Implats

Impala Platinum Holdings Limited (Implats, Group or Company) is one of the world’s foremost producers of platinum and associated Platinum Group Metals (PGMs). Implats is currently structured around five main operations with a total of 20 underground shafts. Our operations are located within the Bushveld Complex in South Africa and the Great Dyke in Zimbabwe, the two most significant PGM-bearing ore bodies in the world.

The Company has its listing on the securities exchange operated by JSE Limited in South Africa, the Frankfurt Stock Exchange (2022 US$ convertible bonds) and a level 1 American Depository Receipt programme in the United States of America.

The summarised consolidated financial information was approved for issue on 5 September 2019 by the board of directors.

This summarised report is extracted from audited information, but is not itself audited. The annual financial statements were audited by PricewaterhouseCoopers Inc., who expressed an unmodified opinion thereon. The audited annual financial statements and the auditor’s report thereon are available for inspection at the Company’s registered office and on the Company’s website.

The directors take full responsibility for the preparation of the summarised consolidated financial statements and that the financial information has been correctly extracted from the underlying annual financial statements.

The summarised consolidated financial statements for the year ended 30 June 2019 have been prepared in accordance with the JSE Limited Listings Requirements (Listings Requirements) and the requirements of the Companies Act, Act 71 of 2008 applicable to summarised financial statements. The Listings Requirements require financial statements to be prepared in accordance with the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards (IFRS), the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council, and contain the information required by IAS 34 Interim Financial Reporting.

The summarised consolidated financial information should be read in conjunction with the consolidated financial statements for the year ended 30 June 2019, which have been prepared in accordance with IFRS.

The summarised consolidated financial information has been prepared under the historical cost convention except for certain financial assets, financial liabilities and derivative financial instruments which are measured at fair value and liabilities for cash-settled share-based payment arrangements which are measured using a binomial option model.

The summarised consolidated financial information is presented in South African rand, which is the Company’s functional currency.

The principal accounting policies applied in the preparation of the consolidated financial statements, from which the summarised consolidated financial statements were derived, are in terms of IFRS. The following new standards and amendments to standards have become effective or have been early adopted by the Group as from 1 July 2018:

• IFRS 15 Revenue from Contracts with Customers (note 10)
• IFRS 9 Financial instruments (note 17)

The Group distinguishes its segments between the different mining operations, refining services, chrome processing and an “all other segments”.

Management has determined the operating segments based on the business activities and management structure within the Group.

Capital expenditure comprises additions to property, plant and equipment (note 6).

The reportable segments’ measure of profit or loss is profit after tax. This is reconciled to the consolidated profit after tax.

Impala mining segment’s two largest sales customers amounted to 10% each of total sales (June 2018: 12% and 8%).

This expenditure will be funded internally and from borrowings, where necessary.

The net realisable value (NRV) adjustment included in inventory in the prior period comprises R250 million for refined metal and R1 268 million for in-process metal.

Included in refined metal is ruthenium on lease to third parties of 25 600 ounces (2018: 45 000 ounces). Metal lease fee income is disclosed under Finance income.

Purchased metal consists mainly of inventory held by Impala Refining Services.

No inventories are encumbered.

Change in engineering estimate

Changes in engineering estimates of metal contained in-process resulted in a R404 million (June 2018: R435 million) (pre-tax) increase of in-process metal.

Change in accounting estimate

Due to the increase in the value of nickel, relative to total revenue for the Group, management has changed the classification of nickel from a by-product to a main product with effect from 1 July 2018. In terms of IFRS by-products, by nature, should be immaterial. When assessed, total by-product revenue including nickel would be in excess of 10% of total revenue. Nickel therefore can no longer be considered immaterial and a by-product.

Following the reclassification of nickel as a main product, the metal inventory cost allocation methodology was re-assessed and amended to allocate production costs, net of by-product revenue, based on relative sales value. In the previous years, production costs, net of by-product revenue was allocated on the basis of ounces. However, given that nickel is measured in tonnes, a different basis of cost allocation was required.

This change in cost allocation methodology resulted in an overall increase in inventory value of R510 million.

All of the facilities remain undrawn. Of these facilities, R4.0 billion expires on 30 June 2021.

Note 5 contains additional disclosure of revenue per operating segment.

Adoption of IFRS 15 Revenue from Contracts with Customers

This standard replaces IAS 18 Revenue.

In accordance with the transition provisions in IFRS 15, the new rules were adopted retrospectively, to open, unfulfilled customer contracts on 1 July 2017, and the effect of the adoption reflected in current year opening retained earnings. The financial impact of the application of the revenue recognition adjustments to opening retained earnings was Rnil.

