Risks and opportunities

Exxaro is fully committed to effective risk management in pursuit of our strategic objective to create shareholder value. The group has a mature risk management culture that forms part of our strategy, governance and day-to-day operations.

Risk management process

The Exxaro risk management process is a strategic enabler and embedded in all our processes, functions and systems. Risk management is ingrained in the Exxaro culture. The board and respective management layers consider business risks when setting strategies and monitor controls continuously at strategic, tactical and operational levels.

Layered approach

Set the Exxaro strategy and objectives

Risk management is performed at each layer with a different scope in mind. Each layer informs the next and is used as input to the specific risk profiles.

Pursuing opportunities

The Exxaro risk management framework also caters for the identification and realisation of opportunities in the organisation. We believe that for Exxaro to remain sustainable in the near future it is important to adapt to change and identify and pursue possible opportunities to ultimately create value for our shareholders.

The following opportunities have been identified as part of the business of tomorrow strategy (opportunities beyond the mining sector):

Risk appetite and thresholds

Exxaro defines risk appetite as the tendency of a group to take risks in a given situation and risk thresholds are used to express our appetite. We understand that if we really want to create value for all our stakeholders and remain sustainable, we need to measure and report on our key performance indicators.

The board and executive committee monitor KPIs quarterly to ensure all risks and key metrics are within Exxaro's risk appetite. The KPIs and their thresholds are reviewed by the board and executive committee at least annually.

2017 vs 2018 risk comparison

The trend report ranks risks from highest to lowest residual risk rating and compares FY17 with FY18. The residual score is the risk remaining after considering the existence and effectiveness of controls in place. Below we show the trend of Exxaro's top ten risks for FY18, ranked by residual risk rating:

Rank			Risk			2017 residual risk rating			Trend			2018 residual risk rating			Comment
1			Dependency on Eskom as a key customer			76						58			Risk rating reduced due to removal of AMSA, favourable arbitration rulings, and improved relationship with Eskom management
2			Maintain a social licence to operate			49						51			More clarity on mining charter offset by increased compliance requirements
3			Community unrest			38						49			Risk rating increased on growing community dissatisfaction with employment, enterprise development, human resources development and supplier development
4			Executing business of tomorrow			17						47			Critical that growth is realised against required investment criteria given global views on thermal coal
5			Competition and product substitution			36						40			Risk rating marginally higher due to increased debate on thermal coal future
6			Capital project execution			48						39			Progressive derisking of mega projects
7			Price and currency volatility			36						39			Increased volatility in prices and exchange rate amid global trade wars and other geopolitical developments globally
8			Cost competitiveness of products			34						38			Need to realise portfolio optimisation and benefits of business excellence and digitalisation
9			Infrastructure access and capacity			34						35			Strategy to increase exports depends on access to allocation of logistical infrastructure
10			Fraud and corruption			40						34			Lower after implementing anti-bribery and anti-corruption initiatives

Residual risk score increased

Residual risk score reduced

Residual risk score unchanged

New risk identified

Top ten heat map distribution

The top ten risks are plotted on the heat map below, followed by an outline of Exxaro's key identified risks, the main drivers, their potential impacts and mitigating treatments. We have considered both internal and external risks, and our mitigation strategies depend on the severity of impact and likelihood of occurrence.