Strategy and risk Risks and opportunities

Operating context

The performance of the Assore group is largely dependent on the level of global economic growth, as almost all its commodities are used in the production of crude and stainless steel, the consumption of which is intimately related to the incidence of global capital spend. Global economic growth, in turn, together with demand and supply dynamics, drives, inter alia, US dollar prices for commodities, while the level of exchange rates, combined with these prices, has a direct bearing on the group’s financial performance. In assessing the group’s risks and analysing its performance, it is essential to understand that by its nature, mining is a long-term business and these analyses should be conducted bearing this in mind.

 

Factors that influence the group’s operating context		The ability and cost competitiveness of existing facilities, taking planned capital improvements into account, to meet global demand
		Exploration for and development of new and existing mineral deposits
		Global inventory levels of inputs into steelmaking processes
		The establishment of new, technologically advanced facilities
		Political conditions in the countries in which customers and competitors are located
		The existence or establishment of sufficient overland logistical capacity (railage capacity)
		The availability of suitable vessels, and the efficiency and capacity of the South African and overseas ports

While ensuring that every reasonable opportunity is pursued to add value to shareholders’ returns, management is aware of the impact of the group’s activities on other stakeholders as well as on the environment. The manner in which the group interacts with its stakeholders and its impact on the environment is addressed in the “Sustainability report”, located on the group’s website under “Annual reports” in the “Investor centre”. The table below sets out the most significant material risks to which the group is exposed and describes the mitigation measures adopted.

Risk description		Impact		Mitigation measures
Financial risks
Fluctuations in exchange rates		Since most sales are denominated in foreign currency, fluctuations in exchange rates (the level of the rand against the US dollar and the euro) can have a significant impact on the group’s earnings		Assore has an established Treasury and Credit Committee, the purpose of which is to limit exposure to exchange rate fluctuations. A limited degree of natural hedging occurs, given that some capital expenditure occurs in foreign currency as well
Changes in international commodity prices		Most iron ore sales are priced on a quarterly basis retrospectively while manganese ore is priced quarterly in advance or on a shipment-by-shipment basis. Most other commodities are priced quarterly in advance. Fluctuations in these prices can have a significant impact on the profitability of the group		Market prices of commodities are continually monitored by Ore & Metal, and the diversified portfolio of commodities provides a degree of hedging against variable commodity prices.
Operational risks
World economic growth		Since most of the group’s commodities are used as inputs in the steel industry, the group’s ability to continue to distribute and sell its commodities is largely dependent on the level of demand for steel, which in turn is linked to economic growth		Management continually monitors market conditions and developments in the steel industry, and ensures that ore reserves are exploited in a manner that ensures suitable sustainable supply of material to our customers
South African logistical infrastructure		The available channels for the export of commodities from the mines to the ports, and the facilities in South Africa’s ports, are both dependent on the level of infrastructural investment by the state through Portnet and Transnet. The level of maintenance and quality of management of the logistical facilities have a direct bearing on the group’s sales volumes		Assmang management and representatives of Ore & Metal meet regularly with all levels of Transnet’s port and rail management to ensure optimum use of the existing channels and to explore expansion and optimal maintenance of these channels
South African labour market		The labour market in South Africa has become increasingly volatile, with prolonged strikes in certain sectors, which usually carry unrealistic demands from trade unions on employers, resulting in protracted negotiations with negative effects on productivity		Management attempts as far as is practical to commence wage negotiations at an early stage, and in an attempt to gain certainty on operating costs; these usually encompass negotiations towards agreements that cover more than one year
Resources and Reserves		By nature, the metal content of orebodies can vary over the course of the life of the mine and, depending on commodity prices, their lives can either increase or decrease, given that mining deeper becomes increasingly more costly. Customer choices and preferences, therefore, have a direct bearing on the economic lives of the deposits		Orebodies are continually monitored, using modelling techniques, and are exploited in conjunction with market demand. Customer relationships are carefully managed in order to ensure that customer requirements are met within physical, chemical and economic constraints. For a detailed analysis of the group’s orebodies, refer to the “Mineral Resources and Reserves report”, located on the group’s website under “Annual reports” in the “Investor centre”
Mining Charter		The Mining Charter places onerous requirements on the operations in order to meet its requirements		Management of the compliance aspects of the charter is undertaken at all operations and every attempt is made to ensure compliance, both at the operations and at a corporate level (refer “Black economic empowerment status report”)