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Notes to the financial statements

24. Financial risk management and derivative financial assets/liabilities

The Group 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.

The types of risk exposure, the way in which such exposure is managed and quantification of the level of exposure in the balance sheet at year end is provided as follows (subcategorised into credit risk, liquidity risk and market risk).

Credit risk

The Group's principal financial assets are bank balances and cash, trade and other receivables and investments. The Group's maximum exposure to credit risk arising from underlying financial assets is as follows:

US$ million 2009 2008
Cash and cash equivalents 3,269 2,771
Trade and other receivables 3,347 2,797
Financial asset investments(1) 1,598 1,108
Other financial assets (derivatives) 603 376
Other guarantees and loan facilities 12 239
  8,829 7,291
(1)
Includes $546 million (2008: $360 million) of preference shares in BEE entities.

The Group limits exposure to credit risk on liquid funds and derivative financial instruments through adherence to a policy of:

  • Where possible 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); and
  • Exposure diversification (the aggregate group exposure to key relationship counterparties cannot 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), 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.

An allowance for impairment of trade receivables is made where there is an identified loss event, which based on previous experience, is evidence of a reduction in the recoverability of the cash flows. Details of the credit quality of trade receivables and the associated provision for impairment is disclosed in note 20.

Liquidity risk

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.

Non-wholly owned subsidiaries, where possible, will 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.

The expected undiscounted cash flows of the Group's financial liabilities (including associated derivatives), by remaining contractual maturity, based on conditions existing at the balance sheet date are as follows:

  Within one year   One to two years
US$ million Fixed interest Floating interest Capital repayment   Fixed interest Floating interest Capital repayment
31 December 2009              
Non-derivative financial liabilities (550) (200) (5,660)(1)   (523) (185) (3,226)
Net settled derivatives(2) 461 (267) -   441 (273) 5
  (89) (467) (5,660)   (82) (458) (3,221)

             
31 December 2008              
Non-derivative financial liabilities (191) (405) (11,385)   (179) (245) (732)
Net settled derivatives 156 (94) 8   164 (101) (53)
  (35) (499) (11,377)   (15) (346) (785)
  Two to five years   Greater than five years
US$ million Fixed interest Floating interest Capital repayment   Fixed interest Floating interest Capital repayment
31 December 2009              
Non-derivative financial liabilities (1,379) (295) (5,877)(3)   (672) (608) (4,394)
Net settled derivatives(2) 1,187 (712) (32)   672 (331) (339)
  (192) (1,007) (5,909)   - (939) (4,733)

             
31 December 2008              
Non-derivative financial liabilities (472) (422) (4,348)   (345) (114) (2,412)
Net settled derivatives 443 (304) 9   345 (195) (400)
  (29) (726) (4,339)   - (309) (2,812)
(1)
Includes guarantees and loan facilities.
(2)
At 31 December 2009 the expected maturities were not materially different from the contracted maturities.
(3)
Includes the full value of the convertible bond and assumes no conversion.

The Group had the following undrawn committed borrowing facilities at 31 December:

US$ million 2009 2008
Expiry date    
Within one year(1) 2,247 2,994
Greater than one year, less than two years 3,090 5
Greater than two years, less than five years 4,093 3,081
Greater than five years 90 25
  9,520 6,105
(1)
Includes undrawn rand facilities equivalent to $1.9 billion (2008: $0.9 billion) in respect of a series of facilities with 364 day maturities which roll automatically on a daily basis, unless notice is served.

In addition, the Group has a dedicated, committed financing facility for Minas Rio of $1.4 billion subject to certain disbursement conditions and the granting of the remaining Installation Environmental licence (regarded as likely to occur in 2010) (2008: for Minas Rio and Barro Alto totalling $1.6 billion).

