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Our most material issues

ARM’s operations impact on those around us in a range of ways, and we are in turn impacted by a broad range of issues and stakeholders. These issues and impacts have to be identified and evaluated to determine which are most material to the long-term sustainability of our business. The final list of material sustainability issues is then incorporated into our strategy, governance frameworks, risk management system, built into operational management processes and monitored through our integrated assurance processes. These include our combined assurance process, the reporting on which continues to be refined. The most material issues also form the basis for the sustainable development information we report to stakeholders through channels that include our Integrated Annual Report and this Sustainability Report.

Determining ARM’s most material issues involves a continuous review of current and evolving sustainable development issues in the light of our on-going operations as well as incorporating global best practice guidelines. This includes a combination of internal performance measurement and the monitoring and evaluation of the very dynamic external environment in which we operate. Our on-going stakeholder engagement programmes are a critical part of this process, as are review and assessment of our performance to date, monitoring of media coverage, the reporting of material issues by members of the extractive industry and policy and regulatory trends.

Our material issues

Although this Sustainability Report highlights ARM’s non-financial sustainability issues – environmental, social and governance issues – we recognise that each of these areas of concern impacts the others and all of them critically affect our ability to generate a sustainable financial return over the long term. Just as our Integrated Annual Report aims to put our financial performance in context to our environmental, social and governance performance, this report seeks to make clear the financial impacts of these sustainability issues.

By their nature, mining activities have a significant impact on the natural environment at the same time as they bring potential social benefits as well as risks for local communities. Yet it is possible for mining to be economically, socially and environmentally sustainable over the long term and we believe our zero harm approach to mining achieves this.

The issues analysed in the table on pages 9 – 11 are those identified as being the most material to ARM’s business. To effectively implement our strategy, we take action to address each of these issues. This implementation takes place within the greater context of our responsibility to comply with all relevant legislation that impacts us, generating an acceptable return for investors and maintaining the highest standards of ethical behaviour and corporate governance.

Resources reviewed include:

  • the results of our dynamic enterprise and business risk management process;
  • feedback on our sustainability performance and reporting, including industry or company-specific issues raised by stakeholders, including employees, contractors, customers, suppliers, business partners, communities, Government, Non-Governmental Organisations (NGOs), investors, the media and industry associations (e.g. the International Council on Mining and Metals (ICMM) and the South African Chamber of Mines (COM));
  • key topics and challenges reported by peer companies or raised by industry associations;
  • a review of key issues covered in the media; and
  • external initiatives and best practice guidelines including:
    • The Global Reporting Initiative (GRI) G3 Guidelines and its Mining and Metals sector supplement (www.globalreporting.org)
    • The International Council on Mining and Metals Sustainability Principles (www.icmm.com) and membership requirements
    • The Millennium Development Goals (www.undp.org/mdg)
    • UN Universal Declaration of Human Rights (www.un.org)
    • The UN Global Compact (www.unglobalcompact.org)
    • ILO Declaration Principles concerning Multinational Enterprises and Social Policy (www.ilo.org)
    • The King Code of Governance Principles (the Code) and the King Report on Governance for South Africa (King III) (www.iodsa.co.za)

Our most material issues, risks and opportunities

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

Risk/challenge/opportunity Impact Mitigating action taken by ARM

Financial risk

Commodity price volatility
ARM’s revenue, earnings and cash flows are dependent upon prevailing commodity prices, determined by the supply of and demand for commodities and linked to global economic conditions. Fluctuation in the commodity prices for the range of commodities we produce 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.
  • ARM limits its foreign exchange hedging to specific items of capital expenditure on major projects.
  • Rand movement provides us with both an opportunity and arisk.

Inflation/increased costs/cost control
ARM is unable to 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.
  • ARM’s ability to contain/reduce costs and maintain operational efficiency is a measure of the quality of its operational management and asset stewardship.
  • Cost performance is a key measure of management performance and operational efficiency.
  • ARM strives to be within the 50th percentile of the global cost curve (based on steady-state production).
  • Regular audits of operations identify potential inefficiencies.

Financing
High debt levels, combined with asignificant project pipeline could reduce ARM’s ability to grow its operations and to take advantage ofbusiness opportunities. ARM would not be able to achieve its growth strategy.
  • ARM’s focus on cash conservation and debt reduction has resulted in ARM being in a strong financial position with low gearing, which allows us to proceed with the funding of 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 our 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.

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 noncompliance 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 noncompliance could damage ARM’s reputation.
  • The Executive: Sustainable Development, reports directly to the Chief Executive Officer, which 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 are run by each operation.
  • ARM has an advanced HIV & Aids management programme.

Project development
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).

Infrastructure access and capacity
Logistics constraints and access to rail and port capacity remains challenges to meeting increased demand for commodities and ARM’s strategic growth. These challenges may result in the inability to achieve planned export targets and have a material impact on future growth with a resultant impact on financial results.
  • Feasibility studies underway to further expand iron and manganese ore operations to benefit from Transnet’s R300 billion Market Demand Strategy to expand SA rail, pipeline and port facilities.
  • ARM remains actively involved in commodity and industry initiatives as well as logistics optimisation processes on mine to optimise logistics for exports.

Reserves and resources
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 can 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.

Security of energy supply
ARM’s mining operations, and particularly, its ferromanganese 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 ARM’s 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 operations.
  • ARM continues to explore potential co-generation opportunities.

Emission and climate change
Extreme weather conditions resulting from climate change; ongoing legislation is likely to result in restriction of industrial emissions, the imposition of added costs for emissions exceeding permitted levels and increased 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 its ability to operate.
  • Climate change issues are a priority for ARM management who are continually working to improve understanding of ARM’s carbon footprint and to reduce the carbon intensity of our operations and activities.
  • Emission inventories continue to be compiled and monitored for all our smelters.
  • Every effort is made to reduce 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. Poverty, a lack of service delivery and employment resulting in social activism. The support of local communities is essential for the successful completion of ARM’s projects. Lack of community support could have a negative impact on productivity and consequently on profitability.

Communities look to ARM and the mining industry as a whole to address their need for infrastructure development, service delivery and employment opportunities. Communities may become dependent on our operations.
  • ARM’s Corporate Social Investment (CSI) and Local Economic Development (LED) plans focus on the upliftment and capacity building of historically disadvantaged communities in the vicinity of our operations.
  • ARM strives to earn the trust of local communities through extensive stakeholder engagement.
  • ARM uses its investment in local communities to enhance the socio-economic capacity of the communities in which it operates, and to avoid dependence on ARM’s operations after closure.
  • ARM focuses on responsible purchasing from local, historically disadvantaged South African suppliers and employment practices that give preference to members of the local community; and in some cases, offers training opportunities to community members.

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.
  • Local communities, labour and Government are recognised and engaged as key stakeholders.
  • ARM has and actively seeks to foster good relations with employees and unions.
  • ARM strives to be an employer of choice and has been acknowledged as a leading employer in the CRF Institute’s “Best Employer” awards for the second consecutive year.

Key employees
The loss of key employees. This could have an adverse effect on ARM. As ARM develops and expands mining operations, its future success will depend on our ability to attract and retain suitably skilled and qualified personnel.
  • ARM aims to be the employer of choice in its industry. Our levels of remuneration are regularly and aggressively benchmarked against our peers. ARM makes a concerted effort to retain and manage the Group’s talent pool.
  • Learnerships, focusing primarily on technical disciplines, increased to 264 in F2012 with the aim of increasing the skills levels of employees.
  • ARM’s graduate training programme is an important part of the human resource development strategy.
 

Sustainability report



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