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Exxaro Resources Limited
Integrated report 2020
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POSITIONING THE BUSINESS FOR GROWTH | Business risks and opportunities for growth | Next: Combined assurance for effective governance

Positioning the business for growth
Business risks and opportunities for growth

Exxaro drives accountability, transparency and business efficiency on all levels of the organisation through our integrated risk management approach that forms part of our strategy, governance and day-to-day operations.

OUR ENTERPRISE RISK MANAGEMENT (ERM) PROCESS

The Exxaro risk management process is a strategic enabler embedded in all our processes, functions and systems. Risk management, together with crisis management, is a board objective, which is ingrained in Exxaro's corporate culture.

The risk management framework is based on principles embodied in the ERM framework published by the Committee of Sponsoring Organisations of the Treadway Commission, the International Guideline on Risk Management (ISO 31000) and King IV. It also considered applicable codes of best practice such as:

  • ISO 9001
  • ISO 14001
  • ISO 18001

The group's risk management is mature. It is performed at management level with a different scope and context in mind. The organisational risk layers are vertically integrated and provide input into the specific risk profiles.

  Strategically promote partnership and set strategic direction
  • Use risk management to test robustness and sustainability of strategy
  • Commission risk-based audits
  Tactically embed strategy, manage service performance, issues and expectations
  • Use risk management to ensure company and commodity strategy is achieved
  • Monitor tactical and operational risks
  • Monitor general controls
  Operationally render and manage day-today service delivery and queries
  • Day-to-day management of risks and monitoring key controls (operations and projects)

GOVERNANCE AND OVERSIGHT OF RISK MANAGEMENT

Exxaro is committed to complying with and maintaining the principles of the code of corporate practices and conduct set out in King IV. In terms of this code, the board is responsible for the overall governance of risk management, as well as forming its own opinion on the effectiveness of the process. Management is accountable to the board for designing, implementing and monitoring the process of risk management and integrating it into the day-to-day activities of the organisation.

Exxaro’s ERM framework aims to integrate risk management across the organisation to support our vision, strategy and values, and drive the achievement of business objectives. Exxaro has accomplished this by:

  • Embedding risk management within its culture
  • Proactively identifying future uncertainties and planning for them
  • Exploiting opportunities presented by risk events
  • Training employees to think about risks as part of their decisionmaking process

RISK APPETITE AND THRESHOLDS

Exxaro defines risk appetite as the type and level of risk the group is willing to accept to meet strategic objectives. The risk appetite is a key input in the strategy planning process.

We understand that, if we want to create value for all our stakeholders and remain sustainable, we need to measure and monitor our progress by using appropriate key performance indicators (KPIs).

The board and executive committee monitor KPIs quarterly to ensure all risks and key metrics are within Exxaro’s risk appetite. The risk appetite is updated, when deemed necessary, as part of the strategic planning process.

Risk appetite methodology
Strategy and strategic objectives linked to sustainability capitals
Natural
Intellectual
Sustainability capitals
Human
Financial
Manufactured
Set risk thresholds
Modify risk thresholds

For details, please refer to performance against strategy.

The Exxaro ERM framework is also an appropriate tool for the identification and realisation of opportunities — for example, early value coal extraction to maximise value in the short to medium term in view of the climate change risk. We believe that for Exxaro to remain sustainable in the near future it is important to adapt the coal business to change and to identify and pursue possible opportunities that ultimately create value, such as reducing stranded high-value coal reserve risk.

The opportunities we identified in 2020 are outlined in the table below and informed our Sustainable Growth and Impact strategy.

Opportunity Strategic objective
The early value coal strategy and our ability to maximise resource to market opportunities leveraging the low cost and flexibility of our coal assets and reserves Make our minerals and energy businesses thrive
Accelerated expansion into renewable energy to support our low-carbon transition Carbon-neutral by 2050
Make our minerals and energy business thrive
The relationships and partnerships we have built and continue to build as part of our ESG commitments and ultimately Sustainable Growth and Impact strategy to create future growth for Exxaro Empower people to create impact
Enhance Exxaro's social impact from its growth and transition to a low-carbon future Become a catalyst for economic development Transition at speed and scale

2020 VERSUS 2019 RISK COMPARISON

Our risk scores are derived from the product of the likelihood and the impact of the unwanted event. We rank our risks according to residual risk score from highest to lowest.