The Group also had a $2 billion European Commercial Paper Programme established in October 2004. Drawings of nil were made at 31 December 2009 (2008: $304 million). The Group also had a Rand 20 billion South African Medium Term Note Programme, established in November 2007, on which total drawings of Rand 691 million ($94 million) were made at 31 December 2009 (2008: Rand 7,273 million ($782 million)). Of this drawing, Rand 491 million ($67 million) was issued as commercial paper (2008: Rand 7,074 million ($761 million)).

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 business, 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 Group Management Committee.

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.

The exposure of the Group's financial assets and liabilities (excluding intra-group loan balances) to currency risk is as follows:

US$ million Financial
assets
(excluding
derivatives)
Impact of
currency
derivatives(1)
Derivative
assets
Total financial
assets -
exposure to
currency risk
At 31 December 2009        
US dollar(2) 4,353 (202) 565 4,716
Rand 3,125 177 7 3,309
Sterling 455 - - 455
Euro 85 2 - 87
Australian dollar 271 - - 271
Brazilian real 407 - - 407
Other currencies 649 23 31 703
Total financial assets 9,345 - 603 9,948

       
At 31 December 2008        
US dollar(2) 3,118 (108) 252 3,262
Rand 3,895 82 71 4,048
Sterling 547 (2) - 545
Euro 136 - - 136
Australian dollar 290 (4) - 286
Brazilian real(3) 357 - - 357
Other currencies(3) 513 32 53 598
Total financial assets 8,856 - 376 9,232
US$ million Financial
liabilities
(excluding
derivatives)
Impact of
currency
derivatives(1)
Derivative
liabilities
Total financial
liabilities -
exposure to
currency risk
At 31 December 2009        
US dollar (7,719) (5,364) (609) (13,692)
Rand (3,550) (4) (50) (3,604)
Sterling (1,609) 1,198 - (411)
Euro (3,764) 3,652 - (112)
Australian dollar (543) - - (543)
Brazilian real (1,052) 401 - (651)
Other currencies (690) 117 - (573)
Total financial liabilities (18,927) - (659) (19,586)

       
At 31 December 2008        
US dollar (7,854) (3,130) (1,056) (12,040)
Rand (5,289) (15) (2) (5,306)
Sterling (1,628) 1,141 - (487)
Euro (1,821) 1,697 - (124)
Australian dollar (528) - - (528)
Brazilian real(3) (973) 22 (439) (1,390)
Other currencies(3) (980) 285 - (695)
Total financial liabilities (19,073) - (1,497) (20,570)
(1)
Where currency derivatives are held to manage financial instrument exposures the notional principal amount is 'reallocated' to reflect the remaining exposure to the Group.
(2)
Of these US$ financial assets, $127 million (2008: $97 million) are subject to South African exchange controls and will be converted to rand within the next six months.
(3)
Comparatives have been reclassified to align with current year presentation.

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 and South African interest rates. Exposure to Brazilian interest rates is expected to continue to increase in the near term.

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 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. Also 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 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.

The exposure of the Group's financial assets (excluding intra-group loan balances) to interest rate risk is as follows:

  Interest bearing
financial assets
  Non-interest bearing
financial assets
 
US$ million Floating
rate
Fixed
rate(1)
  Equity investments Other non-interest bearing Total
At 31 December 2009            
Financial assets (excluding derivatives)(2) 3,530 1,032   1,131 3,652 9,345
Derivative assets 174 -   - 429 603
Financial asset exposure to interest rate risk 3,704 1,032   1,131 4,081 9,948

           
At 31 December 2008            
Financial assets (excluding derivatives)(2) 3,098 464   2,180 3,114 8,856
Derivative assets 196 -   - 180 376
Financial asset exposure to interest rate risk 3,294 464   2,180 3,294 9,232
(1)
Includes $546 million (2008: $360 million) of preference shares in BEE entities.
(2)
At 31 December 2009 and 2008 no interest rate swaps were held in respect of financial asset exposures.

Floating rate financial assets consist mainly of cash and bank term deposits. Interest on floating rate assets is based on the relevant national inter-bank rates. Fixed rate financial assets consist mainly of financial asset investments and cash, and have a weighted average interest rate of 11.0% (2008: 13.5%) and are fixed for an average period of three years (2008: four years). Equity investments have no maturity period and the majority are fully liquid.

