Managing our risks and opportunities
WHY THIS IS MATERIAL TO HARMONY
By identifying and understanding the risks and opportunities facing our business, we are able to mitigate them or manage them to the best of our ability and prepare the company for future challenges and growth prospects.
OUR APPROACH TO RISK MANAGEMENT
At Harmony, our approach to risk relies on continuous monitoring and the adaption of our mitigation approach where this is required. Our risk management strategy aims to be practical and effective, rather than focusing only on compliance. For this reason, risk management is embedded within the day-to-day actions in the business, rather than something that is dealt with once a year.
OUR RISK MANAGEMENT PROCESS
Our risk management process is guided by the requirements of various regulations and legislation and is championed internally by our chief executive officer. The audit and risk committee plays an oversight role, while management is responsible for implementation and compliance. Because relationships are part of everything we do, our risk management process is built to accommodate engagement, from conversations between management and the board regarding risk to discussions with various stakeholders to ensure that we are addressing the right risks.
The process has its starting point in the group strategy. We need to understand what can affect our ability to meet our strategy, as well as what opportunities we can identify that will help us to achieve our goals. In addition to this we also benchmark our identified risks and opportunities against our peers, to ensure that our risks also cover industry challenges.
On a quarterly basis the executive committee and the audit and risk committee examine the risks and discuss any changes in their importance or mitigation for formal reporting to the board. Input is based on experiences at operations, feedback from key stakeholders, external factors and management meetings. In addition, various teams within the company address risk on a regular basis in their day-to-day roles. This creates a constant conversation about risk at different levels, allowing any changes to be captured on an on-going basis.
THE ROLE OF THE BOARD AND AUDIT AND RISK COMMITTEE
Risk is a standard item on the agenda of the audit and risk committee meeting and the role that it plays in our risk management process is a multi-dimensional one.
Primarily the audit and risk committee oversees the identification, prioritisation, management and monitoring of risk at Harmony. Our risk management process is an integrated one, which reflects our integrated approach to business, and thus the committee looks at all risks affecting our strategy.
In order to do this, the committee spends considerable time reviewing the processes in place to identify, monitor and manage risk, such as our risk management policy and process, our methodology and planning, our formal risk assessment, our internal controls and assurance process, our risk appetite and tolerance and our responses to risks. Once the audit and risk committee is satisfied with these, the responsibility falls with executive management and their teams to ensure that these are constantly applied in the day-to-day management actions.
The audit and risk committee takes its findings from these reviews to the board. The top ten risks and mitigating factors are reported to the board on a quarterly basis.
OUR ACTIONS IN 2014
During the year under review we monitored our risks to identify and manage the most material risks facing the company. The following table shows the top strategic risks and opportunities. Various risk factors contain an element of volatility, for example commodity prices and exchange rates, labour dynamics, and the regulatory environment. As a result our risk profile emulates the dynamics of industry and Harmony-specific issues at a point in time – a risk can change its ranking and relevance every few months, once we perform our formal quarterly reviews.
Our risk profile contains potential events and/or factors which pose both a threat as well as an opportunity. These downside and upside risk factors are all duly considered in our day-to-day business activities, and plays an integral role in the formation and management of our group strategy.
| Risk/Opportunity | Context | Mitigation | Link to strategy |
|---|---|---|---|
| Safety | Deep level mining brings with it inherent safety risks. We prioritise safety primarily to protect our people, who are at the centre of all we do here at Harmony. Apart from the effect safety has on our employees’ mindsets and productivity, it also has the potential to impact our reputation, stop production, lead to litigation and decrease the overall value of Harmony. We view safety as an opportunity to engage with many key stakeholders, particularly our employees, and to entrench our values. | Safety is one of our five values at Harmony, making it the basis of all we do. Apart from the everyday safety procedures we have in place we also engage with employees regularly on the topic through training sessions and open discussions. During FY14 we had external professionals review the Harmony Health and Safety strategy to ensure we were on the right track. For more on this see our safety strategy. We also believe that if an incident happens it is best to learn from it. As a result our safety department has begun verifying and evaluating every injury on an ongoing basis. In addition, we have also standardised auditing and reporting of physical conditions at workplaces. For more on this see the safety section. | Safety is integral to the sustainability of our business – it helps foster our relationship with our employees, maintain stable production and retain our licence to operate. It is a feature in our values, our material issues and underlies our strategy. |
| Labour disputes/ labour unrest | In South Africa unstable
labour relations is one of
the largest risks facing the
mining industry as a whole.
