28

FINANCIAL RISK MANAGEMENT

    
  The group is exposed to various financial risks due to the nature and diversity of its activities and the use of various financial instruments. These risks include:
  • Credit risk
  • Liquidity risk
  • Market risk
Details of the group’s exposure to each of the above risks and its objectives, policies and processes for measuring and managing these risks are included specifically in this note and more generally throughout the consolidated financial statements together with information regarding management of capital.

The boards of the individual companies in the group (boards) have overall responsibility for the establishment and oversight of the risk management framework. These boards have delegated these responsibilities to the group’s Executive Committee, which is responsible for the development and monitoring of risk management within the group. This committee meets on an ad hoc basis and regularly reports to the respective boards on its activities. The risk management policies are established to identify and analyse the risks faced by the group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the activities of the group.

The roles and responsibilities of the Executive Committee include:
  • approval of all counterparties;
  • approval of new instruments;
  • approval of the group’s foreign exchange transaction policy;
  • approval of the investment policy;
  • approval of treasury policy; and
  • approval of long-term funding requirements.
The internal auditors undertake regular and ad hoc reviews of risk management, controls and procedures, the results of which are monitored by the Assore Audit and Risk Committee.
       
28.1 Credit risk
  Credit risk arises from possible defaults on payments by customers or, where letters of credit have been issued, by bank counterparties. The group minimises credit risk by the careful evaluation of the ongoing creditworthiness of customers and bank counterparties before transactions are concluded. Certain customers which have a well-established credit history are allowed to transact on open account.

Overdue amounts are individually assessed and if it is evident that an amount will not be recovered, it is impaired and legal action is instituted to recover the amounts involved.

Credit exposure and concentrations of credit risk
The carrying value of the financial assets represents the maximum credit exposure at the reporting date and the following table indicates various concentrations of credit risk for all exposed financial assets held and recognised in the statement of financial position.		    
 

 

 2015  2014 
    R’000  R’000 
  Restricted cash 450 000  – 
  Cash resources 2 421 195  2 144 598 
  Trade receivables 294 724  224 315 
  – Local 24 168  5 189 
  – Foreign 270 556  219 126 
  Other receivables 115 601  159 608 
    3 281 520  2 528 521 
       
  Ageing of receivables    
    2015  2014 
    Carrying Carrying
    amount of amount of
    receivables receivables
    not impaired not impaired
    R’000  R’000 
  Trade receivables 294 724  224 315 
  Not past due, not impaired 292 016  218 262 
  Past due, not impaired as considered recoverable 2 708  6 053 
       
  Other receivables    
  Not past due, not impaired 115 601  159 608 
    410 325  383 923 
       
28.2 Liquidity risk    
  The Executive Committee manage the liquidity structure of the group’s assets, liabilities and commitments so as to ensure that cash flows are sufficiently balanced within the group as a whole. Updated cash flow information and projections of future cash flows are received by the Executive Committee from the group companies on a regular basis depending on the type of funding required. Measures have been introduced to ensure that the cash flow information received is accurate and complete.

Surplus funds are deposited in liquid assets (eg liquid money market accounts).

Undrawn credit facilities
In terms of the Memorandum of Incorporation (MoI) of the holding company, its borrowing powers are unlimited.

The holding company has facilities in place to issue letters of credit and bank guarantees where required and to ensure liquidity (refer note 32). Subsidiary company, Minerais U.S. LLC has a banking facility in place secured by a holding company guarantee, to finance its inventory and receivables, which bears interest at a rate linked to LIBOR. At year-end the facility was US dollar 100 million (2014: US dollar 70 million), of which US dollar 78 310 000 (2014: US dollar 50 906 000) was utilised.

Exposure to liquidity risk
The following table indicates the anticipated timing of cash flows of the group’s financial assets and liabilities, including contingent liabilities at year-end as determined by contractual maturity date including interest receipts and payments.
    Contractual maturity date
      Total   Between Between  
    Carrying expected Less than 4 and 1 and More than
    amount cash flows 4 months 12 months 5 years 5 years
    R’000  R’000  R’000  R’000  R’000  R’000 

 

 2015             
  Financial assets            
  Investments# 281 780  281 780  –  –  –  281 780 
  Investment in associate 120 756  120 756  –  –  –  120 756 
  Trade and other receivables 410 325  410 325  410 325  –  –  – 
  Restricted cash 450 000  450 000  450 000  –  –  – 
  Cash resources 2 421 195  2 421 195  2 421 195  –  –  – 
    3 684 056  3 684 056  3 281 520  –  –  402 536 
  Financial liabilities            
  Preference shares issued 346 100  364 609  6 667  11 842  346 100  – 
  Trade and other payables 304 408  304 408  304 408  –  –  – 
  Overdrafts 960 866  960 866  960 866  –  –  – 
  Guarantees 205 530  205 530  205 530  –  –  – 
    1 816 904  1 835 413  1 477 471  11 842  346 100  – 
  2014             
  Financial assets            
  Investments# 424 601  424 601  –  –  –  424 601 
  Trade and other receivables 383 923  383 923  383 923  –  –  – 
  Cash resources 2 144 598  2 144 598  2 144 598  –  –  – 
    2 953 122  2 953 122  2 528 521  –  –  424 601 
  Financial liabilities            
  Preference shares issued 346 100  370 878  12 157  12 621  346 100  – 
  Trade and other payables 447 104  447 104  447 104  –  –  – 
  Overdrafts 538 588  538 588  538 588  –  –  – 
  Guarantees 205 312  205 312  205 312  –  –  – 
    1 537 104  1 561 882  1 203 161  12 621  346 100  – 
 
# These investments do not have contractual maturities, but have been presented in the “more than five years” column as the entity does not intend to dispose of these investments within the next five years.
               
