Anglo American is exposed in varying degrees to a variety of financial instrument
related risks. The Board has approved and monitors the risk management processes,
inclusive of 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.
Credit risk
The Group's principal financial assets are bank balances and cash, trade and
other receivables and investments. Its credit risk is primarily attributable
to its trade receivables; however, it also arises on liquid funds and derivative
financial instruments. The Group limits exposure to credit risk on liquid funds
and derivative financial instruments by adhering to a policy of:
- Acceptable minimum counterparty credit ratings assigned by international
credit-rating agencies (including long term ratings of A- (Standard & Poor's),
A3 (Moody's) or A- (Fitch) or better).
- Daily counterparty settlement limits (which are not to exceed three times
the credit limit for an individual bank).
- Exposure diversification (the aggregate group exposure to key relationship
counterparties can not exceed 5% of the counterparty's shareholders' equity).
Given the diverse nature of the Group's operations (both in relation to commodity
markets and geographically) it does not have significant concentration of credit
risk in respect of trade receivables, with exposure spread over a large number
of customers.
Liquidity risk
The Group ensures that there are sufficient committed loan facilities 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.
Non-wholly owned subsidiaries in general will arrange and maintain their own
financing and funding requirements. In most cases the financing will be non-recourse
to the Group. In addition, certain projects are financed by means of limited
recourse project finance, if appropriate.
Market risk
This is the risk that financial instrument fair values will fluctuate owing
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 group, the Group is exposed to many currencies principally as
a result of non-US dollar operating costs incurred by US dollar functional
currency companies 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 Board.
In addition, currency exposures exist in respect of non-US dollar approved
capital expenditure projects. The Group's policy is that such exposure can
be hedged at management's discretion, within certain pre-defined limits (otherwise
Board approval is required).
Interest rate risk
Fluctuations in interest rates impact on the value of short term investments
and financing activities, giving rise to interest rate risk. Exposure to interest
rate risk is particularly with reference to changes in US dollar, rand, sterling
and euro interest rates.
The Group policy is to borrow funds at floating rates of interest as this
is considered to give somewhat of a natural hedge against commodity price movements,
given the correlation to 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 and option contracts to manage
its exposure to interest rate movements on a portion of its existing debt.
Also strategic hedging using fixed rate debt may be undertaken from time to
time if considered appropriate.
In respect of financial assets, the Group's policy is to invest cash at floating
rates of interest and cash reserves are to be maintained 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 exposed to movements in the prices of the commodities
it produces. Commodity price risk can be reduced through the negotiation of
long term contracts or through the use of financial derivatives.
In respect of the use of derivative instruments, the Group policy is generally
not to hedge price risk, although some hedging may be undertaken for strategic
reasons. In such cases, the Group uses forward, spot, deferred and option contracts
to hedge the price risk.
Derivatives
In accordance with International Accounting Standards (IAS) 32 and 39, the
fair value of all derivatives are separately recorded on the balance sheet
within other financial assets (derivatives) and other financial liabilities
(derivatives). Derivatives that are designated as hedges are classified as
current or non-current depending on the maturity of the derivative. Derivatives
that are not designated as hedges are classified as current in accordance with
IAS 1 even when their actual maturity is expected to be greater than one year.
The Group utilises derivative instruments to manage its market risk exposures.
The Group does not use derivative financial instruments for speculative purposes;
however, it may choose not to designate certain derivatives as hedges. Such
derivatives that are not hedge accounted 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.