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Exxaro Resources Limited
Group and company annual financial statements for the year ended 31 December 2019

CHAPTER 1: THE YEAR IN BRIEF

CHAPTER 2: REPORTS

CHAPTER 3: SEGMENTAL REPORTING

CHAPTER 4: FINANCIAL STATEMENTS

CHAPTER 5: EARNINGS

CHAPTER 6: OPERATIONAL PERFORMANCE AND WORKING CAPITAL

CHAPTER 7: TAXATION

CHAPTER 8: BUSINESS ENVIRONMENT AND PORTFOLIO CHANGES

CHAPTER 9: ASSOCIATES AND JOINT ARRANGEMENTS

CHAPTER 10: ASSETS

CHAPTER 11: LEASES

CHAPTER 12: FUNDING

CHAPTER 13: PROVISIONS AND CONTINGENCIES

CHAPTER 14: PEOPLE

CHAPTER 15: RELATED PARTIES

CHAPTER 16: FINANCIAL INSTRUMENTS

CHAPTER 17: SUBSIDIARIES

CHAPTER 18: COMPLIANCE

CHAPTER 19: ANNEXURES

CHAPTER 20: ACRONYMS

Currently viewing: CHAPTER 2 / 2.5 Independent external auditor's report

2.5 Independent external auditor's report

2.5

INDEPENDENT AUDITOR’S REPORT

TO THE SHAREHOLDERS OF EXXARO RESOURCES LIMITED
REPORT ON THE AUDIT OF THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS

Our opinion

In our opinion, the consolidated and separate financial statements present fairly, in all material respects, the consolidated and separate financial position of Exxaro Resources Limited (the company) and its subsidiaries (together the group) as at 31 December 2019, and its consolidated and separate financial performance and its consolidated and separate cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa.

What we have audited

Exxaro Resources Limited’s consolidated and separate financial statements comprise:

  • The group and company statements of financial position as at 31 December 2019
  • The group and company statements of comprehensive income for the year then ended
  • The group and company statements of changes in equity for the year then ended
  • The group and company statements of cash fl ows for the year then ended
  • The notes to the financial statements, which include a summary of significant accounting policies.
BASIS FOR OPINION

We conducted our audit in accordance with International Standards on Auditing (ISA). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated and separate financial statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the group in accordance with sections 290 and 291 of the Independent Regulatory Board for Auditors’ Code of Professional Conduct for Registered Auditors (revised January 2018), parts 1 and 3 of the Independent Regulatory Board for Auditors’ Code of Professional Conduct for Registered Auditors (revised November 2018) (together the IRBA Codes) and other independence requirements applicable to performing audits of financial statements in South Africa. We have fulfilled our other ethical responsibilities, as applicable, in accordance with the IRBA Codes and in accordance with other ethical requirements applicable to performing audits in South Africa. The IRBA Codes are consistent with the corresponding sections of the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants and the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards) respectively.

OUR AUDIT APPROACH

Overview

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated and separate financial statements. In particular, we considered where the directors made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.

Materiality

The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.

Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole.

Overall group materiality   R429 million
How we determined it  

5% of consolidated profit before tax from continuing operations, adjusted for the following once-off items as disclosed in note 6.1.3 to the consolidated financial statements, namely:

  • Gain on the disposal of operation
  • Loss on control of subsidiary
  • Gain on disposal of associate
  • Impairment charges relating to investment in associate
  • Impairment reversal relating to property, plant and equipment.
Rationale for the materiality benchmark applied  

We chose consolidated profit before tax from continuing operations as the benchmark because, in our view, it is the benchmark against which the performance of the group is most commonly measured by users, and is a generally accepted benchmark.

The consolidated profit before tax was adjusted to exclude items that are not reflective of the ongoing operations of the business.

We chose 5% which is consistent with quantitative materiality thresholds used for profit-oriented companies in this sector.

How we tailored our group audit scope

We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the group, the accounting processes and controls, and the industry in which the group operates.

Financially significant business units were identified based on scoping benchmarks such as the business unit’s contribution to key financial statement line items (consolidated profit before consolidated tax, consolidated revenue and consolidated total assets) and the risk associated with the business unit.

We conducted full scope audit procedures at seven financially significant business units and performed specified audit procedures at a further 12 business units in order to obtain sufficient appropriate audit evidence over the consolidated numbers.

In establishing the overall approach to the group audit, we determined the type of work that needed to be performed by us, as the group engagement team, component auditors from other PwC network firms and non-PwC firms operating under our instruction. Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those components to be able to conclude whether sufficient appropriate audit evidence has been obtained as a basis for our opinion on the consolidated financial statements as a whole.

The group engagement team performed audit procedures, among others, over the company financial statements, the consolidation process, financial statement disclosure and significant accounting positions taken by the group. Risk assessment analytics were performed for non-significant entities.

KEY AUDIT MATTERS

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated and separate financial statements of the current period. These matters were addressed in the context of our audit of the consolidated and separate financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

  Key audit matter     How our audit addressed the key audit matter
  Environmental rehabilitation provision      
 

This key audit matter relates to the consolidated financial statements

Refer to notes 13.1, 13.2 and 13.3 to the consolidated and company financial statements.

As of 31 December 2019, the group’s environmental rehabilitation provision amounted to R4 404 million.

In determining the environmental rehabilitation provision, management applies significant judgement and assumptions to estimate the closure costs (estimated future costs) and discount rates.

