GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – for the year ended 30 June 2014

3.

Critical accounting estimates and judgements

Use of estimates

The preparation of the financial statements requires the Group’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The determination of estimates requires the exercise of judgement based on various assumptions and other factors such as historical experience, current and expected economic conditions, and in some cases actuarial techniques. Actual results may differ from these estimates.

The significant areas requiring the use of management estimates and assumptions which have a significant risk resulting in a material adjustment to the carrying amount of assets and liabilities within the financial statements are discussed below.

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

3.1

Carrying value of property, plant and equipment (note 5)

Various units-of-production (UOP) depreciation methodologies are available to management, eg centares mined, tonnes mined, tonnes milled or ounces produced. Management elected to depreciate all mining and processing assets using the centares mined methodology.

For mobile and other equipment and certain houses included in PPE, the straight-line method is applied over the estimated useful life of the asset which does not exceed the estimated mine life based on proved and probable mineral reserves as the useful lives of these assets are considered to be limited to the life of the relevant mine.

The calculation of the UOP rate of depreciation will be impacted to the extent that actual production in the future is different from current forecast production based on proved and probable mineral reserves. This would generally result from changes in any of the factors or assumptions used in estimating mineral reserves. Changes in mineral reserves will similarly impact the useful lives of assets depreciated on a straight-line basis, where those lives are limited to the life of the mine.

Mineral reserves

The estimation of reserves impact the depreciation of property, plant and equipment, the recoverable amount of property, plant and equipment, the timing of rehabilitation expenditure and purchase price allocation.

Factors impacting the determination of proved and probable reserves are:

• The grade of mineral reserves may vary significantly from time to time (ie differences between actual grades mined and resource model grades)
• Differences between actual commodity prices and commodity price assumptions
• Unforeseen operational issues at mine sites
• Changes in capital, operating, mining, processing and reclamation costs, discount rates and foreign exchange rates.

Impairment

For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows or cash-generating units (CGUs). The assets within a CGU can include a combination of board-approved projects and mineral resources outside the approved mine plans.

Long-term mining assets that form part of board-approved projects are valued based on estimates of future discounted cash flows (DCFs). DCFs are based on the latest board-approved business forecasts regarding production volumes, costs of production, capital expenditure requirements and metal prices and market forecasts for foreign exchange rates, metal prices and are discounted at a risk-adjusted discount rate, taking into account specific risks relating to the CGU where cash flows have not been adjusted for the risk.

Mineral resources outside the approved mine plans are valued based on the in situ 4E ounce value. Comparable market transactions are used as a source of evidence adjusting specifically for the nature of each underlying ore body and the prevailing platinum price when the transaction was concluded.

All the above estimates are subject to risks and uncertainties including future metal prices and exchange rates. It is therefore possible that changes can occur which may affect the recoverability of the mining assets. The recoverable amounts of non-mining assets are generally determined by reference to market values.

The key financial assumptions used in the impairment calculations are:

• Long-term real revenue per platinum ounce sold of R30 264 (2013: R28 718)
• Long-term real discount rate – a range of 6.0% to 14.0% (2013: 6.0% to 14.0%) for the various operations in the Group.

3.2

Impairment (notes 6 and 7)

Goodwill, which was fully written off in the previous year, was allocated to the Group’s cash-generating units (CGUs) identified in accordance with business operations (Afplats, Imbasa and Inkosi).

In the current year exploration and evaluation assets annual impairment test, management utilised a data set of all platinum transactions done in South Africa since 2005. The transactions are distinguished by ‘status of assets’ (being producing, developing or exploration ) and ‘location of asset’ (being eastern, western or northern limb). This data set and the current economic outlook for the mining industry, yielded in a range of in situ UG2 4E ounce valuations as set out below. The recoverable amount was based on the fair value less cost to sell derived from the reserve and resource ounce valuation which was categorised as a level 2 valuation of the fair value hierarchy.

• The Afplats reserve and resource ounce valuation was based on the UG2 4E ounces. These ounces were valued using a range of US$4 and US$19 (2013: US$5 and US$24) per ounce.
• The Imbasa and the Inkosi resource ounce valuation was also based on the UG2 4E ounces. These ounces were valued using a range of US$2.50 and US$7.50 (2013: US$3 and US$8) per ounce.

This resulted in an impairment of R934 million of exploration and evaluation assets in the current year.

3.3

Production start date (note 5)

The Group assesses the stage of each mine construction project to determine when a mine moves into the production stage. The criteria used to assess the start date are determined based on the unique nature of each mine construction project, such as the complexity of a plant and its location. The Group considers various relevant criteria to assess when the mine is substantially complete, ready for its intended use and moves into the production stage.

• The level of capital expenditure compared to the construction cost estimates
• Completion of a reasonable period of testing of the mine plant and equipment
• Ability to produce metal in saleable form (within specifications)
• Ability to sustain ongoing production of metal.

When a mine construction project moves into the production stage, the capitalisation of mine construction costs ceases and costs are either regarded as inventory or expensed, except for cost qualifying for capitalising related to mining asset additions or improvements, underground mine development or mineable reserve development.

3.4

Income taxes (notes 23 and 31)

The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due.

The Zimbabwean tax authority has indicated that some additional tax is payable. Management has sought advice from independent tax advisers in Zimbabwe and disagrees with ZIMRA’s view. A contingent liability has been raised in this regard.

Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

3.5

Metal in process and product inventories (note 15)

Costs that are incurred in or benefit the production process are accumulated as stockpiles, metal in process and product inventories. Net realisable value tests are performed, at least, on each reporting date, and represent the estimated future sales price of the product based on prevailing metal prices, less estimated costs to complete production and bring the product to sale.

