GROUP FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – for the year ended 30 June 2014

2.

Financial risk management

2.1

Financial risk factors

The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value and cash flow interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group, from time to time, uses derivative financial instruments to hedge certain risk exposures.

Financial risk management is carried out by a central treasury department. Policies are approved by the board of directors, which sets guidelines to identify, evaluate and hedge financial risks in close cooperation with the Group’s operating units. The risk and audit committees approve written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investing excess liquidity.

2.1.1

Market risk

Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar. Foreign exchange risk arises from future commercial transactions and recognised financial assets and liabilities.

To manage foreign exchange risk arising from future commercial transactions and recognised financial assets and liabilities, the Group, from time to time, uses forward exchange contracts within board-approved limits.

The Group entered into a Cross Currency Interest Rate Swap (CCIRS) amounting to US$200 million to hedge certain aspects of the foreign exchange risk on the US dollar convertible bonds. The exchange rate risk on the dollar interest payments is hedged and the risk relating to future capital cash settlement of the bonds at a rand/dollar exchange rate weaker than R9.24/US dollar is hedged. No hedge accounting has been applied. Excluding the foreign exchange effect of dollar interest rate change, a 10% movement in the exchange rate will result in a R213 (June 2013: R198) million profit/loss on the capital portion of the hedge, which offsets the borrowing (US$ Bond) exposure in the sensitivity analysis below.

Sensitivity analysis

Foreign exchange risk sensitivity analysis presents the effect of a 10% change in the year-end exchange rate on financial instruments denominated in foreign currency in profit or loss.

Securities price risk

The Group is exposed to equity securities price risk because of investments held by the Group and classified as available-for-sale financial assets.

These investments were acquired as strategic investments and were not actively managed with reference only to securities price risk.

Sensitivity analysis

The calculation of a 20% change in the share price of available-for-sale investments would have resulted in a R11 million movement in other comprehensive income in 2014 (2013: R22 million).

Commodity price risk

Commodity price risk refers to the risk of changes in fair value or cash flow of financial instruments as a result of commodity prices where the Group holds forward sales contracts, metal purchase commitments, included in trade and other payables which are determined with reference to commodity prices. This exposes the Group to commodity price risk.

From time to time, the Group enters into metal forward sales contracts, options or lease contracts to manage the fluctuations in metal prices, thereby preserving and enhancing its cash flow streams.

Sensitivity analysis

Commodity price risk sensitivity analysis presents the effect of a 10% change in the commodity prices on commodity-based financial instruments in profit or loss.

Fair value interest rate risk

The Group is exposed to insignificant fair value interest rate risk in respect of fixed rate financial assets and liabilities.

Cash flow interest rate risk

The Group is exposed to cash flow interest rate risk in respect of its floating rate financial assets and liabilities.

The Group monitors its exposure to fluctuating interest rates. Cash and cash equivalents and rehabilitation trust investments are primarily invested with short-term maturity dates, which expose the Group to cash flow interest rate risk.

Exposure of the Group’s borrowings to interest rate changes is analysed further in note 19.

Sensitivity analysis

2.1.2

Credit risk

Credit risk arises from the risk that the financial asset counterparty may default or not meet its obligations timeously. The Group minimises credit risk by ensuring that the exposure is spread over a number of counterparties.

The maximum exposure to the credit risk is represented by the carrying value of all the financial assets and the maximum amount the Group could have to pay if the guarantees are called on (note 35).

The potential concentration of credit risk could arise in cash and cash equivalents, trade receivables, loans, advances and other financial assets.

The Group has policies that limit the amount of credit exposure related to cash and cash equivalents to any single financial institution by only dealing with well-established financial institutions of high credit quality standing. The credit exposure to any one of the counterparties is managed by setting exposure limits which are approved by the board.

Trade receivables and advances

The Group has policies in place to ensure that the sales of products are made to customers with an appropriate credit history. Trade debtors comprise a number of customers, dispersed across different geographical areas. Credit evaluations are performed on the financial condition of these and other receivables from time to time. Trade receivables are presented in the statement of financial position net of any provision for impairment. No trade receivables are past due.

Advances are made to customers based on toll refining “in-process metal”. Credit risk on advances where sufficient in-process metal serves as collateral is low (note 16).

Other financial assets

• Loan to the Reserve Bank of Zimbabwe is unsecured with no fixed terms of repayment
• Employee housing loans are secured by a second bond over residential properties.

No other financial assets are past due.

Employee receivables

Employee receivables consist mainly of vehicle loans for which the vehicles serve as collateral. The collateral held is sufficient to cover these employee receivables which is limited by taking the employee’s annual earnings into account.

Only an insignificant amount of these receivables are past due, as a result of employees having left the employment of the Group.

2.1.3

Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. The Group has undrawn general banking facilities with various financial institutions as indicated below. Of these facilities, R3.0 (2013: R3.6) billion were committed facilities at year end.

Credit limit facilities – South African banks

Management regularly monitors rolling forecasts of the Group’s liquidity reserve comprising undrawn borrowing facilities and cash and cash equivalents (note 17) on the basis of expected cash flows.

The table below analyses the Group’s financial liabilities and derivative financial liabilities into the relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date.

Financial assets relevant to the understanding of future cash flow related to financial liabilities have been disclosed below.

At June 2014  

At June 2013  

2.1.4

Sovereign risk

2.2

Capital risk management

The Group defines total capital as “equity” in the consolidated statement of financial position plus debt. The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits to other stakeholders and to maintain an optimal capital structure to reduce cost of capital.

In order to maintain or improve the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue or repurchase shares.

The Group monitors its debt against several ratios, including debt to equity and debt to earnings before interest, tax and depreciation (EBITDA) ratios. The Group strives to keep its net debt-to-equity ratio below 17.5% and net debt to EBITDA below 1:2.5%.