CHAPTER 10: INVESTMENTS IN ASSOCIATES AND JOINT ARRANGEMENTS

10.1 ACCOUNTING POLICIES RELATING TO INVESTMENTS IN ASSOCIATES AND JOINT ARRANGEMENTS

10.1.1 INVESTMENTS IN ASSOCIATES AND JOINT ARRANGEMENTS

Associates are those entities in which the group has significant influence, but not control or joint control, over the financial and operating policies. Significant influence is presumed to exist when Exxaro holds between 20% and 50% of the voting rights of another entity.

Joint arrangements are arrangements in which the group has joint control, established by contracts requiring unanimous consent for decisions on the activities that significantly affect the arrangements’ returns. Joint arrangements are classified and accounted for as follows:

Joint operation: when the group has rights to the assets and obligations for the liabilities relating to an arrangement, each of its assets and liabilities, including its share of those held or incurred jointly, are accounted for in relation to the joint operation.
Joint venture: when the group has rights only to the net assets of the arrangements, its interest is accounted for using the equity method, similar to the accounting treatment for associates.

The company carries its investments in associates and joint ventures at cost less accumulated impairment losses. The cost of investments in associates and joint ventures is the fair value at the date of acquisition or the fair value at the date of loss of control of a former subsidiary where the company retains an associate or joint venture interest in the former subsidiary.

Investments in associates and joint ventures are accounted for using the equity method and are recognised initially at cost. The cost of the investments includes transaction costs.

The group financial statements include Exxaro’s share of the profit or loss and other comprehensive income of equity-accounted investees, after adjustments to align the accounting policies with those of Exxaro, from the date that significant influence commences until the date that significant influence ceases.

The cumulative post-acquisition movements in profit or loss and other comprehensive income are adjusted against the carrying amount of the investment in the group financial statements.

The group’s interest in associates is carried in the statement of financial position at an amount that reflects its share of the net assets and the goodwill on acquisition.

Dilution gains and losses arising on investments in associates are recognised in profit or loss.

Unrealised gains from downstream transactions with equity-accounted investees are eliminated against the investment to the extent of Exxaro’s interest in the investee. Unrealised gains from upstream transactions with equity-accounted investees are eliminated against related assets to the extent of Exxaro’s interest in the investee.

Dividend income is recognised when the right to receive payment is established.

10.2 SIGNIFICANT JUDGEMENTS AND ASSUMPTIONS MADE BY MANAGEMENT IN APPLYING THE RELATED ACCOUNTING POLICIES

In applying IAS 28 Investments in Associates, management has assessed the level of influence that the group has:

RBCT: management concluded that significant influence exists on its 10.82% effective investment in RBCT as a result of Exxaro’s representation on the board of directors of RBCT.
Curapipe: management concluded that significant influence exists on its 10.53% investment in Curapipe as a result of Exxaro’s representation on the board of directors of Curapipe.

In applying IFRS 11 Joint Arrangements, management assessed the level of influence that the group has on its investments in joint arrangements and subsequently classified the investments in Cennergi and Mafube as joint ventures due to the fact that unanimous consent is required for board decisions.

10.3 INCOME/(LOSS) FROM INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

	Group		Company
	Share of income/(loss) of equity-accounted investments		Dividend and other income from equity-accounted investments
For the year ended 31 December	2018 Rm	2017 Rm	2018 Rm	2017 Rm
Continuing operations:
Associates
Unlisted investments	3 079	3 691	2 569	1 488
– SIOC	2 592	3 303	2 569	1 390
– Tronox SA	382	67
– Tronox UK¹	110	119		98
– RBCT	(36)	(24)
– Black Mountain	70	226
– Curapipe	(3)
– AgriProtein	(31)
– LightApp	(5)
Joint ventures
Unlisted investments	180	261	58
– Mafube	114	259
– Cennergi	66	2	58

Income from investments in associates and joint ventures	3 259	3 952	2 627	1 488
Discontinued operations:
Associates
Listed investments
– Tronox Limited²		(1 829)	69	109
Total income from investments in associates and joint ventures	3 259	2 123	2 696	1 597

¹	Application of the equity method ceased on 30 November 2018 when the investment was classified as a non-current assets held-for-sale. The income from Tronox UK, for company, comprises partnership profits.
²	Application of the equity method ceased on 30 September 2017 when the investment was classified as a non-current asset held-for-sale.

