Exxaro Resources Limited
Environmental, social and governance report 2022
Dear shareholders,
I am pleased to present the audit committee report, which is reflective of the committee's independent role with accountability to the board and shareholders, for the year ended 31 December 2022.
As it is increasingly challenging for companies with a large carbon footprint to obtain insurance cover at competitive terms, this is a focal point for the committee. Exxaro has a separate captive insurance company registered in terms of the Insurance Act, 2017 (Act 18 of 2017) to manage short-term insurance arrangements. A formal memorandum is submitted quarterly to the committee, setting out the main activities of the insurance company. The committee considered regulatory compliance, level of self-insurance, financial position, external audit plan for the 2022 financial year audit, investment strategy, insurance renewal programme, and associated cost and exclusions during the period under review.
During 2022, Exxaro Insurance Company embarked on a process to ensure its readiness for the implementation of the new insurance accounting standard IFRS 17 Insurance contracts and was on schedule for implementation on the effective date of 1 January 2023.
Vuyisa Nkonyeni
Audit committee
chairperson
Gender and racial diversity
The impact of the Russia-Ukraine conflict was assessed by management and considered in making relevant estimates and assumptions, particularly impairment assessments.
The coal price and rand/US$ exchange rate assumptions used to forecast future cash flows for impairment assessment purposes were updated to consider the short-term observable impact of the Russia-Ukraine conflict as well as the forecasted medium and longer-term impact on the world economy and commodity prices.
The committee continuously monitored transition plans for the outgoing and incoming independent external and internal auditors to ensure a seamless transition.
The committee is an independent, statutory committee whose members are appointed annually by Exxaro's shareholders in compliance with section 94 of the Companies Act and the principles of good governance. In terms of the Companies Act, this committee has an independent role with accountability to the board and shareholders of the company. The committee does not assume the functions of management, which remain the responsibility of the executive directors, prescribed officers and other members of senior management, nor does it assume accountability for the functions performed by other committees of the board. In addition to the Companies Act, the committee's duties are guided by the JSE Listings Requirements and King IV.
The committee is governed by its terms of reference that codify its role and responsibilities. To assist the board, the committee plays an essential role in providing independent oversight of:
The committee members are elected annually at the AGM by shareholders on recommendation by the board (through the nomination committee). The board ensures, through its recommendations, a balance of skills and experience with specific focus on financial literacy, to enable the committee to discharge its function. Members of this committee consist only of independent non-executive directors.
For the year under review, the committee consistently had four independent non-executive directors. The board is satisfied that the committee members have the necessary academic qualifications or experience in economics, law, corporate governance, finance, accounting, commerce, industry, public affairs and/or human resource management.
In this regard, Billy Mawasha was appointed as a new member of the committee at the 2022 AGM following Ras Myburgh's retirement.
As mentioned earlier, the board addressed composition by approving Nondumiso Medupe's appointment as an independent non-executive director and audit committee member, replacing Vuyisa Nkonyeni, at the upcoming AGM.
The CEO and FD, together with members of the executive team and senior management representing areas relevant to discussions of the audit committee, as well as the independent external auditor, the chief audit officer and chief risk officer, attend meetings either by standing invitation or as and when required.
The internal and external auditors also have unrestricted access to the audit committee.
Refer to board of directors for members' qualifications and experience.
During 2022 the committee held four scheduled meetings, as determined by its terms of reference and two special meetings. The committee's attendance of almost 100% illustrates high levels of engagement and commitment by our audit committee members.
The following table provides an overview of designations and members' attendance at meetings held during the period under review.
| Members | Designation | Attendance at four quarterly meetings | Attendance at one special meeting |
| Vuyisa Nkonyeni | Independent non-executive director and chairperson | 4/4 | 2/2 |
| Billy Mawasha* | Independent non-executive director | 3/3* | 2/2 |
| Isaac Mophatlane | Independent non-executive director | 3/4 | 2/2 |
| Ras Myburgh** | Independent non-executive director | 2/2** | 0/1** |
| Chanda Nxumalo | Independent non-executive director | 3/4 | 2/2 |
* Billy Mawasha was appointed member on 25 May 2022.
