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Exxaro Resources Limited
Environmental, social and
governance report for the year ended
31 December 2023

Audit committee report

Dear shareholders,

I am pleased to present the audit committee report, which reflects the committee's independent role with accountability to the board and shareholders for the year ended 31 December 2023.

Nondumiso Medupe

Audit committee chairperson

Committee overview

Composition

Committee members are elected at the AGM by shareholders on recommendation from the board, through the nomination committee.

Through its recommendations, the board ensures a balance of skills and experience, with a focus on financial literacy, to enable the committee to discharge its function. All committee members are independent non-executive directors.

Vuyisa Nkonyeni, former independent non-executive director and chairperson of the audit committee, and Isaac Mophatlane, independent non-executive director and committee member, retired by rotation at the AGM on 18 May 2023.

On recommendation from the board, shareholders at the 2023 AGM approved the appointment of Nondumiso Medupe as independent non-executive director and audit committee member. Nondumiso was appointed by the board as the audit committee's first female chairperson.

To increase membership of the committee, the board, on recommendation from the nomination committee, appointed Nosipho Molope as independent non-executive director and member of the audit committee, effective 3 January 2024. Her appointment will be submitted to shareholders for approval at the 2024 AGM.

In 2023, the committee maintained its minimum membership of three independent non-executive director members.

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 or human resource management.

Meeting attendees include the CEO, finance director, 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 head of internal audit and group manager risk, either by standing invitation or as required. The internal and external auditors have unrestricted access to the audit committee.

Gender and racial diversity

Meetings

As determined by its terms of reference, the committee held four scheduled meetings and two special meetings in 2023.

Members Designation Attendance at
scheduled meetings
Attendance at
special meetings
Nondumiso Medupe Independent non-executive director and audit committee chairperson 4/4* 2/2*
Billy Mawasha Independent non-executive director 4/4 2/2
Chanda Nxumalo Independent non-executive director 3/4 1/2
Isaac Mophatlane Independent non-executive director 1/1** 1/1**
Vuyisa Nkonyeni Independent non-executive director 1/1** 1/1**
* Nondumiso Medupe's appointment as member on 3 January 2023 was approved at the AGM on 18 May 2023.
** Vuyisa Nkonyeni (former chairperson of the audit committee) and Isaac Mophatlane (former member) retired as members at the AGM on 18 May 2023.

Two additional annual sessions are held with the independent external auditor and internal auditor, separately and without management present, to exchange views and concerns to further strengthen the committee's independent oversight.

Role and purpose

The audit committee is an independent statutory committee with members 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 and is accountable to the board and company's shareholders.

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 board committees. In addition to the Companies Act, the committee's duties are guided by the JSE Listings Requirements and King IV.

The committee's terms of reference govern its role and responsibilities. To assist the board, the committee plays an essential role in providing independent oversight of:

  • Quality and integrity of the financial statements and related public announcements
  • Integrity and content of the integrated reporting process
  • The external auditor's qualification and independence
  • The external audit function's scope and effectiveness
  • Scope and effectiveness of the overall combined/integrated assurance process
  • Efficacy of internal controls and the internal audit function
  • Assessing the adequacy of the company's insurance arrangements regarding the nature of its business and insurable risks
  • Integrity and efficacy of the risk management process relating specifically to internal controls and financial reporting risks through assurance of system controls and policies in place

Terms of reference

The board reviewed and approved the committee's terms of reference, which align with legislation, regulations, King IV and the IoDSA guidance for audit committees.

Performance evaluation

As there is no regulatory requirement to conduct an external independent performance assessment annually and, while King IV recommends regular performance evaluations for all board committees, it has become a governance practice at Exxaro to conduct such independent assessments every second year.

During the year, in accordance with King IV recommendations, the board conducted an internal evaluation of the committee's performance and effectiveness. The evaluation aimed to identify and record areas needing strengthening 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. The assessment concluded that the committee functions effectively.

2023 in review

Key highlights Material themes
Appointment of Nondumiso Medupe as the first female chairperson of the audit committee
Exxaro Insurance Company Limited's successful implementation of IFRS 17 Insurance Contracts, which became effective on 1 January 2023
The committee reviewed the internal audit charter as required by the International Standards for the Professional Practice of Internal Auditing
The committee considered technology and innovation which will be integral for the effectiveness of the internal audit function to ensure (inter alia) an enhanced control environment, which will be deployed over the next three years
The committee approved the updated combined assurance model to include the five lines of assurance wherein the lines of assurance are differentiated by the level of risk ownership and the independence of assurance effort

Committee statements

Finance director and finance function

The committee considered and reviewed an internal assessment of Riaan Koppeschaar's expertise and experience as the finance director and is satisfied that he has the appropriate experience and expertise to execute his responsibilities. The evaluation considered the appropriateness of the expertise and adequacy of resources in the finance function.

Annual financial statements

The committee ensured that the finance function re-evaluated its disclosures in line with latest accounting developments. A clear focus was placed on financial reporting risks and controls presented by geopolitical macro-economic conditions including supply chain disruptions, inflation, interest rates and market volatility.