Due to the strike starting on 23 January, management assumed the first six-month cost of production being normal. This was therefore used as the cost allocated to the main products. R1 255 million due to the strike was expensed immediately within other operating expenditure and did not form part of cost of sales.

Although the quantities of recoverable metal are reconciled by comparing the grades of ore to the quantities of metal actually recovered (metallurgical balancing), the nature of the process inherently limits the ability to precisely monitor recoverability levels. As a result, the metallurgical balancing process is constantly monitored and the engineering estimates are refined based on actual results over time. Changes in engineering estimates resulted in a reduction of in-process metal of R806 million.

3.6

Recoverability of trade and other receivables (note 16)

Due to time involved in toll refining metals, certain customers are granted advances based on a contractually agreed percentage of the fair value of their in-process metal, which serves as collateral for the advances.

The contractually agreed percentage generally provides a sufficient safety margin for normal price fluctuations not to expose the Group to undue credit risk. However, in times of significant price decreases, there is a risk that the fair value of the in-process metal that serves as collateral, could decrease below the carrying amount of the advance.

In cases where the carrying value of advances are not fully supported by the fair value of in-process metal that serves as collateral, management uses judgement to determine the recoverability of the advances.

Items considered by management include the ability of the customer to continue to deliver metals to the Group, the estimated levels of future deliveries and the estimated movements in PGM prices. Recent levels of deliveries and short-term price forecasts are used in management’s assumptions. If customer deliveries or actual PGM prices differ significantly from estimates, there is a possibility of an impairment.

3.7

Derivative financial instrument – US dollar conversion option (note 13)

The fair value of the conversion option of the US$ bond was calculated using the binomial option model.

3.8

Liabilities (note 20)

Post-retirement medical benefits (note 20(i))

The determination of Implats’ obligation for post-retirement healthcare liabilities depends on the selection of certain assumptions used by actuaries to calculate amounts. These assumptions include, among others, the discount rate, healthcare inflation costs, rates of increase in compensation costs and the number of employees who reach retirement age before the mine reaches the end of its life. While Implats believes that these assumptions are appropriate, significant changes in the assumptions may materially affect post-retirement obligations as well as future expenses, which may result in an impact on earnings in the periods that the changes in the assumptions occur.

As at 30 June 2014, actuarial parameters used by independent valuators assumed 7.8% (2013: 6.6%) as the long-term medical inflation rate and an 8.6% (2013: 8.0%) risk-free interest rate corresponding to the yields on long-dated high-quality bonds.

Share-based payments

The Group issues equity-settled and cash-settled share-based payments to employees. Equity-settled share-based payments are measured at fair value (excluding the effect of non-market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed as services are rendered over the vesting period, based on the Group’s estimate of the shares that will eventually vest and adjusted for the effect of non-market-based vesting conditions. Cash-settled share-based payments are valued on the reporting date and recognised over the vesting period.

The fair value of share-based payments is calculated using the binomial option model for non-vested shares, except for fully paid shares which are valued using the share price on valuation date, adjusted for the present value of expected dividends during the vesting period as well as market performance conditions. Vested cash-settled shares are valued at their intrinsic value.

Cash-settled  

Equity-settled  

3.9

Provisions (note 21)

Environmental rehabilitation obligations

The Group’s mining and exploration activities are subject to various laws and regulations governing the protection of the environment. The Group recognises management’s best estimate for asset retirement obligations in the period in which they are incurred. Actual costs incurred in future periods can differ materially from the estimates. Additionally, future changes to environmental laws and regulations, life-of-mine estimates and discount rates can affect the carrying amount of this provision.

Estimated long-term environmental provisions, comprising pollution control, rehabilitation and mine closure, are based on the Group’s environmental policy taking into account current technological, environmental and regulatory requirements.

Provisions for future rehabilitation costs have been determined, based on calculations which require the use of estimates.

South African operations

The discount rate is the long-term risk-free rate as indicated by the government bonds which ranged between 8.2% and 9.0% (2013: 7.7% and 8.6%) at the time of calculation. The net present value of current rehabilitation estimates is based on the assumption of a long-term real discount rate of 2.3% (2013: 1.8%).

Zimbabwe operations

The discount rate used was 7.2% (2013: 7.3%) at the time of calculation. The net present value of current rehabilitation estimates is based on the assumption of a long-term real discount rate of 5.1% (2013: 3.8%).

3.10

Zimbabwe indigenisation

On 14 December 2012, Implats announced that its 50%-held joint venture, Mimosa, had concluded a non-binding termsheet in respect of a proposed indigenisation implementation plan (IIP) with the Government of Zimbabwe (as represented by the Minister of Youth Development, Indigenisation and Empowerment). On 11 January 2013, Implats further announced that its 87%-held subsidiary, Zimplats, had similarly concluded a non-binding termsheet in respect of a proposed IIP. The respective termsheets referred to above stipulated the key terms, subject to certain conditions precedent, for the sale by Mimosa and Zimplats of an aggregate 51% equity ownership of Mimosa Pvt and Zimbabwe Pvt respectively to select indigenous entities. The Company has subsequently been informed that the Government of Zimbabwe wishes to review the termsheets.

The Company has now been advised by the government to factor in certain corporate social responsibility projects with a view to accruing credits towards the 51% indigenous shareholding target. Both Zimplats and Mimosa are engaged in discussions with the Minister of Youth Development, Indigenisation and Economic Empowerment with regard to the indigenisation implementation plan.

Based on the circumstances existing at year end, the Group has reviewed its investment in the Zimbabwean operations for impairment and no indication of impairment existed. These operations are still under the control and the joint control respectively of the Group at the date of this report.

3.11

Classification of joint arrangements (note 8)

3.12

Foreign currency translation