Material issues

The directors’ statement regarding the materiality determination process

As the Board of Merafe we acknowledge our responsibility to ensure the integrity of the Integrated Annual Report, including the determination of material issues. We acknowledge that we have applied our collective mind in determining the material issues for Merafe and have used the materiality process described below.

We believe that this process is suitably designed to identify our material issues. The material issues disclosed in this section accurately reflect the outcome of this process and have taken into consideration our business model, operating context, stakeholder concerns and strategic plan.

Issue   Possible impact   Our response
Global economic environment   The global economic environment can have a positive or negative impact on the demand for the ferrochrome and chrome ore that the Venture produces. When it is doing well then demand increases and prices tend to follow suit. The volatility of the Rand/US Dollar exchange rate also affects our profitability. This financial year, for instance, the appreciation in the value of the Rand against the US Dollar impacted our profitability. All our stakeholders are affected by our ability to be profitable and sustainable.   We cannot influence the Rand/US Dollar exchange rate or the global economy, and market demand dictates the price of ferrochrome. Both Merafe and the Venture can, however, take action to contain costs and remain profitable. The Venture’s investment in increasing the energy efficiency of its operations and reducing the cost of the reductants makes it the lowest-cost producer in South Africa.
Exposure to one commodity   Diversification into other commodities would provide us with a buffer against the cyclical nature of ferrochrome which can and has negatively impacted our profitability in certain years. This issue could impact our shareholders, management and employees.   In August 2014, the Board announced its strategy to focus mainly on ferrochrome and chrome in the medium term and this was the main focus from 2015 to 2019. The Board, by participating in the Venture, ensures that the competitive advantages enjoyed by the Venture as set out in Our operating context mitigate this risk of exposure to one commodity. The Company however will also consider acquisitions outside of ferrochrome on an opportunistic basis.
Venture in which we do not have a majority stake   By not being in control of our own destiny, we could be negatively impacted by such a partnership. Decisions taken in the best interest of the Venture, may on the other hand, negatively impact Merafe. Both shareholders and employees stand to be affected by this issue.   Contractual provisions and partnering with a world-class operator and global ferrochrome leader, are all helpful in bolstering our overall sustainability. We continually strive to ensure the interests of both partners in the Venture are aligned and to maintain strong relationships between both management teams based on mutual respect.
Empowerment credentials   These credentials are important to maintain a competitive advantage and they also affect the empowerment status of the Venture.   In 2015 Glencore BV acquired the shares of Royal Bafokeng Holdings in the Company. The empowerment credentials of Merafe and the Venture continue to be a focus even though there is more clarity on the "once empowered always empowered" principle. See the Chairperson's report for more details as well as the report of the CEO.
Safety, health and wellbeing of Merafe’s employees and the Venture’s employees and contractors   Maintaining a safe and healthy environment is one of the cornerstones of our success. Employee morale is affected by how we manage this issue. Significant reputational damage is also a key factor. This issue could impact employees, contractors and their families; the Department of Mineral Resources and Energy (DMRE) – Mine Health and Safety Inspectorate; trade unions; and investors.   The Venture invests in safety training and efforts to transform its safety culture into one where every employee takes responsibility for their safety and that of their fellow employees. See Human capital.
Industrial action in the mining industry and in particular in the operations of the Venture   Loss of production impacts on profitability. We also need to consider increased costs and the possible damage to property. The safety of the Venture’s employees is also at risk; intimidation of employees by strikers and a breakdown in the relationship with Venture employees are all important factors affecting not only Venture employees but families, communities, the DMRE and shareholders.   Communication and mutual understanding and respect are fostered daily with employees to enhance the working relationship. We also invest time and effort in establishing an understanding with the trade unions. The Venture also abides by the collective agreements in place and negotiates with the unions with the aim of reaching an agreement on annual wage increases. See Human capital.

MATERIALITY DETERMINATION PROCESS

  • The Board sets and approves three-year strategic plans for the Company. On an annual basis the Board reviews and adjusts the strategic plan where necessary.
  • The Board, through the Audit and Risk Committee and Board strategic workshops, annually considers the risks (see Approach to risk management) the Company may face and a risk matrix listing the risks and their importance is updated quarterly. There are approximately four Board and separate Board committee meetings during a year and further separate executive, management and Board strategy sessions to set a new strategic plan and/or assess the current plan in operation.
  • Key to our process is consultation with stakeholders (see Stakeholders). Stakeholder feedback is then discussed at management, executive and Board strategic meetings and incorporated into the strategic plan and risk register.
  • The executive and management of Merafe participate in the Venture (including participation in executive and Board meetings of the Venture), which assists with the assessment and consideration of the Venture’s material issues (see Our approach to governance).
  • During the integrated reporting process, the Board and its committees assess the report to ensure that our reporting is aligned in terms of strategy, key risks and issues material to both Merafe and its stakeholders.
Issue   Possible impact   Our response
Our social licence to operate   Dissatisfied communities embarking on action to remove the Venture’s social licence to operate would create an unsustainable working environment as well as cause significant reputational damage. Communities, investors, DMRE, employees and local municipalities would all be affected.   Community social issues are addressed regularly with goodwill, commitment and leadership. By addressing social issues, the South African mining industry can achieve a more sustainable environment for itself and the communities in which it operates. See Social capital and stakeholder responsiveness.
Chrome ore exports to China   Ferrochrome sales to China are impacted by the export of unbeneficiated chrome ore from South Africa, which is facilitating the growth of a ferrochrome industry in China (see Chief Executives strategic review). Profitability would be negatively impacted and shareholders, Merafe management, Merafe employees, Venture partners, Venture employees and communities, as well as government stakeholders (for example SARS) would feel the effects of this issue.   The strategy of being the lowest cost producer mitigates this risk. The Venture further believes that market forces over the medium term will reduce this risk. See the Chief Executives strategic review and the graphs in Chief Executives strategic review. The Venture is currenly lobbying for a tax in chrome ore exports.
Power prices and the availability of electricity   Loss of sales is highly likely if increased costs make our product prices uncompetitive. A further possible impact is a loss of production because of electricity shortages. Should the Venture be unable to secure electricity supply for new projects, it would be unable to grow its operations. This issue could impact shareholders, Merafe management and employees as well as Venture management, employees, communities and customers.   The Venture’s continued development and application of energyefficient technology allows it to maintain its position as South Africa’s lowest cost producer of ferrochrome and therefore the most competitive South African producer. The Venture regularly engages with Eskom and is represented on the Energy Intensive User Group (see Natural capital).
Climate change   Climate change can impact business continuity and profitability; health and safety and environmental aspects. The Venture’s operations give rise to a significant quantity of indirect and direct greenhouse gas (GHG) emissions and are also exposed to the potential impacts of climate change resulting from GHGs.   The Venture continually engages with legislators, researchers and industry bodies to track and evaluate the situation and develop an improved awareness of and preparation for the risks associated with climate change. The Venture continues to take steps to reduce its carbon footprint. These include the development of energyefficient technology and research into the use of alternative sources of energy. See Natural capital.
Water   Water is an important input in our operations. All stakeholders are impacted by this issue.   With regard to water we ensure that we have adequate supply and storage facilities. We have access to different water schemes, we reuse a large proportion of water and we have access to underground water. In 2017, the Venture embarked, as part of its water conservation and water demand management strategy, to implement compressive model base water balance at all our sites. All of the mines and two of the smelters were completed during 2017 and the rest of the smelters were completed during 2018. The water reticulation is comprehensively mapped and assimilated into the model to ensure all water streams are covered. The models also have a predictive function which simulates any process changes to assess the impact on the whole water reticulation. See Natural capital.