The Group’s accounting policy has been revised to align with IFRS 15, and additional disclosures have been introduced, particularly on the disaggregation of revenue as per this note.

Refer to commentary as well as the financial statements note 21 for more detail regarding the impairment.

As at the end of June 2019 the Group had contingent liabilities in respect of guarantees and other matters arising in the ordinary course of business from which it is anticipated that no material liabilities will arise. The Group has issued guarantees of R1 587 million (2018: R2 163 million). Guarantees of R1 877 million (2018: R1 477 million) have been issued by third parties and financial institutions on behalf of the Group consisting mainly of guarantees to the Department of Mineral Resources for R1 755 million (2018: R1 355).

The Group entered into PGM purchase transactions of R5 175 million (June 2018: R3 749 million) with Two Rivers Platinum, an associate company, resulting in an amount payable of R1 361 million (June 2018: R1 145 million) at year end. It also received refining fees to the value of R33 million (June 2018: R33 million).

The Group previously entered into sale and leaseback transactions with Friedshelf, an associate company. At the end of the period, an amount of R1 154 million (June 2018: R1 192 million) was outstanding in terms of the lease liability. During the period, interest of R122 million (June 2018: R125 million) was charged and a R160 million (June 2018: R148 million) repayment was made. The finance leases have an effective interest rate of 10.2%.

The Group entered into PGM purchase transactions of R4 876 million (June 2018: R3 372 million) with Mimosa Investments, a joint venture, resulting in an amount payable of R1 166 million (June 2018: R965 million) at year end. It also received refining fees to the value of R317 million (June 2018: R285 million).

These transactions are entered into on an arm’s-length basis at prevailing market rates.

Fixed and variable key management compensation was R97 million (June 2018: R67 million).

The carrying amounts of financial assets and liabilities approximate their fair values with the exception of the US$ convertible bond (carrying amount R3 067 million) which has a fair value of approximately R3 430 million, and the ZAR convertible bond (carrying amount R2 764 million) which has a fair value of approximately R3 002 million. These fair values are categorised within Level 3 of the fair value hierarchy. A discounted cash-flow valuation technique was used, using a 4.25% discount rate on the US$ convertible bond and 9.57% discount rate on the ZAR convertible bond.

Adoption of IFRS 9 Financial Instruments

This standard replaces IAS 39 Financial Instruments.

The adoption of IFRS 9 Financial Instruments from 1 July 2018 resulted in changes in accounting policies and resulted in an adjustment to opening “other reserves”. The adjustment of R94 million is as a result of the valuation of the equity investment in Rand Mutual Assurance (RMA) which was previously measured at cost (Rnil) in accordance with IAS 39 and has now been measured at fair value through other comprehensive income. The Group has not restated comparatives on transition because the Group was not able to meet the requirement in the standard to do so without the use of hindsight. IFRS 9 adoption has impacted both the classification and impairment requirements of financial assets. The Group now classifies former loans and receivables and held-to-maturity financial assets as measured at amortised cost. Derivative financial instruments and available-for-sale financial assets have now been classified as measured at fair value through profit and loss (FVTPL) and fair value through other comprehensive income (FVOCI) respectively.

The following table indicates the reclassifications and adjustments recognised for each individual line item as per the statement of financial position as at 1 July 2018:

The reclassification detailed in the table above was informed by the Implats’ business models for managing financial assets and the following Implats financial asset characteristics:

Reclassifying equity instruments previously classified as available-for-sale to FVOCI

The Group elected to present changes in the fair value of all its equity investments previously classified as available-for-sale in other comprehensive income, due to the Group’s business model to hold these assets for value appreciation over the long term as well as collecting contractual cash flows. The cumulative fair value gains or losses on these instruments were not reclassified and will continue to be recognised in “other reserves” in equity. The gains or losses on these investments will not be reclassified to profit or loss upon derecognition.

Reclassification to amortised cost

Held-to-maturity financial assets and loans and receivables (including cash and cash equivalents) carried at amortised cost were reclassified to financial assets at amortised cost. This is in line with the Group’s business model to hold the assets to maturity, and to collect contractual cash flows that consists solely of payments of principal and interest on the outstanding amount.

Financial assets and liabilities at fair value through profit or loss

The derivative financial assets do not meet the criteria for classification at either amortised cost or FVOCI. The derivative financial assets are therefore classified as measured at FVPL. The derivative financial liabilities are measured in accordance with IFRS 9 at FVPL.