Risk = f

( Likelihood
of risk occuring		 X Impact
of the risk		 )

% of risks linked to sustainability capitals

Natural
10%

Human
20%

Social and relationship
20%

Manufactured
20%

Financial
30%

Intellectual
0%

 

% risks from internal versus external sources

50%

50%

Matla mineral resource management team at work

TOP 10 HEAT MAP

Exxaro’s top 10 risks are plotted inherently (before controls) and residually (after controls) on the heat maps below, followed by an outline of our key identified risks, the main drivers, their potential impacts and mitigating treatments. We have considered internal and external risks. Our mitigation strategies depend on the severity of impact and likelihood of occurrence.

Inherent risk rating
Residual risk rating
Residual risk
Rank Risk Likelihood Impact Residual risk
1 COVID-19 concerns 70 96 67
2 Eskom systemic risk 71 91 65
3 Unavailability of rail capacity 85 75 60
4 Community unrest 79 72 57
5 Employee safety and health concerns 58 95 56
6 Cost competitiveness of products 49 95 47
7 Climate change concerns 52 90 46
8 Country risk (political) 58 80 46
9 Inability to achieve financial targets 75 60 45
10 Low commodity price 55 81 44
Inherent risk
Rank Risk Likelihood Impact Inherent risk
1 COVID-19 concerns 98 100 98
2 Community unrest 97 95 92
3 Eskom systemic risk 95 95 90
4 Cost competitiveness of products 95 95 90
5 Employee safety and health concerns 92 95 87
6 Climate change concerns 95 90 86
7 Low commodity price 95 85 81
8 Country risk (political) 95 80 76
9 Unavailability of rail capacity 85 75 64
10 Inability to achieve financial targets 85 60 51

RESPONSE TO RISKS AND TRENDS

Managing risk is a trade off between the expense of treatment plans and the impact of the risk.

 To manage the risks associated with COVID-19 and to ensure business continuity, a decision was taken to activate Exxaro’s crisis management plan as an integrated response that prioritised actions to ensure the stability of operations and safety of our employees, contractors, service providers and host communities. The crisis management team was mandated to oversee the COVID-19 response strategy to ensure that action plans/treatments to address risks were implemented effectively. Amid these extraordinary circumstances, the impact of the pandemic on the business and its financial performance was not material.

This bears testament to the resilience of our business and the effectiveness of our response actions. As we venture along the transition journey to transform our business, we anticipate our risk profile will morph to reflect exposures characterising the nature of our business. At the same time, we will continue to harness opportunities along our journey.

  
Ranking
Risk name
Outlook

01

COVID-19 concerns

The COVID-19 pandemic has dealt a heavy blow to the global economy. The effects of the second wave of COVID-19 will continue to be felt throughout 2021. The current COVID-19 preventative measures and anticipated roll-out of the vaccine programme in South Africa with the aim of achieving herd immunity will assist in arresting the spread of the disease.

02

Eskom systemic risk

Financial viability of Eskom remains a concern in the short to medium term. Eskom's operational challenges and the slowdown in the economy will affect Eskom's ability to generate revenue and address its financial challenges.

03

Unavailability of
rail capacity

Exxaro currently does not have full access to our contracted export capacity due to various operational challenges experienced by TFR. A study is currently underway to identify alternative solutions to transport our product.

04

Community unrest

Civil unrest has been identified as one of the country's key risks. This will impact our communities and has the potential to spill over into operations. The socio-economic impacts of COVID-19 will continue to be felt as the South African economy struggles to recover and create job opportunities.

05

Employee safety and
health concerns

With continued implementation of safety improvement plans, our safety performance is expected to continue improving.

06

Cost competitiveness
of products

Rand per tonne (impacted by production and efficiency) will remain a focus area. Volatile conditions and cost pressure remain. Key actions to reduce cost include: install renewable electricity given the expected price increases from Eskom

07

Climate change
concerns

COVID-19 has increased global action against climate change.