28.3 Market risk
  Market risk is defined as the risk that movements in market risk factors, in particular US dollar commodity prices and the US dollar/SA rand exchange rate will affect the group’s revenue and operational costs as well as the value of its holdings of financial instruments. The objective of the group’s market risk management policy is to manage and control market risk exposures to minimise the impact of adverse market movements with respect to revenue protection and to optimise the funding of the business operations.

The group companies are responsible for the preparation and presentation of market risk information as it affects the relevant entity. Information is submitted to members of the Executive Committee where it is monitored and further analysed to be used in the decision- making process. The information submitted includes information on currency, interest rate and commodities and is used by the committee to determine the market risk strategy going forward. In addition, key market risk information is reported to members of the Executive Committee on a weekly basis, and forecasts against budget are prepared for the entire group on a monthly basis.
               
28.3.1 Interest rate risk
  Interest rate risk arises due to adverse movements in domestic and foreign interest rates. The group is primarily exposed to downward interest rate movements on floating investments purchased and to upward movements on overdrafts and other banking facilities. There is no fair value interest rate risk, as there are no fixed rate financial instruments.

The board determines the interest rate risk strategy based on economic expectations and recommendations received from the Executive Committees. Interest rates are monitored on an ongoing basis and the policy is to maintain short-term cash surpluses adequate to meet the group’s ongoing cash flow requirements at floating rates of interest.

At the reporting date the interest rate profile of the group’s interest-bearing financial instruments was as follows:
       
    2015  2014 
    R’000  R’000 
  Variable rate instruments    
  Liabilities    
  Preference shares (included in long-term borrowings (refer note 14)) 346 100  346 100 
  Overdrafts (refer note 20) 960 866  538 588 
  Assets    
       
  Cash resources (refer note 9) 2 421 195  2 144 598 
  Fair value sensitivity analysis for fixed rate instruments
The group does not account for any fixed rate financial assets and liabilities at fair value through profit and loss, therefore a change in interest rates at the reporting date would not affect profit or loss.

Cash flow sensitivity analysis for variable rate instruments
An increase of 50 basis points in interest rates applicable to variable rate instruments at the reporting date would have increased profit after tax by R4 011 000 (2014: R4 536 000). This assumes that all other variables remain constant. There is no impact on the group’s equity. Net effect on profit or loss is equal but opposite for a 50 basis points decrease in interest rates on the variable instruments listed above.
       
28.3.2 Commodity price and currency risk    
  Commodity price risk arises from the risk of an adverse effect on current or future earnings resulting from fluctuations in world prices for the commodities in which the group trades. The group also has transactional foreign exchange exposures, which arise from sales or purchases by the group in currencies other than the group’s functional currency. The market is predominantly priced in US dollars and to a lesser extent in Euros which exposes the group to the risk that fluctuations in the SA rand exchange rates may have a positive or negative impact on current or future earnings.

The group manages its commodity price risk, to which it is exposed through its investment in Assmang, by concluding supply contracts with certain customers for periods of up to three months. Contracts with other customers contain retrospective pricing arrangements which may impact the group either positively or negatively. With respect to its exposure to foreign currency fluctuations, the group constantly reviews the extent to which its foreign currency receivables are covered by forward exchange contracts, taking into account changes in operational forecasts and market conditions and the group’s hedging policy (refer to forward exchange contracts and other commitments below).

The group’s exposure to currency risk at year-end was as follows:
    2015  2014 
    R’000  R’000 
  Foreign receivables included in trade receivables    
  – US dollar 275 312  219 126 
 

Foreign overdraft facility

    
  – Overdrafts 960 866  538 588 
       
 

Total exposure

    
 

A 5% strengthening of the rand against the above currencies would have decreased profit after taxation by R44 502 000 (2014: R27 326 000) as a result of revaluation of foreign denominated balances. A 5% weakening of the rand against the abovementioned currencies would have had an equal but opposite effect on profit after taxation, on the basis that all other variables remained constant.

    
       
  Forward exchange contracts and other commitments    
  The group undertakes economic hedging of receivables denominated in US dollars at times when the rand/US dollar exchange rate appears volatile. The level of exposure on these limited hedging activities did not exceed US dollar 100 (2014: US dollar 70) million at any stage during the year.

A foreign subsidiary had forward commitments with regard to its inventory of ores, alloys and metals, which for accounting purposes are regarded as executory contracts and are therefore not included in the statement of financial position, but can be summarised as follows:
    2015  2014 
    Foreign Presentation Foreign Presentation
    currency currency currency currency
    notional notional notional notional
    amount amount amount amount
    USD’000  R’000  USD’000  R’000 
 

Purchase contracts

        
  US dollar 11 300  138 669  31 800  336 485 
  Sales contracts        
  US dollar 20 200  247 886  75 100  794 656 
           
 

Equity price risk

        
  The value of the group’s listed and unlisted investments are susceptible to market price risk arising from uncertainties about future value of the investments concerned. The group manages the equity price risk through monitoring developments in the mining and metal industries and the executive directors of the board review and approve all equity investment decisions.

At the reporting date, the exposure to listed investments at fair value was R234,0 million (2014: R378,0 million). A decrease of 1% on the relevant market index would have an impact of approximately R2,3 million (2014: R3,8 million) on other comprehensive income attributable to the group, depending on whether or not the decline is significant or prolonged. An increase of 1% in the value of the listed investments would only impact other comprehensive income, but would not have an effect on profit and loss.