26.

Financial risk management
 

The group is exposed to various financial risks due to the nature and diversity of its activities and the use of various financial instruments. These risks include:

  • credit risk
  • liquidity risk
  • market risk

Details of the group’s exposure to each of the above risks and its objectives, policies and processes for measuring and managing these risks are included specifically in this note and more generally throughout the consolidated financial statements together with information regarding management of capital.

The boards of directors (boards) of all group companies have overall responsibility for the establishment and oversight of the group’s risk management framework. These boards have delegated these responsibilities to Executive Committees, which are responsible for the development and monitoring of risk management policies within the group. These committees meet on an ad hoc basis and regularly report to the respective boards on their activities. The risk management policies are established to identify and analyse the risks faced by the group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the activities of the group.

The roles and responsibilities of the committees include:

  • approval of all counterparties;
  • approval of new instruments;
  • approval of the group’s foreign exchange transaction policy;
  • approval of the investment policy;
  • approval of treasury policy; and
  • approval of long-term funding requirements.

The internal auditors undertake regular and ad hoc reviews of risk management, controls and procedures, the results of which are monitored by the Assore and Assmang Audit and Risk committees.
  26.1 Credit risk                
   

Credit risk arises from possible defaults on payments by customers or, where letters of credit have been issued, by bank counterparties. The group minimises credit risk by the careful evaluation of the ongoing creditworthiness of customers and bank counterparties before transactions are concluded. Customers are generally required to raise letters of credit with banking institutions that have acceptable credit ratings. However, certain customers who have a well-established credit history are allowed to transact on open accounts.

Overdue amounts are individually assessed and if it is evident that an amount will not be recovered, it is impaired and legal action is instituted to recover the amounts involved.

Credit exposure and concentrations of credit risk
The carrying amount of financial assets represents the maximum credit exposure at the reporting date and the following table indicates various concentrations of credit risk for all non-derivative financial assets held:
                  2011 2010
                  R’000 R’000
    Loans and long-term receivables 53 051 31 906
    Trade receivables 1 618 028 1 460 915
    Local 61 691 85 128
    Foreign 1 556 337 1 375 787
    Other receivables – local 14 242 20 131
    Total carrying amount per consolidated statement of financial position (refer note 8) 1 685 321 1 512 952
    Security held over non-derivative financial assets    
    Irrevocable letters of credit – issued by foreign banks 123 403 758 341
    Aged as follows:    
      2011 2010
      Receivables Receivables Impairment Carrying Receivables Receivables Impairment Carrying
      not impaired impaired amount amount not impaired impaired amount amount
      R’000 R’000 R’000 R’000 R’000 R’000 R’000 R’000
    Loans and long-term receivables 53 051 – – 53 051 31 906 – – 31 906
    Trade receivables 1 618 028 – – 1 618 029 1 460 915 – – 1 460 915
    Not past due, not impaired 1 618 028 – – 1 618 028 1 459 873 – – 1 459 873
    Past due – – – – 1 042 – – 1 042
    Other receivables 14 242 – – 14 242 20 131 – – 20 131
    Not past due, not impaired 14 242 – – 14 242 20 131 – – 20 131
                     
    As above 1 685 321 – – 1 685 321 1 512 952 – – 1 512 952
                     
  26.2 Liquidity risk
   

The Executive Committees manage the liquidity structure of the group’s assets, liabilities and commitments so as to ensure that cash flows are sufficiently balanced within the group as a whole. Updated cash flow information and projections of future cash flows are received by the Executive Committees from the group companies on a regular basis (depending on the type of funding required). Measures have been introduced to ensure that the cash flow information received is accurate and complete.

Surplus funds are deposited in liquid assets (eg liquid money market accounts) (refer note 25.6).

Undrawn credit facilities
In terms of the Articles of Association of the holding company, the borrowing powers are unlimited. However, based on their respective Articles of Association, restrictions on the following joint venture and subsidiary companies are in place. External borrowings at year-end amounted to R154,1 million (2010: R1 034,4 million).
                  2011 2010
                  R’000 R’000
    Assmang Limited    
    Authorised in terms of the Articles of Association 8 753 613 6 860 259
    Less: External borrowings at year-end    
    – Overdrafts and short-term borrowings (2 359) (3 612)
    Unutilised borrowing capacity 8 751 254 6 856 647
    Minerais U.S. LLC    
    Authorised in terms of the Articles of Association 338 813 382 940
    External borrowings at year-end (151 788) (98 032)
    Unutilised borrowing capacity 187 025 284 908
    The general banking facilities made available to group companies are unsecured, bear interest at rates linked to prime, have no specific maturity date and are subject to annual review by the banks concerned. The facilities are in place to issue letters of credit, bank guarantees and ensure liquidity.
     
    Exposure to liquidity risk
    The following are the cash flows of the group’s financial assets and liabilities at year-end as determined by contractual maturity date including interest receipts and payments but excluding the impact of any netting agreements with the third parties concerned.
     
