OUR STRATEGY

The company has both a corporate (external) business strategy and an operational (internal) strategy. Our strategy is based on growth, diversification and optimisation. Our aim is to grow the business into a long-life, major producer of PGMs; doing this safely and efficiently while continuously moving down the cost curve.

Corporate strategy

We maintain a strong statement of financial position and significant empowerment credentials. Management actively pursues value enhancing transactions, targeting large, shallow, mechanisable, contiguous assets. Any step outside of those guidelines would have to constitute a very compelling value proposition for Northam shareholders.

Strategic delivery:

• Northam announced the Tumela resource acquisition from Anglo American Platinum Limited in October 2017. This is a brownfields expansion for the Zondereinde mine, with Tumela being a contiguous resource, accessible from Zondereinde infrastructure. A number of regulatory approvals are outstanding at the date of this report
• Northam announced the purchase of the Eland mine from Glencore Operations South Africa Proprietary Limited (Glencore Operations), while simultaneously concluding a long-term marketing agreement for chrome ore sales with Glencore International AG. Eland represents a low-cost option for the future. A number of regulatory approvals are outstanding at the date of this report
• Northam initiated the disposal of its 7.5% interest in the Pandora joint venture in May 2017, illustrating its focus on core, wholly-owned and managed operations
• Subsequent to year end a suite of PGM recycling equipment and the associated premises were acquired in the United States of America

Operational strategy

Zondereinde

Merensky and UG2 reefs are mined concurrently from the same infrastructure. Measured and indicated resources are 39.2Moz and 44.8Moz for the Merensky and UG2 reefs respectively. Current LoM stands at more than 30 years, post the acquisition of the Tumela resource.

• The Merensky reef has been largely depleted on the upper levels of the mine and future production will come from the deepening project extending from 13 level to 17 level. Development of the decline system has progressed to the 17 level elevation while reef access continues on 16 level. The project remains on schedule for completion by 2020. The acquisition of the Tumela resource has obviated the immediate need to deepen to 18 level
• The UG2 orebody is less exploited and an extensive resource exists. Production from this reef has been limited by milling capacity and the ability to handle the chrome content in the smelting facility. We are unlocking the metallurgical constraints in the process plant to enable a higher ratio of UG2 ore to be mined
• The Tumela block acquisition needs to be completed, in cooperation with Anglo American Platinum, following the conclusion of a number of regulatory requirements
• We are improving our position on the cost curve through an increase in production and strong cost control
• Production is expected to rise to 350 000oz of refined PGMs by 2022

Booysendal

Both the UG2 and Merensky reefs are present and mineable. Total resource is in excess of 105Moz over a strike length of 14.5 km which will support multiple long-life mining modules.

• It is important that we extract further value from the Booysendal resource through growth initiatives. The following growth options have been identified, which will lift the nameplate capacity from 160 000oz to 215 000oz of refined PGMs per annum:
  • A deepening project adding two more operational levels at the existing UG2 North mine, with a completion date of June 2018
  • Developing the Booysendal Merensky North mine. The Merensky orebody is currently producing at 25 000oz per annum
• Booysendal South mine will sustain production at 250 000 to 300 000oz of refined PGMs for more than 25 years. Given Booysendal's favourable cost profile, this will enable Northam to grow down the cost curve. This project is our primary internal growth option

Eland

This purchase from Glencore Operations was announced in February 2017. There are a number of outstanding regulatory requirements.

• Full capital application is planned in F2018 for the reestablishment of Eland as a 150 000oz PGM production unit
• Eland provides the group with additional mining footprint, increasing flexibility and reducing overall operational risk

Processing and refining

Northam's processing and refining capability is a strategic advantage that will be further developed. The following initiatives are intended to improve throughput, increase recovery and reduce risk:

• Expanding the Zondereinde smelter with the addition of a 20MW furnace, which will enable an increased UG2 mining ratio. Capital cost of this project is R750 million, an amount offset by E20 million from Heraeus in return for an extension of their refining contract. Commissioning is expected in December 2017
• Gas cleaning equipment for SO₂ abatement will be required by 2020
• Installation of a new autoclave has been completed, reducing risk and cost, and doubling nickel capacity in the base metals recovery plant

OUR MATERIAL ISSUES:

THOSE WIDER ISSUES THAT MAY INFLUENCE STRATEGIC PERFORMANCE

Material issues are those issues that are most material to the business and stakeholders, and which fundamentally influence the assessments and decisions of stakeholders.