Impairment of financial assets

The Group has five types of financial assets that are subject to IFRS 9’s new expected credit loss model (ECL):

• Trade receivables for sales of inventory and tolling refining services;
• Other receivables, which consist mainly of employee receivables;
• Interest-free housing loans to employees;
• Debt instruments carried at amortised cost; and
• Cash and cash equivalents.

The Group was required to revise its impairment methodology under IFRS 9 for each of these classes of assets. The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables.

The lifetime ECL was applied to the outstanding trade receivable balances at 1 July 2018 which resulted in a negligible amount of impairment. All trade receivable balances have been recovered in full for the past five years.

The 12-month ECL (general approach ECL) has been applied to the following financial assets whose credit risk is considered to be low:

• Housing loans;
• Employee receivables;
• Debt instruments held at a financial institution; and
• Cash and cash equivalents.

Housing loans consist of housing loans advanced to Implats employees in terms of the Implats housing scheme. These loans are secured by a second bond over residential properties. Prior to granting the loan, employees undergo a screening process by an institutional bank to assess their creditworthiness for the entire value of the loan (bank and Implats loan value). After the bank’s approval, Implats issues the employee with the housing loan, secured by a secondary bond over the property. An impairment rate of 0.5% was applied to housing loans. This impairment assumption is based on expected default rates on the overdue loans, by employees showing signs of financial distress and adverse expected changes in macro-economic circumstances that could affect employees, such as increases in interest and inflation rates, which would move the loan from a low credit risk category to a higher risk category.

Employee receivables consist of short-term advances. These receivables are generally recovered from the employees’ salaries within 30 days, and due to their short-term nature, are consider to have a low credit risk. Indicators of increased credit risk include failure to recover the advances within 30 days.

Long-term debt instruments at amortised cost are considered to have low credit risk and are mostly held with investment grade entities. The loss assessment on the total carrying amount of the investments was therefore limited to 12 months expected losses.

The Group’s cash and cash equivalents are also subject to the impairment requirements of IFRS 9. The Group’s cash is held at investment grade financial institutions, which are considered to have a low credit risk and the expected credit losses were immaterial.

General factors of an increase in credit risk in long-term debt investments and cash and cash equivalents include a downgrade in the sovereign or financial institution’s credit ratings. The outcome of the general approach ECL model assessments on the above financial assets was immaterial at 1 July 2018, therefore no adjustment was made to opening retained earnings.

At 30 June 2019 the ECL was reassessed. There were no significant changes in the circumstances that impact credit risk, therefore no changes in the value of the provisions were required since initial adoption.

On 17 July 2019, Implats announced an offer to holders (“bondholders”) of its US$ 3.25% convertible bonds due 2022 (“US$ bonds”) to pay the bondholders a cash consideration to incentivise them to exercise their conversion rights, in accordance with the terms and condition of the bonds, to convert their US$ bonds into ordinary shares in Implats. Bondholders representing US$249.8 million of the US$ bonds accepted this offer. As a result, a cash consideration of R510 million was paid to the bondholders and 64.2 million ordinary shares were issued by Implats to bondholders who elected to accept this offer. On 13 August 2019, the remaining bondholder elected to convert his US$200 000 bond into 51 404 shares in terms of the terms and conditions of the bond. The shares were issued on 27 August 2019. Consequently, the total number of ordinary shares in issue, post the conversion, increased to 799 million.

At year end, the US$ bonds did not have a dilutive impact on earnings per share or headline earnings per share.

On the conversion date, Implats will:

• Expense the cash consideration of R510 million paid to bondholders
• Transfer the carrying value of its US$ bonds at that date to ordinary share capital (the carrying value at 30 June 2019 was R3 067 million (note 9)); and
• Transfer the fair value of the US$ bond conversion option at that date to other equity reserves (the carrying value at 30 June 2019 was R1 611 million (note 10.1)).

The movement in the carrying value of the US$ bonds and fair value of the US$ bond conversion option between 1 July 2019 to the conversion date, will be accounted for in the profit or loss for the period.

In addition, the 64.3 million ordinary shares will be included in the weighted average number of ordinary shares in issue from the date of issue.

The June 2018 royalty expense of R350 million, which was previously disclosed separately on the Consolidated statement of profit or loss and other comprehensive income, and the prior year’s movement in the rehabilitation provision expense of R90 million, previously included in other operating expenses, were reclassified to cost of sales in the current financial year.

These items were reclassified due to their nature, which is directly related to cost of production.

The residual other operating income and expense items were not directly related to cost of production and were therefore reclassified to other income and other expenses respectively.