The risks (and opportunities) set out below represent selected uncertainties and trends that may impact on ARM’s execution of its strategy in the future.
| Risk |
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Mitigation |
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| Commodity price volatility |
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| ARM's revenue, earnings and cash flows are dependent on
the prevailing commodity prices which are determined by the
supply of and demand for raw materials, and are linked to
global economic conditions. The recent dramatic and rapid
deterioration in the global economy, resulting in prices of the
majority of commodities trading at dramatically lower levels,
has highlighted the significance of this risk factor (Refer to
the profit variance analysis in the Financial Review, page 17). |
|
ARM manages the risk of commodity price fluctuations through
maintaining a diversified portfolio of commodities. The general policy is
not to engage in commodity price hedging. ARM, in close association
with its partners, constantly monitors the commodity markets and
matches production with market demand and commodity prices.
Focus and emphasis on containing and reducing operating expenses
also assists in mitigating this risk.
The target of having ARM operations in the lower half of the
applicable cost curves provides a significant competitive advantage
to ARM given the lower level of commodity prices. |
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| Fluctuations in currency exchange rates |
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| ARM's products are mostly sold in US Dollars. Fluctuations
in the exchange rate of the South African Rand against the
US Dollar can have a material impact on ARM's financial
results. (Refer note 34 in the Financial Statements.) |
|
ARM's foreign exchange hedging is limited to specific items of
capital expenditure on major projects only. Movement in the Rand
provides both an opportunity and a risk, and ARM's philosophy
is thus to consider currency hedges only on specific purchase
transactions but the general policy is that ARM does not hedge. This
exposure is to some extent offset by the inverse relationship which
exists between the Rand/US Dollar exchange rate and most US Dollar
commodity prices. |
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| Event risks |
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| ARM's operations are potentially subject to events, many of
which are outside management's control. These operating
risks include: unusual or unexpected geological features,
ground conditions or seismic activity, climatic conditions
(including those resulting from climate change) such as
flooding and drought, congestion at ports, industrial action
or disputes, environmental hazards, technical failures, fires,
explosions and other incidents at mines, smelters, etc. |
|
ARM has an effective and well developed risk management process
which has been in place for a number of years. Commitment to
comprehensive and effective risk management is an imperative at
all levels within ARM.
ARM has introduced an integrated approach to risk management,
which includes an Enterprise Risk Management process and a
Balanced Scorecard approach. This 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 within ARM. |
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| Inflation/increased cost |
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As ARM is unable to directly set the prices it receives for
the commodities it produces its ability to contain costs in
an inflationary environment and maintain low-cost efficient
operations can have a significant impact on its profitability.
ARM's ability to contain or reduce costs and achieve
operational efficiency is a measure of the quality of its
operational management and stewardship of its assets. |
|
Cost efficiency and cost reduction remain important ongoing performance measurements within ARM. Operational efficiency
is identified as one of its four key strategies. ARM ensures that
investment is made in high quality and low cost assets. Volume
growth which allows for economies of scale, ensures appropriate
cost control. |
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| Reserves and resources |
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ARM's mineral resources and ore reserves, as set out later
in this report, are based on numerous technical and
economic assumptions which are subject to change.
Mine reserves decline as commodities are extracted and
thus successful ongoing exploration and development
activities are important. Various governmental permits are
required to utilise these reserves. |
|
Annual updates and revisions are undertaken in the context of
changing markets and strategic objectives.
ARM continues to invest in exploration and development/maintenance
capital to ensure optimal long-term extraction of ore reserves. ARM
closely monitors regulatory compliance in terms of new order mining
rights in South Africa. |
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| Safety, health and environment (SHE) |
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Although not extensively exposed to deep-level mining
operations, mining remains a hazardous industry and is
subject to extensive and increasingly more stringent SHE
regulations and legislation. Risks which could potentially
harm ARM's financial position and reputation include:
 |
Lost time due to impact of illness e.g HIV & AIDS; |
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Accidents which occur, despite extensive training and safety procedures; |
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Increased rehabilitation costs due to changing variables; and |
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Costs associated with changing compliance requirements. |
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Ensuring the safety, health and wellbeing of all employees at work
is of paramount importance to ARM. This, together with care for the
environment in which ARM operates, are fundamental to ARM's
sustainable development strategy and initiatives.
To ensure ongoing improvement, risk preparedness and compliance,
ARM's officials constantly monitor and review procedures, initiate
awareness campaigns and regularly engage with government and
regulators, and monitor legislative requirements.
External independent specialist audits of the SHE performance of all
operations are undertaken to determine current status of legal
compliance, compile risk profiles of each operation as well as
identify opportunities for improvement.
Action plans to address findings, risk improvement recommendations
and gaps identified during the audits are compiled and addressed by
each operation and are presented at a Group SHE Forum.
The Group SHE Manager, reporting directly to the Chief Executive
Officer and oversight by the Sustainable Development Committee,
ensures oversight over the process and provides impetus and
guidance to operations in the achievement of corporate goals. |
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| Off-mine infrastructure |
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| ARM does not control major logistics infrastructure related
to bulk export materials, where a significant portion of
revenue is sourced. Electricity and water supply is also
supplied and controlled by governmental institutions. |
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ARM has long-term contracts in place, negotiated at economically
viable tariffs.
Senior management task teams meet regularly with relevant authorities
to ensure minimal risk. |
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| Project development |
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| A mining company needs a significant pipeline of growth
projects to ensure its sustainability into the future. Ineffective
management of projects can result in cost overruns and
costly delays in going into production that could prevent it
from benefiting from favourable market developments. |
|
ARM currently has three major projects in progress:
 |
Nkomati Nickel Mine expansion; |
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Khumani Iron Ore Mine expansion; and |
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Goedgevonden Thermal Coal Project. |
The development of the Vale/ARM joint venture's copper assets
is under consideration. ARM has a proven track record of project
delivery on time and within or below budget.
ARM engages in rigorous feasibility studies before initiating capital
investments in projects and ensures best practices are adopted
across the various divisional operations. |
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| Production curtailment |
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| The current global recession has resulted in a dramatic
reduction in demand for commodities, which negatively
impacted on commodity prices. As a result many mining
companies have curtailed production. While this curtailment
allows mining companies to remain cash positive, reduce
average operating costs and avoid over supply of markets
or inventory build-up, it may also result in them incurring
costs in the form of redundancy payments, the cost of
resuming production, indirect costs in the form of foregone
revenue, the deterioration of assets or increased unit costs.
Closure of operations can impact negatively on employees
and the local communities. |
|
The Machadodorp Works has been operating at minimal levels due
to the global recession, while Cato Ridge Works has considerably
reduced production and shut down certain of its furnaces. The mines
feeding these smelters have commensurately cut back production.
A thorough review of the likely impacts and risks is undertaken prior
to suspending operations and mitigating actions implemented to
reduce associated costs and offset the socio-economic impact of
closures, where possible. Suspended operations are maintained
under care and maintenance programmes to ensure a rapid restart
and preserve asset quality and operational integrity. Restocking
at all operations has occurred to ensure a rapid response to any
market opportunities. Most operations have commenced increasing
production. |
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