10.4 INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

10.4.1 INVESTMENTS IN ASSOCIATES

		Group
	Note	Investments Rm	Preference dividend receivable Rm	Total Rm
At 31 December 2018
At beginning of the year		15 810	2	15 812
Interests acquired¹		818		818
Reclassification to non-current assets held-for-sale²		(1 787)		(1 787)
Net share of results		3 081		3 081
– Share of income		3 079		3 079
– Elimination of intergroup profits		2		2
Dividends received		(2 569)		(2 569)
Share of reserve movements		124		124
Movement in indebtedness from associates			(2)	(2)
At end of the year	10.5	15 477		15 477
At 31 December 2017
At beginning of the year		21 518		21 518
Interests acquired¹		26	2	28
Loss on dilution of investment		(106)		(106)
Reclassification to non-current assets held-for-sale²		(6 061)		(6 061)
Net share of results		1 860		1 860
– Share income (continuing operations)		3 691		3 691
– Share loss (discontinued operations)²		(1 829)		(1 829)
– Elimination of intergroup profits		(2)		(2)
Dividends received		(1 499)		(1 499)
Share of reserve movements		72		72
At end of the year	10.5	15 810	2	15 812

¹	Refer note 10.5.
²	The reclassification to non-current assets held-for-sale relates to Tronox UK (from 30 November 2018) and Tronox Limited (from 30 September 2017).

		Company
	Note	Investments Rm	Preference dividend receivable Rm	Total Rm
At 31 December 2018
At beginning of the year		2 298	2	2 300
Interests acquired¹		818		818
Reclassification to non-current assets held-for-sale²		(1 091)		(1 091)
Movement in indebtedness from associates			(2)	(2)
At end of the year	10.5	2 025		2 025
At 31 December 2017
At beginning of the year		13 152		13 152
Interests acquired1		26	2	28
Reclassification to non-current assets held-for-sale²		(10 880)		(10 880)
At end of the year	10.5	2 298	2	2 300

¹	Refer note 10.5.
²	The reclassification to non-current assets held-for-sale relates to Tronox UK (from 30 November 2018) and Tronox Limited (from 30 September 2017).

10.4.2 INVESTMENTS IN JOINT VENTURES

		Group
	Note	Investments Rm	Loans Rm	Total Rm
At 31 December 2018
At beginning of the year		1 479	126	1 605
Net share of results		199		199
– Share of income		180		180
– Elimination of intergroup profits		19		19
Dividends received		(58)		(58)
Share of reserve movements		9		9
Settlement of loan receivable¹		(60)	(126)	(186)
Loan granted²			250	250
Interest raised on loan²			9	9
At end of the year	10.5	1 569	259	1 828
At 31 December 2017
At beginning of the year		1 258	126	1 384
Net share of results		267		267
– Share of income		261		261
– Elimination of intergroup profits		6		6
Share of reserve movements		(46)		(46)
At end of the year	10.5	1 479	126	1 605

¹	The loan to Cennergi of R186 million has been settled
²	A loan of R250 million was granted to Mafube. Interest of R9 million has accrued on this loan balance in accordance with the terms and conditions of the loan. Refer note 11.2.2.

		Company
	Note	Investments Rm	Loans Rm	Total Rm
At 31 December 2018
At beginning of the year		696	186	882
Settlement of loan receivable¹			(186)	(186)
At end of the year	10.5	696		696
At 31 December 2017
At beginning of the year		696	186	882
At end of the year	10.5	696	186	882

¹	The loan to Cennergi of R186 million has been settled.

