate supply sources.
Lengthy process of executing new mining rights	Medium	Medium	Ensure compliance with mining charter requirements. Continuous engagement with Department of Mineral Resources.
Securing a strategic partner for Australia Sands operation	Medium	Medium	Actively participate in securing a preferred technology partner in good financial standing for Australia Sands.
OPERATIONAL
Anticipated significant price increases for electricity combined with power supply uncertainty, and the impact of interruptions on safety, production and profitability	High	High	Participation in industry forums that engage with Eskom and the National Energy Regulator of South Africa (NERSA). Investigation into co-generation. Implementation of power-saving initiatives and examination of alternatives for conserving and using electricity throughout operations. Commitment to assist Eskom with additional coal supply to achieve stability in power grid.
Above-inflation increases in certain input and maintenance costs as well as availability concerns on certain materials	Medium	High	Strategic sourcing and long-term contracting with reliable suppliers. Continuous business improvement initiatives and knowledge sharing.
PROFITABILITY
Volatility in currencies combined with impact of forecast macroeconomic parameters and commodity prices on operating margins, returns on investments, project cost escalation in respect of growth aspirations, and loan covenant compliance	High	High	Judicious hedging policy. Continuous business improvement initiatives with rigorous tracking. Optimised use of operating assets to leverage benefits of higher throughput. Investigate downstream integration opportunities and diversification of markets and product sector.
Rail and port infrastructure constraints inhibiting coal exports and ability to transfer zinc feedstock to zinc refinery	High	High	Collaborate with Transnet Freight Rail; upgrade loading facilities; engage with Richards Bay Coal Terminal (RBCT) shareholders on additional export allocation; engage to fully utilise Exxaro’s RBCT allocation of 6,3Mtpa; evaluate viability of acquiring own rolling stock.
Impact of the buoyant construction and engineering market on the cost of capital projects	High	Medium	Maintain database on escalations of major commodity items based on industry trends and own experience to ensure comprehensive provision for escalation on project costing and timing of long-lead items.
Prolonged depressed global economic downturn impacting on demand and prices	Medium	Low	Restructure to be profitable throughout the commodity cycle. Ensure a fit-for-purpose support services offering.
HUMAN RESOURCES
Attraction and retention of key skills impacting on current production and future growth	Medium	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 multidisciplinary project teams Strategy to comply with code of practice.
ENVIRONMENT
Risks posed by continuously changing environment legislation, including delays in permit approvals Pressure from authorities to guarantee environmental liability shortfall.	High	High	Continuous monitoring of work performed in line with rehabilitation strategy. Process hazard reviews on emissions. Continuous engagement with authorities. Ongoing rehabilitation managed out of operational budgets while Exxaro Environmental Rehabilitation Fund provides for final closure costs.
SAFETY AND SUSTAINABLE DEVELOPMENT
Poor safety record resulting in government, labour union and other stakeholder intervention	Medium	Medium	Enhancing safety awareness and preventative programmes through a strong focus on hazard identification and visible felt leadership. Focusing on outcomes of 2009 CEO Safety Summits.
HIV/Aids pandemic	Medium	Medium	Improve voluntary counselling and testing enrolment by creating a conducive environment for disclosure and treatment participation.