08

Country risk

Socio-political risks, policy uncertainty and the weak economy have heightened focus on this risk.

09

Inability to achieve
financial targets

Record highs were recorded for export coal volumes at the end of December 2020. Good financial results are expected for 2021 due to cost-saving initiatives and favourable commodity prices.

10

Low commodity prices

The positive outlook for coal prices in 2021 will have a positive impact on revenue and profits.
Lines of defence
1 Management of risk (risk owner)
2 Management support and oversight
3 Independent assurance
Risk trend
Increased
Reduced
Unchanged
New
   
1. COVID-19 concerns
Capitals impacted
Drivers
  • Low commodity prices
  • Disengaged and anxious workforce (permanent employees and contractors)
  • Rapid spread of the virus
  • Increased risk of cyberattacks due to remote working
  • Deterioration of employee health (mental and physical)
  • Uncontrollable cost of goods and services
  • Unavailability of critical goods and services
  • Community unrest due to loss of livelihoods impacting on Exxaro's operations
  • Counterparty risk (contractors/suppliers/customers)
  • Productivity decline (operations not operating at full capacity and not complying with disaster management guidelines among others)
 Strategic performance KPIs
  • Core operating margin
  • Annualised ROCE
  • Annual core HEPS and net debt to annualised EBITDA
  • LTIFR
  • Fatalities
  • Project delivery KPIs including SLPs
  • Mining Charter III and B-BBEE targets
 
Impacts
  • Safety impacts (fatalities and incidents)
  • Health impacts
  • Financial losses
  • Unable to meet financial targets
  • Legal and regulatory non-compliance with the Disaster Management Act, 2002 (Act 57 of 2002)
  • Production stoppages
  • Delay in implementation of strategy
  • Inability to obtain lines of credit
 Treatments
  • "Hardened" security processes and tools and increased monitoring
  • Commissioning of testing facilities in Limpopo and Mpumalanga to conduct mass testing
  • Mental wellness programmes in place
  • Monitor compliance with contractual agreements (cost of goods and services)
  • Monitor critical goods stock levels and services required
  • Ongoing engagement with Minerals Council South Africa and provincial and local governments
  • Ongoing monitoring of messaging and continuous updates of critical information
  • Roll out and continuous updating of COVID-19 business continuity management plan at operations
  • Human resources guidelines in line with government's lockdown regulations
  • Activation of crisis management plan
 
Lines of defence: 1 and 2 Materiality theme: Risk trend
   
2. Eskom systemic risk
Capitals impacted
Drivers
  • Inadequate environmental financial provision at tied operations
  • Environmental rehabilitation fund shortfall at Matla
  • Realisation of approved funding for capital requirements (Matla capital project programme)
  • Further delays in Eskom's Medupi power station operating at full capacity
  • Eskom liquidity risk: Eskom not honouring commercial rights and obligations as per CSAs
 Strategic performance KPIs
  • B-BBEE contribution level
  • Black ownership
  • SLP project delivery
  • Capital project delivery
  • Core operating margin
  • Annualised ROCE
  • Annual core HEPS and net debt to core EBITDA

Year in review of this report and Strategic performance dashboard in the ESG report
 
Impacts
  • Cost of coal production becomes uncompetitive at Matla (lack of capital)
  • Loss of revenue
  • Reputational damage
  • Cash flow constraints at Eskom resulting in late or no payment to Exxaro
  • Operational constraints at Grootegeluk due to pit liberation impacts as a result of further Medupi power station delays or inability of Eskom to take contracted offtake
 Treatments
  • Cost of coal production becomes uncompetitive at Matla (lack of capital)
  • Enforcement of CSA and arbitration award in terms of environmental funding
  • Capex funding to build siding to evacuate coal at Matla
  • Active participation by Exxaro to move coal from the Waterberg to Mpumalanga and deployment of temporary solution to load test train from Waterberg to Mpumalanga
  • Top management and political interaction with ministers when required
  • Ongoing discussions on the future of Matla
 