10.5 DETAILED ANALYSIS OF INVESTMENTS IN ASSOCIATES AND JOINT ARRANGEMENTS

10.5.1 SUMMARY OF INVESTMENTS IN ASSOCIATES AND JOINT ARRANGEMENTS

		Nature of business¹	Country of incorporation			Group carrying value		Company carrying value		Fair value²		Fair value hierarchy level	Valuation technique
	Note			2018 %	2017 %	2018 Rm	2017 Rm	2018 Rm	2017 Rm	2018 Rm	2017 Rm
Associated companies
Listed
Tronox Limited³		M	USA	23.35	23.66					3 226	7 290	1	Listed market price
Unlisted										19 705	26 394	2	Adjusted equity value
SIOC⁴		M	RSA	20.62	20.62	9 511	9 367
Tronox SA		M	RSA	26.00	26.00	2 185	1 800	1 181	1 181
Tronox UK⁵		F	UK	26.00	26.00		1 677		1 091
RBCT		T	RSA	12.56	12.56	2 157	2 193
Black Mountain⁶		M	RSA	26.00	26.00	818	747
Curapipe⁷		R&D	Israel	10.53	13.70	22	28	27	28
– Investment						22	26	27	26
– Preference dividend receivable	11.2.2								2
AgriProtein⁸		WC	UK	26.37		643		674
LightApp⁹		EN	Israel	28.98		141		143
Total associate companies						15 477	15 812	2 025	2 300
Incorporated joint ventures
Unlisted
Mafube		M	RSA	50.00	50.00	1 496	1 105
– Investment						1 237	1 105
– Loan¹⁰	11.2.2					259
Cennergi		EN	RSA	50.00	50.00	332	500	696	882
– Investment						332	374	696	696
– Loan¹¹	11.2.2						126		186
Unincorporated joint operations
Moranbah coal project		M	AUS	50.00	50.00
Total joint arrangements						1 828	1 605	696	882
Total investments in associates and joint						17 305	17 417	2 721	3 182

¹	M — Mining, F — Financing, EN — Energy, T — Export terminal, R&D — Research and Development, WC — Waste Conversion
²	Fair value represents the directors’ value for unlisted investments at reporting date and market value for listed investments at reporting date.
³	Tronox Limited was classified as a non-current asset held-for-sale since 30 September 2017.
⁴	The fair value of SIOC is determined by applying an adjusted equity valuation technique, based on the share price of KIO on 31 December 2018 of R283.05 per share (31 December 2017: R379.13 per share), adjusted for a liquidity discount rate of 20% (2017: 20%).
⁵	Tronox UK was classified as a non-current asset held-for-sale on 30 November 2018 (refer note 9.4).
⁶	Black Mountain’s financial year end is 31 March and therefore not co-terminous with that of Exxaro. Financial information has been obtained from published information or management accounts as appropriate.
⁷	Curapipe was acquired on 3 August 2017.
⁸	On 31 May 2018 Exxaro acquired an equity interest in AgriProtein. The purchase price amounted to US$52.5 million, comprising an initial cash consideration of US$14.5 million (R184.2 million) paid on 1 June 2018 and deferred consideration amounting to US$38 million (R482.8 million) which will be paid over the next two years. The timing of the deferred consideration is dependent on AgriProtein’s capital expenditure requirements. Transaction costs of R6.6 million were capitalised to the cost of the investment. AgriProtein develops municipal organic water-conversion plants to generate high quality, natural protein sold for use in animal feed and agriculture.
⁹	On 18 September 2018 Exxaro acquired an equity interest in the shareholding of LightApp. The purchase price amounted to US$10 million, comprising an initial cash consideration of US$5 million (R71.9 million) paid on 27 September 2018 and deferred consideration amounting to US$5 million (R70.7 million) which will be paid over the next two years. Transaction costs of R0.6 million were capitalised to the cost of the investment. LightApp is one of the leading start-ups in industrial energy analytics.
¹⁰	A loan was granted to Mafube.
¹¹	The loan to Cennergi of R186 million has been settled in full.

Restrictions

There are no significant restrictions on the ability of associates or joint ventures to transfer funds to Exxaro in the form of cash dividends, or to repay loans or advances made by Exxaro.

Risks

Refer note 13.4 for details with regard to contingent liabilities relating to associates and joint ventures.

Refer note 11.1.4 for details with regard to capital commitments relating to associates and joint ventures.

Refer note 16.3.4 for details with regard to loan commitments relating to associates and joint ventures.

10.5.2 SUMMARISED FINANCIAL INFORMATION OF ASSOCIATES AND JOINT VENTURES

The summarised financial information set out below relates to the associates and joint ventures that are material to the group and represents 100% of the entity’s financial performance and position, adjusted to reflect adjustments made by Exxaro when using the equity method.