** Ras Myburgh retired as member on 25 May 2022.
Two additional sessions are held annually with the independent external auditor and independent internal auditor respectively, where management is not present, to facilitate an exchange of views and concerns to further strengthen independent oversight by the committee.
The terms of reference were reviewed and enhanced in accordance with the 2022 IoDSA guidance for audit committees and approved by the board. The terms of reference continue to be aligned with legislation, regulations and King IV.
The committee has considered and reviewed an internal assessment of the expertise and experience of Riaan Koppeschaar, the FD, and is satisfied that he has the appropriate experience and expertise to execute his responsibilities. The evaluation also considered the appropriateness of the expertise and adequacy of resources in the finance function.
The independent external auditor for the 2022 financial year was KPMG, with its delivery partner, AM PhakaMalele, the appointment being approved by shareholders as presented by separate resolution at the AGM held 25 May 2022, in terms of paragraph 3.84 of the JSE Listings Requirements. The committee, having assessed the suitability of the appointment of the external auditor and designated audit partner, is satisfied that KPMG is independent of the group as per section 94(8) of the Companies Act, and has recommended them for appointment for the ensuing year ending 31 December 2023, at the upcoming AGM by way of a separate resolution of shareholders in terms of the JSE Listings Requirements paragraph 3.84(g).
The committee executed its responsibility in assessing the suitability of the external auditor and designated individual auditor as required by paragraph 3.84(g)(iii) of the JSE Listings Requirements by considering the relevant information pursuant to paragraph 22.15(h) of the JSE Listings Requirements, and has been provided with all decision letters and/or explanations issued by the Independent Regulatory Board for Auditors (IRBA) as well as summaries regarding monitoring procedures and deficiencies issued by the external auditor.
Fees paid to KPMG for 2022 and PwC for 2021 are disclosed in note 6.1.3 of the group and company annual financial statements for the year ended 31 December 2022. Exxaro has an approved policy to regulate the use of non-audit services by the independent external auditor, which differentiates between permitted and prohibited non-audit services, and specifies a monetary threshold against which approvals are considered.
During the review period, PwC, the former independent external auditor, received R0.2 million (2021: R30 million) for statutory audit services and R1.67 million (2021: R8 million) for non-audit services. KPMG was paid R3.75 million as an interim audit fee and R23.43 million for the statutory audit services. The committee is satisfied with the level and extent of non-audit services rendered by PwC during the year, which did not affect its independence. KPMG, in terms of its policy, is not allowed to perform non-audit services.
The audit committee is satisfied that Safeera Loonat, as designated individual auditor, is accredited and appears on the JSE List of Auditors in compliance with section 22 of the JSE Listings Requirements.
During 2022, KPMG partnered with AM PhakaMalele, a level 1 B-BBEE company, to honour Exxaro's commitment to transformation.
To allow for audit firm rotation and, notwithstanding the fact that the board was satisfied with the independence, conduct and quality of internal audit services rendered by EY, the committee recommended the appointment of a new independent internal auditor through a formal process. Following an open tender process, the board, on recommendation of the audit committee, appointed PwC as the group's new internal auditor from 1 July 2022. To continue strengthening the internal audit function, to be fit for purpose, adding value and given Exxaro's evolving business model, the internal audit approach was refreshed with key features. In line with Exxaro's commitment to transformation, PwC has partnered with a level 1 B-BBEE company, Ngubane & Co, to fulfil the internal audit function.
The internal audit function is co-sourced to PwC under the management control of Exxaro's chief audit officer. Their responsibilities are detailed in an internal audit charter approved by this committee, which is reviewed and approved annually.
The main function of internal audit remains to express an opinion on the effectiveness of governance, risk management and systems of internal controls as well as the internal control environment within the group. Furthermore, the internal audit function provides an independent, objective assurance and consulting service designed to add value and improve the organisation's operations. The committee is pleased with the overall performance of the internal audit function services provided by PwC.
The group and company annual financial statements for the year ended 31 December 2022 were prepared by management, reviewed by the committee and the board, and audited by the independent external auditor. The committee is satisfied that the group and company annual financial statements for the year ended 31 December 2022 comply with the relevant provisions of the Companies Act, IFRS, interpretations issued by the IFRS Interpretations Committee, the JSE Listings Requirements as well as applicable accounting policies and practices. The committee is also satisfied that the group and company annual financial statements for the year ended 31 December 2022 fairly present a balanced view of the group and company's financial position, financial performance and cash flows for the year.
