Annual Integrated Report 2016

Managing risk and opportunity

Management is responsible for identifying significant risks to and opportunities for the business and for implementing the controls and actions required to improve the management of the identified risks on a regular basis.

RISKS

Management reports on the key risks of the business to the audit and risk committee and to the board in April and November each year. This report is also considered by the board semi-annually.

The risks are assessed and documented for the following divisions of the group:

  • Corporate office
  • Norplats Properties Proprietary Limited
  • Zondereinde mine (including Northam Chrome)
  • Booysendal mine

A recent addition to the risk management function has been the generation of a regulatory universe report. The regulatory universe report is a list of all major or material Acts and regulations that apply to Northam as a mining entity in South Africa. Through this dynamic function, management keeps abreast of key legislation applicable to the group and its operations to ensure compliance and/or the institution of remedial actions. Incidents of known non-compliance or potential non-compliance are recorded and summarised in the regulatory universe report, along with the remediation applied.

A further example of the dynamism and flexibility of the risk discipline is its ability to adjust and respond swiftly to issues and risks of the day. An illustration of this was the implementation of internal fire audits at the group operations in January 2016, in response to the incidence of underground fires in ex-group operations. The assessments examined whether any hazards exist in terms of fires and associated risks in the workplace and focused also on the validity and operational effectiveness of existing systems, policies and procedures. The results of these assessments were reviewed personally by the chief executive. No other additional risk factors were identified.

All assurance activities in respect of the control environment are co-ordinated, through a combined assurance approach, including management and independent assurance providers, for example internal and external auditors.

This is an ongoing process managed and monitored by Northam’s management to ensure that the assurance received is adequate to address the significant risks faced by the group. Formal assurance is provided by management and the external and internal auditors at each half year. This is known as combined assurance and is monitored by the audit and risk committee.

Group inherent and residual risks

The group risks included in this report have been prepared from the more detailed divisional risk registers maintained by management and indicates the group’s combined key risks (risks ranked as priority 1, 2 and 3) as identified by management across all divisions of Northam. Similar risks for various divisions have been combined to summarise the group overall risk rating for each key risk area.

LEGEND FOR THE KEY RISK REPORT

The table below explains the terminology or abbreviations which are applicable to the graph and the report:

Term or abbreviationExplanation
Key risks (risk with residual risk classifications below)
Priority 1Extreme residual risk requiring immediate escalation to the audit and risk committee and the board of directors. Remedial actions to be implemented by management immediately.
Priority 2High residual risk requiring immediate escalation to management and remedial actions to be implemented.
Priority 3Moderate residual risk requiring remedial actions to be implemented by management.
Priority 4Management must consider whether the benefit of further reduction outweighs the cost thereof.
All risk graphs
Inherent riskThe risk to Northam without taking into account the controls implemented and other mitigating factors.
Control effectivenessThe effectiveness of the controls implemented as assessed by management of Northam.
Residual riskThe risk after taking into account the controls implemented by management and the effectiveness of those controls.

The key risks and any changes to the risk register since the key risks were last presented are reflected in the table below.

RiskPrevious ratingChange in risk ratingCurrent ratingMitigating measures and comments
1.
Complexity and availability of Merensky Reef
Priority 1UnchangedPriority 1

Merensky reef remains difficult to mine in the short term. Management is pursuing the deepening project at Zondereinde mine in order to open more face for Merensky ore. A higher proportion of UG2 ore is now being mined as it is more readily available, with the UG2 to Merensky proportion changed from 1:1 to 60:40. See Manufactured capital, Natural capital.

Construction of a new 20MW furnace commenced in February 2016 to cater for a higher volume of UG2. See Manufactured capital on page 38.

Booysendal mine provides geographic diversification and access to a less complex, shallower UG2 orebody with a higher base metal content that can be mined mechanically and with the possibility of additional Merensky ore. See Manufactured capital.

2.
Industrial (or community) action
Priority 2 Unchanged Priority 2

A three year wage deal was secured at both mines, at Zondereinde with the National Union of Mineworkers (NUM) and at Booysendal through MRC (the main contracting company with various unions, mainly NUM and the Associated Mine and Construction Union (AMCU)). See Human capital.

In recognition of employees’ freedom of association, Northam’s policy is to grant organisational rights to any union with representation of 15% or more of a relevant category of employees. Management maintains open channels of communication with its labour force, both with employees of influence and with representative union structures. For bargaining rights, a union is required to prove 33.3% representation of its relevant constituency. In addition, management consults with any legitimate worker representatives or committees to resolve any concerns which may arise.

Zondereinde: A verification exercise to assess union representation thresholds was performed by the CCMA earlier in the year. The results indicated that the NUM remains the majority union with bargaining rights.

Stakeholder liaison with the local SAPS through security structures in the event of possible industrial action is in place.

Management engages with employees of influence and union leadership to understand issues of the day and to deal with any potential problems proactively. Structures are in place to engage with the unions in terms of housing issues, empowerment and other concerns. In addition management communicates directly with employees to keep them informed of developments. This is done via e-mail, sms and notice boards.

See Human capital with regard to the interruption to underground mining at Zondereinde towards the end of the financial year.

Booysendal: No major difficulties were experienced on the eastern limb regarding labour. However community service delivery protests did disrupt the employees’ ability to get to work and may continue to do so. See Human capital.