The exposure of the Group's financial liabilities (excluding intra-group loan balances) to interest rate risk is as follows:

  Interest bearing
financial liabilities
Non-
interest
bearing
financial
liabilities
 
US$ million Floating
rate
Fixed
rate
Total
At 31 December 2009        
Financial liabilities (excluding derivatives) (5,529) (8,697) (4,701) (18,927)
Impact of interest rate swaps(1) (6,896) 6,896 - -
Derivative liabilities (109) - (550) (659)
Financial liability exposure to interest rate risk (12,534) (1,801) (5,251) (19,586)

     
At 31 December 2008        
Financial liabilities (excluding derivatives) (10,461) (3,459) (5,153) (19,073)
Impact of interest rate swaps(1) (2,829) 2,829 - -
Derivative liabilities - - (1,497) (1,497)
Financial liability exposure to interest rate risk (13,290) (630) (6,650) (20,570)
(1)
Where interest rate swaps are held to manage financial liability exposures the notional principal amount is 'reallocated' to reflect the remaining exposure to the Group.

Interest on floating rate instruments is based on the relevant national inter-bank rates. Remaining fixed rate borrowings accrue interest at a weighted average interest rate of 9% (2008: 8%) and are at fixed rates for an average period of four years (2008: two years). Average maturity on non-interest bearing instruments is 14 months (2008: 17 months).

Commodity price risk

The Group's earnings are exposed to movements in the prices of the commodities it produces.

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 and deferred contracts to hedge the price risk.

Certain of the Group's sales and purchases are provisionally priced and as a result are susceptible to future price movements. The exposure of the Group's financial assets and liabilities to commodity price risk is as follows:

  Commodity price linked Not linked
to
commodity
price
 
US$ million Subject to price movements Fixed
price(1)
Total
At 31 December 2009        
Total net financial instruments (excluding derivatives) 352 733 (10,667) (9,582)
Commodity derivatives (net)(2) (78) - - (78)
Non-commodity derivatives (net) - - 22 22
Total financial instrument exposure to commodity risk 274 733 (10,645) (9,638)

       
At 31 December 2008        
Total net financial instruments (excluding derivatives) (291) 183 (10,109) (10,217)
Commodity derivatives (net)(2) (318) - - (318)
Non-commodity derivatives (net) - - (803) (803)
Total financial instrument exposure to commodity risk (609) 183 (10,912) (11,338)
(1)
Includes financial instruments whose commodity prices are set annually or via contract negotiation.
(2)
Includes a $44 million (2008: $249 million) derivative embedded in a long term power contract.

Derivatives

In accordance with IAS 32 Financial Instruments: Presentation and IAS 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 are classified as current or non-current depending on the expected maturity of the derivative.

The Group utilises derivative instruments to manage its 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. Such derivatives that are not hedge accounted are classified as 'non-hedges' and fair value movements are recorded in the income statement.

The use of derivative instruments is subject to limits and the positions are regularly monitored and reported to senior management.

Embedded derivatives

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of their host contract and the host contract is not carried at fair value. Embedded derivatives may be designated into hedge relationships and are accounted for in accordance with the Group's accounting policy set out in note 1.

Cash flow hedges

In certain cases the Group classifies its forward exchange and commodity price contracts hedging highly probable forecast transactions as cash flow hedges. Where this designation is documented, changes in fair value are recognised in equity until the hedged transactions occur, at which time the respective gains or losses are transferred to the income statement (or hedged balance sheet item) in accordance with the Group's accounting policy set out in note 1.

Fair value hedges

The majority of interest rate swaps (taken out to swap the Group's fixed rate borrowings to floating rate, in accordance with the treasury policy) have been designated as fair value hedges. The respective carrying values of the hedged debt are adjusted to reflect the fair value of the interest rate risk being hedged. Subsequent changes in the fair value of the hedged risk are offset against fair value changes in the interest rate swap and classified within financing costs in the income statement.