                Between Between  
          Carrying Total Less than 4 and 1 and 5 More than
          amount cash flows 4 months 12 months years 5 years
          R’000 R’000 R’000 R’000 R’000 R’000
    2011            
    Financial assets            
    Available-for-sale investments 887 249 887 249 – – – 887 249
    Other investments 30 789 30 789 – – 30 664 125
    Other non-current financial assets 53 051 53 051 – – – 53 051
    Trade and other receivables 1 632 270 1 632 270 1 632 270 – – –
    Cash deposits held by environmental trusts 70 292 70 292 70 292 – – –
    Cash resources 2 264 442 2 264 442 2 264 442 – – –
          4 938 093 4 938 093 3 967 004 – 30 664 940 425
    Financial liabilities            
    Preference shares issued – – – – – –
    Trade and other payables 1 238 051 1 238 051 1 238 051 – – –
    Short-term borrowings and overdrafts 154 147 154 147 151 788 2 359 – –
          1 392 198 1 392 198 1 389 839 2 359 – –
    2010            
    Financial assets            
    Available-for-sale investments 602 851 602 851 – – – 602 851
    Other investments 73 267 73 267 – – 73 142 125
    Other non-current financial assets 31 906 – – – – 31 906
    Trade and other receivables 1 481 046 1 481 046 1 481 046 – – –
    Cash deposits held by environmental trusts 57 927 57 927 57 927 – – –
    Cash resources 1 849 982 1 849 982 1 849 982 – – –
          4 096 979 4 065 073 3 388 955 – 73 142 634 882
    Financial liabilities            
    Interest-bearing borrowings 6 345 6 345 – 3 612 2 733 –
    Trade and other payables 1 006 078 1 006 078 1 006 078 – – –
    Short-term borrowings and overdrafts 1 028 033 1 028 033 1 028 033 – – –
          2 040 456 2 040 456 2 034 111 3 612 2 733 –
                     
  26.3 Market risk
   

Market risk is defined as the risk that movements in market risk factors, in particular US dollar commodity prices and the US dollar/SA rand exchange rate will affect the group’s revenue and operational costs as well as interest rate risk on the value of its holdings of financial instruments. The objective of the group’s market risk management policy is to manage and control market risk exposures to minimise the impact of adverse market movements with respect to revenue protection and to optimise the funding of the business operations.

The group companies are responsible for the preparation and presentation of market risk information as it affects the relevant entity. Information is submitted to the Executive Committees where it is monitored and further analysed to be used in the decision-making process. The information submitted includes information on currency, interest rate and commodities and is used by the Executive Committees to determine the market risk strategy going forward. In addition, key market risk information is reported to the Executive Committees on a weekly basis and forecasts against budget are prepared for the entire group on a monthly basis.

Commodity price and currency risk
Commodity price risk arises from the risk of an adverse effect on current or future earnings resulting from fluctuations in metal and mineral prices. The group also has transactional foreign exchange exposures, which arise from sales or purchases by the group in currencies other than the group’s functional currency. The group’s markets are predominantly priced in US dollars and to a lesser extent in euros which exposes the group to the risk that fluctuations in the SA rand exchange rates may have an adverse effect on current or future earnings.

The group manages its commodity price risk where possible by entering into supply contracts with customers covering periods of between three months and a year, depending on the commodity traded. With respect to its exposure to foreign currency fluctuations, the group constantly reviews the extent to which its foreign currency receivables and payables are covered by forward exchange contracts taking into account changes in operational forecasts and market conditions and the group’s hedging policy. No speculating in foreign currency is allowed within the group.

Interest rate risk
Interest rate risk arises due to adverse movements in domestic and foreign interest rates. The group is primarily exposed to downward interest rate movements on floating investments purchased and to upward movements on overdrafts and other banking facilities. There is no other exposure to fair value interest rate risk as all fixed rate financial instruments are measured at amortised cost.

The board determines the interest rate risk strategy based on economic expectations and recommendations received from the Executive Committees. Interest rates are monitored on an ongoing basis and the policy is to maintain short-term cash surpluses adequate to meet the group’s ongoing cash flow requirements at floating rates of interest.

At the reporting date the interest rate profile of the group’s interest-bearing financial instruments was as follows:
                  2011 2010
                  R’000 R’000
    Variable rate instruments    
    Liabilities    
    Finance leases (refer note 13) 2 359 6 345
    Preference shares (included in short-term borrowings; refer note 18) – 930 000
    Overdrafts (refer note 18) 151 788 98 032
                     
    Assets    
    Other non-current financial assets 53 051 31 906
    Cash deposits held by environmental trusts per statement of financial position 70 292 57 927
    Cash resources 2 264 442 1 849 982
                     
    Fair value sensitivity analysis for fixed rate instruments    
    The group does not account for any fixed rate financial assets and liabilities at fair value through profit and loss, therefore a change in interest rates at the reporting date would not affect profit or loss.    
                     
