Anglo American is exposed in varying degrees to a variety of financial instrument related risks. The Board has approves and monitors the risk management processes, including documented treasury policies, counterparty limits, controlling and reporting structures. The risk management processes of the Group’s independently listed subsidiaries are in line with the Group’s own policy.
The Group's principal financial assets are cash, trade and other receivables, investments and derivative financial instruments. The Group’s exposure to credit risk primarily arises on trade receivables and liquid funds but also on derivative financial assets and financial asset investments.
The Group limits credit risk on liquid funds and derivative financial instruments through diversification of exposures with a range of approved financial institutions. Counterparty limits are set for each financial institution with reference to credit ratings assigned by S&P, Moody’s and Fitch Ratings.
Given the diverse nature of the Group’s operations (both in relation to commodity markets and geographically), together with insurance cover (including letters of credit from financial institutions), it does not have significant concentration of credit risk in respect of trade receivables, with exposure spread over a large number of customers.
The Group ensures that there are sufficient committed loan facilities (including refinancing where necessary) in order to meet short term business requirements, after taking into account cash flows from operations and its holding of cash and cash equivalents, as well as any Group distribution restrictions that exist.
In addition, certain projects are financed by means of limited recourse project finance, if appropriate.
This is the risk that financial instrument fair values will fluctuate due to changes in market prices. The significant market risks to which the Group is exposed are foreign exchange risk, interest rate risk and commodity price risk.
Foreign exchange risk
As a global business, the Group is exposed to many currencies principally as a result of non-US dollar operating costs and to a lesser extent, from non-US dollar revenues. The Group’s policy is generally not to hedge such exposures as hedging is not deemed appropriate given the diversified nature of the Group, though exceptions can be approved by the Group Management Committee.
In addition, currency exposures exist in respect of non-US dollar approved capital expenditure projects and non-US dollar borrowings in US dollar functional currency entities. The Group’s policy is that such exposures should be hedged subject to a review of the specific circumstances of the exposure..
Interest rate risk
Interest rate risk arises due to fluctuations in interest rates which impact on the value of short term investments and financing activities. The Group’s exposure to interest rate risk is particularly with reference to changes in US and South African interest rates.
The Group policy is to borrow funds at floating rates of interest as, over the longer term, this is considered by management to give somewhat of a natural hedge against commodity price movements, given the correlation with economic growth (and industrial activity) which in turn shows a high correlation with commodity price fluctuation. In certain circumstances, the Group uses interest rate swap contracts to manage its exposure to interest rate movements on a portion of its existing debt. Strategic hedging using fixed rate debt may be undertaken from time to time if approved by the Group Management Committee.
In respect of financial assets, the Group's policy is to invest cash at floating rates of interest and to maintain cash reserves in short term investments (less than one year) in order to maintain liquidity, while achieving a satisfactory return for shareholders.
Commodity price risk
The Group's earnings are principally exposed to movements in the prices of the commodities it produces.
The Group policy is generally not to hedge commodity price risk, although some hedging may be undertaken for strategic reasons. In such cases, the Group generally uses forward and deferred contracts to hedge the price risk.
In accordance with International Accounting Standards (IAS) 32 Financial Instruments: Presentation and IAS 39, the fair value of derivatives are separately recorded on the balance sheet within ‘Derivative financial assets’ and ‘Derivative financial liabilities’. Derivatives are classified as current or non-current depending on the maturity of the derivative.
The Group utilises derivative instruments to manage certain market risk exposures as explained above. The Group does not use derivative financial instruments for speculative purposes; however, it may choose not to designate certain derivatives as hedges for accounting purposes. Such derivatives are classified as ‘non-hedges’ and fair value movements are recorded in the income statement in our financial report and accounts.
The use of derivative instruments is subject to limits and the positions are regularly monitored and reported to senior management.