In recent years there has
been an increase in interunion
rivalry and prolonged
strikes for higher wages.
If unmanaged this could
result in industrial action, as
well as work stoppages and
increased indebtedness for
our employees, which could
further aggravate the problem.
In Papua New Guinea we face both labour
and landowner unrest.
Apart from the effect this has on our relationships with our employees and communities, it also has the potential to decrease our production, cause damage to our assets and increase the need for security because of increased safety risks. In addition, prolonged strikes can have adverse financial impacts on employees, Harmony and the surrounding communities – something that undermines our work to bring economic stability to the environments where we work. |
This is another risk where we
believe that the key to effective
mitigation lies in relationships.
In South Africa we have ongoing engagement with organised labour at both mine and company level and take a proactive approach to address employees’ concerns. During FY14 a financial literacy intervention to address employee indebtedness was rolled out and we embarked on a consultation process on the Employee Relations Policy Framework which will be finalised during FY15. In Papua New Guinea we continuously engage with all stakeholders, including employees, provincial and local government, landowners and regulators. For more on this see the employees section. |
There is no question about the centrality of this risk to our strategy – we cannot achieve any of our objectives with the support of the people of Harmony. By maintaining a stable workforce we are able to provide our employees with decent working conditions, while also being able to work consistently to achieve our strategy. |
| Not achieving our operational objectives | While the risk always exists that we may not meet our operational objectives it is something we monitor closely, as each objective is a step closer to achieving our strategy. In particular, unplanned events, operational results, cash flows and gold price fluctuations can all affect our ability to meet our strategic objectives, and so are factors that we watch carefully. Apart from the longterm impact of not meeting objectives on our strategy and sustainability, it can also affect our financial results and investor confidence, and could eventually lead to mine closures. |
Apart from monitoring our performance against targets and making adjustments on an ongoing basis we have put in place a number of mitigation measures during the year under review. These include the engagement of independent consultants at Kusasalethu and Hidden Valley, and the re-design of the planning process to focus on de-bottlenecking and optimisation, as well as an increased focus on mining and engineering risks through smaller regional general manager sections and additional senior capacity in the engineering section. For more on this see the 2014 operational performance overview. | Ultimately, Harmony needs to be a successful, resilient business before it can be a responsible corporate citizen and employer of choice. As a result, achieving our operational objectives are the crux of our strategy, as they allow us to strengthen and grow our business and to ultimately share the rewards with our stakeholders. |
| Gold price and foreign exchange fluctuations (varying from planned levels) | As a gold mining company we are a price taker, with the gold price being affected by various factors outside of our control. A variation of gold price from planned levels can cause margin squeeze and impact our ability to deliver production and growth targets which, in turn, affects the daily running of our business. Fluctuations in the gold price can also impact our financial results and investor confidence. If the gold price remains at an unexpected low it could cause job losses or mine closures. | We work consistently to adapt our business in order to make it more resilient to changes in prices. In FY14 we specifically took a fresh look at our planning process in order to decrease bottlenecks and improve optimisation. In addition we also made our planning parameters more conservative, improved Hidden Valley’s profitability, rescheduled our capital expenditure and ensured we had sufficient funding facilities. This focus on cash flows allows us flexibility when the price dips below expected levels. However, the gold price also presents an opportunity for us – if it rises above planned levels it can stimulate growth within our business. For more on this, see the financial review. | The resilience we create to adapt to the changing gold price is an integral part of our strategy, as it is this resilience that will allow us long-term sustainability. |
| Socio-economic, political and regulatory changes | It is imperative to our business
that we maintain our licence
to operate. This means that
we need to stay up to date
and comply with all necessary
socio-economic, political and
regulatory changes in both
South Africa and Papua New Guinea. In
South Africa these regulations
include existing and new
labour legislation, political
and regulatory changes,
and Mineral and Petroleum
Resources Development Act
amendments, among other
regulatory requirements.