The group and company annual financial statements for the year ended 31 December 2023 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 2023 comply with the relevant provisions of the Companies Act, IFRS® Accounting Standards interpretations issued by the IFRS Interpretations Committee (IFRIC® Interpretations), the JSE Listings Requirements and applicable accounting policies and practices. The committee is satisfied that the group and company annual financial statements fairly present a balanced view of the group and company's financial position, financial performance and cash flows.

Effectiveness of internal financial controls

During the year, the committee, with input and reports from the independent internal and external auditors, reviewed the system of internal financial reporting procedures based on the ERM framework. 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 2023. Informed by these reviews, the committee confirmed that no material findings came to the committee's attention to indicate the ineffectiveness of internal financial reporting controls during 2023.

Independent external auditor

KPMG was the independent external auditor for 2023, with its delivery partner, AM PhakaMalele. Their reappointment was approved by shareholders as presented by separate resolution at the AGM on 18 May 2023, in terms of the JSE Listings Requirements paragraph 3.84.

Assessment and recommendation

Having assessed the suitability of the appointment of the external auditor and designated audit partner, the committee is satisfied that KPMG is independent of the group as per section 94(8) of the Companies Act.

The committee considered the relevant information under paragraph 3.84(g)(iii) of the JSE Listings Requirements. Thus, the committee executed its responsibility to consider the suitability of the external auditor and designated individual auditor, as required by paragraphs 3.84(g)(iii) and 3.87 (and previously paragraph 22(15)) and in terms of their mandate required by paragraph 3.86 of the JSE Listings Requirements.

The committee recommends KPMG with its delivery partner, AM PhakaMalele, for reappointment for the ensuing year ending 31 December 2024 at the upcoming AGM on 23 May 2024 by way of a separate resolution by shareholders in terms of the JSE Listings Requirements paragraph 3.84(g)(iv) and section 61(8) of the Companies Act.

Independent external auditor fees

Fees paid to KPMG for 2023 and 2022 are disclosed in the group and company annual financial statements for the year ended 31 December 2023.

The policy for engagement of the external auditor to supply assurance and other services was reviewed in 2023. The committee considered the Revisions to the Non-Assurance Services Provisions of the Code from the International Ethics Standards Board for Accountants and the Revisions to The Non- Assurance Services Provisions of the Code from Independent Regulatory Board for Auditors, and set the threshold for assurance and other services for the external auditor at a maximum of 20% of the statutory audit fee for any given financial year end. It was confirmed that KPMG, in terms of its internal policy, will not provide any advisory or tax services to its audit clients.

During the review period, the following fees were paid to the independent external auditor:

2023
Rm
2022
Rm
Statutory audit fees 30.3 27.5
Non-audit service fees 3.0 1.7
Total 33.3 29.2

The committee is satisfied with the level and extent of assurance and other services rendered by KPMG during the year, which did not affect its independence.

Registered with regulator

The audit committee is satisfied that Safeera Loonat, as designated individual auditor, and KPMG are registered in compliance with paragraph 3.87 of the JSE Listings Requirements.

Transformation

For both 2023 and 2022, KPMG partnered with AM PhakaMalele, a level 1 B-BBEE company, honouring Exxaro's commitment to transformation.

Internal auditor

The committee ensured the internal audit function focused on the company's key risks and is a valuable resource for the audit committee and the organisation.

The internal audit function is partially outsourced to PwC under the management control of Exxaro's head: internal audit. PwC partnered with a level 1 B-BBEE company, Ngubane & Co, to fulfil the internal audit support function. Their responsibilities are detailed in an internal audit charter approved by the committee, which is reviewed and approved annually with an internal audit plan.

The main function of internal audit is 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.

The internal audit function provides an independent and objective consulting service designed to add value, maintain assurance and improve Exxaro's operations. The committee is pleased with the overall performance of the internal audit function and the services provided.

Internal audit charter

The committee reviewed the internal audit charter as required by the International Standards for the Professional Practice of Internal Auditing.

It approved the following:

  • Transition from a predominately outsourced model with key inhouse employees. This will allow Exxaro to retain valuable institutional knowledge. Internal auditors who are familiar with the group's culture, processes and history can provide deeper insights into risks and control issues. Co-sourcing will allow Exxaro to adjust the size and composition of the audit team based on our changing needs, without the fixed costs associated with maintaining a large inhouse team, as some of the resources can be pulled from our service providers
  • Improvement of the independence and objectivity of the internal audit function by shifting administrative reporting from the finance director to the CEO, with functional reporting to the audit committee chairperson remaining in place
  • Reallocation of the portfolio of group security and combined assurance from the internal audit function in line with best practice to the chief sustainable impact officer and the chief strategic resilience and governance officer, respectively
  • Integration of technology and innovation for enhanced efficiency and effectiveness of the function, leading to:
    • An improved control environment
    • Enhanced organisational performance
    • Business insight reporting
    • Efficient audits with reduced costs using exception-based auditing
    • Effective use of audit resources
    • Deployment of real-time key risk monitoring over the next three years

Combined assurance

As required by King IV, assurance was broadened to cover all sources of assurance, including external assurance, internal audit, management oversight and regulatory inspections. The combined assurance model has been updated to include the introduction of the five lines of assurance to differentiate the level of risk ownership and independence of assurance efforts and by providers.