	Associates			Joint ventures
	Tronox SA Rm	SIOC Rm	RBCT Rm	Mafube Rm	Cennergi Rm
Statements of comprehensive income
For the year ended 31 December 2018
Revenue	9 370	45 725	1 139	1 515	1 050
Operating expenses	(6 959)	(29 395)	(1 405)	(1 066)	(315)
Net operating profit/(loss)	2 411	16 330	(266)	449	735
Finance income	146	484		9	44
Finance costs	(543)	(221)	(110)	(71)	(612)
Profit/(loss) before tax	2 014	16 593	(376)	387	167
Income tax (expense)/benefit	(546)	(3 944)	36	(123)	(34)
Profit/(loss) for the year from continuing operations	1 468	12 649	(340)	264	133
Loss for the year from discontinued operations		(82)
Profit/(loss) for the year	1 468	12 567	(340)	264	133
Other comprehensive income	12	522	6
Total comprehensive income/(loss) for the year	1 480	13 089	(334)	264	133
Dividends paid to Exxaro		2 569			58
Statements of financial position
At 31 December 2018
Non-current assets	11 365	41 431	22 546	3 544	5 570
Current assets	10 019	21 921	229	751	500
Total assets	21 384	63 352	22 775	4 295	6 070
Equity and liabilities
Total equity	8 403	46 145	19 937	2 473	730
Non-current liabilities	9 131	11 559	1 621	1 499	5 311
Current liabilities	3 850	5 648	1 217	323	29
Total equity and liabilities	21 384	63 352	22 775	4 295	6 070
Included above in joint ventures:
Cash and cash equivalents				329	264
Financial liabilities (excluding trade and other payables and provisions)				533	5 135
– Non-current				533	5 135
Depreciation and amortisation				143	181

	Associates			Joint ventures
	Tronox SA Rm	SIOC Rm	RBCT Rm	Mafube Rm	Cennergi Rm
Statements of comprehensive income
For the year ended 31 December 2017
Revenue	7 400	46 379	1 033	2 006	1 036
Operating expenses	(6 628)	(29 905)	(1 265)	(1 255)	(419)
Impairment reversals		4 789
Net operating profit/(loss)	772	21 263	(232)	751	617
Finance income	106	627		35	40
Finance costs	(532)	(378)	(35)	(24)	(626)
Profit/(loss) before tax	346	21 512	(267)	762	31
Income tax (expense)/benefit	(86)	(5 418)	43	(230)	(27)
Profit/(loss) for the year from continuing operations	260	16 094	(224)	532	4
Loss for the year from discontinued operations		(74)
Profit/(loss) for the year	260	16 020	(224)	532	4
Other comprehensive income/(loss)	18	(454)	7
Total comprehensive income/(loss) for the year	278	15 566	(217)	532	4
Dividends paid to Exxaro		1 390
Statements of financial position
At 31 December 2017
Non-current assets	11 493	41 006	22 762	2 843	5 794
Current assets	7 526	20 430	225	564	769
Non-current assets held-for-sale		1 235
Total assets	19 019	62 671	22 987	3 407	6 563
Equity and liabilities
Total equity	6 923	45 452	20 272	2 210	695
Non-current liabilities	8 640	11 197	1 695	870	5 401
Current liabilities	3 456	4 973	1 020	327	467
Non-current liabilities held-for-sale		1 049
Total equity and liabilities	19 019	62 671	22 987	3 407	6 563
Included above in joint ventures:
Cash and cash equivalents				313	553
Financial liabilities (excluding trade and other payables and provisions)					5 589
– Non-current					5 216
– Current					373
Depreciation and amortisation				187	188

10.5.3 RECONCILIATION OF CARRYING AMOUNTS OF INVESTMENTS

Set out below is a reconciliation of the equity attributable to owners of the parent (closing net assets) in 10.5.2, to the carrying value of the investment.

	Associates			Joint ventures
	Tronox SA Rm	SIOC Rm	RBCT Rm	Mafube Rm	Cennergi Rm
At 31 December 2018
Closing net assets	8 403	46 145	19 937	2 473	730
Interest in equity-accounted investment (%)	26.00	20.62	10.82	50.00	50.00
Interest in equity-accounted investment	2 185	9 515	2 157	1 237	365
Unrealised profit in closing balances		(4)			(33)
Loans to equity-accounted investments				259
Carrying value	2 185	9 511	2 157	1 496	332
At 31 December 2017
Closing net assets	6 923	45 452	20 272	2 210	695
Interest in equity-accounted investment (%)	26.00	20.62	10.82	50.00	50.00
Interest in equity-accounted investment	1 800	9 372	2 193	1 105	347
Unrealised profit in closing balances		(5)			(33)
Loans to equity-accounted investments					186
Carrying value	1 800	9 367	2 193	1 105	500

Exxaro Resource limited Report Selector 2018

Acronyms