Kumba Iron Ore, a business unit of Anglo American won the EY 2016 Excellence in Integrated Reporting Awards. In this exclusive guest article for CFO South Africa, Nadia Schoeman, who has headed up the integrated reporting team since 2015, explains how Kumba’s report went from good to great.
By Nadia Schoeman
Kumba's 2015 Integrated Report was our fifth such report to the market. In the past years, we have progressively worked on improving the reporting of non-financial metrics and the integration thereof in our story. Every year we have challenged ourselves to better understand the integrated reporting model and to reflect the resources and relationships that Kumba depends on to create value in a more concise and integrated manner.
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We had a challenging story to tell in our 2015 report due to plummeting iron ore prices. The market has changed fundamentally from 2014 with a continuation of the oversupply in the iron ore seaborne market, slowing demand growth in China and resilient Chinese domestic supply creating further headwinds for price.
The sharp decline and volatility in the iron ore price has been a significant factor for Kumba and the mining industry in general. We have responded decisively to position our business to withstand a longer period of lower iron ore prices. A shift in strategy from volume to value led to a reconfiguration of our mines to reduce the amount of waste and to save costs. All of these changes contributed to the challenging story we had to tell in our integrated report. The most important thing we wanted to accomplish was for shareholders and other stakeholders to understand that the changes in our business model had not been a knee-jerk reaction to the sudden volatility, but a sequence of well-measured decisions taken over a period of time. We had to realign our strategy to remain sustainable over the longer term.
Previously, we were focussed on ramping up production and we had plans to extend our footprint into Central and West Africa. But when the iron ore price fell, from $135 per tonne in 2013 to a low of $38.50 per tonne in December 2015, we had to make some very difficult decisions. Our change of focus from volume to value had a huge impact on the way we run our mines, especially the more matured Sishen mine.
We went back to the drawing board to see how we could mine differently and get more value out of our operations. This resulted in a complete redesign of our life-of-mine plans. A slope failure - basically a collapse of a high wall, at our Thabazimbi mine, prompted a decision to initiate closure procedures. Our newer Kolomela mine, near Postmasburg in the Northern Cape, was less impacted by the redesign.
Being able to produce an integrated report of high quality while so much is going on, requires strong and consistent support at board level. The Kumba audit committee and board played a crucial role in overseeing the integrity of the data and validating the assurance process of a project of this stature and magnitude. Our parent company, Anglo American also provided structured guidance on the design and theme of the report, and this was critical in ensuring that the business units across the group adopted a standardised approach to the utilisation of the corporate Anglo brand.
Since our first report in 2010, we established an internal project team, with members from investor relations, communications, human resources, safety, health and environment, stakeholder relations, company secretariat and finance. The team in turn takes its lead from an executive steering committee. We have had some successes and some learnings during those five years. Every year we ensure that we identify areas of improvement and we work hard to close the gap between the narrative contained in our report and best practice, as defined by reporting industry experts.
To produce a high-quality integrated report takes about eight months and the report contains a large amount of financial information. Having a dedicated accountant on the team made collating and verifying the information much easier. Another benefit was to help align the messaging in the integrated report to that of the annual results reported earlier. Attention to detail also ensured that the suite of different reports all contained the same correct information, with appropriate cross-references.
At the start of the integrated reporting process, a materiality workshop is facilitated with members of the Kumba executive committee and other key members of senior management. This process is aimed at critically understanding how Kumba creates value and to identify and prioritise those matters that substantively impact on value creation over the short, medium and long term. The first step is to evaluate the business model, key relationships and resources.
Once these are established we identify key trends in the external environment that impacts the way in which Kumba creates value. Participants then consider the manner in which Kumba creates or diminishes value across the six capitals in each stage of our value chain and identify specific opportunities for leveraging value creation. The material matters identified are then reviewed against the outcomes of our most recent internal risk assessment and recently identified stakeholder interests. Finally, all identified material matters are considered against our strategic focus areas or objectives. This process then helps to develop the structure and content of the report.
Although we have produced a great report, we are most proud of delivering on the board's expectations. We were tasked to compile a report that showed how Kumba was responding to the tough operating context in order to remain a resilient business that would continue to deliver value to our stakeholders, and managed to do that in a clear and concise manner.
To keep improving, we continue to do a lot of benchmarking and consider how to best incorporate the aspects we feel will add value to the report. The question to ask is, what do the shareholders really care about? That is what the integrated report should highlight in a graphic manner. A lot of the compliance information can be published on the company's website. It is easy to write a report of 400 pages. The bigger challenge is to present your story in a concise manner.
In the end, a good quality integrated report goes a long way in giving shareholders and other stakeholders comfort in knowing that the company that they are invested in, whether financially or otherwise, is a sustainable business, with a strong focus on strategic direction. If CFOs are interested in reassuring shareholders of the intrinsic value of their companies, publishing a good integrated report is one of the best ways to do it.
Why did Kumba win?
The adjudicators for EY's Excellence in Integrated Reporting Awards 2016 were associate professor Mark Graham, professor Alexandra Watson and associate professor Goolam Modack, all active at the College of Accounting at the University of Cape Town. This was their verdict about Kumba's integrated report:
Overall, Kumba's report scored excellently in almost every aspect of the marking process. This crisp and concise report has a clear focus on sustainable value creation and the issues that are material to this value creation.
The explanation of the value chain that includes activities, outcomes and strategic focus areas is indeed excellent. The diagrammatic presentation of the business model incorporates appropriate detail on the factors influencing revenue and costs, which is particularly appropriate given the challenging operating context. The six capitals are introduced early on in the report, together with the key inputs and outcomes for each capital. The actions that are required to enhance these outcomes as well as the trade-offs between the capitals are well articulated.
We particularly liked the high level of connectivity in this report. The strategy, business model, operating context, material risks and opportunities, and governance and operational performance is well integrated within the report. The explanation of the group's strategic objectives and the detailed strategies needed to achieve these objectives is informative.