The condensed consolidated interim financial statements for the quarter ended December 2020 are prepared in accordance with the International Financial Reporting Standards, IAS 34 Interim Financial Reporting, the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by Financial Reporting Standards Council and the requirements of the Companies Act of South Africa. The accounting policies applied in the preparation of these interim financial statements are in terms of International Financial Reporting Standards as issued by the IASB and are consistent with those applied in the previous annual financial statements.

The preparation of these condensed consolidated financial statements was supervised by the Chief Financial Officer, G T Pearce, CA(SA) and were authorised for issue on 3 February 2021.

The condensed consolidated interim financial statements for the quarter ended December 2019 and December 2020 have been reviewed in accordance with the International Standard on Review Engagements 2410 by the group's auditors, KPMG Inc. Their review report, which includes an unmodified review conclusion, is available for inspection at the company's registered office together with the financial statements identified in the auditor's report. The auditor's report does not necessarily report on all of the information contained in this announcement/ financial results. Shareholders are therefore advised that in order to obtain a full understanding of the nature of the auditor's engagement they should obtain a copy of the auditor's report together with the accompanying financial information from the issuer's registered office. Any reference to future financial performance included in this announcement, has not been reviewed or reported on by the company's auditors.

Going concern

The group incurred a loss of US$17 million for the quarter ended December 2020 (2019: Profit of US$24 million) which includes a fair value loss of US$13 million relating to financial instruments (refer note 8). The group's performance for the quarter was adversely impacted by the continued Covid-19 pandemic and the economic after effect which may continue for the remainder of the 2021 financial year due to the uncertainty around the pandemic. The group has agreed a covenant suspension period for the measurement of the financial covenants applicable to its debt facilities until September 2021 with the first measurement due at the end of December 2021. The impact of Covid-19 on its results and future covenant compliance are continuously assessed and monitored by the group.

As a result, the group continues to focus on the preservation of liquidity and cash flow, and implement various cost saving measures across all operations, curtail excess production and where possible defer non-essential capital expenditure and apply measures to optimise working capital. The directors have reviewed the group's financial position, existing borrowing facilities and cash on hand, and are satisfied that the group will continue as a going concern for the foreseeable future.

⁽¹⁾ Includes the group's treasury operations and insurance captive.
⁽²⁾ Relates to delivery costs netted off against revenue.

Reconciliation of EBITDA excluding special items and operating profit excluding special items to segment operating profit and profit for the period
Special items cover those items which management believes are material by nature or amount to the operating results and require separate disclosure.

⁽¹⁾ Includes the group's treasury operations and insurance captive.

Plantations are stated at fair value less cost to sell at the harvesting stage. In arriving at plantation fair values, the key assumptions are market prices less cost of delivery, discount rates and volume and growth estimations.

Mature timber that is expected to be felled within 12 months from the end of the reporting period is valued using unadjusted current market prices. Mature timber that is to be felled in more than 12 months from the reporting date is valued using a 12 quarter rolling historical average price. Immature timber is valued using a discounted cash flow method taking into account the growth cycle of a plantation.

The fair value of plantations is a Level 3 measure in terms of the fair value measurement hierarchy as established by IFRS 13 Fair Value Measurement.

The group's financial instruments that are measured at fair value on a recurring basis consist of derivative financial instruments and investments funds. These have been categorised in terms of the fair value measurement hierarchy as established by IFRS 13 Fair Value Measurement per the table below.

⁽¹⁾ The fair value of the financial instruments are equal to their carrying value.
⁽²⁾ Included in other non-current assets.

There have been no transfers of financial assets or financial liabilities between the categories of the fair value hierarchy.

The fair value of all external over-the-counter derivatives is calculated based on the discount rate adjustment technique. The discount rate used is derived from observable rates of return for comparable assets or liabilities traded in the market. The credit risk of the external counterparty is incorporated into the calculation of fair values of financial assets and own credit risk is incorporated in the measurement of financial liabilities. The change in fair value is therefore impacted by the movement of the interest rate curves, by the volatility of the applied credit spreads, and by any changes to the credit profile of the involved parties.

There are no financial assets and liabilities that have been remeasured to fair value on a non-recurring basis.

The carrying amounts of other financial instruments which include cash and cash equivalents, trade and other receivables, certain investments, trade and other payables, bank overdrafts and current interest-bearing borrowings approximate their fair values.

Since the 2020 financial year-end, the ZAR has strengthened by approximately 15% against the US Dollar, the group's presentation currency. This has resulted in a similar increase of the group's South African assets and liabilities and equity, which are held in the aforementioned functional currency, on translation to the presentation currency at period end.

Cash and non-current interest-bearing borrowings and derivative liabilities

On 25 November 2020, Sappi Southern Africa Limited, a wholly owned subsidiary of Sappi Limited, issued US$123 million (ZAR1.8 billion) senior, unsecured, convertible bonds due in 2025. The bonds will, subject to certain conditions including shareholder approval, be convertible into ordinary shares of Sappi Limited. The bonds were issued at par and carry a fixed-term-interest-rate coupon of 5.25% per annum. The initial conversion price of ZAR33.16 was set at a premium of 32.5% above the reference share price of ZAR25.03. A derivative liability for the conversion option was initially recognised at US$22 million (ZAR321 million) and was revalued to US$36 million at the quarter ended December 2020 with US$13 million recognised in profit (loss) as finance costs. Following shareholder approval, this option meets the definition of equity and will be accounted within equity. Interest-bearing borrowings increased by US$101 million (ZAR1,479 million).

The fair value of the embedded derivative related to the bond was calculated using option pricing methodologies with the following key assumptions:

There has been no material change, by nature or amount, in transactions with related parties since the 2020 financial year-end.

There have been no reportable events that occurred between the balance sheet date and the date of authorisation for issue of these financial statements.

There has been no significant change to managements' estimates in respect of new accounting standards, amendments and interpretations to existing standards that have been published which are not yet effective and which have not yet been adopted by the group.