    Cash flow sensitivity analysis for variable rate instruments    
    An increase of 50 basis points in interest rates at the reporting date would have increased profit after tax by the amounts shown below. Net effect on profit or loss is equal but opposite for a 50 basis points increase in interest rates on the financial instruments. This assumes that all other variables remain constant and there is no impact on the group’s equity.    
    Variable rate instruments 7 911 6 663
                     
    The group’s exposure to currency risk at year-end was as follows:        
              2011 2010
              US dollar Euro US dollar Euro
              000 000 000 000
    Gross financial position exposure, relating to trade receivables 18 585 907 16 088 658
    Estimated forecast sales 1 178 442 85 817 408 009 1 021
    Net exposure 1 197 027 86 724 424 097 1 679
    A 5% strengthening of the rand against the above currencies at 30 June would have decreased profit by the following amounts upon the revaluation of trade receivables: R’000 R’000 R’000 R’000
              6 297 445 6 161 377
    A 5% weakening of the rand against the above currencies at 30 June would have had an equal but opposite effect on the amounts shown above, on the basis that all other variables remain constant.        
                     
    Forward exchange commitments
At year-end, a foreign subsidiary had forward commitments with regard to its inventory of ores, alloys and metals, which for accounting purposes are regarded as executory contracts and are therefore not included in the statement of financial position, but can be summarised as follows:
          2011 2010
          Foreign Legal   Foreign Legal  
          currency currency   currency currency  
          nominal nominal Fair notional notional Fair
          amount amount value amount amount value
          USD’000 R’000 R’000 USD’000 R’000 R’000
    Purchase contracts            
    US dollar 12 700 86 058 86 058 4 300 32 933 32 933
    Sales contracts            
    US dollar 29 100 285 762 285 762 25 600 196 065 196 065
                     
  26.4 Fair value of financial assets and liabilities
    The categorisation of each of financial asset and liability, including their fair values, is included below:
          Available-   Liabilities at Other Total  
          for-sale Loans and amortised assets and carrying Fair
          investments receivables cost liabilities value value
        Note R’000 R’000 R’000 R’000 R’000 R’000
    2011              
    Financial assets              
    Available-for-sale investments 5 887 248 – – – 887 248 887 248
    Other investments 5 – – – 30 789 30 789 30 789
    Other non-current financial assets 6 – 53 051 – – 53 051 53 051
    Trade and other receivables 8 – 1 632 270 – – 1 632 270 1 632 270
    Cash deposits held by environmental trusts   – 70 292 – – 70 292 70 292
    Cash resources 25.6 – 2 264 442 – – 2 264 442 2 264 442
          887 248 4 020 055 – 30 789 4 938 092 4 938 092
    Financial liabilities              
    Interest-bearing borrowings 13 – – – – – –
    Trade and other payables 16 – – 1 238 051 – 1 238 051 1 238 051
    Short-term borrowings and overdrafts 18 – – 154 147 – 154 147 154 147
          – – 1 392 198 – 1 392 198 1 392 198
    2010              
    Financial assets              
    Available-for-sale investments 5 602 851 – – – 602 851 602 851
    Other investments 5 – – – 73 267 73 267 73 267
    Other non-current financial assets 6 – 31 906 – – 31 906 31 906
    Trade and other receivables 8 – 1 481 046 – – 1 481 046 1 481 046
    Cash deposits held by environmental trusts   – 57 927 – – 57 927 57 927
    Cash resources 25.6 – 1 849 982 – – 1 849 982 1 849 982
          602 851 3 420 861 – 73 267 4 096 979 4 096 979
    Financial liabilities              
    Interest-bearing borrowings 13 – – 2 733 – 2 733 2 733
    Trade and other payables 16 – – 1 006 078 – 1 006 078 1 006 078
    Short-term borrowings and overdrafts 18 – – 1 031 645 – 1 031 645 1 031 645
          – – 2 040 456 – 2 040 456 2 040 456
    Determination of fair values
Quoted market prices at reporting date have been used to determine the fair value of available-for-sale investments. Where quoted, market prices were not available, a valuation technique, most commonly discounted cash flows, was used. For trade receivables and payables, the fair value was determined using the discounted cash flow method at market-related interest rate. Carrying amounts approximate fair value for all other financial assets and liabilities.
     
    Fair value hierarchy
The group uses the following hierarchy of valuation techniques for determining the fair value of financial instruments measured at fair value:
   
Level 1: quoted prices in active markets for identical assets or liabilities when available
Level 2: other techniques using inputs that are observable, either directly or indirectly
Level 3: techniques using inputs that are not based on observable market data
     
                  2011 2010
                  R’000 R’000
    Available-for-sale investments as above, measured at Level 1 887 248 602 851