3.
Not meeting production targets
Priority 3 Unchanged Priority 3

Production targets may be impacted by a number of factors including work stoppages either owing to labour and/ or community disruption or safety stoppages. Northam management is intent on cultivating good relationships with employees and with contracting companies to obviate labour disruption.

In order to avoid safety stoppages operational management encourages safe working practices, which inevitably contribute to efficient and effective operations, and management incentivises employees to produce efficiently.

4.
Succession planning and skills shortage
Priority 2 Unchanged Priority 2

The group has developed appropriate remuneration policies and practices to retain its competitive edge in the industry especially for technical skills. Having identified particular areas where transformation is required, management focuses on attracting senior level previously disadvantaged individuals to take up senior level appointments over the next two years.

A senior human resources executive has been appointed to focus on succession planning, in collaboration with heads of departments to identify appropriate candidates.

In-house training and mentoring have been improved to promote skills enhancement, with external recruitment being applied where necessary.

This risk is rapidly turning into an opportunity for Northam as more skilled and trained employees come on to the market, given the difficulties encountered in the resources sector.

5.
Fraud and corruption
Priority 3 Unchanged Priority 3 Continuous audits (internal and external) and review of controls are being conducted. The whistle blowing/ethics hotline has recently been the subject of a revitalisation campaign to heighten awareness at both operations. To address this risk, a security sub-department reports to the financial division.
6.
Exchange rate and commodity price
Priority 3 Unchanged Priority 3 Northam has adequate funding in place to support its operations in the short to medium term. A pricing committee has been established to deal with price forecasts and hedging, if necessary. Given the low PGM prices over an extended period now, management has implemented supplier cost reviews, general cost cutting exercises and deferment of cash outflows, where possible. In addition, management has appointed a consultancy firm to identify additional cost saving opportunities. Furthermore, the group’s growth strategy focuses on synergies, lower costs and shallow orebodies where it is possible to mechanise.
7.
Single stream processconcentrator
Priority 3 Unchanged Priority 3 This construction of a new 20MW furnace which commenced in February 2016 is part of the smelter expansion and de-risking programme. The project, estimated at R750.0 million, is expected to be completed by the end of the 2017 calendar year. See Manufactured capital.
8.
Health and safety
Priority 2 Unchanged Priority 2

Underground mining is inherently hazardous and requires full compliance with health and safety regulations, compulsory safety training and the compulsory use of PPE.

The established health and safety departments have implemented health and safety codes of practice and standard operating procedures are in place. The Chamber of Mines’ safety strategy has been approved by the board.

The group’s growth strategy involves acquiring and/or developing shallow, mechanisable orebodies. Given that mechanised mines are less labour-intensive, they are also safer.

At Zondereinde, the use of hydropower largely eliminates the presence of dust thus improving health and safety conditions for employees.

HIV/AIDS and TB have been aggressively targeted with a strong focus on prevention.

9.
Changing regulations
Priority 3 Unchanged Priority 3

There is currently uncertainty regarding the applicability of the Department of Trade and Industry’s (DTI’s) BBBEE codes. The DTI and DMR are working on the harmonisation of codes to be applied to mining companies. A new Mining Charter is also being considered. The new Mining Charter is expected to be released during the second half of calendar year 2016. Management is focused on housing, BEE and transformation in order to comply with the key objectives of mining legislation. Management is also working on operationalising the two community trusts and the employee trust that are part of the Zambezi Platinum transaction. See Social capital.

10.
Electricity Supply (Eskom)
Priority 3 Unchanged Priority 3

The threat of supply disruptions has abated since the electricity crisis first broke in 2008. Contingency mitigation measures are now well established and Booysendal’s mechanised mining equipment is largely diesel powered, thereby reducing the load.

Operational management has developed constructive relationships with Eskom’s staff, and electricity management programmes are well established. Automated emergency generators are in place to allow co-generation.

The most important issue about electricity relates to cost. Eskom has embarked on an extensive expansion programme that needs funding and seems to have some spare capacity currently because of slowed economic growth. Both of these factors will undoubtedly lead to higher costs.

11.
Employee availability – loss of productivity due to staff illness and absenteeism
Priority 3 Changed Priority 1

People management has gained emphasis, with supervisors responsible for providing greater oversight and managing teams closely.

Certain human resource procedures need to be boosted and integrated with IT systems. An upgrade of IT systems is underway and this will assist in the measurement and monitoring of employee movements and behaviour.

OPPORTUNITIES

The company’s chief executive officer has outlined Northam’s growth strategy which is to grow down the cost curve by mining shallow mechanisable PGM orebodies. The strategy is on track and opportunities for growth are constantly assessed and reviewed. This includes both organic and external opportunities.

All growth and expansion opportunities are assessed in terms of the companies’ investment criteria and are required to at least meet the companies cost of capital. Management is focused on growing the business at a rate that is faster than the preference share coupon rate (which is prime interest rate plus 350 basis points, currently 14.0% at 30 June 2016) of Zambezi Platinum, which was introduced by the BEE transaction mentioned above.

The group’s organic growth projects, which are epitomised by the expansion projects of Booysendal South, do meet the group’s investment criteria and sufficient time has been taken by management to ensure that the risk of project failure is minimised.

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