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Principal risks and uncertainties

The risks, challenges and opportunities set out below represent selected principal issues that may impact on ARM’s results and operations in the future.

For a detailed analysis of financial instruments and risk management issues refer to note 36 (PDF - 66KB) to the financial statements, and for risk management procedures and processes refer to the corporate governance (PDF - 217KB) section.

Risk/challenge/opportunity Impact Action taken by ARM

Financial risk
Commodity price volatility
ARM’s revenue, earnings and cash flows are dependent on prevailing commodity prices determined by the supply and demand of commodities, linked to global economic conditions. Fluctuations in commodity prices for the range of commodities may have a material impact on ARM’s financial results.
  • Maintains a diversified portfolio of commodities.
  • Follows a general policy not to engage in commodity price hedging.
  • Constantly monitors commodity markets and matches production with market demand and commodity prices.
  • Focuses on containing and reducing operating expenses.
Fluctuations in currency exchange rates
ARM’s products are mostly sold in US Dollars. Fluctuations in the exchange rate of the South African Rand against the US Dollar may have a material impact on ARM’s financial results.
  • Foreign exchange hedging is limited to specific items of capital expenditure on major projects. Exchange rate fluctuations in many instances provide both an opportunity and a risk.
Cost management
ARM is unable to directly set the prices it receives for the commodities it produces. Extraction and processing costs of raw materials and consumables, such as reductants, reagents, power, fuels, labour, transport and equipment are susceptible to inflationary and supply and demand pressures. ARM’s ability to contain costs in
an inflationary environment and maintain low-cost efficient operations can have a significant impact on its profitability. The competitiveness of its products and its long-term profitability can negatively impact ARM’s earnings.
  • Ability to contain/reduce costs and maintain operational efficiency is a measure of the quality of ARM’s operational management and asset stewardship.
  • Cost performance is a key measure of management performance and operational efficiency.
  • Target, by 2012, to be within the 50th percentile of the respective global cost curve (benchmarked at steady-state/normalised production volumes).
  • Regular audits of operations to identify potential inefficiencies.
Financing
High debt levels, combined with a significant project pipeline could reduce ARM’s ability to grow its operations and to take advantage of business opportunities.  
  • As a result of a focus in F2009 on cash conservation and debt reduction, ARM has a strong financial position with low gearing, which ensures ARM can proceed with funding key growth projects.