The model incorporates and optimises all assurance services and functions to 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 the organisation's external reports.

An annual combined assurance plan is submitted for approval to the audit committee, detailing all proposed assurance activities within the group, including the level of assurance. The 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.

The committee's role is to review the effective establishment and operation of combined assurance within the group. To this end, the company established a combined assurance framework. The committee is satisfied that the combined assurance framework is a platform to coordinate Exxaro's assurance functions. The combined assurance framework coordinates assurance coverage for Exxaro's risk exposure as identified and ranked by Exxaro's risk management function, including optimisation of assurance functions aligned with King IV recommended assurance practices.

The committee is satisfied with the arrangements for ensuring an effective and efficient combined assurance model within the group.

Technology and information governance

In terms of King IV, the committee exercises oversight of technology and information governance.

The committee received reports on the group's digital transformation as well as the impact of cyber risk on information technology performance to support strategy execution.

As information governance plays a pivotal role in ensuring alignment with organisational objectives and adherence to industry benchmarks, the information management governance framework was aligned with recognised industry standards, including ISO 27001, COBIT 2019, ITIL 4, ISO 31000 and ISO 27031, among others.

To further enhance decision making, oversight and strategic direction, several management governance forums have been implemented in 2023. A number of foundational policies support these structures by guiding behaviour, expectations and operations.

Other key matters in review

The committee exercised oversight of the following matters in 2023:

  • Exxaro Insurance Company Limited:
    • 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, being Exxaro Insurance Company Limited
    • 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 2023 audit, investment strategy, insurance renewal programme, and associated cost and exclusions during the period under review
    • The committee reviewed Exxaro's strategy regarding insurance cover and self-insurance
    • The committee was informed and kept abreast of the implementation of IFRS 17 Insurance Contracts
  • Tax compliance status and reporting: Reporting to the committee includes reporting on all tax matters, including tax audits, tax disputes with tax authorities and status of tax returns and payments. The committee was also appraised of global tax developments. The committee is satisfied that the group is tax-compliant ( tax report)
  • Macro-economic and commodity price forecast review: During the year, the committee reviewed and was satisfied with the key macro-economic indicators and assumptions used to compile the 2024 budget
  • Group hedge and loan covenant compliance: The committee is satisfied with the group's hedge effectiveness and loan covenant position applicable to each facility within the group
  • Counterparty and dealer limits: The committee considered the criteria for selection of multi-fund managers and approved the revised dealer limits and counterparty limits for the group's treasury operations in the financial markets
  • External audit plan: The committee approved the external audit plan and approach for the financial year ended 31 December 2023
  • Treasury risk management and hedging policy: The committee considered the revised policy and recommended it for board approval
  • Policy for engagement of independent external auditor for assurance and other services: The policy was revised with some services excluded, particularly those involving management functions or management decision making. The committee recommended the policy for board approval
  • Significant internal audit findings and forensic investigations: The committee ensured corrective measures were in place where internal audit or forensic investigations identified internal control deficiencies. The committee will continue to monitor the efficacy of these measures
  • Management representation letter: The committee authorised the CEO and finance director to sign the management representation letter for the interim and year-end reporting periods
  • Internal audit report: The committee considered the status of the execution of the annual internal audit plan and results of completed audits
  • Regulatory changes: The committee noted the amendments to the JSE Listings Requirements and the JSE Debt Listings Requirements dealing with auditor accreditation, new and revised accounting standards and pronouncements, and the impact of these on the group
  • Sustainability KPI: The committee noted the performance and assurance opinion and recommended that the board monitors progress toward carbon neutrality by 2050
  • Director education and development: The committee received an update on accounting developments relating to climate- change disclosures
  • JSE proactive monitoring and thematic reviews

Future focus

Key focus areas 2023/2024

Monitoring implementation of the strategy concerning the deployment of new post-modern enterprise resource planning solutions to ensure acceptable cost, risk and alignment with the Exxaro strategy
Ensuring alignment of the combined assurance process, internal audit plan and external audit plan in terms of a risk-based approach
Reviewing Exxaro's future strategy regarding insurance cover and self-insurance, taking into account global resistance to thermal coal and insurance markets
Enhancing the committee composition and skills set
Monitoring and considering the impact of cyber security risks and use of artificial intelligence in the finance and internal control environment
Managing talent challenges in the finance and internal audit functions as a result of global war for talent
Reviewing the transition from a predominantly outsourced model to a co-sourcing internal audit model ensuring Exxaro's transformation objectives are achieved

Conclusion

In carrying out its duties, the committee has due regard to its terms of reference, the Companies Act, the JSE Listings Requirements and 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 (paragraph 3.84(g) in particular) and King IV.

On behalf of the audit committee

Nondumiso Medupe
Audit committee chairperson

10 April 2024

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