Our material issues are identified through analysis of our internal and external environments, from information contained in the group's risk register and from stakeholder feedback. These issues are reviewed by management on an ongoing basis. We take this materiality determination process seriously, seeing it as an opportunity to assess whether we are focusing our energy and resources in the correct areas.

In the Business performance section of this report, we report on our financial and non-financial performance under the capitals. Our material issues, along with associated risks, have been linked to each capital.

Our material issues for F2017 were determined as follows:

Material issue	Description	Interested and affected stakeholders
Managing production and performance to ensure successful execution of our business strategy	It is the role and responsibility of executive management to set realistic strategic targets for the business. The success of this strategy affects shareholders and stakeholders alike. See Financial capital and Manufactured and intellectual capital.	Shareholders and investors Employees Customers Suppliers and contracting companies Communities and non-governmental organisations (NGOs) Government and regulatory authorities
Continuing to improve the safety performance and the health and wellness of our workforce	It is our aim to further improve the safety performance and the health and wellness of all employees. We will do this by continuously seeking to reduce injuries, applying appropriate technologies, communication and training, and reinforcing operational standards and responsibility. See Human capital.	Shareholders and investors Employees Customers Suppliers and contracting companies Communities and NGOs Government and regulatory authorities
Effective project execution	The group has a large capital expansion programme in place to secure its future through the creation of long-life, low-cost operations. Successful project execution is key to creating a sustainable business for the long-term benefit of all stakeholders. See Manufactured and intellectual capital and Financial capital.	Shareholders and investors Employees Customers Suppliers and contracting companies Communities and NGOs Government and regulatory authorities
Maintaining our legislative and regulatory compliance, focusing on the MPRDA and the Mining Charter	We recognise that we do business within the legal framework of the various South African government departments and aim for full compliance with the laws of the land. Given its influence on our licence to operate, the most relevant aspects of legislation for Northam and its operations are the Mineral and Petroleum Resources Development Act (MPRDA) and the associated Mining Charter. See Human capital and Social capital.	Shareholders and investors Employees Customers Suppliers and contracting companies Communities and NGOs Government and regulatory authorities
Managing the environmental impact of our operations and conserving natural resources	We make every effort to minimise our environmental impacts; we seek to comply strictly with all environmental legislation and where possible we conserve land. We make optimal use of and conserve our natural resources (our focus is on water and energy, areas where we are most exposed). See Natural capital.	Shareholders and investors Communities and NGOs Government and regulatory authorities
Maintaining constructive communication channels with all our stakeholders	We recognise that stakeholders, be they shareholders, employees, communities or government, have certain expectations of the group, not all of which may be appropriate or possible to meet. We understand and manage these expectations through credible and effective stakeholder engagement. See Social capital and Human capital.	Shareholders and investors Employees Customers Suppliers and contracting companies Media Communities and NGOs Government and regulatory authorities

MANAGING RISKS AND OPPORTUNITIES:

KEY VARIABLES WHICH MAY IMPEDE OR IMPROVE DELIVERY OF OUR STRATEGY

Northam management considers that its business activities and the external operating environment are subject to an inherent element of risk. Risk presents an uncertainty and a threat to the group's pursuit of its strategic, operational and financial objectives and performance.

Risk is inevitable in our business, but it is possible to manage some of the risks. We have created and employed a risk management system that seeks to:

• minimise the impact of any realised risk on our stakeholders
• pursue business opportunities and grow shareholder value
• develop and protect our people, our assets, our environment and our reputation

The risk management process is complex; it comprises the identification, assessment and prioritisation of risks, followed by a coordinated and economical application of resources to minimise or control the probability of occurrence and the impact of negative events, as well as maximising the realisation of opportunities.

Risk can never be entirely avoided or mitigated. The group therefore accepts some level of residual risk, but it is imperative that all risks are identified, isolated and clearly defined and managed within financial and practical constraints.

Business risk management is required to cover all financial, market and business continuity risks and should include planned emergency response plans for catastrophic events that could impact the sustainability of an enterprise or the health and safety of the workforce and other stakeholders.

Risk and governance

The group has a statutory obligation to manage risk. In addition, risk management is integral to good corporate governance in terms of King IV.

Management is responsible for identifying significant risks to and opportunities for the business and for implementing the controls and actions required to manage identified risks.

Management reports on the key risks of the business to the audit and risk committee and to the board twice a year.

The management function also generates a regulatory universe report. The regulatory universe report is a list of all major or material legislation and regulations that apply to the group as a mining entity in South Africa. Through this dynamic function, management keeps abreast of key legislation applicable to the group and its operations to ensure compliance and/or the institution of remedial actions. Incidents of known noncompliance or potential non-compliance are recorded and summarised in the regulatory universe report, along with the remediation applied.