The committee, with input and reports from the independent internal and external auditor, reviewed the system of internal financial reporting procedures, as underpinned by the ERM framework, during the year. This review included consideration of all Exxaro entities within the consolidated group to ensure that the committee had access to all financial information to allow for effective preparation and reporting on the group and company annual financial statements for the year ended 31 December 2022. Informed by these reviews, the committee confirmed that there were no material findings that came to the attention of the committee to indicate ineffectiveness of internal financial reporting controls during 2022.
As required by King IV, assurance was broadened to cover all sources of assurance, including external assurance, internal audit, management oversight and regulatory inspections. In addition, the combined assurance model was expanded to incorporate and optimise all assurance services and functions so that, taken as a whole, these enable an effective control environment and support the integrity of information used for internal decision making by management, the governing body and its committees and of the organisation's external reports.
An annual audit plan is submitted for approval to this committee, detailing all proposed assurance activities within the group, including the level of assurance to be provided. This committee ensures alignment of the combined assurance plan, internal audit plans and external audit plans. Risk acceptance, level 1 finding disclosure process and risk extension requests are adopted as protocols.
It is the committee's role to review the effective establishment and operation of combined assurance within the group. To this end, the company established the combined assurance framework. The committee is satisfied that the combined assurance framework, constituted as a working group, serves as a platform to coordinate Exxaro's assurance functions, specifically the internal assurance functions, including internal audit, and externally sourced independent assurance functions. In addition, the combined assurance framework coordinates assurance coverage for Exxaro's risk exposure as identified and ranked by Exxaro's risk management functions, including optimisation of assurance functions aligned with King IV recommended assurance practices. The combined assurance framework is an internal management structure and forms part of the internal governance structure of the entity and, along with the rest of the internal governance structure, falls under executive oversight.
The committee is satisfied with the arrangements in place for ensuring an effective and efficient combined assurance model within the group.
In terms of King IV, the committee exercises oversight of technology and information governance. In addition, the committee governs technology and information in a way that supports the organisation in setting and achieving its strategic objectives.
During the period under review, major information management initiatives included enhancing cybersecurity controls and awareness, drafting a ransomware policy and response plan, and upgrading end-user device security. Control measures to close the gap between residual and desired cybersecurity risk increased. The committee monitored progress and management provided comprehensive quarterly updates.
The committee exercised oversight over the following matters in 2022:
Other key issues that received attention during the year included:
The table below shows the key focus areas for the committee.
| 2022/2023 | Status |
| Review the strategy in relation to the deployment of new post-modern ERP Solutions to ensure acceptable cost, risk and alignment with the Exxaro strategy | Ongoing |
| Ensure alignment of the combined assurance process, internal audit plan and external audit plan in terms of a risk-based approach | Achieved |
| Review Exxaro's future strategy relations to insurance cover and self-insurance, taking into account global resistance to thermal coal and insurance markets | Ongoing |
| Continued to oversee the project plan for financial and risk-based disclosures in terms of Exxaro's aim to comply with the TCFD | Ongoing |
| Approve the levels of materiality to be used for internal audit (including audit protocols and classification of findings) and consider levels of materiality for the independent external auditor | Achieved |
| Oversee transition plans for internal and external audit functions | Achieved |
During the period under review, in accordance with King IV recommendations, an independent evaluation of the performance and effectiveness of the committee. The aim of the evaluation was to identify and record areas in need of strengthening and/or refinement while considering internal and external dynamics and factors that may positively or negatively impact the committee's ability to enhance its performance and effectiveness in these areas. An area of ongoing focus was identified during the valuation is the digitalisation of insourced internal audit services. It concluded that the committee functions effectively.
The committee, in carrying out its duties, has due regard to its terms of reference, the Companies Act, the JSE Listings Requirements as well as the principles and recommended practices of King IV. The committee is satisfied that it has considered and discharged its responsibilities in accordance with its terms of reference and confirms that it fulfilled its mandate and responsibilities in terms of the Companies Act, the JSE Listings Requirements and King IV.
On behalf of the audit committee
Vuyisa Nkonyeni
Audit committee chairperson
14 April 2023
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