The group's strategic treasury function predominantly provides financial risk management services to the business, coordinates access to domestic and international financial markets, and monitors and manages the financial risks relating to the operations of the group through internal risk reports which analyse exposure by degree and magnitude of risks. These risks include market risk (including foreign currency risk, interest rate risk and price risk), credit risk and liquidity risk.
The group's objectives, policies and processes for measuring and managing these risks are detailed below.
The group seeks to minimise the effects of these risks by using derivative financial instruments to hedge these risk exposures. The use of derivative financial instruments is governed by the group's policies approved by the board of directors, which provide written principles on foreign exchange risk, interest rate risk, commodity price risk, credit risk, the use of financial derivatives and non-derivative financial instruments, and the investment of excess liquidity. Compliance with policies and exposure limits is reviewed by the internal auditors on a continuous basis and the results are reported to the audit committee.
Financial instruments, including derivative financial instruments, are not entered into nor traded for speculative purposes rather, financial instruments are entered into to manage and reduce the possible adverse impact on earnings and cash flows of changes in interest rates and foreign currency exchange rates.
In managing its capital, the group focuses on a prudent gearing position, return on shareholders' equity (or ROCE) and the level of dividends to shareholders. The group's policy is to cover its annual net funding requirements through long-term loan facilities with maturities spread over time. Neither the company nor any of its subsidiaries are subject to externally imposed capital requirements.
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices, will affect profit or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.
The group's activities expose it primarily to the financial risks of changes in the environmental rehabilitation funds, portfolio investment and deposit facilities quoted prices (see 16.3.3.2.1), foreign currency exchange rates (see 16.3.3.2.2) and interest rates (see 16.3.3.2.3). The group enters into a variety of derivative financial instruments to manage its exposure to foreign currency risks and interest rate risks, including:
The group's exposure to equity price risk arises from investments held by and classified either as at FVOCI or at FVPL. Currently, the group's exposure to equity price risk is not considered to be significant as Chifeng is seen as a non-core investment.
The group's exposure to price risk in relation to quoted prices of the environmental rehabilitation funds, portfolio investments and deposit facilities is not considered a significant risk as the funds are invested with reputable financial institutions in accordance with a strict mandate to ensure capital preservation and growth. The funds are held for strategic purposes rather than trading purposes.
Certain transactions are denominated in foreign currencies, hence exposures to exchange rate fluctuations arise.
The currency in which transactions are entered into is mainly denominated in US dollar, euro and Australian dollar.
Exchange rate exposures are managed within approved policy parameters utilising FECs, currency options and currency swap agreements.
The group maintains a fully covered exchange rate position in respect of foreign balances (if any) and imported capital equipment resulting in these exposures being fully converted to rand. Trade-related import exposures are managed through the use of economic hedges arising from export revenue as well as through FECs. Trade-related export exposures are hedged using FECs and currency options with specific focus on short-term receivables. Any open exposure to foreign currency risk on these balances is insignificant as the turnaround time is generally less than 30 days. Foreign denominated capital purchases funded by ZAR denominated project financing arrangements are hedged using FECs.
Uncovered cash and cash equivalents as at 31 December 2024 amount to US$71.22 million (2023: US$38.92 million).
Monetary items have been translated at the closing rate at the last day of the reporting period.
The FECs which are used to hedge foreign currency exposure mostly have a maturity of less than one year from the reporting date. When necessary, FECs are rolled over at maturity.
The following significant exchange rates applied during the year:
| 2024 | 2023 | ||||||
|
Average spot rate |
Average achieved rate |
Closing spot rate |
Average spot rate |
Average achieved rate |
Closing spot rate |
||
| US$ | 18.32 | 18.80 | 18.87 | 18.45 | 18.94 | 18.30 | |
|---|---|---|---|---|---|---|---|
| € | 19.82 | 19.53 | 19.94 | 20.19 | |||
| AU$ | 12.10 | 11.68 | 12.26 | 12.46 | |||
Hedge accounting: Cash flow hedges – forward exchange contracts
FECs are designated as hedging instruments in cash flow hedges of expected US dollar capital purchases. Additionally, cash held in US dollar for purposes of settling the final purchase transactions are designated as part of the hedging relationship. These transactions are highly probable, and relate to the group's commitments under construction projects subject to project financing arrangements.
