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Managing risk, issues & opportunities

Risk philosophy

Investors are more willing to invest in a company with a well-defined risk philosophy and an integrated enterprise-wide risk management (ERM) programme. The philosophy and ERM programme are underpinned by a risk-appetite strategy to assess high-level risks which are then applied consistently in resource-allocation decisions to mitigate risks that might impact on the stakeholder value.

In line with its vision, Exxaro maintains an integrated ERM programme to guide individual business units in their risk management endeavours to prevent or reduce the adverse impacts of operational losses, earnings surprises and reputational damage. The board-approved methodology followed throughout the group ensures a better understanding of the trade-off between risk and reward which, in turn, enhances strategic decisions relating to improved capital allocation to address strategic risks.

The effectiveness of the ERM process is measured by how well it aligns the key fundamentals of governance, business objectives, ethics, policies, standards, strategies and compliance.

In Exxaro, the focus is on bringing these fundamental components ever closer to the operational risk management processes.

Our ERM approach is aimed at:

minimising losses caused by adverse events
reducing earnings surprises and reputational damage
contributing to the protection of shareholder value.

Risk appetite

The board, guided and assisted by the audit, risk and compliance committee, defines and approves Exxaro’s risk appetite. Exxaro’s risk-bearing capacity is a function of its ability to withstand unexpected losses and the effect such losses may have on the company’s ability to continue operating as a going concern.

In Exxaro, the embedded nature of the ERM programme is reﬂ ected in a centralised ERM hub dedicated to strategic direction and policy development, and
risk committees operating at business unit level to implement this policy.

Risk culture

Exxaro has a policy of zero tolerance for compliance failures and its aim is to speedily identify and rectify any deviation.

Promoting a risk-conscious culture is a constant focus throughout the company. All risk owners are responsible for continually monitoring the existing and everchanging risk profile of the environment in which they conduct their business.

Risk

Divisional and business-unit risk committees play an important role in identifying operational risk and in the development and application of generic mitigating strategies. They also have a risk oversight function by virtue of being closer to activities that could have adverse results. Each committee is chaired by the head of the business centre and meets quarterly. The group risk manager attends all meetings.

Risk management objectives

The risk management process is continual, with well-defined steps. When taken in sequence, these support better decision making by contributing greater insight into risks and their impacts. Risks from all sources are identified and once they pass the materiality threshold, a formal process begins in which causal factors and consequences are identified and the correlation with other risks and the current risk-mitigating strategy is reviewed. One of the challenges is to ensure that mitigating strategies are geared to deliver reliable and timely risk information to minimise adverse impacts of risks that might materialise.

The top business risks based on impact, likelihood or the probability of occurrence, together with the mitigating control measures, are disclosed in descending order.

Risk	Severity	Probability	Control measures
Operational Granting of new mining rights or conversion of old rights	High	High	Ensure compliance with mining charter requirements. Continuous engagement with the Department of Minerals and Energy (DME).

Operational KZN Sands – furnace production capacity	High	High	Pursuing optimisation initiatives and projects that can positively influence achieving nameplate capacity, including investigation into alternative hearth technology.

Profitability Impact of buoyant construction and engineering market on the cost of capital projects	High	High	Maintaining a database on escalation 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-time items.

Human resources Retention and availability of skills base impacting on current production and future growth	High	High	Implementation of effective retention strategy for key disciplines. Remain an employer of choice due to – regularly benchmarked market-related remuneration – comprehensive training – growth opportunities.
			Focus on innovative recruitment initiatives and succession planning. Continuous rotation and exposure of own talent in multidisciplinary project teams.
Strategic KZN mineral sands business feedstock resources	High	Medium	Finalise feedstock reserve prioritisation feasibility studies. Obtain DME approval of mining rights for Fairbreeze C extension and Braeburn as delays are already affecting operational activities.

Strategic Funding value-added growth within balance sheet and equity-raising constraints	High	Medium	Ranking value-adding opportunities in an aligned growth strategy and in terms of astrategic investment framework. Optimising dedicated project finance facilities.

Profitability Impact of continued rand and Australian dollar strength combined with forecast macro-economic parameters and commodity prices, on operating margins and returns on investment	High	Medium	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.

Profitability Anticipated significant price increases for electricity	High	Medium	Participation in industry forums that engage with Eskom and National Energy Regulator of South Africa (Nersa). Investigation into co-generation.

Operational Power supply certainty and the impact of interruptions on safety, production and profitability	Medium	High	KZN Sands and Zincor have load-sharing agreements with the electricity utility. Commitment to assist Eskom with additional coal supply required to achieve stability in the power plant feed and transmission grid. Examination of alternatives with regard to the conservation and use of electricity throughout operations.

Environmental Risks posed by continuously changing and onerous environmental legislation	High	Low	Rehabilitation strategy developed with continuous monitoring of work performed in line with strategy. Ongoing rehabilitation is managed out of operational budgets while the Exxaro Environmental Rehabilitation Fund provides for final closure costs. Continuous engagement with authorities.