Lines of defence: 1 and 2 Materiality theme: Risk trend
   
3. Unavailability of rail capacity
Capitals impacted
Drivers
  • Cable theft and derailments.
  • Transnet's locomotive availability.
  • Inadequate maintenance of fleet due to lack of spares at TFR
 Strategic performance KPIs
  • Core operating margin
  • Annualised ROCE
  • Annual core HEPS and net debt to annualised EBITDA
 
Impacts
  • Operational stoppages
  • Financial loss
  • Unable to meet contractual agreements
  • Unable to meet 2021 budget
  • Unable to grow and execute the value extraction strategy
  • Shareholder dissatisfaction
 Treatments
  • Marketing and Logistics team exploring options to evacuate export bound coal
  • Continuous engagement with TFR to understand issues and provide assistance
 
Lines of defence: 1 Materiality theme: Risk trend
   
4. Community unrest
Capitals impacted
Drivers
  • Dissatisfaction with local economic development initiatives
  • Political agitation
  • High unemployment rate
  • Poor/lack of service delivery by local government
  • High demand for skills development, employment and local procurement
  • 2021 municipal electioneering
  • Perceived slow transformation at operations
  • Conduct of contractors (employment practices) Exxaro is seen as endorsing
  • Fractured communities and competing interests
  • Manipulation of information/community against Exxaro
  • Lack of employment opportunities (worse since COVID-19 outbreak)
  • Economic recession resulting in job losses during the COVID-19 pandemic
  • Lack of procurement opportunities
 Strategic performance KPIs
  • B-BBEE contribution level
  • Black ownership
  • SLP project delivery
  • Community benefit initiatives
  • ESD performance

Year in review and Strategic performance dashboard in the ESG report

 
Impacts
  • Production interruptions
  • Negative media reports (reputation)
  • Jobs/opportunities for sale (misrepresents Exxaro)
  • Potential harm to mine employees and contractors
  • Potential damage to mine equipment and property
 Treatments
  • Emergency response and crisis management plans
  • Carve out opportunities
  • Municipal capacity building
  • Impact Catalyst projects (refer to Communities)
  • ESD (including contractors)
  • Build local, provincial and national government relationships
  • Invest in non-mining skills development programmes
  • Roll out bursaries/skills development programmes
  • Roll out community engagement plans for proactive engagement (refer to Communities)
  • Transparent and ongoing communication with communities
  • Effective local procurement strategy
  • Certified COVID-19 testing facilities in Mpumalanga and Limpopo for community members in place
 
Lines of defence: 1 and 2 Materiality theme: Risk trend
   
5. Safety and health concerns
Capitals impacted
Drivers
  • Rapid spread of COVID-19 infections among employees and contractors
  • Anxious and disengaged workforce (additional COVID-19 regulation and some companies impacted by COVID-19 laying off contractors)
  • High/excessive fatigue levels
  • Poor procedures for maintenance of equipment and machinery
  • Inadequate on-the-job training due to illiteracy
  • Lack of awareness of health risks
  • Lack of hazard awareness (in line of fire)
  • Non-adherence to procedures
  • Lack of communication between teams working on equipment
  • Lack of change management
  • Design or modification of equipment without sign-off
  • Inadequate supervision
 Strategic performance KPIs
  • Fatalities
  • LTIFR
  • OHIFR
  • Number of safety and health stoppage directives in terms of section 54 of Mine Health and Safety Act, 1996 (Act 29 of 1996)

Year in review and Strategic performance dashboard

 
Impacts
  • Unwanted health and safety incidents
  • Operational stoppages
  • High insurance premiums
  • Loss of licence to operate
  • Decrease in quality of life
  • Section 54 and 55 fines and penalties imposed by the DMRE
  • Loss of productivity (deaths, medical incapacity or sick leave)
 Treatments
  • Analyse historical incident data to identify trends and root causes
  • Mental wellness programmes in place
  • Ongoing safety, health, environment and community risk management
  • Improve safety management with innovation (including wearables)
  • Ensure proximity detection systems implemented and maintained
  • Ensure safety improvement plan is communicated and implemented
  • COVID-19 response plan developed and rolled out
 