We considered the provision for environmental rehabilitation to be a matter of most significance to our current year audit due to the following:

  • The significant judgement and estimates applied by management
  • The significance of the balance to the financial statements as a whole.
    

Through discussions with management, we obtained an understanding of management’s process of calculating the environmental rehabilitation provision.

We made use of our sustainability and climate change expertise to perform the following procedures:

  • On a business unit sample basis, we assessed the reasonableness of the process followed by management to determine the closure costs by comparing it to industry practice. We found the process followed by management to be reasonable
  • We assessed the objectivity, competence and experience of management experts by obtaining evidence relating to their qualifications and professional membership. In doing so, we inspected their CV's and considered whether the management experts, where applicable, were in good standing with the relevant professional bodies.
  • We assessed whether the closure costs used by management’s expert considered the requirements of the relevant laws and regulations, such as water treatment costs, in order to identify potential environmental liabilities that were not provided for and process-related omissions on the closure costs estimation that could be of material significance.

We made use of our valuations expertise to test the reasonableness of the discount rates applied by management by independently modelling bond curves over the range of discounting periods utilised by management, taking into account market-related information. We found management’s discount rates to be within a reasonable range.
  Impairment of investment in ECC      
 

This key audit matter relates to the consolidated and separate financial statements.

Refer to notes 10.1.2 and 17.3.4 to the consolidated and separate financial statements.

IAS 36 Impairment of Assets requires the group to assess for impairment when impairment indicators are identified.

At the reporting date, management identified the decline in the market conditions as an indicator of impairment for the ECC cash-generating unit (CGU).

As a result of this, management performed an impairment assessment to determine the recoverable amount of the ECC CGU. The recoverable amount was determined based on a discounted cash flow model, taking into account cash flow forecasts and expected market and economic conditions.

The most significant assumptions and estimates applied by management in determining the recoverable amount were:

  • Coal price forecasts (API4 and coal domestic selling prices)
  • R/US$ exchange rates
  • Discount rates.

At group level, the recoverable amount determined by management exceeded the carrying amount of the ECC CGU, resulting in no impairment recognised.

An impairment of R227 million was recognised for the investment in ECC held at the company level. Refer note 17.3.4 to the financial statements.

We considered the impairment assessment of the ECC CGU at group level and the investment in ECC held at company level to be a matter of most significance to our current year audit due to the significant judgement and estimates applied by management in determining the recoverable amount of the ECC CGU and the investment in ECC.

    

We made use of our corporate finance and financial modelling expertise, and through discussions with management, we obtained an understanding of the valuation models used by management in their impairment assessments. We compared management’s models to industry best practice. We found management’s model to be consistent with industry practice.

We benchmarked management’s assumption of the longterm coal price forecasts and the exchange rates used in the valuation model against external market and third-party data and found management’s assumptions to be within reasonable ranges.

We used our valuation expertise to independently calculate the discount rate, taking into account data such as the risk-free rate, cost of debt, debt-equity ratio, market risk premium and beta of comparable companies which we obtained from third-party sources. We compared the results of our independent calculations to the discount rates used by management. Where the discount rates determined by us differed from those used by management, the impact of the differences was not material.

We tested the accuracy of the valuation model used by management by performing a recalculation of the recoverable amount and compared the results of our recalculation to management’s calculations. No material differences were noted.

We compared the recalculated recoverable amount to the carrying value of the ECC CGU at group level, as well as the carrying value of the investment held at company level. No material differences noted.
OTHER INFORMATION

The directors are responsible for the other information. The other information comprises the information included in the document titled “Exxaro Resources Limited group and company annual financial statements for the year ended 31 December 2019”, which includes the certificate by the group company secretary, the report of the directors and the audit committee report as required by the Companies Act of South Africa, and in the document titled “Exxaro Resources Limited integrated report 2019”. The other information does not include the consolidated or the separate financial statements and our auditor’s report thereon.

Our opinion on the consolidated and separate financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.

In connection with our audit of the consolidated and separate financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated and separate financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

RESPONSIBILITIES OF THE DIRECTORS FOR THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS

The directors are responsible for the preparation and fair presentation of the consolidated and separate financial statements in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of consolidated and separate financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated and separate financial statements, the directors are responsible for assessing the group and the company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the goingconcern basis of accounting unless the directors either intend to liquidate the group and/or the company or to cease operations, or have no realistic alternative but to do so.

AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS

Our objectives are to obtain reasonable assurance about whether the consolidated and separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISA will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated and separate financial statements.

As part of an audit in accordance with ISA, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

  • Identify and assess the risks of material misstatement of the consolidated and separate financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control
  • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group and company internal control
  • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors
  • Conclude on the appropriateness of the directors’ use of the going-concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group and company ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated and separate financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the group and/or company to cease to continue as a going concern
  • Evaluate the overall presentation, structure and content of the consolidated and separate financial statements, including the disclosures, and whether the consolidated and separate financial statements represent the underlying transactions and events in a manner that achieves fair presentation
  • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the consolidated and separate financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS

In terms of the IRBA Rule published in Government Gazette Number 39475 dated 4 December 2015, we report that PricewaterhouseCoopers Inc has been the auditor of Exxaro Resources Limited for nine years.

PricewaterhouseCoopers Inc
Director: TD Shango
Registered auditor

Waterfall City

20 April 2020