Reviewed condensed group financial statements and unreviewed production and sales volumes information for the year ended 31 December 2014

NOTES TO THE REVIEWED CONDENSED GROUP FINANCIAL STATEMENTSfor the year ended 31 December

         
      Year ended 31 December  
      2014  
Reviewed  
Rm  
2013  
Audited  
Rm  
 

7.  

Impairment charges/(reversals) of non-current assets  

       
  Mayoko iron ore project     5 208      
  Impairment of property, plant and equipment     4 740      
  Impairment of goodwill (note 13   1 020      
  – total impairment charges     5 760      
  – net tax effect     (552)     
  Intellectual property     202      
  Impairment of intangible asset     202      
  – total impairment charges (pre- and post-tax)    202      
  New Clydesdale Colliery (NCC) operation       132    
  Impairment of property, plant and equipment       292    
  Reversal of impairment of property, plant and equipment       (149)   
  – total impairment charges       143    
  – net tax effect       (11)   
  Zincor       (98)   
  Reversal of impairment of property, plant and equipment       (98)   
           
  Net impairment charges per statement of comprehensive income (including discontinued operations)    5 962   45    
  Net tax effect     (552)  (11)   
  Net effect on attributable earnings     5 410   34    
  – continuing operations     5 410   132    
  – discontinued operations       (98)   
   
 

Mayoko iron ore project  

 

The Mayoko iron ore project is located in the Republic of the Congo (RoC) and was acquired in February 2012 through the acquisition of AKI. The project is reported within the iron ore operating segment which forms part of the ferrous reporting segment.  

  After the acquisition, Exxaro aimed to secure a mining convention agreement, as well as port and rail access agreements (project agreements). This included a company mining tax regime with the government of the RoC. These negotiations were done simultaneously with ongoing work for:  
  • confirmation of inferred and proven resources; and
  • clearing and construction of the infrastructure required to mine the resource.
 

Based on the conceptual positive business case, a decision was taken to start the project in phases (ramping up to 2 million tonnes per annum (Mtpa)) as soon as the mining convention and project agreements had been finalised.  

 

Based on the assumption that project agreements would be finalised in a reasonable timeframe, Exxaro began acquiring assets (such as rolling stock, beneficiation plant, harbour cranes, etc.) and appointing people to permit fast-track initiation. However, the mining convention was not signed until January 2014 (effectively 10 months after the original submission) and there has since been slow progress on other required project agreements, which are still outstanding.  

 

With the time lapse, the financial models (on a 12 million tonnes concept study level) were updated with the latest assumptions on capital, operational costs, resources and long-term iron ore prices which indicated that the project may not achieve Exxaro's required hurdle rates. The major driver of the change in the returns since acquisition was attributed to higher capital expenditure. At the time of finalising the revised concept study, Exxaro had not yet been successful in concluding the definitive project agreements.  

 

As a result of the delays in finalising these agreements, as well as higher future project development costs following the outcome of the concept study, a pre-tax impairment loss of R5 803 million (R5 760 million excluding the impairment of financial assets and write down of trade and other receivables), was raised consisting of an impairment of goodwill acquired in the business combination with AKI in 2012 of R1 020 million, impairment of property, plant and equipment of R4 740 million (including the mineral resource of R1 877 million recognised on acquisition of the project and project-related costs capitalised of R1 696 million) as well as impairment and write-off of financial assets amounting to R43 million in terms of IAS 39 Financial Instruments: Recognition and Measurement.  

 

The recoverable amount, being the fair value less costs of disposal (level 3 as per IFRS 13 Fair value Measurement), was considered to be immaterial and the project was impaired to a recoverable amount of Rnil. This was derived using a discounted cash flow valuation technique (consistent with the valuation technique used on 31 December 2013) where cash flow projections and a post-tax discount rate of 17% (31 December 2013: 14%) were used. The increase in the discount rate is as a result of the market assumptions on risk inherent in the implementation of the project.  

  Key assumptions made in the valuation, included the following:   31 December  
2014  
31 December  
2013  
  LoM: estimated at   25 years   35 years  
  Iron ore price: range   US$78/tonne  
and  
US$117/tonne  
US$88/tonne  
and  
US$169/tonne  
  Post-tax discount rate   17,0%   14,0%  
       
 

The values assigned to the key assumptions represented management's best estimates with respect to its LoM and operating projections, as well as pricing forecasts. The iron ore price ranges were based on the current known industry trends and analysis.  

 

The discount rate was a post-tax US-based weighted average cost of capital adjusted for various risk factors, based on historical data from both external and internal sources.  

 

The decrease in the LoM to 25 years (31 December 2013: 35 years) is mainly due to the increase in annual production costs, acceleration in ramp-up, lower plant yield and different ore mix, based on the most recent information available.  

  Management has identified that a reasonably possible change in two key assumptions could cause the carrying amount to exceed the recoverable amount. The following table shows the amounts by which these two assumptions would need to change individually for the estimated recoverable amount to be equal to the carrying amount prior to the impairment:  
  Key assumption   Unit   Change  
required  
  Post-tax discount rate   %   (8) 
  Iron ore price: range   US$/tonne   17 and 26  
       
 

Intellectual property  

   
 

Exxaro has taken the decision not to develop the underground coal gasification project in 2015. The decision is based on the current economic environment and the expected capital expenditure required for the project. The licence relating to this technology is not transferable and non-income generating. The licence (intangible asset) has been fully impaired with a value of R202 million following the revised management intention.  

 

NCC operation

   
 

The carrying value of property, plant and equipment of the NCC coal operation, reported within the commercial operating segment contained in the coal reporting segment, was impaired with R292 million to the recoverable amount based on impairment tests performed in June 2013. The recoverable amount was revised following the classification of the NCC operation as held-for-sale at 31 December 2013 due to the signing of the sales agreement of the NCC operation, which was concluded with Universal Coal Development VII Proprietary Limited (Universal) in January 2014. As a result of the revision to the recoverable amount, a partial impairment reversal to the amount of R149 million was recorded on 31 December 2013, bringing the net pre-tax impairment loss recorded to R143 million.  

 

Zincor 

   
 

The impairment reversal of the carrying value of property, plant and equipment at the Zincor operation was based on the revised recoverable amount of the operation. The recoverable amount was revised following the sale of Exxaro Base Metals Proprietary Limited (Exxaro Base Metals), which included the Zincor assets (refer to note 10).