There is an economic relationship between the hedged items and the hedging instruments as the terms of the FECs match the terms of the expected highly probable expected transactions (ie, notional amount and expected payment date). The group has established a hedge ratio of 1:1 for the hedging relationships as the underlying risk of the FECs are identical to the hedged risk components. To test the hedge effectiveness, the group use the "dollar offset method" and compare the changes in the fair value of the hedging instruments against the changes in fair value of the hedged items attributable to the hedged risks. Hedge ineffectiveness can arise from:
The group is holding the following FECs and US$ bank balances associated with the hedging relationship:
| 2024 | |||
| 0 to 6 months | 6 to 12 months | Total | |
| US$ denominated cash and cash equivalents (in Rm) | 381 | 381 |
|---|
| 2023 | |||
| 0 to 6 months | 6 to 12 months | Total | |
| US$ denominated cash and cash equivalents (in Rm) | 151 | 151 | |
| FEC Notional amount (in Rm) | 338 | 142 | 480 |
| Average forward rate (ZAR/US$) | 19.09 | 20.29 | 19.56 |
Financial performance effects of hedging recognised during the year:
| |
Group | |||
| For the year ended 31 December | Line item in which recognised |
Note | 2024 Rm |
2023 Rm |
| Transfer to property, plant and equipment | Assets under construction | 10.1.3 | 17 | 2 |
|---|
Financial position effect of hedging instruments and hedging items
| Group | ||
| At 31 December | 2024 Rm |
2023 Rm |
| Hedging instruments: Outstanding US$ buy FECs and US$ cash available to settle the transaction | ||
| Nominal amount | 391 | 637 |
| Carrying amount | 381 | 137 |
| – Current financial liability | 381 | (14) |
| – US$ denominated cash and cash equivalents | 151 | |
| Cumulative loss in fair value used for calculating hedge ineffectiveness | (10) | (21) |
| Hedged items: Cash flows on US$ capital purchases | ||
| Nominal amount | 391 | 637 |
| Carrying amount in cash flow hedge reserve | (3) | 19 |
| Carrying amount in cost of hedge reserve | 14 | 1 |
| Cumulative loss in fair value used for calculating hedge ineffectiveness | (10) | (21) |
Cost of hedging and cash flow hedge reserves composition:
| Group | |||||
| Cost of hedging reserve | Cash flow hedge reserves | ||||
| At 31 December | 2024 Rm |
2023 Rm |
2024 Rm |
2023 Rm |
|
| Reserves relating to foreign currency risk exposure | (10) | (9) | 2 | (6) | |
|---|---|---|---|---|---|
| – Gross | (14) | (12) | 3 | (8) | |
| – Deferred tax thereon | 4 | 3 | (1) | 2 | |
| Reserves relating to interest rate risk exposure | (26) | 12 | |||
| – Gross | (35) | 17 | |||
| – Deferred tax thereon | 9 | (5) | |||
| Balance of share of movements of equity-accounted investees | (87) | ||||
| Balance of NCI share of reserves | 3 | 2 | (33) | ||
| Total | (7) | (7) | (111) | (27) | |
Movement analysis of cash flow hedge reserves relating to foreign currency risk exposure:
The group is exposed to interest rate risk as it borrows and deposits funds at floating interest rates on the money market and extended bank borrowings. The group's main interest rate risk arises from long-term borrowings with floating rates, which expose the group to cash flow interest rate risk. The risk is managed by undertaking controlled management of the interest structures of the investments and borrowings, maintaining an appropriate mix between fixed and floating interest rate facilities in line with the interest rate expectations. The group also uses interest rate swaps and interest rate forwards to manage the interest rate risk exposure.
When the contractual terms of the borrowings and covenants thereof require the use of hedging instruments to mitigate the risk of fluctuations of the underlying interest rate risk cash flow exposure and the impact on profit or loss of specific projects being financed, the group looks to apply hedge accounting where an effective hedge relationship is expected and to the extent that such exposure poses a real risk to the achievement of the loan covenants.
The financial institutions chosen are subject to compliance with the relevant regulatory bodies.
Interest rate benchmark reform
A fundamental reform of major interest rate benchmarks is being undertaken globally, including the replacement of some interbank offered rates (IBORs) with alternative nearly risk-free rates (referred to as 'IBOR reform'). The group has exposures to IBORs on its financial instruments that will be replaced or reformed as part of these market-wide initiatives. The group's main IBOR exposure at 31 December 2024 was indexed to JIBAR. The South African Reserve Bank (SARB) indicated its intention to move away from JIBAR and to create an alternative reference rate for South Africa. The SARB has confirmed its preference for the adoption of the South African Rand Overnight Index Average (ZARONIA) as the preferred unsecured candidate to replace JIBAR in cash and derivative instruments.
On 2 November 2022, the SARB commenced publishing ZARONIA primarily to allow market participants to observe its performance and consider the implications of adopting it as a replacement for the JIBAR. The observation period ended on 3 November 2023. Certain observation period statistics have been restated to reflect revisions that were processed post their publication. Market participants may use ZARONIA as a reference rate in financial contracts. The Market Practitioners Group has designated ZARONIA as the successor rate to replace JIBAR. The SARB has indicated that the transition from JIBAR to ZARONIA is a multi-year initiative and that a formal announcement of the cessation of JIBAR will be made during 2025, and the production of the benchmark should be discontinued before the end of 2026.
The group's strategic treasury function monitors and manages the group's transition to alternative rates. The group's strategic treasury function evaluates the extent to which contracts reference IBOR cash flows, whether such contracts will need to be amended as a result of IBOR reform and how to manage communication about IBOR reform with counterparties.
Non-derivative financial liabilities
The group's IBOR exposures to non-derivative financial liabilities as at 31 December 2024 are the secured project financing and unsecured loan facility indexed to JIBAR. Refer note 12.1.3.
Derivatives
The group holds interest rate swaps for risk management purposes that are designated in cash flow hedging relationships. The interest rate swaps have floating legs that are indexed to JIBAR. Refer note 16.3.3.2.3.2.
Hedge accounting
The group's hedged items and hedging instruments as at the reporting date are indexed to JIBAR. These benchmark rates are quoted each day and the IBOR cash flows are exchanged with counterparties as usual. Refer note 16.3.3.2.3.2.
There is uncertainty about when and how replacement may occur with respect to the relevant hedged items and hedging instruments. As a result, the group continues to apply the amendments to IFRS 9 issued in September 2019 (Phase 1) to those hedging relationships.
IR