Provision is made for costs relating to environmental rehabilitation consisting of activities relating to restoration, decommissioning as well as costs of residual impact at a rehabilitated mine after final closure restoration and decommissioning have been completed. Estimates are based on unscheduled closure costs that are reviewed internally every six months and by external consultants every three years or earlier, should the level of risk require such external review. Where provision is made for dismantling of assets and site restoration costs, an asset of similar initial value is raised and depreciated in accordance with the accounting policy for property, plant and equipment.

Contributions are made to the environmental rehabilitation funds to provide for funding of costs relating to the residual impact at each mine after closure, rehabilitation and decommissioning, have been completed. The environmental rehabilitation funds are consolidated.

ENVIRONMENTAL REHABILITATION

Estimates are made in determining the present liability of environmental rehabilitation provisions consisting of a restoration provision, decommissioning provision and a residual impact provision. Each of these provisions are based on an estimate of unscheduled closure costs on reporting date, inflation and discount rates relevant to the calculation and the expected date of closure of mining activities in determining the present value of the total environmental rehabilitation liability.

On 20 November 2015, the Financial Provisioning Regulations, 2015 (FPR:2015) were promulgated by the Minister of Environmental Affairs for South Africa as replacement of financial provisioning and rehabilitation legislation contained in the MPRDA and the National Environmental Management Act, 1998 (NEMA). After promulgation of the FPR:2015, the Department of Environmental Affairs (DEA) met with various stakeholders who sought clarification on a number of issues. This resulted in amended regulations pertaining to the financial provisioning for prospecting, exploration, mining or production operations which were issued on 10 November 2017.

On 21 September 2018, the Minister of Environmental Affairs for South Africa amended the FPR:2015 by extending the transitional period from 19 February 2019 to 19 February 2020. All holders of mining or exploration rights or permits will therefore have to comply with the financial provisioning requirements in terms of the MPRDA until 20 February 2020 when the FPR:2015 will come into effect. However, the FPR:2015 has not been finalised by the DEA and more interaction between the DEA and various stakeholders is expected.

The obligation to ensure that water is treated according to statutory requirements is specifically included in the scope of both internal and external review of closure costs. Costs relating to water treatment which is expected within a 20-year window period from date of review, is quantified and included in the environmental rehabilitation provisions for relevant mines. The majority of the costs relating to water treatment is included in the provision for residual impact. Where necessary, the costs associated with constructing a water treatment plant has also been included.

Discounting of the costs relating to unscheduled closure on reporting date is calculated over the expected LOM of each mine. The LOM is based on remaining reserves at each mine as well as the level of complexity to perform mining activities at these reserves.

The assumption that post-closure rehabilitation will take place over a period of five years resulted in discounting of the costs included in the residual impact provision to be calculated over expected remaining LOM and an additional five years for postclosure activities to be completed.

OTHER SITE CLOSURE COSTS

The provision includes estimates for plant and facility closures, dismantling costs and employee termination costs, in terms of announced restructuring plans. Provision is made on a piecemeal basis only for those restructuring obligations supported by a formally approved plan.

The provision includes social and labour costs for mines closing in the near future in terms of approved social and labour plans for these sites.

KEY ASSUMPTIONS

SENSITIVITIVES

FUNDING

The FPR contains funding requirements in the form of financial guarantees as well as trust funds. Exxaro has financial guarantees per mine which are ceded to the DMR, as well as environmental trust funds.

The timing and occurrence of any possible outflows of the contingent liabilities above are uncertain.

SARS

On 18 January 2016, Exxaro received a letter of audit findings from SARS following an international income tax audit for the years of assessment 2009 to 2013. According to the letter, SARS proposed that certain international Exxaro companies would be subject to South African income tax under section 9D of the Income Tax Act. Assessments to the amount of R442 million (R199 million tax payable, R91 million interest and R152 million penalties) were issued on 30 March 2016 and Exxaro formally objected against these assessments. These assessments were subsequently reduced by SARS to R246 million (including interest and penalties). A resolution hearing with SARS was held on 18 July 2017 but the parties could not settle the matter. Notice was given to refer the matter to the Tax Court and a court date of 4 March 2019 was allocated to Exxaro. The hearing could not proceed and Exxaro currently awaits future communication from SARS.

These assessments have been considered in consultation with external tax and legal advisers and senior counsel. Exxaro believes this matter has been treated appropriately by disclosing a contingent liability for the amount under dispute.