In Papua New Guinea, we adhere to local
legal and fiscal framework
changes, while also addressing
increased socio-economic
investment expectations. | We believe that the key to mitigating this risk is to develop and maintain healthy relationships with the involved parties, so as to always understand what is expected from us. See more on our stakeholder engagement during the year. In South Africa, we have regular interaction with the regulator to influence legislation as well as regular meetings with community leaders to address community concerns. In addition we align our Social and Labour Plans with municipal Economic Development Plans, and we keep organised labour abreast of developments in labour legislation. In the year under review we worked with the Chamber of Mines on input towards the Mineral and Petroleum Resources Development Act amendments. In Papua New Guinea, the Morobe Mining Joint Venture, Harmony and the Chamber of Mines collectively participate in industry consultation. | Maintaining our licence to operate is a material issue for us, as we recognise the requirements of both South Africa and Papua New Guinea, and work to be a socially responsible company. More than that though, maintaining our right to mine is at the heart of our strategy, as it allows us to keep working and building a sustainable business that shares benefits. |
| Major infrastructure incidents | As a mining company we rely on large infrastructure in order to maintain the work at our operations. If there are any breakdowns or infrastructure failures these have the potential to cause production losses, to cause expensive damage that could take time to repair as well as threaten the safety of our employees. |
We spend a considerable amount of time on the maintenance of our infrastructure to try proactively address any potential problems. During FY14 we had third party engineering audits at Kusasalethu and other selected mines. We also improved operational risk management through focused weekly risk reviews and appointed two additional senior engineering managers at a regional level. For more on this see 2014 operational performance overview. | Much like achieving our operational objectives, avoiding major infrastructure incidents relates to the everyday business side of our strategy - the only way to ensure a sustainable business is to be able to continue mining daily, and we require functional, safe infrastructure for this. |
| Major environmental incidents | Part of our commitment to
be a responsible miner is
to effectively manage our
environmental impact. Apart
from actively managing our
impact on the environment
and preventing environmental
incidents, this also includes
using appropriate amounts of
these resources and ultimately
reduce our carbon footprint. The impacts associated with environmental incidents and non-compliance are varied. Primarily we are concerned with the health of our employees and communities, as well as protecting the environment in which we work. Non-compliance brings with it the risk of liability and the penalty of fines, as well as the potential for litigation. All of this can negatively impact our reputation. | In South Africa, we manage our environmental issues in a variety of ways. Our energy efficiency strategy is achieved through concerted efficiency programmes and a drive to include renewable energy into our consumption. We also focus on groundwater modelling, regional closure plans and compliance to slimes dams code of practice. In order to assure our compliance to environmental standards we have legal compliance audits against company standards and ISO 14001 as well as third party tailings management and audit. In Papua New Guinea, our focus is on the effective management of engineered waste rock dumps and all surface water on site. Here we have an External Stakeholder Advisory Panel that independently reviews our progress. For more on this see managing our effluents and waste. | Our natural resources need to be managed effectively in order for our business to thrive. By mitigating the risk of environmental incidents we are able to focus on using recourses correctly, while planning sufficiently for our eventual closure. |
| Potential liability for occupational health diseases | This is another issue that we as well as our South African peers face with regard to work-related illness, such as silicosis. This is an industrywide issue. The risk is two-fold. Firstly, we need to address what has happened in the past. Secondly, we work now to mitigate the risk of occupational health risks to ensure this risk does not continue into the future. | We mitigate our health risks through a pro-active health strategy as well as an at-work management programme. For more on this see the section on health. | Much like the nature of this risk the impact it could have on our strategy is two-fold. Firstly, our people are at the heart of our business and we want to do all we can to ensure they remain healthy. Secondly, the potential liability could decrease our cash flow and make us less resilient in the future. |
| Funding of capital expenditure/ projects | In order to grow our business we need to be able to fund projects and capital expenditure. This funding can be affected by commodity price volatility, operational results and cash flow, market capitalisation or funding constraints and investor return expectations, which can, in turn, interrupt our plans for the future. All of this can lead to financial difficulties and stunt our ability to create value. | In order to keep our cash flow healthy we have a variety of mitigating actions, including a strong low-leveraged balance sheet, monitoring capital market for opportunities and focusing on a decent operational performance. As with many of our risks we also turn to our relationships to try mitigate this through solid relationships with financial institutions. For more on this see the financial review. | Part of our strategy is to grow our business and ensure we can continue well into the future and ensure that we are able to fund our growth. |
