Anglo American Annual Report 2012

FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS25. FINANCIAL RISK MANAGEMENT AND DERIVATIVES continuedInterest rate riskInterest rate risk arises due to fluctuations in interest rates which impact on the value of short term investments and financing activities. The Group’s exposureto interest rate risk is particularly with reference to changes in US and South African interest rates.The Group’s 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 naturalhedge against commodity price movements, given the correlation with economic growth (and industrial activity), which in turn shows a high correlation withcommodity price fluctuation. In certain circumstances, the Group uses interest rate swap contracts to manage its exposure to interest rate movements on aportion of its existing debt. Strategic hedging using fixed rate debt may also 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 thanone 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:FloatingrateInterest bearingfinancial assetsFixedrate (1)Non-interestbearing financial assetsEquityinvestments Other Total2012 2011FloatingrateInterest bearingfinancial assetsFixedrate (1)Non-interestbearing financial assetsEquityinvestments Other TotalUS$ millionFinancial assets (excluding derivatives) (2) 9,651 508 1,062 3,865 15,086 12,623 689 1,206 3,962 18,480Derivative assets 748 – – 100 848 638 – – 202 840Financial asset exposure to interestrate risk 10,399 508 1,062 3,965 15,934 13,261 689 1,206 4,164 19,320(1)Includes $397 million (2011: $534 million) of preference shares in BEE entities.(2)At 31 December 2012 and 31 December 2011 no interest rate swaps were held in respect of financial asset exposures.Floating rate financial assets consist mainly of cash and bank term deposits. Interest on floating rate financial assets is based on the relevant nationalinter-bank rates. Fixed rate financial assets consist principally of financial asset investments and cash, and have a weighted average interest rate of 11.6%(2011: 12.7%) for an average period of one year (2011: three years). Equity investments have no maturity period and the majority are fully liquid.The exposure of the Group’s financial liabilities (excluding intra-group loan balances) to interest rate risk is as follows:FloatingrateInterest bearingfinancial liabilitiesFixedrateNon-interestbearingfinancialliabilities2012 2011FloatingrateInterest bearingfinancial liabilitiesFixedrateNon-interestbearingfi n a n c i a lliabilitiesUS$ millionTotalTotalFinancial liabilities (excluding derivatives) (4,296) (13,444) (4,441) (22,181) (3,254) (9,610) (4,963) (17,827)Impact of interest rate swaps (1) (13,135) 13,135 – – (8,074) 8,074 – –Derivative liabilities (165) – (916) (1,081) (158) – (954) (1,112)Financial liability exposure to interest rate risk (17,596) (309) (5,357) (23,262) (11,486) (1,536) (5,917) (18,939)(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 financial liabilities is based on the relevant national inter-bank rates. Remaining fixed rate borrowings accrue interest at a weightedaverage interest rate of 6.2% (2011: 9.3%) for an average period of three years (2011: two years). Average maturity on non-interest bearing instruments is17 months (2011: 12 months).Commodity price riskThe 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 Groupgenerally 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’sfinancial assets and liabilities to commodity price risk is as follows:Commodity price linkedSubject topricemovementsFixedprice (1)Notlinked tocommodityprice2012 2011Commodity price linkedNotSubject tolinked topriceFixed commodityTotal movementsprice (1) priceTotalUS$ millionTotal net financial instruments (excludingderivatives) 304 1,087 (8,486) (7,095) 352 945 (644) 653Commodity derivatives (net) (1) – – (1) (17) – – (17)Non-commodity derivatives (net) – – (232) (232) – – (255) (255)Total financial instrument exposure tocommodity risk 303 1,087 (8,718) (7,328) 335 945 (899) 381(1)Includes receivables and payables for commodity sales and purchases not subject to price adjustment at the balance sheet date.170 Anglo American plc Annual Report 2012