Approach to risk management
The Merafe Board is responsible for our governance of risk and for setting levels of risk tolerance. It has tasked the Audit and Risk Committee with assisting the Board in carrying out its risk responsibilities. The process of risk management has been delegated to management and the Audit and Risk Committee, acting on behalf of the Board, ensures that there is ongoing assessment and monitoring of our risks. The Merafe Executive Committee is accountable to the Board for designing, implementing and monitoring Merafe’s risk management processes and senior managers are responsible for effectively managing risks within their respective areas of responsibility.
Merafe’s risk management policy and framework (available on our website) describes our risk management philosophy, approach and process and guides the implementation of our risk management process in a uniform manner across the Company.
Certain risks are inherent in a mining business and these need to be managed effectively. The Venture’s risk management system allows it to pursue business opportunities and grow shareholder value, while at the same time developing and protecting its people, assets, environment and reputation. Its processes are defined within a risk framework that is well understood across its operations.
Both Merafe and the Venture undertake comprehensive quarterly risk reviews, the results of which are included in their annual business plans and regularly reviewed.
The Board will continue in 2020 to focus on the principal risks set out hereunder as well as attempting to identify any further emerging risks in a fast changing environment.
Our principal risks, which include risks related to the Venture, are the following:
- The possible negative impact on our earnings of commodity price volatility, currency exchange rate fluctuations and the health of the global economy. The preventative actions the Venture takes to reduce the impact, which include managing production levels, scaling down mining and smelting activities during downturns in global demand and maintaining its position as the lowest-cost ferrochrome producer in South Africa, are described in the Principal risks and uncertainties table.
- Socio-political climate in South Africa, which includes industrial unrest and the risk of the Venture not winning broad support for its activities from local communities. These were key issues in 2019. Both of these possibilities could result in disruptions affecting our profitability. To reduce these risks the Venture’s stakeholder engagement and responsiveness efforts play a critical role. In addition, Merafe and the Venture invest in social and labour plan commitments, which include local economic development, healthcare and education projects. We also invest in corporate social responsibility initiatives.
- Investors’ negative perceptions of the South African mining industry impact on investors’ appetite for investment in South African mining stocks. Merafe focuses on maintaining relationships with our existing investors and building new relationships. To achieve this our team regularly makes presentations and has discussions with investors and potential investors. We also keep investors informed through our reporting and our website.
- Inability to obtain debt finance due to a downgrading of Merafe’s credit status could adversely affect our financial position. To counteract this risk we maintain a strong balance sheet, low gearing and a good reputation and relationship with our bankers and have tangible assets to secure financing.
- Non-compliance with and changes to laws, regulations, taxes and mining rights can result in extensive disruption to the Venture’s operations, loss of revenue and fines. The loss of mining rights could affect our business. The Venture and Merafe maintain extensive, transparent and open relationships with regulators and local, regional and national government bodies. We keep abreast of all changes to legislation and closely monitor compliance with it.
- Empowerment credentials: in this regard see our commentary in Material issues section and the Chairperson's report of this report.
- Operational risks include a number of factors that are out of our control, including the availability of raw materials, water and power, unusual ground conditions and the impact of climate change. To combat the impact of these risks, the Venture has a comprehensive programme in place to identify, understand and manage the risks that could affect our business and our operations. The risk registers of both Merafe and the Venture are regularly updated.
- Chrome ore exports to China could undermine the South African ferrochrome industry. The ferrochrome industry engaged with government to develop a solution that will support government’s beneficiation and job creation strategies and ensure the sustainability of South Africa’s ferrochrome industry. Any change in circumstances for China, which include increased chrome ore prices, freight rate increases and environmental issues covered, also reduce the risk of China undermining our industry.
- Cost control is a key factor in the Venture’s competitiveness and profitability. The Venture prides itself on being a low-cost producer and cost control is a key management performance measurement. The Venture’s development of cost-efficient proprietary technology plays a significant part in its cost reduction. We are also engaging with government regarding carbon taxes and electricity costs.
- Lack of energy supplies could impact on the Venture’s ability to operate. The Venture has an ongoing programme to assess and monitor energyrelated risks, including scenario analyses. We also manage the risk by implementing energy-efficiency plans and assessing the risks associated with energy supply at the design phase of our projects.
- Emissions and climate change regulations could have an adverse impact on our ability to maintain profitability and water scarcity has also become an issue that could in future affect the Venture’s ability to operate. The Venture continually engages with government and key policymakers to advocate a rational approach to carbon taxes and it has reduced the carbon emissions attributable to the electricity it purchases by improving the energy efficiency of its operations and investigating the use of renewable energy sources. The Venture has also successfully reduced its water consumption per tonne of product produced.
- The Venture’s operations are subject to extensive health, safety and environmental ("HSE") regulations and legislation and community expectations; HIV and Aids and associated disease remain the major healthcare challenges for our industry and if the Venture’s employees suffer from symptoms associated with HIV and Aids it could have a negative impact on its production levels and our profitability. The Venture gives these issues priority and significant resources are committed to providing a safe and healthy workplace, keeping our impact on the environment to a minimum and addressing the impact of HIV and Aids on our employees and the communities in the vicinity of our operations.
- Loss of key and skilled employees, particularly to competitors, could result in financial loss and reputational damage. The policy of both Merafe and the Venture is to invest in future key contributors and to implement adequate notice periods.