Non-hedges

The Group may choose not to designate certain derivatives as hedges, for example certain forward foreign currency contracts that provide a natural hedge of non-US dollar debt in the income statement or where the Group is economically hedged but IAS 39 hedge accounting cannot be achieved. Where derivatives have not been designated as hedges, fair value changes are recognised in the income statement in accordance with the Group's accounting policy set out in note 1 and are classified as financing or operating depending on the nature of the associated hedged risk.

The fair value of the Group's open derivative position at 31 December (excluding normal purchase and sale contracts held off balance sheet), recorded within 'Other financial assets (derivatives)' and 'Other financial liabilities (derivatives)' is as follows:

  2009   2008
US$ million Asset Liability   Asset Liability
Current          
Cash flow hedge(1)          
Forward foreign currency contracts 40 -   10 (75)
Forward commodity contracts - (3)   - (49)
Other - (1)   - -
Fair value hedge          
Interest rate swaps 18 -   140 -
Other - -   2 -
Non-hedge ('Held for trading')(2)          
Forward foreign currency contracts 285 (18)   73 (460)
Cross currency swaps 14 (14)   20 -
Other 8 (40)   14 (14)
Total current derivatives 365 (76)   259 (598)

         
Non-current          
Cash flow hedge(1)          
Forward foreign currency contracts 19 -   - (57)
Forward commodity contracts - -   - (4)
Fair value hedge          
Interest rate swaps 157 (70)   4 -
Non-hedge ('Held for trading')(2)          
Forward foreign currency contracts 26 (2)   41 (69)
Cross currency swaps 7 (424)   20 (504)
Other 29 (87)   52 (265)
Total non-current derivatives 238 (583)   117 (899)
(1)
The timing of the expected cash flows associated with these hedges is as follows:
US$ million 2009 2008
Within one year 36 (160)
Greater than one year, less than two years 19 (80)
Greater than two years, less than five years - (11)
Greater than five years - -
  55 (251)
The periods when these hedges are expected to impact the income statement generally follow the cash flow profile with the exception of hedging associated with capital projects which is included in the capitalised asset value and depreciated over the life of the asset.
(2)
Comparatives have been adjusted in accordance with IAS 1 Presentation of Financial Statements - Improvements, as described in note 1.

These marked to market valuations are in no way predictive of the future value of the hedged position, nor of the future impact on the profit of the Group. The valuations represent the cost of closing all hedge contracts at year end, at market prices and rates available at the time.

Normal purchase and normal sale contracts

Commodity based contracts that meet the scope exemption in IAS 39 (in that they are settled through physical delivery of the Group's production or are used within the production process), are classified as normal purchase or sale contracts. In accordance with IAS 39 these contracts are not marked to market.

Capital risk management

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and, with cognisance of forecast future market conditions and structuring, to maintain an optimal capital structure to reduce the cost of capital.

In order to manage the short and long term capital structure, the Group adjusts the amount of ordinary dividends paid to shareholders, returns capital to shareholders (via, for example, share buybacks and special dividends), arranges debt to fund new acquisitions and also may sell non-core assets to reduce debt.

The Group monitors capital on the basis of the ratio of net debt to total capital less investments in associates (gearing). Net debt is calculated as total borrowings less cash and cash equivalents and current financial asset investments (excluding derivatives which provide an economic hedge of debt and including the net debt of disposal groups). Total capital is calculated as 'Net assets' (as shown in the Consolidated balance sheet) excluding net debt. Gearing as at 31 December 2009 was 30.8% (2008: 37.8%). The decrease in gearing since 31 December 2008 is primarily due to the increase in net assets.

Financial instrument sensitivities

Financial instruments affected by market risk include borrowings, deposits, derivative financial instruments, trade receivables and trade payables. The following analysis, required by IFRS 7, is intended to illustrate the sensitivity of the Group's financial instruments (as at year end) to changes in commodity prices, exchange rates and interest rates.