The risk management framework combines the group's governance structure and the risk management structure in one document in order to provide a commitment, set of expectations, and organisational and personal accountability and responsibility.

At the operations, the general managers work together with their corporate counterparts to ensure that risk is managed both strategically and operationally. Thorough and effective risk management requires that all identified risks be anticipated, understood and addressed. The process requires communication and consultation with a broad group of stakeholders, while external service providers assist in ensuring the continuous identification, monitoring and review of risks. Ultimate responsibility for the oversight of risk management lies with the audit and risk committee and the board.

Implementing effective risk management

The success of any risk management intervention depends on the effectiveness of the management framework providing the foundation and processes to embed it throughout the group at all levels, as well as the continuous monitoring thereof. The Northam group is committed to effective and efficient planning and decision-making. An effective risk management programme supports this goal in that it promotes and improves forward planning and critical thinking, thereby enabling better decision-making.

Our comprehensive risk management system has been implemented across our operations. Processes are defined within a risk management framework that is well understood across all operations. Managing risk is a continuous challenge. Self-assessment is ongoing to identify, evaluate and manage significant risks, and results are regularly updated on our group risk register.

Each operation is required to undertake a comprehensive risk review at least twice a year. These results are then consolidated into the group register, indicating key risk areas which may impact the group's business plan.

Changes in the operations' risk profile and actions taken to control and mitigate risks are reported to the audit and risk committee, the executive committee and the board.

Certain risks inherent to a mining operation will always exist. The challenge is to manage them effectively. Our principal risks relate to operational challenges, such as mining activities, project management, health and safety, the environment and communities. We also face risks associated with commodity price and currency exposure.

The principal risks and uncertainties that may impact our ability to execute our stated business strategy are detailed below.

Combined assurance

The combined assurance model requires that all assurance activities in respect of the control environment are co-ordinated and are required to offer an increased level of assurance. Management is appointed by the organisation as the owner and manager of risk. The internal assurance discipline is generally performed by internal assessors, safety managers, compliance and legal functions. The third leg of the co-ordinated model includes the external audit function which provides an independent and objective assessment of key risks. Formal combined assurance is therefore provided by management and the internal and external auditors. This combined assurance is monitored by the audit and risk committee.

The group risks included in this report have been prepared from the more detailed divisional risk registers maintained by operational management and indicate the group's combined key risks (risks ranked as Priority 1, 2, 3 and 4) as identified by management across all divisions of Northam. Similar risks for various divisions have been combined to summarise the group overall risk rating for each key risk area.

Residual risk

Below is an explanation of the Priority ratings:

Priority 1

Extreme residual risk requiring immediate escalation to the audit and risk committee and the board of directors. Remedial action to be implemented by management immediately

Priority 2

High residual risk requiring immediate escalation to management and remedial actions to be implemented

Priority 3

Moderate residual risk requiring remedial actions to be implemented by management

Priority 4

Low risk. Management is required to consider whether the benefit of further reduction outweighs the cost thereof

⬆ ⬌ ⬇

Indicates the direction of change of risk rating since the last assessment, higher or the same or lower