Lines of defence: 1, 2 and 3 Materiality theme: Risk trend
   
6. Cost competitiveness of products
Capitals impacted
Drivers
  • LoM
  • Poor capital project execution
  • Not achieving productivity indices (benchmark standards)
  • Cost containment discipline not uniform
  • Inflationary pressures
  • Deteriorating mining conditions (decreasing yield and increasing stripping ratio)
  • Not meeting production volumes
  • Volatility of exchange rate
  • Commodity price decline
  • Inaccurate financial modelling
  • Higher fixed costs (corporate office costs charged to BUs)
  • South African geographical constraints
  • Frequent changes in legislation (cost of licence to operate)
 Strategic performance KPIs
  • Core operating margin
  • Annualised ROCE
  • Annual core HEPS and net debt to annualised EBITDA
 
Impacts
  • Reputational damage
  • Social impact
  • Financial loss
  • Margin squeeze
  • Premature mine closure and allocation of costs to other operations
  • Reduced earnings will impact approval of capital projects
 Treatments
  • Embrace technology and innovation initiatives to improve productivity performance
  • Ensure achievement of P75 (refers to an improved year-on-year performance level in terms of production volumes across our BUs, against a base set for each operation in 2018, to be achieved in 2020)
  • Ensure BUs comply with concurrent rehabilitation
  • Optimise operating model and avoid duplicated activities
  • Create strategic partnership to leverage economies of scale
  • Ensure balance between capital optimisation and prioritisation
  • Investigate and divest non-core and non-robust assets
  • Provide for post-production stoppage (rehabilitation cost)
  • Review and monitor performance of suppliers and service providers
  • Increased awareness of cost management
  • Focus on sustainable cost reduction programmes and business improvement initiatives
  • Planned reviews by coal operating company
  • Rebalancing product chains for better use of infrastructure
 
Lines of defence: 1, 2 and 3 Materiality theme: Risk trend
   
7. Climate change concerns
Capitals impacted
Drivers
  • Poor plant or operations design unable to withstand extreme weather conditions
  • Poor monitoring and reporting of climate change impacts
  • Infrastructure vulnerabilities
  • Lack of awareness of climate change impacts
  • Increased non-governmental organisation activism
  • International and local investor negative sentiment towards fossil fuels
 Strategic performance KPIs
  • Water intensity
  • Carbon intensity

Year in review and Strategic performance dashboard

 
Impacts
  • Reputational damage
  • Loss of licence to operate
  • Financial loss (increased carbon tax among others)
  • Environmental impacts (extreme heat; drought)
  • Legal claims against heavy polluters
  • Health and safety impacts on employees (increased occupational incident rate due to heatstroke and increase in skin cancer among others)
  • Energy security and supply
  • Loss of throughput
  • Natural disasters (flooding)
 Treatments
  • Invest in renewable energy initiatives
  • Raise awareness about climate change impacts
  • Continuously investigate measures to reduce climate change impacts
  • Engagement with regulators to anticipate policy changes
  • Investigate suitable PPE for extreme weather conditions
  • Link performance reward system to climate change mitigation
  • Review conditions of work under extreme weather conditions
  • Engage with government and other role players in the industry to align in transition to a low-carbon future
  • Invest in appropriate technology to reduce own emissions
  • Embed climate change mitigations in design criteria for existing and new projects
  • Plan and embark on early value coal strategy to reduce stranded assets
  • Develop renewable energy strategy to transition to lower carbon economy
  • Adopt TCFD framework to engage with stakeholders
  • Align with Paris Agreement
  • Develop market intelligence on carbon pricing
  • Effective water management processes for water security
 
Lines of defence: 1, 2 and 3 Materiality theme: Risk trend
   
8. Country risk (political)
Capitals impacted
Drivers
  • Lack of investment and low employment creation
  • Uncertainty about land ownership and security of tenure
  • Limited local government capacity to deliver services
  • Potential for nationalisation sentiment
  • Continued poor economic performance will influence policy and political outcomes
  • Slow implementation of required reforms
  • Corrupt practices (private and public sector)
  • Rating agencies downgrade South Africa to junk status
  • South Africa's real gross domestic product (GDP) growth forecasted to be (3.1%) for 2021
  • Limited fiscal capacity
 Strategic performance KPIs
  • Enhancing social investment through "impact at scale" initiatives for local and regional community development
  • Government engagements (national, provincial and local) through industry lobby groups and own initiatives
  • Strategic capital investment that contributes to economic development
 