Operational risk
ARM‘s operations are affected by the availability of raw materials, water and power. Other operating risks range from: unusual or unexpected geological features, ground conditions or seismic activity to technical failures, fires, explosions and other incidents at mines and smelters. Any of these could adversely affect our ability to operate cost efficiently or meet production levels.
  • An effective, well-developed and entrenched risk management process is in place.
  • Comprehensive and effective risk management remains an imperative at all levels within ARM and its operations.
  • An integrated approach to risk management not only helps to ensure appropriate corporate governance compliance, but also provides a practical and effective tool for the management of risk.
Project execution
ARM has a significant pipeline of growth projects which require strong project management skills. Ineffective management of projects could result in cost overruns and delays.
  • ARM’s managed businesses have a proven track record of project delivery (on time and within budget).
Resources and Reserves
Mine reserves decline as commodities are extracted. There is also the possibility that some reserves cannot be mined as profitably as anticipated. Exploitation of existing reserves, successful exploration and development activities and acquiring access to economically recoverable reserves are essential for ARM’s future.
  • Existing operations have substantial reserves that may be exploited via organic growth projects.
  • ARM continues to assess quality growth opportunities and actively focuses on opportunities to explore and develop new ventures to increase and diversify its portfolio of assets.
Infrastructure access and capacity
Logistics constraints and access to rail and port capacity remain challenges to meeting increased demand for commodities and achieving ARM strategic growth. These challenges may result in the inability to achieve planned export targets and have a material impact on future growth with resultant impact on financial results.
  • ARM is actively involved in commodity and industry initiatives with Transnet, co-funding feasibility studies to enable optimisation of logistics for exports.
  • Individual operations continue to optimise on mine/site turnaround time, to ensure improved export logistics.
  • Also investigating alternative export channels such as Maputo, Walvis Bay and Luderitz.
Security of energy supply
ARM’s mining operations and more particularly its ferromanganese and ferrochrome smelters, are intensive users of electricity. Electricity constraints have reduced the reliability of the energy supply in South Africa and increased prices. The lack of a sustainable supply of energy may negatively impact on our ability to operate and influence future expansion prospects. The considerable increase in electricity costs in South Africa may affect our ability to contain costs.
  • Energy efficiency plans have been implemented at all our operations.
  • ARM continues to explore potential co-generation opportunities.
Health and safety
Although ARM is not significantly exposed to deep level mining operations, mining remains a hazardous industry and is subject to extensive and increasingly more stringent health, safety and environmental legislation and regulations. Failure to provide a safe working environment and/or non-compliance with legislation and regulation could impact negatively on employee safety, health, employee and community relations and profitability. Injury or loss associated with any safety breach, breach of regulations or non-compliance could damage ARM’s reputation.
  • The Group Sustainable Development Reporting Manager, reporting directly to the Chief Executive Officer, ensures oversight of the process.
  • ARM participates in industry forums in which health and safety best practices are shared with a view to improving performance in these areas.
  • Medical surveillance is performed in compliance with legislation.
  • Wellness programmes which create awareness and provide input on methods of treatment of chronic diseases (including Tuberculosis, sexually transmitted diseases and other HIV-related opportunistic infections) are run by each operation.
  • ARM has an advanced HIV and Aids Management Programme.
Environment
The environmental challenges facing ARM include its impact on climate change. These challenges include impact primarily through greenhouse gas emissions resulting from the generation of the energy it consumes and its use of reductants; biodiversity conservation and land management; resource management, in particular water and energy; emissions; dust from its operations; waste and tailings management; and closure planning and closed site management. Estimated rehabilitation provisions based on the best information available and provided for over the life of our operations may subsequently need to be increased. This could impact on earnings.
  • Water management is a priority at all ARM operations and of particular importance to sustain both our operations and the surrounding communities.
  • ARM’s operations have environmental management programmes based on ISO 14001.
  • Integrated air quality management plans, including emission inventories are in place at the two smelters; both Cato Ridge and Machadodorp have emission reduction projects.
Emission and climate change
Climate change and weather-related events. Legislation relating to climate change is likely to result in restriction of industrial emissions, and the imposition of a carbon tax and added costs for emissions that exceed permitted levels and increase costs for monitoring, reporting and accounting for emissions. Climate change may result in weather-related events or other physical threats that may hamper production or damage assets. Failure to meet and exceed best practice for monitoring and reporting emissions could have a reputational impact on ARM and affect our ability to operate.
  • Climate change issues are a priority for ARM management who are continually working to improve our understanding and management of ARM’s carbon footprint and reduce the carbon intensity of our operations and activities.
  • Emission inventories continue to be compiled and monitored for all ARM smelters.
  • Every effort is being made to reduce our consumption of electricity by enhancing efficiency.

Social risk
Community and corporate social investment
ARM’s operations and future projects can have an impact on communities in the vicinity in which we operate. Support of local communities for our activities is essential for the successful completion of projects. Lack of community support could have a negative impact on productivity and consequently on profitability. Communities may become dependent on our operations.
  • ARM’s Corporate Social Investment (CSI) and Local Economic Development (LED) plans focus on the upliftment of historically disadvantaged communities in the vicinity of our operations with the aim of building capacity.
  • ARM strives to earn the trust of local communities through extensive stakeholder engagement with these communities.
  • ARM uses its investment in local communities to enhance the socio-economic capacity of the communities in which it operates, and to avoid them becoming dependent on ARM’s operations after closure.
Labour relations
From time to time our operations experience limited work stoppages and industrial action. Work stoppages result in production interruptions and could have a material impact on ARM’s financial results.
  • The majority of ARM’s workforce is unionised. ARM has and actively seeks to foster good relations with employees and unions.
Key skills shortages
The attraction and retention of key skills. As ARM develops and expands, our future success will depend on our ability to attract and retain highly skilled and qualified personnel.
  • ARM strives to be the employer of choice in its industry. Levels of remuneration are regularly and aggressively benchmarked against peers. ARM makes a concerted effort to retain and manage the Group’s talent pool. In F2011, ARM spent an equivalent of 6.4% of its salary spend on training and skills development.
  • Learnerships, primarily focusing on technical disciplines, increased to 231 in F2011 with the aim of increasing the skills levels of employees.
  • ARM’s graduate training programme continues as an important part of human resource development strategy. Bursaries and study assistance allowances for graduates were provided to 220 people in F2011.
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