| Large capital projects | In connection to the previous risk, once projects are funded it is important that they then prove successful to cement our future plans. If projects are not delivering or not showing return on investment we will have to manage investor needs and / or expectation while protecting our cash flow. | We mitigate this risk in three steps. Firstly, we apply a project-management gatereview process to define and approve projects to be implemented to ensure that the correct projects are chosen. Secondly, we appoint the right project management team to implement and manage each project. Finally, formal project reviews are used to track progress and implement corrective actions if required. In Papua New Guinea specifically, we design our projects with payback and financial hurdles in mind. Here we also focus on improving project management maturity in the organisation and ensuring compliance to the governance processes stipulated in our project management system. For more on this see the projects and exploration section. | One of our strategic deliverables is to safely deliver on plans. This risk is directly related to that deliverable – we need to work smartly from the start of any project to ensure we can bring it into production safely and effectively in order to secure future success. |
| Discovery/acquisition of quality mineral reserves | A risk facing any mining company is that of sustainable production and maintaining reserves and resources. At Harmony we are no different, and we use exploration as an opportunity to improve our future production. However, we are aware of the opportunity loss associated with not increasing our ore reserves sufficiently that we need to manage. Also, we face the risk that exploration may not realise a reserve base increase. All of this can impact our investor confidence and growth strategy. | We face this from various sides. In order to maintain a competitive advantage we aim to be a lowest cost producer (R/tonne). In regards to ensuring exploration leads `to sufficient resources we have a new business team to review and recommend opportunities to the board as well as scientific targeting of exploration targets and professional exploration teams. For more on this see projects and exploration and reserves and resources . | In order to remain a globally competitive mining company (our ultimate strategic goal), we need to continue having profitable reserves and resources to mine. By focusing on exploring and securing quality tonnages we are able to do this. |
| New technology | New technology provides us with an opportunity to increase our competitive advantage and make our business model more resilient as we move into the future. For example, we can use new technology to respond to cost pressures such as electricity tariff increases and labour, which will allow us to make our production and costs more efficient. This, in turn, can help us increase revenue and share more benefits. |
Ways in which we are working on capitalising from new technology include safety improvements, energy efficiency and alternative energy mix, water conservation technology, nuclear radiation rehabilitation and we also continue to evaluate new mining methods. | Every one of our strategic objectives can be enhanced by embracing innovation through new technology which will increase efficiencies, productivity and safety. |
| Diversification of metal base | The gold market is cyclical by nature, so investigating mining of other metals provides us with an opportunity to gain exposure to potentially countercyclical gold price movements. This could help us sustain profits when there is a downward movement in the gold price and supports our growth strategy. |
In Papua New Guinea, we are actively pursuing the development of the Golpu project in order to gain exposure to copper. In South Africa we are evaluating opportunities where we can exploit our existing operating strengths while diversifying. For more on this see projects and exploration. | By exposing ourselves to a more diverse metal base we will make our business model more resilient and, as a result, more sustainable in the long term. |
| Compliance with corporate governance and public disclosure requirements | Across our business, and particularly in South Africa, our corporate governance must meet and surpass requirements. This requires us to stay abreast of changes in the regulatory framework in order to proactively gear ourselves for such changes and to manage our cost of compliance. It provides us with an opportunity for transparency, which add increases investor confidence and improves our reputation. | Obviously the most apparent
mitigation of this risk is
compliance to the relevant
legislation and standards, such
as King III Code of Governing Principles. For more on this
see the corporate governance section.
In addition, we manage this risk through transparent communication, consistent messaging and on-going engagement with all our stakeholders, to ensure that we are meeting expectations and that people understand our actions. For more on this see stakeholder engagement. |
Effective corporate governance is central to our strategy. As a result, we ensure that the business is run ethically, and that this feeds into our strategy and everyday actions. |
| Productivity | In order to be a successful
business we need to produce
enough gold to be profitable.
This all relates back to
productivity which is affected,
in simple terms, by labour.
If we have enough skilled,
healthy, motivated and safe
working labour, we are able
to produce our targeted
gold production. In addition
we focus on infrastructure,
technical efficiencies and safe
working areas.
Productivity is both a risk and an opportunity for Harmony. If well-mitigated it means we are able to produce volumes that are either in line with or above expectations. This, in turn, strengthens our business. However, if we produce below target it can destabilise our business, and make it harder for us to reach other business targets. As a result it is essential that we are producing enough tonnes or ounces per person working. |
This is a complex risk, and
we therefore mitigate it in various ways, see operational performance 2014 for more on this.
These include a pro-active
health strategy and at-work
management programme.
As with many of our risks we recognise how important relationships are in managing productivity and we work with both organised labour and our employees to prevent absenteeism. | A stable workforce enables sustainable productivity which is imperative for achieving our business goals. |
For more detailed information pertaining to risk factors and their potential impact see the Form 20-F as filed with the United States’ Securities Exchange Commission.