Impacts
  • Political instability
  • Possibility of community unrest for political support
  • Stakeholder dissatisfaction
  • Potential regulatory penalties/oversight
  • Increased compliance burden
  • Potential increase in royalties/taxes
  • Reduced investment opportunities (increase in cost of capital)
  • Increased cost of doing business (such as increased compliance burden)
  • Fewer opportunities for co-investment with government in community development
  • Breakdown in government relationships with Exxaro
  • Higher expectation from society and government for more social investment
  • Potential for junk status rating and downgrade of Exxaro's credit status due to link to Eskom
  • Pressure on revenue
  • Policy uncertainty
 Treatments
  • Aligning purpose with governance and ethics
  • Continuous monitoring of independent country risk assessment report
  • Engage shareholders on coal business and capital allocation for new strategy
  • Establish and participate in collaborative regional development platforms for community impact
  • Exxaro developing renewables strategy that could result in new investment and electricity security
  • Long-term investment perspective for growth, development and impact
  • Municipal capacity building
  • Ongoing engagement with Minerals Council and provincial and local governments
  • Strive for full compliance with relevant legislation for business continuity
  • Continued support of relevant business lobby groups to engage business and government
  • Increased and improved analysis of dynamic political landscape and impacts of stakeholders
  • Increased focus on provincial and local players and intensified engagement across local stakeholder networks to mitigate shocks "from above"
 
Lines of defence: 1 Materiality theme: Risk trend
   
9. Inability to achieve financial targets
Capitals impacted
Drivers
  • Macro-economic factors
  • Disaster Management Act directives issued
  • Critical input supplies not available
  • Counterparties not meeting contractual obligations (Eskom and AMSA)
  • Claims from contractors due to the impact of the COVID-19 pandemic on timelines
  • Reduced rail capacity for exports in 2021
 Strategic performance KPIs
  • Core operating margin
  • Annualised ROCE
  • Annual core HEPS and net debt to annualised EBITDA
 
Impacts
  • Cash flow constraints
  • Increased cost of production
 Treatments
  • Disposal of ECC and the Leeuwpan operations (high on the cost curve)
  • Ability to refinance loan facilities
  • Focus on current operating excellence and digitalisation initiatives to reduce rand per tonne impacts
  • Proactively draw down available borrowing facilities
  • Evaluate claims from contractors in terms of process (Supply Chain and projects)
  • Detailed daily cash flow management
  • Monitor supplier financial status (critical and strategic suppliers)
 
Lines of defence: 1, 2 and 3 Materiality theme: Risk trend
   
10. Low commodity price
Capitals impacted
Drivers
  • Global and domestic economic slowdown worse after the COVID-19 outbreak
  • Structural economic challenges in the USA and trade wars
  • Global resistance to fossil fuels
  • Cost of renewable energy technology decreases
 Strategic performance KPIs
  • Core operating margin
  • Annualised return on capital employed
  • Annual core HEPS and net debt to annualised EBITDA

Year in review and Strategic performance dashboard

 
Impacts
  • Financial losses
  • Difficult to forecast planning and budgets
  • Feasibility of new projects (capital projects not achieving expected returns)
  • Existing assets not achieving expected returns
 Treatments
  • Impact of volatility frequently assessed in corporate model
  • Improve speed of mine planning to match price volatility
  • Negotiate long-term fixed price agreements
  • Diversify away from thermal coal
  • Adoption of resource to market model
  • Focus on market intelligence in the coal sector
  • Adjust and optimise business plan for circumstances (alternative markets)
  • Ensure operations are low on the cost curve
 
Lines of defence: 1 Materiality theme: Risk trend

Exxaro Resources Limited Integrated report 2020