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. 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 committees 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. The group maintains credit insurance on certain accounts in South Africa and all accounts established in the United States.

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 financial assets held and recognised in the statement of financial position.
       
    2016  2015 
    R’000  R’000 
  Restricted cash 479 522  450 000 
  Cash resources 3 184 925  2 421 195 
  Trade receivables 356 117  294 724 
  – local 75 453  24 168 
  – foreign 280 664  270 556 
  Other receivables 62 349  115 601 
    4 082 913  3 281 520 
       
    2016  2015 
    Carrying Carrying
    amount of amount of
    receivables receivables
    not impaired not impaired
    R’000  R’000 
  Trade receivables 356 117  294 724 
  Not past due, not impaired 355 305  292 016 
  Past due, not impaired as considered recoverable 812  2 708 
  Other receivables    
  Not past due, not impaired 62 349  115 601 
    418 466  410 325 
       

28.2

Liquidity risk
  The Executive Committee manages 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 with large South African banks.

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 bear interest at a rate linked to LIBOR. At year-end, the facility was US$100 million (2015: US$100 million), of which US$67 000 000 (2015: US$78 310 000) was utilised.

Exposure to liquidity risk
The following table indicates the anticipated timing of cash flows for the group’s financial assets and liabilities, including guarantees at year-end as determined by contractual maturity date including interest receipts and payments.
               
        Contracted maturity date    
      Total   Between    
    Carrying expected Less than 4 and Between 1  More than
    amount cash flows 4 months 12 months and 5 years 5 years
    R’000  R’000  R’000  R’000  R’000  R’000 
  2016             
  Financial assets            
  Listed and unlisted investments# 224 675  224 675        224 675 
  Investment in foreign listed associate 124 848  124 848  –  –  –  124 848 
  Trade and other receivables 418 466  418 466  418 466  –  –  – 
  Restricted cash 479 522  479 522  479 522  –  –  – 
  Cash resources 3 184 925  3 184 925  3 184 925  –  –  – 
    4 432 436  4 432 436  4 082 913  –  –  349 523 
  Financial liabilities            
  Trade and other payables 822 996  822 996  822 996  –  –  – 
  Overdrafts 995 774  995 774  995 774  –  –  – 
  Guarantees 210 762  210 762  210 762  –  –  – 
    2 029 532  2 029 532  2 029 532  –  –  – 
  2015             
  Financial assets            
  Listed and unlisted investments# 281 780  281 780  –  –  –  281 780 
  Investment in foreign listed 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  – 
  # These investments do not have contractual maturities, but have been presented in the “more than five years” column as, at present, the group 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 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’s 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 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 members of the Executive Committee and senior executives of its offshore interests. 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:
               
    2016  2015 
    R’000  R’000 
  Variable rate instruments    
  Liabilities    
  Preference shares (included in long-term borrowings (refer note 14)) –  346 100 
  Overdrafts (refer note 20) 995 774  960 866 
  Assets    
  Cash resources (refer note 9) 3 184 925  2 421 195 
       
  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 taxation by R7 881 000 (2015: R4 011 000). 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 metal and mineral prices. 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. These markets are predominantly priced in US dollar 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 exposures are covered by forward exchange contracts, taking into account changes in operational forecasts and market conditions and the group’s hedging policy (refer “Forward exchange contracts and other commitments” below).
 

The group’s exposure to currency risk at year-end was as follows:
    2016  2015 
    R’000  R’000 
  Foreign receivables included in trade receivables    
  – US dollar denominated 280 664  275 312 
  Foreign overdraft (refer note 20)    
  – US dollar denominated 995 774  960 866 
  Total exposure at year-end 1 276 438  1 236 178 
       
  Foreign currency sensitivity analysis
  A 5% strengthening of the rand against the US dollar would have decreased other comprehensive income for the year by R25 744 000 (2015: R44 502 000) 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 other comprehensive income, 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 dollar at times when the rand/US dollar exchange rate appears volatile. The level of exposure on these limited hedging activities did not exceed US$100 million (2015:US$100 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:
           
    2016  2015   
      Presentation   Presentation
    Foreign currency Foreign currency
    currency notional currency notional
    amount amount amount amount
    US$’000  R’000  US$’000  R’000 
  Purchase contracts        
  US dollar 13 100  194 696  11 300  138 669 
  Sales contracts        
  US dollar 33 800  502 346  20 200  247 886 
           
  Equity price risk
  The group’s listed and unlisted investments are susceptible to market price risk arising from uncertainties about future value of the investment. The group manages the equity price risk through monitoring developments in the mining and metal industries. 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 R180,0 million (2015: R234,0 million). A decrease of 1% on the relevant market index would have an impact of approximately R1,8 million (2015: R2,3 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 or loss unless the shares are sold or fall below cost.