Anglo American Annual Report 2012

EXTERNAL RISKSLinking to our 4 strategic pillars for more informationINVESTING Page 14 ORGANISING Page 18OPERATING Page 22EMPLOYING Page 32Change in risk during 2012No change in riskIncreased riskDecreased riskCOMMODITY PRICESCommodity prices for all products that Anglo American producesare subject to wide fluctuation.Impact: Commodity price volatility can result in a material andadverse movement in the Group’s operating results, asset values,revenues and cash flows. Falling commodity prices could preventus from completing transactions that are important to the businessand which may have an adverse effect on Anglo American’sfinancial position – e.g. the inability to sell assets at the values orwithin the timelines expected.If commodity prices remain weak for a sustained period, our abilityto deliver growth in future years may be adversely affected asgrowth projects may not be viable at lower prices, and we maynot be able to compete for new, complex projects that requiresignificant capital investment.Root cause: Commodity prices are determined primarily byinternational markets and global supply and demand. Demand forcommodities will largely be determined by the strength of theglobal economic environment.Mitigation: The diversified nature of the commodities thatAnglo American produces provides some protection to this risk,and our policy is not to engage in commodity price hedging. Weconstantly monitor the markets in which we operate, reviewingcapital expenditure programmes accordingly so as to ensure thesupply of our products reflects forecast market conditions.Commentary: During 2012, prices in all the commodities we minefell as a result of global economic weakness. Further detail of pricemovements is provided on page 5.Increased riskINVESTING Page 14 ORGANISING Page 18OPERATING EMPLOYINGCLIMATE CHANGEOur operations are exposed to changes in climate and the needto comply with changes in the regulatory environment aimed atreducing the effects of climate change.Impact: Potential impacts from climate change are difficult toassess and will depend on the circumstances at individual sites,but could include increased rainfall, flooding, water shortages andhigher average temperatures. These may increase costs, reduceproduction levels or impact the results of operations.Policy developments at an international, national and sub-nationallevel, including those related to the 1997 Kyoto Protocol andsubsequent international agreements and emissions tradingschemes, could adversely affect the profitability of the Group.Regulatory measures may influence energy prices, demand or themargins achieved for carbon intensive products such as coal.Root cause: Anglo American is a significant user of energy. We arealso a major coal producer and exporter.Mitigation: In addition to the initiatives to monitor and limit theimpact of operations on the environment, we continuously seek toreduce energy input levels at our operations. Our asset optimisationprogramme seeks to make operations more energy efficient.No change in riskINVESTING ORGANISING Page 18OPERATING Page 22 EMPLOYINGLIQUIDITY RISKOur Group is exposed to liquidity risk in terms of being able tofund operations and growth.Impact: If we are unable to obtain sufficient credit as a result ofprevailing capital market conditions, we may not be able to raisesufficient funds to develop new projects, compete for new complexprojects requiring significant capital expenditure, fund acquisitionsor meet our ongoing financing needs. As a result, our revenues,operating results, cash flows or financial position may beadversely affected.Root cause: Liquidity risk arises from uncertainty or volatility inthe capital or credit markets owing to perceived weaknesses of theglobal economic environment, or possibly as a response to shockevents. Liquidity risk also arises when lenders are insecure aboutour long term cash generative capacity.Mitigation: We have an experienced Treasury team which isresponsible for ensuring that there are sufficient committed loanfacilities in place to meet short term business requirements aftertaking into account cash flows from operations and holdingsof cash, as well as any Group distribution restrictions that exist.We limit exposure on liquid funds through a policy of minimumcounterparty credit ratings, daily counterparty settlement limitsand exposure diversification.No change in riskINVESTING ORGANISING Page 18OPERATING EMPLOYINGPOLITICAL, LEGAL AND REGULATORYWherever we operate, our businesses may be affected by politicalor regulatory developments, including changes to fiscal regimes orother regulatory regimes.Impact: Potential impacts include restrictions on the export ofcurrency, expropriation of assets, imposition of royalties or othertaxes targeted at mining companies, and requirements for localownership or beneficiation. Political instability can also result incivil unrest and nullification of existing agreements, mining permitsor leases. Any of these may adversely affect the Group’s operationsor results of those operations.Root cause: The Group has no control over local political acts orchanges in local tax rates. It recognises that its licence to operatethrough mining rights is dependent on a number of factors,including compliance with regulations.Mitigation: The Group actively monitors regulatory and politicaldevelopments on a continuous basis.Commentary: During 2012 we saw new or increased taxesand royalties introduced in Australia, Brazil, Chile, Colombia,South Africa and Zimbabwe, resolution of a legal dispute in Chileregarding the option over ownership of part of our Anglo AmericanSur assets and the loss of our mining concession in Venezuela.These matters are further explained on pages 62, 70 and 73respectively and all are indicative of a more difficult political, legaland regulatory environment.Increased riskINVESTING Page 14 ORGANISING Page 18OPERATING Page 22 EMPLOYING Page 32Operating and financial reviewAnglo American plc Annual Report 2012 49