Anglo American Annual Report 2012

OPERATING AND FINANCIAL REVIEW RISKEXTERNAL RISKS continuedLinking to our 4 strategic pillars for more informationOPERATIONAL RISKSLinking to our 4 strategic pillars for more informationINFLATIONThe Group is exposed to potentially high rates of inflation in thecountries in which it operates.Impact: Higher rates of inflation may increase future operationalcosts if there is no concurrent depreciation of the local currencyagainst the US dollar, or an increase in the dollar price of theapplicable commodity.This may have a negative impact on profit margins andfi n a n c i a lr e s u l t s .Root cause: Cost inflation in the mining sector is more apparentduring periods of high commodity prices as demand for inputgoods and services can exceed supply.Mitigation: We closely manage costs through our assetoptimisation and supply chain initiatives and, where necessary,through adjusting employee and contractor numbers.Commentary: Despite commodity price reductions throughout2012, cost inflation in the mining sector continued during the period,which, combined with commodity price reductions, squeezedoperating margins. Further detail is provided on pages 42–47.Increased riskINVESTING ORGANISING Page 18OPERATING EMPLOYINGCOUNTERPARTY RISKThe Group is exposed to counterparty risk from customers,certain suppliers and holders of cash.Impact: Financial losses may arise should those counterpartiesbecome unable to meet their obligations to the Group.Root cause: Severe economic conditions or shock events asexperienced in recent years can have a major impact on the abilityof financial institutions and other counterparties with whom wehave relationships to meet their obligations.Mitigation: Our Group Treasury team is responsible for managingcounterparty risk with banks where Anglo American places cashdeposits. However, the Treasury operations of joint venturesand associates are independently managed and may exposethe Group to financial risks greater than the Group’s own policieswould permit.For other counterparty risks our businesses have creditmanagement procedures in place.No change in riskINVESTING ORGANISING Page 18OPERATING EMPLOYINGCURRENCY RISKThe Group is exposed to currency risk when transactions arenot conducted in US dollars.Impact: Fluctuations in the exchange rates of the most importantcurrencies influencing our own operating costs and asset valuations(the South African rand, Chilean peso, Brazilian real, Australiandollar, and pound sterling) may materially affect the Group’sfi n a n c i a lr e s u l t s .Root cause: The global nature of the Group’s businesses exposesthe Group to currency risk.Mitigation: Given the diversified nature of the Group, the Group’spolicy is generally not to hedge currency risk. Mitigation in the formof foreign exchange hedging is limited to debt instruments andcapital expenditure on major projects.HEALTH AND SAFETYFailure to maintain the high levels of safety management canresult in harm to our employees, contractors, communities nearour operations and damage to the environment.Occupational health risks to employees and contractorsinclude noise-induced hearing loss, occupational lung diseasesand tuberculosis (TB).In sub-Saharan Africa in particular, HIV/AIDS is a threat toeconomic growth and development.Impact: In addition to injury, health and environmental damage,impacts could include fines and penalties, liability to employeesor third parties, impairment of Anglo American’s reputation,industrial action or inability to attract and retain skilled employees.Government authorities may force closure of mines on a temporaryor permanent basis or refuse mining right applications.The recruitment and retention of skilled people required to meetgrowth aspirations can be affected by high rates of HIV/AIDS.Root cause: Mining is a hazardous industry and workingconditions such as weather, altitude and temperature can addto the inherent dangers of mining, whether underground or inopen pit mines.Mitigation: Anglo American sets a very high priority on safetyand health matters. A safety risk management process, globalstandards and a safety and environment assurance programmeform part of a consistently applied robust approach to mitigatingsafety risk.Anglo American provides anti-retroviral therapy to employeeswith HIV/AIDS and undertakes education and awarenessprogrammes to help prevent infection or spread of infection.No change in riskINVESTINGOPERATING Page 22ORGANISINGEMPLOYINGENVIRONMENTCertain of our operations create environmental risk in the form ofdust, noise or leakage of polluting substances from site operationsand uncontrolled breaches of tailings dam facilities, generatingharm to our employees, contractors, the communities near ouroperations, air quality, water purity and land contamination.Impact: Potential impacts include fines and penalties, statutoryliability for environmental remediation and other financialconsequences that may be significant.Governments may force closure of mines on a temporary orpermanent basis or refuse future mining right applications.Root cause: The mining process, including blasting andprocessing of orebodies, can generate dust and noise and requiresthe storage of waste materials in liquid form.Mitigation: The Group implements a number of initiatives tomonitor and limit the impact of its operations on the environment.No change in riskINVESTINGOPERATING Page 22ORGANISINGEMPLOYINGNo change in riskINVESTING ORGANISING Page 18OPERATING EMPLOYING50 Anglo American plc Annual Report 2012