Elaboration on the key risk areas of the group

Risk	Previous rating	Change in risk rating	Current rating	Potential impact	Comments/mitigation
1) Licence to operate
In the South African mining landscape, the MPRDA of 2002 requires compliance with a number of associated guidelines which are subject to review from time to time. These include approval of social and labour plans (SLPs), and compliance with the South African Mining Charter. In a volatile operating environment, managing the needs and expectations of communities, governments, employees and other stakeholders who provide mining and metals companies with their social licence to operate is a delicate balancing act of agendas and issues. In times of increased activism from communities and politicians who need to respond to general consensus, the mining industry is under pressure to deliver more.	Priority 3	⬆	Priority 1	Non-compliance with Charter guidelines and SLP targets could affect our legal licence to operate. Stakeholder perceptions with regard to the value they derive from the operating entity could result in protest action and/or violence. Through our adherence to the MPRDA and Mining Charter, we share the value we create at our mining operations with stakeholders, as we strive to meet or exceed set targets.	The current controls in place to address this risk include the following: Quarterly and annual milestones for the Mining Charter are monitored by appropriate levels of management The executive human resources (HR) manager is assigned to drive the implementation of all interventions as prioritised in SLPs Monthly reporting by mine management on progress, challenges and hurdles in respect of compliance as well as quarterly reporting to the social, ethics and human resources (SE&HR) committee is in place Presentations are occasionally made to Department of Mineral Resources (DMR) The revised third Mining Charter has now been withdrawn by the Minister of the DMR. This will hopefully open the way for new negotiations for an acceptable charter for all stakeholders. Northam's position on the revised charter remains aligned with that of the South African Chamber of Mines, of which Northam is a member. Similarly, on all the other contentious matters regarding the mining environment in South Africa which are before the courts, Northam is supportive of the SA Chamber of Mines' efforts and believes it is critical to bring government back to the negotiating table and work towards a situation that can ultimately grow and strengthen the sector
2) Exchange rates and commodity prices
Revenues and earnings are dependent, inter alia, on prevailing exchange rates and commodity prices which are largely determined by the supply of, and demand for, raw materials and are closely linked to the global economic climate. Commodity mining companies are price takers, with limited ability to influence the price of their products. Future planning is threatened by low US dollar metal prices for a protracted period, as well as the relative strength of the South African rand.	Priority 3	⬆	Priority 1	Our products are priced in US dollars while our operating costs are denominated in ZAR, resulting in the volatility of our profits.	Northam has adequate funding in place to support its operations in the short to medium term. A pricing committee deals with price forecasts and hedging, if necessary. These projected exchange rates and prices are included in the monthly cash flow forecasts to determine the cash requirements of the group. Should commodity prices stay lower for longer than expected, some of the projects of the group could be negatively impacted. The group's growth strategy focuses on synergies, lower costs and shallow orebodies where it is possible to mechanise.
3) Execution of growth projects and the development of new operations
The group's growth strategy is focused on growing production down the cost curve by mining shallow mechanisable orebodies. In terms of the group's investment criteria the returns from growth projects are required at least to meet the cost of capital. The strategy is on track and opportunities for growth are constantly assessed and reviewed.	Priority 4	⬆	Priority 1	Any restriction on our ability to develop our pipeline of projects to develop lower cost supply will impact future revenues, costs and our reputation.	Northam has a track record of delivering major growth projects on time and budget. Project development teams are experienced and competent. Cost control is the key to project development. A comprehensive project approval process is in place and governs every stage, from approval to commissioning, and includes future scenario planning. This ensures that material risks are comprehensively assessed and, where possible, mitigated before the project proceeds to its next phase. Early warning systems are also in place to ensure that projects are on track.
4) Health and safety
Underground mining is inherently hazardous, thereby constituting a risk to the operations and the business.	Priority 2	⬌	Priority 2	Accidents and incidents may result in injuries and fatalities, and ultimately in reputational damage. Associated downtime is costly. New or amended legislation and regulations may lead to increased operating costs and/or fines, penalties or other actions that may adversely affect our financial position.	Full compliance with health and safety legislation and regulations, compulsory continuous safety training and the compulsory use of personal protective equipment are standard procedures, non-adherence to which can result in disciplinary proceedings. The established health and safety departments have implemented health and safety codes of practice and standard operating procedures are in place. The group's growth strategy involves acquiring and/or developing shallow, mechanisable orebodies. Given that mechanised mines are less labourintensive, they are also safer. At Zondereinde, the use of hydropower cools and largely eliminates the presence of dust in the work environment thereby partly mitigating some of the effects of harsh underground mining conditions. HIV/AIDS and TB have been aggressively targeted with a strong focus on prevention.
5) Liquidity risk