The sensitivity analysis has been prepared on the basis that the components of net debt, the ratio of fixed to floating interest rates of the debt and derivatives portfolio and the proportion of financial instruments in foreign currencies are all constant and on the basis of the hedge designations in place at 31 December. In addition, the commodity price impact for provisionally priced contracts is based on the related trade receivables and trade payables at 31 December. As a consequence, this sensitivity analysis relates to the position as at 31 December.

The following assumptions were made in calculating the sensitivity analysis:

  • All income statement sensitivities also impact equity.
  • For debt and other deposits carried at amortised cost, carrying value does not change as interest rates move.
  • No sensitivity is provided for interest accruals as these are based on pre-agreed interest rates and therefore are not susceptible to further rate changes.
  • Changes in the carrying value of derivatives (from movements in commodity prices and interest rates) designated as cash flow hedges are assumed to be recorded fully within equity on the grounds of materiality.
  • No sensitivity has been calculated on derivatives and related underlying instruments designated into fair value hedge relationships as these are assumed materially to offset one another.
  • All hedge relationships are assumed to be fully effective on the grounds of materiality.
  • Debt with a maturity of less than one year is floating rate, unless it is a long term fixed rate debt in its final year.
  • Translation of foreign subsidiaries and operations into the Group's presentation currency has been excluded from the sensitivity.

Using the above assumptions, the following tables show the illustrative effect on the income statement and equity that would result from reasonably possible changes in the relevant commodity price, foreign currency or interest rates.

US$ million Income statement Equity
Commodity price sensitivities    
2009    
10% increase in the platinum price (14) (14)
10% decrease in the platinum price 14 14
10% increase in the copper price 89 89
10% decrease in the copper price (89) (89)
10% increase in the coal price - -
10% decrease in the coal price - -
2008    
10% increase in the platinum price (9) (9)
10% decrease in the platinum price 9 9
10% increase in the copper price 47 47
10% decrease in the copper price (47) (47)
10% increase in the coal price - (11)
10% decrease in the coal price - 11
Interest rate sensitivities    
2009    
50 bp increase in US interest rates 3 3
50 bp decrease in US interest rates (3) (3)
50 bp increase in South African interest rates - -
50 bp decrease in South African interest rates - -
2008    
25 bp increase in US interest rates (6) (6)
25 bp decrease in US interest rates 6 6
50 bp increase in South African interest rates (11) (10)
50 bp decrease in South African interest rates 11 10
Foreign currency sensitivities(1)    
2009    
+10% US dollar to rand (59) (59)
-10% US dollar to rand 59 59
+10% US dollar to Australian dollar 4 4
-10% US dollar to Australian dollar (4) (4)
+10% US dollar to Brazilian real 191 198
-10% US dollar to Brazilian real (175) (183)
+10% US dollar to Chilean peso (11) (67)
-10% US dollar to Chilean peso 14 82
2008    
+10% US dollar to rand 45 42
-10% US dollar to rand (46) (43)
+10% US dollar to Australian dollar 20 19
-10% US dollar to Australian dollar (20) (18)
+10% US dollar to Brazilian real (125) (128)
-10% US dollar to Brazilian real 176 180
+10% US dollar to Chilean peso (25) (42)
-10% US dollar to Chilean peso 30 51
(1)
+ represents strengthening of US dollar against the respective currency.

The above sensitivities are calculated with reference to a single moment in time and are subject to change due to a number of factors including:

  • fluctuating trade receivable and trade payable balances;
  • derivative instruments and borrowings settled throughout the year;
  • fluctuating cash balances;
  • changes in currency mix; and
  • commercial paper with short term maturities, which is regularly replaced or settled.

As the sensitivities are limited to year end financial instrument balances they do not take account of the Group's sales and operating costs which are highly sensitive to changes in commodity prices and exchange rates. In addition, each of the sensitivities is calculated in isolation, while in reality commodity prices, foreign exchange rates and interest rates do not move independently.

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Annual Report 2009