| 27. | Financial instruments and risk management | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Principles of risk management The Group is exposed to the following risks from its use of financial instruments:
This note presents information about the Group's exposure to each of the above risks, the Group's objectives, policies and processes for measuring and managing risk, and the Group's management of capital. Further quantitative disclosures are included throughout these consolidated financial statements. The Board has overall responsibility for the establishment and oversight of the Group's risk management framework. The Board has established an Audit and Risk Committee, which is responsible for monitoring the Group's risk management policies. The Committee reports directly to the Board on its activities. The Group's 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 Group's activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Audit and Risk Committee oversees how management monitors compliance with the Group's risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Audit and Risk Committee is assisted in the oversight role at operations level by internal audit. Internal audit undertakes both regular and adhoc reviews of risk management controls and procedures, the result of which are reported to the Audit and Risk Committee. The overall objective of the Venture's treasury department is to effectively manage credit risk, liquidity risk and market risks in accordance with the Group's strategy as the Group's activities expose it to a variety of risks. Other responsibilities of the Venture's treasury department include management of the Group's cash resources, approval of counter-parties and relevant transaction limits and the monitoring of all significant treasury activities undertaken by the Group. The Venture manages the treasury department through a Central Treasury function. The Venture's treasury department prepares monthly treasury reports which monitor all significant treasury activities undertaken by the Venture through the Central Treasury Function. The report also benchmarks significant treasury activities and monitors key banking risks to ensure continued effectiveness. The Group's significant financial instruments comprise of financial assets and financial liabilities measured at amortised cost. The main purpose of these financial instruments is to finance the Group's acquisitions and ongoing operations. |
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| 27.1 | Credit risk | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit risk is the risk of financial loss to the Group if a customer or counter-party to a financial instrument fails to meet its contractual obligations. The Group minimises credit risk by ensuring that the exposure is spread over a number of counterparties. Exposure to credit risk arises as a result of transactions in the Group's ordinary course of business and is applicable to all financial assets. Counter-parties are assessed both prior to, during and after conclusion of transactions to ensure exposure to credit risk is limited to an acceptable level. There is no material concentration of credit risk in cash and cash equivalents, trade and other receivables and loans. Cash and cash equivalents The Group limits its exposure to credit risk by investing only in liquid securities and only with approved banks and financial institutions. The Group's cash balances are in the form of short-term deposits in both local and foreign currency. Trade and other receivables The Group's exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the Group's customer base, including the default risk of the industry and country in which the customers operate, has less of an influence on credit risk. Management have considered recoverability of trade and other receivables noted in note 1.17 and 11 and no significant ECLs are expected. Trade receivables are presented in the statement of financial position net of any provision for impairment. No trade receivables are past due. The Group sells the majority of its ferrochrome to a broad range of international customers in terms of the Venture agreement. The marketing agent, Glencore International AG (GIAG), accepts 60% of the risk related to non-payment of credit sales of ferrochrome and 100% of the risk of non-payment of credit sales of chrome ore. In general, GIAG acts as a sales and marketing agent, on-selling purchases from the Group to a wide variety of customers. These sales are governed by various sales, marketing and distribution agreements. As these agreements have been in place for a number of years and the Group has not been exposed to significant unrecoverable amounts, the Group does not believe that these arrangements expose it to unacceptable credit risks. Where concentrations of credit risk exist, management closely monitors the receivable and ensures appropriate controls are in place to ensure recovery. The Group does not have netting arrangements with any debtors. The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:
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| 27.2 | Liquidity risk | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Liquidity risk is the risk that the Group will not be able to meet its financial obligations on time. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation. The Venture's treasury department is responsible for management of liquidity risk, including funding, settlements, related processes and policies of the Venture. The Group manages its liquidity risk on a concentrated basis, utilising various sources of finance to maintain flexibility while ensuring access to cost-effective funds when required. The operational, tax, capital and regulatory requirements and obligations of the Group are considered in the management of liquidity risk. In addition, management utilises both short and long-term cash flow forecasts and other consolidated financial information to manage liquidity risk. The Group uses activity-based costing to cost its products, which assists it in monitoring cash flow requirements and optimising its cash return on investments. Typically the Group ensures that it has sufficient cash on demand to meet expected operational expenses for a period of 60 days, including the servicing of financial obligations, this excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. In addition, the Group maintained the following facilities at 31 December 2022: The Company
Merafe Ferrochrome
The Venture
As indicated, GHSA also issues guarantees on behalf of the Venture. At year end, the Venture had the following guarantees in place (Merafe's attributable portion):
All of the above guarantees are in the name of GHSA and relate to the Venture. The guarantees are not assessed for ECLs as per IFRS 9 as they are guaranteed by the individual banks and counterparties and measured at fair value.
The following are the contractual maturities of financial liabilities including estimated interest payments and excluding the impact of netting arrangements.
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| 27.3 | Market risk | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and ferrochrome prices, will affect the Group's income or the value of its holding of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising return. Currency risk Foreign currency In the normal course of business, the Group enters into transactions denominated in foreign currencies (primarily US$). As a result, the Group was subject to transactions and translation exposure from fluctuations in foreign currency exchange rates. The Group's exposure to foreign currency risk is as follows:
Exchange rates The following exchange rates were applied during the year:
Foreign currency sensitivity analysis A 10 percent weakening of the Rand against the US$ at 31 December 2022 would have increased equity and profit before tax by R122m (2021: R144m). A 10 percent strengthening of the Rand at 31 December 2022 against the US$ would have decreased equity and profit before tax by R122m (2021: R144m). This analysis assumes that all other variables, in particular interest rates, remain constant. This sensitivity does not represent the profit and loss impact that would be expected from a movement in foreign currency exchange rates over the course of a period of time. Interest rate risk profile At the reporting date, the interest rate profile of the Group's interest-bearing financial instruments were:
a) The Venture: prime less 3.55% b) The Company and Merafe Ferrochrome Call deposits: daily call deposits rates. At year end the call deposit rate was 5.71%
Sensitivity analysis for interest rate risk Cash and cash equivalents An increase of 50 basis points in interest rates will increase equity and profit or loss by R6m (2021: R5m*). A decrease of 50 basis points in interest rates would have the equal but opposite effect. This analysis assumes all other variables remain constant.
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| 27.4 | Categories of financial instruments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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The following tables present the carrying values and fair values of the Group's financial instruments. Fair value is the price that would be expected to be received to sell an asset or paid to transfer a liability in a market at the measurement date under current market conditions. Where available, market values have been used to determine fair values. When market values are not available, fair values have been calculated by discounting expected cash flows at prevailing market interest and exchange rates. The estimated fair values have been determined using market information and appropriate valuation methodologies, but are not necessarily indicative of the amounts that the Group could realise in the normal course of business. Amortised costs approximates fair value. The financial assets and liabilities are presented by class in the tables below at their carrying values Categories of financial assets Group – 2022
Group – 2021
Company – 2022
Company – 2021
Categories of financial liabilities Group – 2022
Group – 2021
Company – 2022
Company – 2021
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