The risk of insufficient cash/financing facilities to fund the operations and growth aspirations of the group.	Priority 4	⬆	Priority 2	The company will not be able to service its shortterm debt obligations as well as capital requirements for internal and external growth.	Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents, the availability of funding through an adequate amount of committed credit facilities. Accurate cash flow forecasts are gaining importance in ensuring the required financial strength for the implementation of projects for longterm growth and profitability. Currently the group has a healthy cash balance as well as a revolving credit facility of R1.0 billion available should commodity prices stay lower for longer. Monthly cash flow forecasts are prepared and reviewed by appropriate levels of management. Cash requirements, available facilities and forecasts are continually assessed to ensure that management acts on liquidity risk well in advance.
6) Industrial action
Industrial action relates to either protected or unprotected business interruption.	Priority 2	⬌	Priority 2	Industrial action has a negative impact on productivity, morale, and on company performance.	Management maintains open channels of communication with its employees both through formal structures such as the various forums that exist as part of the labour relations structure, line management and informally through relationships. Management seeks to deal with any potentially damaging issues swiftly and effectively.
7) Complexity and scarcity of Merensky reef
Zondereinde mines both the UG2 and Merensky reefs. The UG2 reef is more conformable than the Merensky, giving rise to a higher UG2 ratio in the ore mix to the smelter. The higher grade Merensky reef is largely mined out in the upper mine.	Priority 1	⬇	Priority 2	The Cr2O3 content of the UG2 ore presents major challenges in processing.	Focus remains on husbanding the Merensky orebody. The deepening project was initiated to provide a source of less complex Merensky reef and has been prioritised down to 17 level. In addition, the block of ground purchased from Anglo American Platinum Limited's neighbouring Tumela mine will compensate for the loss of Merensky reef elsewhere at Zondereinde. This block will be developed over an 18-month period after the section 102 approval is granted. The construction of the new 20MW UG2 furnace is well underway and this will be able to cater for a higher volume of UG2 ore when the need arises.
8) Not meeting production targets
Given that fixed costs make up a significant portion of total production costs (especially at the deeper conventional Zondereinde mine) production needs to be sustained above certain levels to ensure that revenues cover fixed working costs. Production volumes could be adversely impacted by industrial action, safety stoppages, community protests and other production interruptions.	Priority 3	⬌	Priority 3	Without sufficient revenues to cover working costs, the group's profitability could be jeopardised.	Labour and community relationships are actively managed through our stakeholder engagement programme, and a number of forums which address specific issues which impact on perceptions and experience. In order to avoid safety stoppages operational management encourages safe working practices, which inevitably contribute to efficient and effective operations, and this incentivises employees to produce efficiently.
9) Fraud and corruption
Fraud and corruption in business involves misappropriation of funds, bribery, misuse of office by company officials and dishonesty in financial matters.	Priority 3	⬌	Priority 3	Fraud and corruption entail the improper use of available resources and can jeopardise the efficiency of an entity. These resources would otherwise be employed in regular business operations. Bribery in tender allocation may result in higher costs and in enlistment of incompetent contractors, thereby impacting business efficiency and productivity. Reports of corruption may result in a loss of confidence in the business and reputational damage.	Continuous audits (internal and external) and review of controls are performed. The whistle blowing/ethics hotline has recently been revitalised to heighten awareness at both mining operations. All hotline calls are rigorously investigated and appropriately followed up. Management continuously reinforces the current controls which include: Strict adherence to policies and procedures Segregation of duties Supervisory controls Theft, fraud and corruption hotline in place and advertised Fraud awareness campaigns Incident reporting and investigation Updating of approvals framework Internal and external audits
10) Labour efficiency and availability
High levels of labour unavailability/absenteeism.	Priority 3	⬌	Priority 3	Low labour availability impacts negatively on productivity and therefore profitability.	The HR module of SAP (Systems, Applications and Products) was implemented early in April. This will improve forecasting of labour availability. Certain HR procedures have been integrated with the new SAP IT system. This will assist in the measurement and monitoring of employee movements and behaviour. People management has gained emphasis, with supervisors responsible for providing greater oversight and managing teams closely. Labour numbers have reached full complement since the discharge of a number of employees following the June 2016 violence in and around Zondereinde, with various other vacancies currently being filled.
11) Single stream processing
The group is dependent on the original single furnace attached to the smelting operations at the Zondereinde metallurgical complex. The original smelter with a capacity of 15MW dates back to the establishment of the Zondereinde mine in the late 1980s.	Priority 3	⬌	Priority 3	The integrity of the smelter could be adversely affected by the higher UG2 ratios mined at Zondereinde, along with the preponderance of UG2 ore from Booysendal.	The capital for an additional 20MW furnace was approved by the board in June 2015. Construction started in February 2016, as part of a smelter expansion and de-risking programme. The project, which is estimated to absorb ~R750.0 million, is expected to be completed by the end of the 2017 calendar year.
12) Electricity supply
Northam is dependent on state-owned enterprise Eskom for its energy supply. Factors that reduce the reliability of energy supply are beyond our control. The most significant risk is that of supply disruption.	Priority 3	⬌	Priority 3	Constrained energy supplies may impact our ability to operate, or threaten planned operational expansions or the development of new mines.	The threat of supply disruptions has abated since the electricity crisis first broke in 2008. Contingency mitigation measures are now well established and Booysendal's mechanised mining equipment is largely diesel powered, thereby reducing the group's dependence on Eskom. Operational management has developed constructive relationships with Eskom's staff, and electricity management programmes are well established. Automated emergency generators are in place to allow co-generation.